More Irony Courtesy of the Sausage Factory (with bonus Baucus Follies feature)

Just yesterday the WSJ Op-Eders treated us to the illogic of anti-trust enforcement (see here) and today they note the pathetic irony of the current direction on tax policy:

"There's another irony here: Advocates of higher taxes on the rich argue that Congress has a duty to inform Blackstone's prospective shareholders about the potential tax hike before the IPO. That's because if taxes are raised on these partnerships, the value of their shares will fall -- and no one wants small investors to take a hit. But the same logic should also apply to the 15% tax rate on dividends and capital gains that Senator Baucus and his fellow Democrats want to increase to 39.6% and 20% by letting the Bush tax cuts expire; that would also whack small investors by slashing stock values."

N.B. Here is a brief history of Max Baucus's follies - here, here, here, here, and here.

BaucusCare Would Incent Me to Dump My Plan

I've been thinking about the Baucus plan and maybe I'm missing something, but it could work out pretty good for me and many others like me. Let me walk you through this. Because we essentially already have ObamaCare here in New York state, I pay through the nose for my insurance, on the order of $20,000 (actually, I got a notice today that it is going up 20% in 2010). Unless someone in the Baseball household has a major procedure, the cumulative Baseball family healthcare spending comes nowhere near that, so we lose money, but we get the insurance value (which, of course, Anthony Weiner doesn't understand). So, Baucus (he who either lies or doesn't understand basic finance) is going to slap me with a penalty if I don't buy a government-dictated insurance policy that will almost certainly not be to my specific needs. That penalty ranges but let's say I get hit with the maximum that I've read, $3,800. Why would I not dump my insurance, pay the penalty, and have roughly $20,000 left over for out of pockets and "self-insurance"? I'm still pretty young, so aside from getting hit by the proverbial bus, statistically I've got several years of decent health in which to pay Baucus's silly fine and bank some reserves. Assuming I don't spend all the savings on getting drunk, I could bank $250,000 by the time I hit 50. In the meantime, I can take my cash horde to all the doctors that will opt out of BaucusCare, the same way they have opted out of Medicare, and negotiate privately. Medicine will be more expensive and innovation will suffer, which I am not happy about, but at least I won't be competing with and waiting in line behind all the rubes with their BaucusCare plan cards!

UPDATE: Now I read that the fine will max out at $1900. All the better for me to purchase healthcare services with cash on the barrel.

Max Baucus Bribes the Investment Industry

The Great Sausage Factory, under the management of the Democrats, is contemplating revising the tax treatment of how a huge swath of the investment world gets compensated. The WSJ has the background here. The tax hit that private equity firms, hedge funds and other investment vehicles that earn a "carried interest" would take would be enormous. It is hard to understand why the Democrats would contemplate such a move given that private equity and hedge fund money went solidly for them prior to last November and helped put them over the top. Why they would then turn around and poke this industry in the eye with a stick is a headscratcher. I guess the Dems feel that they might lose this support for the all-important 2008 cycle unless they do a little arm twisting. Thus the kabuki dance that Sausage Factory Division Supervisor Max Baucus is conducting over the issue. This Bloomberg article refrains from saying baldly that the bribe is underway, but the upshot is pretty clear, Baucus's crusade could easily come to naught if the campaign contributions continue to flow healthily into Democrats' coffers.

How You and Me Are Going to Outfox Max Baucus

Greg Mankiw has a post today rebutting Robert Frank's dismissal of marginal tax rate reductions. I am not going to wade into that technical discussion except to say that it is fun to watch academic economists dress up in jargon and debate, again, whether incentives matter. This post did however prompt me to post about a dinner I had the other night (where coincidentally Ned Phelps was sitting at the next table over from me...reducing his, or his companions', savings in lieu of a little consumption, namely of expensive wine, Williams-Selyem Pinot Noir to be precise). Anyway, at the dinner I was chatting with a large shareholder of a small company about recapitalization options. The company in question has a large amount of cash, very little debt and not much of an appetite for acquisitions. So how should we go about returning that cash to shareholders? Buy in shares? Maybe but that increases the equity holders' stakes increasing their reliance on a liquidity event someday, which may or may not be doable, depending on economic conditions, before 2010 when the 15% capital gains tax rate goes up. Why tee up a potentially much higher tax bill? Pay a dividend? Fine. Regular or one-time special? Well, if you commit to a regular dividend, you expose investors to the increased dividend tax rates when the 15% rate also goes up in 2010. A special dividend looks like the way to go. You can determine the precise amount of excess cash and control the timing, so shareholders can get a hefty payout at the 15% rate. OK, done, the big shareholder will discuss it with the Board of Directors.

