Buffett Tax Line is Old News

Anyone thinking Mr. Buffett has discovered some new truth about "the rich" and taxes, think again.  He played this hand several years ago at a speech in support of then-Democratic candidate, Hillary Clinton.

Read the original story from the July 15, 2007 New York Times.

New Article from Michael Barro

Progressive Tax System

With the media flooded with news and commentary regarding the progressive tax system, it is imperative that the trained eye maintain a careful watch on the facts.   Here is a table from the Tax Policy Center summarizing the average tax rates paid by quin tiles of US income earners.  Contrary to what Mr. Buffet may think or read, and what Obama accepts from Buffet as fact, the empirical data suggests otherwise.  

If you can remember only one fact, make it this one: The middle class (middle quintile) pays 14.1 percent of its income in federal taxes, while the rich (top tenth of one percent of the population) pay 30.4 percent.

Let this serve a lesson:  even "positive" economics can be misused either as a mistake or a lie.

Obama Gets the Numbers Wrong In His Tax Plan
Huffington Post

WSJ: The Buffett Alternative Tax

The Wall Street Journal:  Review & Outlook Sept 20th

Washington has repeated nearly every economic policy mistake of the 1930s in recent years, so why not repeat one of the bigger blunders of the 1960s too? We refer to President Obama's proposal yesterday for a new "Buffett Rule" to raise taxes on Americans earning more than $1 million a year. This may sound familiar to readers of a certain age, because it is how the current, and much-hated, Alternative Minimum Tax was born.
Mr. Obama, meet Joe Barr. As LBJ's last Treasury Secretary—he served only 30 days—Barr became famous for his January 1969 testimony before Congress that 21 millionaires had paid no income tax in 1967. No fewer than 115 tax returns reporting income above $200,000 had also paid no income tax, and Barr predicted a "taxpayer revolt" unless something was done about it.
Washington proceeded to bend tax policy to chase those 21 millionaires, and so we got the Minimum Tax of 1969 that later became the Alternative Minimum Tax. The AMT now hits some four million taxpayers, and 27% of households that paid it in 2008 had adjusted gross income of $200,000 or less.
Editorial page editor Paul Gigot on Obama's tax pitch.
Because it hits taxpayers with heavy deductions, the AMT wallops in particular the upper-middle-class suburbs in high-tax states like New Jersey, Connecticut, Illinois and California. Congress keeps passing an annual reprieve to prevent the AMT from hitting another 20 million or so taxpayers, most of whom are far from millionaires.
So here we are back at the same old political stand, though even Mr. Obama concedes that today those he routinely calls "millionaires and billionaires" pay at least some tax. The President's complaint, echoing billionaire Warren Buffett, is that too many billionaires pay a lower rate than regular salary earners. So even as he endorsed tax reform in general yesterday, Mr. Obama insisted that one of his reform "principles" is that people who make more than $1 million must pay a higher tax rate than middle-class earners.
There's one small problem: The entire Buffett Rule premise is false, as the nearby table shows. In 2008, the last year for which such data are available, the IRS reports that those who made more than $1 million in adjusted gross income paid an average income tax rate of 23.3%.
That's slightly lower than the 24.1% rate paid by those making between $500,000 and $1 million, probably because the richest are like Mr. Buffett and earn more from capital gains and dividends. The rate for a relative handful of the rich—400 people—fell to 18%, the modern equivalent of Barr's Gang of 21. But nearly all millionaires still paid a rate that is more than twice the 8.9% average rate paid by those earning between $50,000 and $100,000, and more than three times the 7.2% average rate paid by those earning less than $50,000. The larger point is that the claim that CEOs are routinely paying lower tax rates than their secretaries is Omaha hokum.
If Mr. Obama really wants all of these people to pay even more in taxes, there are only two ways to do so. One is to raise tax rates on capital gains, dividends and other investment income that is taxed at 15% and represents a great deal of income for the wealthy. This is probably Mr. Buffett's tax secret, though to our knowledge he hasn't released his returns to the public.
The problem is that this is a tax increase on capital investment, which the U.S. already taxes at prohibitive rates thanks to our high corporate tax rate of 35%. Capital gains and dividends are taxed twice, first as corporate profits and then as payouts to individuals. Their real capital gains tax rate is closer to 45% than 15%, which is why politicians of both parties have long supported a capital-gains rate differential.
The other way to raise taxes on the rare Buffett is with a new Minimum Tax, a la Joe Barr. But as we've seen with the AMT, while the politicians may start by chasing "millionaires and billionaires," over time they always end up taxing the middle class because that's where the real money is. Mr. Obama could tax every billionaire in America at a 100% rate and still wouldn't make a dent in the federal deficit. He would, however, succeed in making those taxpayers invest less and search for tax shelters, assuming they didn't move offshore.
We rehearse all of this because it shows that the real point of Mr. Obama's Buffett Rule and his latest deficit proposal isn't tax justice or good tax policy. It is all about re-election politics. Down in the polls and facing a sullen liberal base, Mr. Obama wants to rally the left behind him, and nothing fires them up like the pretense that government is sticking it to the rich. Mr. Obama is picking a tax fight that he apparently believes will carry him to re-election next year.
And what about the economy? Well, the plan Mr. Obama unveiled yesterday along with his Buffett Rule would sock the economy with $1.5 trillion in new taxes over 10 years, or about 1% of GDP. This includes the tax increases built into the 2013 expiration of the Bush-era tax rates but not those of ObamaCare. Anyone who believes this will help an economy that is creating few new jobs and growing by only 1% probably also believes that only the rich would pay the Buffett Alternative Tax.

