Thursday, February 06, 2003

Note: I originally posted this at another blog by accident.

"White House Aides Push for 50% Cut in Dividend Taxes" (front page, Dec. 25) says tax analysts believe that bringing this tax in line with the lower capital gains taxes would eliminate an imbalance that favors faster-growing companies like Microsoft that do not pay dividends. It is those companies that we want to reward, as a way to increase job growth and give them more access to capital, which, in turn, creates even more jobs.
Passaic, N.J., Dec. 25, 2002

Let us be fair: Mr. Fumento is quoting from the original article: "Tax analysts said that would eliminate one imbalance in the current tax system that favors fast-growing companies like Microsoft that pay no dividends but attract investors with the prospect of big increases in their stock prices."), so it isn't really he who appears to be telling as many lies as there are words; it's Times reporter Edmund L. Andrews and the editors.

How many false statements are there? Well, for starters:

(1) MSFT is "fast-growing"

This will come as a major surprise to the company's investors, who see growth only through leveraging monopoly power and spending our money to force everyone else out of the market by losing a billion here and a billion there, such as with the X-Box.

(2) MSFT attracts investors "with the prospect of increases in their stock price"

This will also amaze MSFT investors, several of whom purchased the company at upwards of $90.00 a share. Even those of us who came in relatively recently (I bought my first shares in the company at approximately $66.60) will be amazed that there is a prospect of an increae in the stock price.

Additionally, one might fairly ask what type of investor is attracted to the prospect of a decrease in that stock's price.

(3) the attraction of investors to companies "with the prospect of increases in their stock prices" is an imbalance, and this, er, favoritism needs to be corrected

Let's see: You have a choice between a stock that pays a 2% dividend and may go up and a stock that pays no dividend and may go up. Doesn't the choice ultimately depend on whether you expect the stock to appreciate more? And when a company (say, MSFT, just to be consistent) continually throws its good money after bad investments, do you really expect its "prospect of increases" (I know no one who consistently buys stocks expecting them to decline) to outweigh those of the dividend-paying company?

Bad enough that the Times couldn't figure this out; guess they didn't have access to any chaart of MSFT stock, such as the one freely available from Yahoo! (for instance, the two-year graph ). Or maybe that the options for next January (available from appear to imply a fair price in one yar of around 54.70, which would be maybe 3% on the current stock price.

6 February Note: Current numbers project similarly on a percentage basis; it is simply that MSFT has dropped to 47.29

And then we have Mr. Fumento, who has been convinced by the Times that MSFT is a role model.

(4) MSFT needs more access to CAPITAL (part 1)

MSFT cannot access the capital markets? This will come as a great surprise to them as well as their stockholders (guess what? Stock is capital). Do they have any debt? With their excess cash on hand--much of which owns stock in other companies--it's difficult to believe they would have trouble finding a lender.

(5) MSFT NEEDS more access to capital (part 2)

MSFT is more cash-rich than Shrub's top ten campaign donors. And paying dividends REDUCES capital on-hand. So firms that actually NEED access to capital won't pay dividends, or at least won't increase them.

(6) MSFT is fast-growing

MSFT has a hiring freeze. Giving them more money will not change that. It will just make that money unavailable to some company that needs it.
The Real Danger of the Fiscal Budget

The Fiscal Year 2004 Budget, first discussed on the 4th, continues to provide endless amusement--until, of course, one considers that it is supposed to be a credible document, not a Tom Clancy novel.

This one becomes a tale of intrigue and outright lies on page 31, with the chapter--er, section--entitled "The Real Fiscal Danger." If you recall from the previous post (or see below), the White House has decided to shorten its budget projection to five years (all of which are, of course, in deficit). There are two things this allows them to do: either (1) not publish projections of greater deficits in future years which would belie their claim that the deficit trends downward or (2) project surpluses from the "stimulus" being provided that would imply that there will be revenues that would allow this and future administrations to maintain funding at current levels for some programs.

Which is most likely is, perhaps, a matter for speculation. However, the one piece of evidence presented (p. 28) indicates that the confidence bands for 2008 run from -$661B to +$281B. (It does not seem coincident, as a hint, that the document publishes the positive number first.) This implies that the mean expectation is a deficit of $190B. So from FY 2004 (-$307) to FY 2008 (-$190), there will be less than a 40% decrease in the annual deficit increase. It seems unlikely that the next 61.9% will become a surplus the following year, though I suppose it could happen if we do things such as charge Veterans more for health care, as the administration proposed today.

Apples and Oranges

So what we know so far is that (1) this Administration considers long-term budget projections unreliable, (2) we have a fiscal issue--deficits--that is not a crisis (see their commentary on the budget as posted on the 4th), and (3) the administration wants more tax cuts enacted.

What does this administration present for its brief discussion of Social Security and Medicare? 75-YEAR projections and then a present value legerdemain that they are the “real fiscal danger.”

Details to come.

Tuesday, February 04, 2003

Sorry about the delay in the mortgage deduction discussion, but a rather messy hard drive crash leaves me looking for a good Data Recovery shop.

Meanwhile, The Fiscal Year 2004 Budget from the White House is out, and it is delightfully funny. Favorite item so far comes from the explanation as to why this budget is only projecting out five years (p. 29):

[The Congressional Budget Office] also has noted problems with making five- and 10-year forecasts by stating, "Looking forward five or 10 years...increases the likelihood that budgetary decisions will be made on the basis of projections that later turn out to have been far wrong."

Given that this budget projects deficits for as far as they do project (instead of that legendary perpetual surplus that was touted in 2001), the previous few pages rationalising that the 2001 "tax relief law" didn't cause deficit spending appear disingenuous.

They get worse, of course, if you look at what is actually said (p. 27): "[I]f the tax cut of 2001 had never become law, the budgets for 2002 and 2003 would have been in deficit by $117 billion and $170 billion respectively."

So 2003 would have been -$170B. Instead (p. 28), "The Administration estimates that if the President's policies are enacted [but before the cost of any war] the federal government will run a deficit of some $307 billion this year."

I may be slow, or at least fuzzy-math impaired, but it looks as if they're saying that the tax cut is responsible for $137B worth of a $307B deficit. So 44.625% of the deficit is directly caused by a bill that was passed when some people (who should have known better then) believed there would be "surpluses as far as the eye could see."

Now that there are deficits as far as the eye can see, what is the appropriate reaction?

(p. 27) "By any measure, the projected deficit for 2004 must be judged as moderate. As a share of the economy (GDP), it would be smaller than in 12 of the last 20 years."

There aren't any specific numbers on the associated graph, but it appears that the exception years are 1995-2002. In other words, all but one of those twelve years to which we are supposed to compare the percentage were under Republican presidents. The fiscal conservatives of my ancestral party are rolling over in their graves right now.

More to come.