That's when it hit me. I probably knew in a vague sense the consequences, but at that moment it crystalized for me. It is so obvious. Hundreds if not thousands of company's will be recapitalizing in 2009, paying out huge special dividends just before the dividend tax rate goes up. Many will lever up and many will cease dividends altogether post 2010 and use the cash flow to reduce the debt, in essence pulling profits forward in time to give their shareholders cash at the 15% rate and reduce the level of future profits that would be subject to higher rates of taxation. Imagine that, receiving your little slice of US corporate profitability for years 2011-2015 in 2010, cash money! The implications for the Treasury are that there will be a surge of revenue in 2010 and a cratering of revenue beyond. Private equity types are doing this already. When the outlook for capital gains is cloudy (or even when it is not) they sell bonds to pay themselves a fat dividend. As 2010 approaches, everybody will be getting in on this game. You've got to own stocks to get your share of the cash tsunami but massive capital losses would be in the offing. Start learning now about buying long dated puts on the market indices and/or selling calls.

Furthermore, congress will interpret the revenue surge as a permanent increase in the tax base, and they will rapidly increase spending. The post 2010 federal budget deficits could be huge when the tax receipts dry up. With guys like Max Baucus at the wheel, I say it's a safe bet. Won't be good for treasuries.

With treasuries and stocks looking bad, usually what happens is capital flows to real estate (think 2002). I think it is fair to say that 2011 is far enough away for the collective memory of where we are today with real estate to have faded by then. I predict another real estate boom circa 2012.

Now It All Makes Sense - Baucus Edition

Finally!! There is an explanation for Max Baucus's idiocy, which I have been diligently chronicling since 2006!

Now, I know that we easterners should not talk, but really, Montanans...you can't find anybody better to send to DC?!?!?!

Sen. Baucus Reports to School Early

I laid down my marker awhile ago that Max Baucus would get a painful education in tax avoidance behavior as corporate America's sharholders outfox him. Turns out he is already getting an early tutorial in the incentive effects of shifting tax policy.

Something I Never Thought I'd Say...

I will drink to Max Baucus! (Note: drinking apparently is the appropriate salute) Actually, Sausage Maker Baucus is probably not genuinely doing us any favors, just bowing down to the reality that, whatever party is in power, we - meaning the hedge fund industry - play the game pretty well too (except for that whole Barack Obama thing).

This Max Baucus's Stock Market

Kudlow thinks the stock market is rocking because of robust profits combined with low interest rates. Sure, I guess. I think it is because by buying stocks, investors are going to receive all the corporate profits from 2011 and several years hence in an advanced payment at the low low tax rate of 15%. I call it the Max Baucus Lottery. You gotta be in it to win it!

Less Than Six Months Left to Stick It To Max Baucus!

In my ongoing efforts to give the likes of Max Baucus a lesson in supply-side economics, here is an except from a letter I posted today to the Chairman of a publicly traded company in which I own a decent stake...

"Turning to slightly longer term considerations, the 15% tax rate on dividends established by the Jobs and Growth Tax Relief Reconciliation Act of 2003 will likely sunset at the end of this year barring action from Congress to extend it. In order to return cash to shareholders in the most tax efficient way, we encourage the Board of Directors to consider altering its dividend policy if the current dividend tax rate is indeed allowed to expire. In such a case, we recommend that the Board 1) declare a special dividend equal to 3 times the normal annual dividend...to be paid before the sunset provisions take effect, 2) cease regular dividend payments in 2009 and beyond, and 3) commit to a share buyback program sufficient to retire at least 1% of the outstanding shares for every year in which regular dividends are not paid, subject to the share price level."

I'll keep readers posted as to whether management is on board.

Background here and here and here.