AOL: 3 Signs We're Heading for a Recession

Zero. Zilch. Nada. That's the number of jobs created in August 2011.

By itself, it's just a single data point. And while the U.S.'s gloomy employment situation is distressing, that figure alone is no reason to hit the panic button.

Does that mean our economy is on the mend -- or at least that we've hit the bottom and there's nowhere to go but up? Hardly.

In fact, we've got a four-alarm economic fire burning: Take the employment situation, add the state of consumer confidence, and top it off with Wall Street skittishness, and all signs point to trouble ahead.

Who Says We're Heading into Recession, Act II?

Not Ben Bernanke. In his Jackson Hole speech, he said, "I expect the economy to continue to expand in the second half of this year, albeit at a relatively modest pace." That's a whole lot of nothing, but what else is our Federal Reserve chairman going to say? He can't say we're heading for a recession. We have to look at the data and make up our own minds.

So we turn to the professionals that dissect the economy's every twitch and flutter. Of course, these are the same economists who believed economic growth would pick up during the second half of 2010. Yet growth slowed down.

Then they tweaked the timeline and announced that the first half of 2011 was when things would really start rocking again. Really? The government recently revised its first- and second-quarter annualized growth to 0.4% and 1%, respectively. Those aren't exactly on up-tempo beats.

Now we're told that economic growth will strengthen as we head into 2012. I'm beginning to wonder if economists are looking at the same stats I'm seeing.

The Writing's on the Wall

Despite being one of the best systems in the world, the U.S. economy is not poised for rapid growth anytime soon. In fact, the signs are stronger than ever that we're heading into Recession, Act II. Here are three reasons why.

1. It's the jobs, stupid.
Let's start with the stunningly awful jobs report in August.

Persistent, high unemployment is a big problem. Lakshman Achuthan, managing director of the Economic Cycle Research Institute, summed the situation up perfectly for CNN Money by saying, "When employment drops, incomes fall. When income falls, sales fall. When sales fall, production falls. When production falls, employment falls."

How can unemployment come down if our economy isn't growing? And how can the economy grow if there's no job creation? Case in point, Cisco (CSCO) and Research In Motion (RIMM), in the face of declining profits, announced they will be laying off 6,500 and 2,000 employees, respectively. Until we break this cycle, high unemployment will continue to be a drag on economic growth.

2. Job jitters = pinched pocketbooks
If people can't find jobs or are worried about the ones they have, how can they be confident about spending money? The answer is they can't. Consumer confidence crumbled in August, with the Confidence Board's index falling from 59.2 in July to 44.5 in August.

To put consumer confidence in better perspective, let's look at the domestic same-store sales of Wal-Mart (WMT) and Costco (COST). Same-store sales, excluding gasoline sales, dropped for the ninth consecutive quarter at discount giant Wal-Mart. Contrast that with Costco's same-store sales trend: The warehouse retailer made it seven quarters in a row of positive comps.

Unlike higher-end Costco members, the average Wal-Mart consumer continues to feel the pinch of the lackluster recovery. He or she has plenty of reasons to worry going forward. Those concerns will show up in lower sales in the future.

3. A stressed consumer = a distressed Wall Street
Wall Street is also feeling Main Street's jitters. The S&P 500 has fallen more than 13% since peaking on July 7, 2011, and there is fear in investors' eyes. Investors continue to pull money out of mutual funds, making a flight to safety. The price of gold is near $1,900 an ounce and 10-year Treasury yields dipped below 2%. Those aren't signs of confident investors.

