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Wed. May 21, 2003

Voodoo Deja Vu

Voodoo Deja Vu – I’ve been meaning to write about this for a while, but when it comes to high finance, who would listen to a self employed creative type of middling success? Thankfully, some Big Guns have stepped up to the plate, as “America’s Richest Assail Bush Tax Cut”: “You would think two of the wealthiest Americans would have no problem with a tax cut that would put thousands, if not millions, of dollars in their pockets. But billionaire investors Warren Buffett and George Soros, Nos. 2 and 24 on Forbes Magazine’s list of the 400 richest Americans, both railed on Tuesday against President Bush’s plan to deepen income tax cuts and eliminate taxes on corporate dividends.”

Mr. Soros, worth over $6 Billion, “said they would not revive the U.S. economy in the short-term but were only aimed at helping the rich get richer. ’This move is designed not to have much impact now. It’s designed to have an impact over an extended period and it’s basically using the recession to redistribute income to the wealthy.’”

Wow. A multi-billionaire who doesn’t lust after the next billion enough to just keep his trap shut and accept the windfall. And he’s not alone.

I’ve been meaning to write about this because it creates a certain sense of deja vu. Once upon a time, a President told us he was going to slash the tax base of this country by a third, and double defense spending. At the time, I saw this as the personal equivalent of me saying, “I’m going to tell my boss to cut my pay by 33%, and I’m going to buy a Mercedes convertible.” It might work, but only for a little while.

At least one of the people also running for President at that time had similar feelings. George Bush Sr. called Reagan’s plan “Voodoo Economics.” Of course, he later went down to the crossroads to make his deal with the devil, became Reagan’s running mate, and apparently passed the Voodoo legacy on to his son.

The result of Voodoo Run #1? The national debt went from about $900 Billion when Reagan took office (largely built up during the later years of the Vietnam War), to over $4 Trillion dollars by the end of the 80’s. To this day, we pay well over $100 Billion per year … in interest on that debt. It’s like the world’s largest over the limit credit card. We rarely touch the core debt, we just flush hundreds of billions down the toilet in interest payments.

I know, someone will scream out, “Clinton balanced the budget, generated a projected surplus, and that was supposed to be used to pay down the national debt, but Bush squandered it!” Unfortunately for partisan debate, it’s a bit more complex than that, because of that word “projected.” In fact, you might call it Voodoo Run #2, even though it was almost a complete inversion of the Reagan approach.

While 2002 was not a banner business year for me, come January, 2003, I had a very good month of income generation. The best in quite some time. I could have decided, this is my new economic reality, and every month this year, my income will rise by X% above this January base. I could have made grandiose plans based on this projected income, possibly even some grandiose financial commitments.

But I didn’t, because I knew it was an aberration, and sure enough, February reverted to more normal levels. Well, what did we collectively have during the late 90’s? A gross financial aberration, where people made 30, 50, 100 percent on their investments per year. They job hopped to great salary jumps with big stock options. And we thought it would go on forever. We planned on it.

And for every dollar made during that massive boom time, the government got some dimes in taxes. Sure enough, with this revenue influx we soon could not only balance the current year budget, we could project that at this rate, we could pay off the national debt in XX years, as well as give everyone free ice cream for life.

Well, the free ice cream stopped in the second quarter of 2000. Those dimes stopped flowing in at such an exuberant rate, and sure enough, those projections became completely invalid. As they were from the beginning.

Now we approach Voodoo Run #3, the Return of Deficit Spending. And I think we should heed the words of Warren Buffet, who has written an excellent editorial in the Washington Post entitled “Dividend Voodoo.” Mr. Buffet caught a lot of flack during the late 90’s boom, because he did not move his fund into heavy investments in booming high tech stocks. Many of his fund owners felt he was foolish to miss out on the huge increases. But he knew it was an aberration, and in the Death Valley days of the post-boom market, his fund didn’t crash, it kept up the respectable gains it had been making for decades.

And like me, Mr. Buffet tends to real world examples. He explains that right now, all things considered, he and his receptionist pay about the same amount of their grossly different incomes to the government … about 30 percent. He then explains what would happen to that relative parity under the new tax cuts: “Owning 31 percent of Berkshire, I would receive $310 million in additional income, owe not another dime in federal tax, and see my tax rate plunge to 3 percent.”

“Let me repeat the point: Her overall federal tax rate would be 10 times what my rate would be. When I was young, President Kennedy asked Americans to ’pay any price, bear any burden’ for our country. Against that challenge, the 3 percent overall federal tax rate I would pay—if a Berkshire dividend were to be tax-free—seems a bit light.”

He also points out the sheer idiocy by which this will be achieved: “The Senate decided that the dividends an individual receives should be 50 percent free of tax in 2003, 100 percent tax-free in 2004 through 2006 and then again fully taxable in 2007. The mental flexibility the Senate demonstrated in crafting these zigzags is breathtaking [...] The manipulation of enactment and sunset dates of tax changes is Enron-style accounting, and a Congress that has recently demanded honest corporate numbers should now look hard at its own practices.”

Indeed. And we should all look hard at where the impact of this cut falls. Look at yourself. How much will you personally gain from tax free dividends in 2004? Now, look up the chain, and see where the benefit falls for them. There’s no need to look down. You’ll just see me.

But of course that’s just the peasant viewpoint, so take it from the Second Richest Man in America: “When you listen to tax-cut rhetoric, remember that giving one class of taxpayer a ’break’ requires—now or down the line—that an equivalent burden be imposed on other parties. In other words, if I get a break, someone else pays. Government can’t deliver a free lunch to the country as a whole. It can, however, determine who pays for lunch. And last week the Senate handed the bill to the wrong party.”

“Supporters of making dividends tax-free like to paint critics as promoters of class warfare. The fact is, however, that their proposal promotes class welfare. For my class.”

George Bush needs to be careful about his father’s legacies. His dad enjoyed sky high approval ratings after a highly successful war, and looked politically unbeatable. 18 months later, he had his butt handed to him by a Democratic challenger who was largely unknown at the time of the Gulf War.

When billionaires speak out against a tax cut, claiming it “promotes class warfare,” it’s becoming clear it could easily happen again.