Holman Jenkins On The Baucus Shakedown

Holman Jenkins gives wider audience to Max Baucus's (along with co-bandito Chuck Grassley) Wall Street shakedown machine that I highlited previously. The best reason to read Holman is that he always cuts through the farsical political thicket to ask the one, seminal question on any issue. In this case it is:

"But what about the economic issue? Any tax is a disincentive, so let's just say the tax code imposes less of a disincentive than it might to what private equity does: buying, overhauling and reselling companies. Is there a public-interest reason suddenly now to use a tax-policy bludgeon to reduce the attractiveness of this business?"

Of course another good reason to read Holman is that his plucky writing style gives us fantastic formulations like "unlimbered a delicious flow of campaign dollars."

Markets Not Channelling Max Baucus

I have posted numerous times on how failing to extend the tax cuts of dividends and capital gains will tank the stock market. Well, Don Luskin highlights a disturbing trend. Someone tell Senator Baucus.

Stupid Is As Stupid Says

Bloomberg has a story on the Senate's vote on a tax cut package that clears the way for a conference committee to extend the dividend and capital gains tax cuts, which are currently set expire in 2008, to 2010. The article is nothing exciting except for a quote from Sen. Max Baucus (D-MT), who expresses his hope that the tax cut extension won't be included in the final conference bill. The Montanan actually said "it will make no sense to focus on capital gains and dividends issues that won't affect a single American until 2009."

Now I don't actually think that Sen. Baucus is really that stupid, but rather he is ignoring what he knows to be true in order to present an alternative analysis that is consistent with his party's legislative goals. While I have observed that this behavior, a form of dishonesty, is commonplace among elected officials (points for subtle understatement?), I nonetheless believe in the principle that people should be ridiculed for what actually comes out of their mouth if warranted.

So, until such time as courses in basic corporate finance are available to Montanans, let's help the Senator out. All together now...

Net...Present...Value...of...Future...After...Tax...Cash...Flows.

Donny Baseball's Anti-Max Baucus Capital Allocation Blueprint for Public Companies

Ripped directly from Strattec's (STRT) 2007 annual report:

"The Board therefore declared a regular quarterly dividend of $0.15 per share. Further, given the magnitude of our cash reserves and the current relatively favorable tax treatment of qualified dividends, the Board believes this is an opportune time to declare a special, one-time dividend of $1.00 per share. Both our initial quarterly dividend and the special dividend are payable on October 1st, 2007 to shareholders of record as of September 14, 2007."

Smart companies, and hopefully companies that I am invested in, will have this in their 2009 annual reports:

"Further, given our cash position and the impending changes in tax policy, the Board determined that the best way to return excess cash to shareholders was to declare a special dividend equal to the dividends that the company would have paid in fiscal years 2010 and 2011. This special dividend will be paid to shareholders of record on December 15, 2009, and subsequently the company will cease regular dividend payments. To compensate for the loss of regular dividends, the Board has increased the authorized share repurchase plan to allow the company to buy back up to 15% of outstanding shares through December 31, 2012."

Translation: "Suck it, Max Baucus."

US Stock Market Eating Fried Turkey?

Here's a thought (just spit-balling here), maybe the stock market is defying the negative prognostications of all the nattering nabobs because the good ole' US of A is looking a helluva lot more attractive given unsettling political developments in places that were once thought to be relatively stable and attractive emerging markets. You've got the spread of Chavismo, then Thailand, now Turkey.

Although you'd expect such an attitude to buoy the dollar which ain't happenin' so the theory is speculative. Still my leading candidate is what I call the Max Baucus Lottery.

Luskin on Rangelnomics

Don Luskin explores the "voluntary" nature of Rangelnomics in today's WSJ. Much like I posited here - "One way to achieve this would be to simply stop working. Imagine someone age 42 who has accumulated $4,999,000 million in assets and currently makes $499,000 and whose career/business trajectory will place them over the thresholds in short order. That person could decide that they have enough money to live a cushy life playing alot of golf, skiing and/or taking frequent, splendid vacations abroad " - Don rightly points out that the Laffer Curve cuts both ways - "All the rich need to do in order to make true Mr. Rangel's characterization of our tax system is to retire to their yachts, rather than continue to contribute to the economy by running hedge funds or doing private equity deals." Best line, "Mr. Rangel will get a lesson in supply-side economics he'll never forget." Not just him, but Max Baucus too.

So, You're Gonna Raise My Taxes?

Barack Obama: "I will raise taxes."

Donny Baseball: "I will shelter income."