Companies, flush with cash, are starting to buy back shares. That's not a good thing. It means that they are not investing in physical or human capital because they don't see enough demand on the horizon. Investors want to believe that companies are repurchasing shares because stock prices are attractive. Unfortunately, companies have a history of buying lots of shares at high prices rather than low ones.

Fearful investors are good for those looking to buy stocks in the future, not for those that currently own equities. It's sad but true. Stock prices fall as fear grows. Consumers who feel less wealthy tighten their purse strings, spend less money, and drag the economy down with them.

Someone's Gotta Say It

For me, these three signs point to another recession. The employment situation remains gloomy. Consumer confidence continues to crumble and investors are starting to get scared. Our economy runs on confidence and there's just not enough to keep it from contracting in the near future.

To see how David is investing during these turbulent times, follow him on Twitter at @trendsandtrades. You'll have access to all his research as well as the buys and sells he's making in today's volatile markets.

See full article from DailyFinance: http://srph.it/nA80oB

Is a College Degree Worth the Price?

The combination of the high and ever-rising price tag for a college education and the less-than-promising job prospects for new grads are fueling a hot debate about the value of a bachelor's degree: Is it actually worth the money?

See full article from DailyFinance

Economics Students Angered

An economics professor at a local college made a statement that he had never failed a single student before, but had recently failed an entire class.

All grades would be averaged and everyone would receive the same grade so no one would fail and no one would receive an A....

After the first test, the grades were averaged and everyone got a B.   The students who studied hard were upset and the students who studied little were happy.

As the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too so they studied little.

The second test average was a D!   No one was happy.

When the 3rd test rolled around, the average was an F.  As the tests proceeded, the scores never increased as bickering, blame and name-calling all resulted in hard feelings and no one would study for the benefit of anyone else.

All failed, to their great surprise, and the professor told them that socialism would also ultimately fail because when the reward is great, the effort to succeed is great, but when government takes all the reward away, no one will try or want to succeed. 

WSJ: Will Refinancing Stimulate the Economy

One policy idea being floated involves the federal government influencing Fannie Mae/Freddie Mac to underwrite a massive program to refinance existing mortgages at current, relatively low interest rates.  An assessment of the problems with this idea is contained within the following link:


Are Stocks Undervalued?


Recessions: Historical Earnings Forecast Errors

Source: Bianco Research (shaded areas = recessions)
Here is a question worth considering: Is Wall Street setting itself up for another huge Earnings miss?Consider the chart above, and the differences between Wall Street forecasts and actual quarterly earnings from 1985-2011.
Jim Bianco notes that “Wall Street is one of the few places where practice does not make perfect. Notice that every subsequent recession sees larger earnings error rates than the previous recession.
Consider the prior significant earnings misses:
• 1990/1991 Recession: Top-down forecasters (strategists) were too optimistic by 10%. Bottoms–up forecasters (adding up the 500 company forecasts) were too optimistic by 25%.
• 2000/2001 Recession: Top-down forecasters were too optimistic by 25%. Bottom-up forecasters were too optimistic by 23%.
• 2007/2009 “Great Recession” top-down forecasters were too optimistic by 39.6%. Bottom-up forecasters were too optimistic by 40%.

Both strategists and Analysts seem to be getting significantly worse at predicting earnings.
The significance of this is what might happen if the economy slips into recession: In the event that occurs, present earnings forecasts for 2012 of $112 might too high by as much as 20% to 40%.
Hence, why a recession driven earnings contraction supports much lower equity prices.
Are markets cheap? The correct answer is it depends on the economy and earnings over the next few quarters . . .

Source:  The Big Picture, September 7, 2011.

WSJ: Mitt Romney's 59 Economic Flavors

Mitt Romney rolled out a major chunk of his economic agenda yesterday, and we'll say this for it: His ideas are better than President Obama's. Yet the 160 pages and 59 proposals also strike us as surprisingly timid and tactical considering our economic predicament. They're a technocrat's guide more than a reform manifesto.


The rollout is billed as Mr. Romney's "plan for jobs and economic growth," and it rightly points out that to create more jobs requires above all faster growth. This may seem like common sense, but it's a notable break from the Obama Administration's penchant for policies that "target" jobs rather than improving overall incentives for job creation. So we have had policies for "green jobs," or construction jobs, or teaching jobs, or automobile jobs, or temporary, targeted tax cuts for jobs—even as the economy struggles.

