Wednesday, December 5, 2012

The 2012 Election is Over, But...

Even though the e-ink on the ballots is just beginning to dry, today alone I've already seen talk about a possible run for the Commander in Chief in 2016 by both Clinton and Ryan.
As I sit in Albany, NY in between meetings a block away from many state government buildings to type this, I am not shy about saying that I abhor politics and politicians in general.  But it's not them per se that bothers me as much as it is their utter lack of ability to deal with the biggest plagues this country has seen during the past 4 1/2 years since the great depression.

Long Term Captial Gains
In recent months, there was much ado about long term capital gains tax rates, which was hard to escape when people like Warren Buffet said (paraphrased) that there was something wrong when he's paying a lower effective tax rate than his administrative assistant.  And who can forget the ballyhoo surrounding Mitt Romney's tax returns, especially after it was revealed that his effective tax rate for 2011 was under 15%?

Should these men (and others) be vilified?  Certainly not.  If there exists a legal way to lower your taxes then berating them is in essence shooting the messenger.  Fix the problem instead of trying to punish the people who are doing what they are legally allowed to do.  And yet our duly elected officials in Washington, D.C. can't seem to determine what needs to be done or are unwilling to do it.

As far as the "what needs to be done" part goes, first it's worth the time to understand that investments, especially long term ones (held longer than one year), are essential to the growth of our nation.  Long term capital gains tax rates are necessarily lower to encourage people to invest in businesses rather than put their money in interest bearing vehicles like municipal bonds.  (I am not saying there is anything wrong with bonds.  But they are issued relatively rarely for big infrastructure projects typically so the effect that investors can have on the growth of the economy is somewhat limited as a result.)  This financial motivation needs to be preserved at the same time that we resolve the quandary that has resulted because the ultra-rich are able to throw fistfuls of money at the stock market to the point that they are getting sub-15% tax rates like Mr. Romney.

How do we meet these goals that seem to be at odds with each other?  In my opinion, the answer is simple:  replace the flat capital gains tax rate with a percentage discount of the effective tax rate based on the Adjusted Gross Income.  Using a 15% discount for the sake of example, Mr. Buffet's AGI would put him in the highest tax bracket (currently 36%) so the capital gains tax for him would be 36% - 15% * 36% = 30.6%.  He receives a material financial benefit for investing in the businesses that make this country strong, and the Federal Government gets just over double the tax revenue as well.

Depressed Housing Market
Another issue that has effected people in all income brackets is the housing market.  While I'm not naive in thinking that the mortgage industry was the sole cause of the financial crash in 2007, it certainly was the catalyst that started the chain reaction, ultimately claiming Bear Stearns and other financial institutions as a result.  The Occupy Wall Street movement capitalized on the situation stating that Wall Street got a bail out while those who were left with underwater mortgages because of their shenanigans were unable to bail themselves out much less expect someone else to help them along the way.  (Let's ignore the impotent mortgage modification programs that the Obama administration instituted.)

I bought a 600 square foot, one bedroom apartment in a nice area of Long Island, NY around the time that the market reached its apex.  And soon after, my wife got pregnant with our child requiring us to look for a larger place to live so I put my apartment on the market.  18 months later after selling at a 30% loss based on my purchase price I found out that I could not deduct the loss from my tax returns.

To me this seems outright silly.  I can deduct long term capital losses in the financial markets, so why can I not do so with a long term investment in housing?  While I have yet to find a confirmed answer to this, I can only speculate that it is meant to prevent people from intentionally selling at a discount, yielding a substantial tax deduction for them and a very cheap house for their children, for example.

The merits and demerits of this preventative approach can also be debated for hours, but in the end we have to assess the macro level view, which is to say that our steadfast refusal to allow these long term losses to be deducted has cost our GDP more than the loss of potential tax revenues that could have been avoided by savvy investors.  In other words, the longer we avoid taking drastic steps to alleviate the backlog of houses that cannot currently be sold due to the unwillingness for banks to approve short sales, the greater the impact that the extremely depressed housing market will have on our overall economy.

Finally, it has been noted several times in the media that unemployment has been inflated primarily because companies are hoarding cash to hedge against the risk that changes in corporate taxes will impact them significantly.  They are scared silly, and other items with significant financial impacts (such as "Obamacare") haven't helped either.

And yet I read that during the current negotiations to avoid the so called "fiscal cliff," the GOP offered as part of their plan to close several tax loopholes that are well documented and have existed for some time.  Why are they only now saying they are willing to do this?  The moment anyone says "well, now we're willing to do this," corporations want to run for the hills.  (Disclaimer:  I have not looked into the specifics of the loopholes offered by Speaker Boehner on behalf of the GOP so it is entirely possible that none of these are related to corporate taxes.  I would find this extremely unlikely given the propensity of the GOP to protect lower tax rates on individuals, especially those in the upper income class.)

These should be dealt with immediately so that corporations can have confidence in their financially ability to move forward without incurring significant additional risk to their ability to survive.  This will result in freeing up the cash that has been hitherto been hoarded for business growth activities including, presumably, hiring of additional staff to support that growth.

Your thoughts are appreciated.