Totally legally of course. IRAs, HSAs, 529s. Plenty to work with there. Build up a stash now, so maxing out all these contributions during an Obama presidency won't hurt you. Got some equity in your house? HELOCs are going cheap. If you were planning on doing an addition or any work that could add to the value of your home, now is the time. The HELOC can give you an additional mortgage interest deduction and you pad your long term asset base. Jittery about the housing market? Get over it. Buy that house and get that mortgage deduction and property tax deduction. Have more than 20% to put down? Stick to 20%. Put the excess in munis and take the bigger deduction. Own stocks? Write the Board of Directors and suggest they implement the Donny Baseball/Anti-Max Baucus Advance Dividend Payment Scheme.

Happy tax avoidance!

Healthcare Fun

Pew took a poll. Even after skewing the number of respondents in favor of Democrats by 11%, they still got results showing that 47% oppose ObamaCare versus 34% that support it. And even then, Bloomberg reported it as a win for Obama.

The MSM is crowing about the CBO scoring of the Baucus bill even though it is a total sham (complete with government math), it is not a bill, it is totally conceptual. The bill, if we actually get one, will not look like the concept at all. And we won't know the difference because we won't be able to see it because the Democrats opposed posting the bill for a even a modest amount of time so people can read it. Of course anybody with common sense would ask, why are they hiding this thing? Well, because they don't want you to know what is in the bill because it has nothing to do with healthcare reform, it has to do with government control and wealth distribution.

This is your government ladies and germs. Have a nice day.

Let's Call A Liberal Institution A Liberal Institution

Let's argue from elementary principals even though the argument will never be accepted on elementary principals; it'll be horned into Lakoff's phony theory of mean conservatives versus nurturing liberals.

So let's go.  ObamaCare is a massive income redistribution mechanism, so says Max Baucus in a moment of candor.  Blacks will be the overwhelming beneficiaries of this income redistribution that we call ObamaCare.  So when Romney says that he wishes to repeal ObamaCare, he says that he wishes to halt a massive income redistribution scheme towards blacks.  Is there any wonder they, the NAACP - a fervently pro-income redistribution group - would boo this policy proposal?  Of course not.

What is left unreported and unanalyzed is how unemployment, the result of poor economic growth - affects the black community.  One could argue that what they will gain from ObamaCare is easily negated by what they lose due to unemployment and low wages resulting from a lack of economic growth.  Romney tried to convey this message, but you can be 100% sure that it didn't register and that the media won't report the nuance.

Am I saying that the NAACP is incapable of parsing this nuanced message? Yes, I am.  Notice I am not saying that black Americans are not capable of parsing this message.  Not at all.  Just the NAACP.

It was good that Romney spoke to the NAACP, but let's face it...it was a waste of time.

Whose Goons? Schums's Goons?

...before I get started, let me just say, is that title worthy of Suess's Fox In Socks, or what?!?!

Do I just have a fan within the office of the U.S. Senate Sergeant at Arms or are Chuck Schumer's jack-booted goons after me AGAIN! Or maybe it is Max Baucus's goons...like I was a big insurance company or something? Who bloody knows. Anyway gentlmen, I have like 20 readers, go pick on Fox News.

Merrill Lynch Talked Down From The Ledge

Merrill Lynch smartly decided to hold on to the securities that it seized as collateral for loans from two busted Bear Stearns hedge funds. No sense in dumping these CDOs on the market, but I think what was really at work here is that the industry at large helpfully suggested to Merrill that the current political environment is not an auspicious time to showcase more negative fallout from the subprime lending crisis. The Sausage Factory is currently debating the "Blackstone Tax" in addition to substantially higher and punitive tax increases on private equity and hedge fund compensation, protectionist measures against global trade, higher taxes on energy producers, a 4.3% surtax on high income earners to provide AMT relief, and countless other anti-business, anti-growth policies. Now is hardly the time to draw negative attention to these derivatives markets and investment vehicles. The political risk to economic growth and the investment climate is too great. Whether or not these CDOs are toxic or not, best to take one for the team and lay low. Don't give farm country populist goofballs like Grassley and Baucus any more ammunition to crusade against what they don't understand.

UPDATE: There is alot to this story. One interesting twist is that Bear Stearns's rival banks were probably happy to let Bear twist alone in the wind as comeuppance for its crappy move over the LTCM affair years ago.