Mr. Romney seems to understand that the private economy will inevitably produce millions of new jobs—in industries and companies we can't predict—when it resumes growing at 3% or more. This is an important philosophical distinction that drives most of the Romney agenda.
So it's good to see the former Massachusetts Governor endorse the House GOP effort to review and approve major new regulations that cost more than $100 million. Mr. Romney also joins the other GOP candidates in vowing to repeal ObamaCare and Dodd-Frank. He'd pull the Energy Department from the role as venture capitalist that it has pursued since the Bush Administration, re-focusing it back on basic research, rather than backing solar companies that go bankrupt.
His section on "human capital" is also laudable, pointing out how little sense it makes to educate the world's smartest young people in our universities only to send them home after they graduate. He'd offer more visas to keep more of them here. The former Bain Capital executive would also apply his management skills to revamping the vast federal job-training archipelago, with its 47 programs. His proposal for "personal reemployment accounts" for laid-off workers isn't a new idea but it is worth trying.
Where the Governor is less persuasive is on the larger issues of taxes, spending, entitlements and trade. Here he ducks and covers more than he needs to.
On taxes, Mr. Romney would immediately cut the top corporate income-tax rate to 25% from 35%. His advisers say there's already a bipartisan consensus that the U.S. rate hurts American companies, and they're right. Even Mr. Obama agrees.
But on other taxes, Mr. Romney shrinks from a fight. He says he favors tax reform with lower individual tax rates but only "in the long run." His advisers say that means in the first two years of his Presidency, but then why not sketch out more details?
The answer may lie in his proposal to eliminate the capital gains tax—but only for those who earn less than $200,000 a year. This eviscerates most of the tax cut's economic impact and also suggests that he's afraid of Mr. Obama's class warfare rhetoric. He even picked Mr. Obama's trademark income threshold for the capital gains cut-off.

If Mr. Romney thinks this will let him dodge a class warfare debate, he's fooling himself. Democrats will hit him anyway for opposing Mr. Obama's proposal to raise taxes on higher incomes, dividends and capital gains in 2013. Perhaps Mr. Romney feels that his wealth and background make him especially vulnerable to the class charge, but if he won't openly make the economic case for lower tax rates he'll never get Congress to go along.
On spending, Mr. Romney joins the GOP's "cut, cap and balance" parade, setting a cap on spending over time at 20% of GDP. What Mr. Romney doesn't do is provide even a general map for how to get there, beyond cutting spending on nonsecurity domestic programs by 5% upon taking office.
He praises Paul Ryan for making "important strides" on Medicare but says his plan "will differ," without offering details. He also says there are a "number of options" to reform Social Security without endorsing any of them. We are told those specifics will come later. It's hardly unusual for candidates to avoid committing to difficult proposals, but it won't help Mr. Romney contrast his leadership with Mr. Obama's.
By far the most troubling proposal is Mr. Romney's call for "confronting China" on trade. This is usually a Democratic theme, but Mr. Romney does Mr. Obama one worse by pledging to have his Treasury brand China a "currency manipulator" if it doesn't "move quickly to bring its currency to full value." He'd then hit Beijing with countervailing duties.
Starting a trade war is a rare policy mistake that Mr. Obama hasn't made, but Mr. Romney claims it is a way to faster growth. His advisers say he doesn't favor a 25% tariff on Chinese goods as some in Congress do, but once a President unleashes protectionist furies they are hard to contain.
His economic aides say this idea comes directly from Mr. Romney himself, which is even less reassuring. It looks like a political maneuver to blunt the criticism he'll receive because some of Bain Capital's companies sent jobs overseas, or perhaps this is intended to win over working-class precincts in Pennsylvania and Ohio. But giving Americans the impression that a trade war will bring those jobs back to the U.S. is offering false hope. It also distracts from the other fiscal and regulatory reforms that are needed to attract capital and create jobs.


The biggest rap on Mr. Romney as a potential President is that it's hard to discern any core beliefs beyond faith in his own managerial expertise. For all of its good points, yesterday's policy potpourri won't change that perception.

IBD Editorial: Is Gov. Perry Smart?

Politics: Liberals and their water-carriers in the media are trying mightily to characterize Republican front-runner Rick Perry as less intelligent than the president they're bent on re-electing. But who are the dumb ones here?

Denigrating an opponent's intelligence is one way progressives like to work as they follow the "Rules for Radicals" that Saul Alinsky set out for those who wish to seize power on behalf of the left. Followers of the Chicago Marxist include President Obama.

