April 24, 2014

“Can’t anybody here play this game?” Casey Stengel 1962

Casey Stengel 196

This was a quote from Casey about the hapless 1962 Mets, but is also applicable to this administration. The latest looniness comes from Obama’s budget and corporate tax proposals. It seems like he and his bosses (Jimmy Hoffa Jr, George Kaiser, George Soros et al) can’t seem to do anything right.

Because of the sheer volume of extreme stupidity, I will only address a couple of his proposals. To address them all would necessitate an entire career and I am at that age where buying green bananas is a risky investment.

Number 1. Adopting a minimum tax on “millionaires”. This is popular since nearly 50% of Americans pay no tax whatsoever. (Am I the only one who sees the irony in people who pay no taxes insisting someone else pay 44.6% of their salaries in federal taxes because they are not paying their fair share.)

 

But let’s analyze this a bit, shall we? Exactly who is getting away with paying 15% of their income in taxes? Is it the CEO’s? Maybe movie stars? Well, how about athletes? No, none of these. It’s mostly venture capitalists and investor’s whose money is used to grow existing businesses or growing new ones.

Capitalism creates prosperity, not socialsim!

This is not Jack and the Beanstalk magic money. You don’t plant it, then sit back and watch it grow. In fact, in venture capitalism, one out of every three dollars is lost. What makes venture capitalism attractive is the hope for huge gains. Microsoft made 3 people billionaires and over 12,000 people millionaires. There are hundreds of success stories like this. Hewlitt Packard started out in a garage with 500 dollars working capital. Without venture capital, they may have upgraded to a small ranch house but would not be the powerhouse they are today. Home Depot, Staples, Lowes, and an endless list of others.

They all have two things in common. They needed investment capital to allow them to grow. And secondly, that growth allowed them to expand and create thousands upon thousands of new opportunities for bright and energetic employees.

Government is a lot like a baseball manager. A really good one can win you an extra one or two games a year, but a truly bad once can lose you dozens.

Without the tax advantage they now have, many venture capitalists would just move towards foreign investments or triple tax free municipal bonds. (More on munis in a moment) That would be like removing the motor from your boat just before a big race.

Now what would capital gains do to small businesses? Let’s say you have a metal fabrication plant and would like to expand, which would require buying bigger machinery. As a company can write down depreciation on machinery. Eventually, you will have written off their total value. However, when you trade in that machinery for new, you must pay capital gains tax on the value of your trade in at the current 15%. Now suppose Obama doubles it as he says he would like to and small companies would find themselves paying a 30% tax on the trade in? Do you suppose that could prevent their making an upgrade? You’d better believe it.

Okay, to recap where we are, Obama has now killed venture capitalism and badly wounded small businesses. Who is next on his hit list? The cities. One of his proposals would lift the tax exempt status of municipal bonds. It would be a disaster for any city near default. The advantage to the cities is that they can issue bonds at a much lower interest rate than they would if taxes needed to be paid on the income. Many cities could find there are no buyers for their bonds at all and would have to cut all or most nonessential services and some essential ones. Some cities would have to go into default, sending ripples throughout the economy.

Obama also announced a cutting of corporate taxes to 28% from 35%, but he plans on ending “loopholes” and would increase revenue by 250 billion dollars assuming no growth in the economy. So is it a cut or an increase? Enquiring minds want to know.

And then you have collateral damage. Already, the fed agreeing to keep interest rates at near zero have forced many retirees to look for part time employment, since their savings no longer produce income for their retirement. But 401ks and Roth IRAs will take a hit under Obama when the capital gains tax doubles. I know 401ks are tax deferred, but that is only as far as your individual return is concerned. The money fund still has to pay CG when an asset of the plan is sold. On the other hand, with the rationing Obama has already built into Obamacare, you might not live long enough to run out of money.

It makes you scratch your head and wonder “Can’t anybody here play this game?”

Steve Ahle

I am an author, whose books can be found on Amazon.com. All enjoy a 5 star rating. They are A Walk Through the Willows, Melissa's Song, The Tangled Web,Innocent,The Calculating Corpse and It's All About me. Click the website link for more information.

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