One rules says: "Ridicule is man's most potent weapon. It's hard to counterattack ridicule, and it infuriates the opposition, which then reacts to your advantage."

This is precisely what the left has done with Perry, questioning his mental ability while holding up the president as a paragon of intelligence. Such ridicule, they hope, will goad Perry and those who support him into saying something stupid or regrettable.

Unfortunately for the left, Perry's no dummy. And Americans, increasingly, are looking at the record of our sitting president and wondering how he could go from failure to failure and not alter course — a mark of someone — dare we say it? — who isn't very smart.

How intelligent was it, for example, for Obama early in his term to make a deal with Russia giving up our planned missile defense in Eastern Europe in exchange for help with Iran (which never came)?
What was the president thinking when he signed ObamaCare into law, even though surveys showed 89% of Americans said they were satisfied with their current health care plan? A costly, care-rationing program that Americans want repealed will cost well over $1 trillion over 10 years.

Cash for Clunkers ran out of money its first week, and GM recently announced that taxpayers won't ever get their money back. A huge waste of money that didn't revive car sales. A smart move in retrospect?
Then there was the brilliant $839 billion stimulus, which so far this year has resulted in an economy growing at a near-recessionary 0.7% while unemployment remains stuck above 9%. And the big thinkers at the White House would like to do it all over again!

Didn't the cerebral Obama think twice before running up $4 trillion in debts in less than three years, pushing America's total indebtedness above $14.5 trillion, or 100% of GDP, and bringing about the first-ever downgrade of the nation's credit rating?

What brainiac decided to walk away from longtime U.S. ally Hosni Mubarak in Egypt, so that the fundamentalist, America-hating Muslim Brotherhood can write a new constitution and take power?
What was the president thinking when he backed a rebel insurgency in Libya without knowing who will take power once Moammar Gadhafi is gone? Meanwhile, we've largely abandoned our best, and only, democratic friend in the region, Israel, which appears on the verge of war with the Palestinians and possibly Iran and Egypt. Has this been intelligent?

Not only is this partial record abysmal, but Obama seems dead-set on repeating the same errors — seeking more stimulus, pushing more targeted tax breaks for favored industries and perpetuating the absurd myth that we can recover by creating "green" jobs.

Perry? The knock on him is that he's a Texan with a Texan's drawl. For elitist liberals, a southern accent is akin to a mental disability.

He's also a graduate of Texas A&M, not some fancy Ivy League school, like Obama and most of his aides and Cabinet. Enemies deride him by calling him "Gov. Goodhair." But let's look at the record.
Perry served his country as pilot of C-130 transport planes — huge, $130 million aircraft that carry very important cargo, including troops and equipment. Does anyone believe the U.S. Air Force would entrust such a responsibility to someone of limited intelligence?

It also takes more than a little savvy to win every political office you've sought. And so far, Perry's eight for eight. He's been governor of the nation's fastest-growing, most business-savvy state for 10 years.
Since June 2009, Texas has produced nearly 40% of all net new U.S. jobs. He talks about small, manageable government, and delivers. Every one of his budgets — every one — has been balanced, and his state has a $6 billion "rainy day fund."

Remember in August, when S&P downgraded U.S. debt from AAA to AA+? In 2009, S&P upgraded Texas' rating from AA to AA+. If only we had such a dunce in the White House now.
To recast a quote from Forrest Gump, "intelligent is as intelligent does." Perry seems to do lots of smart things, despite lacking the elitist credentials of the so-called leaders in today's dysfunctional, hyper-incompetent Washington.

But this is an old slur. Whenever the left doesn't like someone, they resort to ridicule. That happened with Harry S Truman, who didn't even go to college but who as president made courageous and often unpopular decisions — such as resisting Soviet expansionism — that later turned out to be right.
Likewise, President Reagan was the butt of leftist jokes for his alleged lack of intelligence. "An amiable dunce," they called him. They also looked down on his humble education — he attended tiny Eureka College in Illinois.

But Reagan not only knew more about economics than his supposed intellectual betters — having been educated in the pre-Keynesian, 19th-century tradition of economic thought. He had character, courage, conviction and communication skills that made him the greatest president of the 20th century.
Now they're giving Gov. Perry the same treatment. Good luck. By his lead in the polls, it looks like Americans, rather than dwelling on his transcripts, are cottoning to his common sense and sound policy ideas.
Source:  Investors Business Daily, September 1 2011