Obama's Dividend Assault: Silver Lining for Private Equity?

[1] Among the proposals in the 2013 budget, Team Obama wants to increase the tax rates on dividends received by the "rich." Obama defines "rich" to include families that earn $250,000 annually (and single individuals that earn $200,000).

(Any higher thresholds would substantially reduce the amount of taxes raised from increased taxes on the "rich." As government's thirst for revenue intensifies, expect the threshold to drop. It's all relative. A family that earns $150,000 is living large compared to a family that earns $50,000. And an individual that earns $75,000 is sampling the good life compared to an individual that earns $25,000.)

[2] In today's Wall Street Journal, the editors took aim at President Obama's "assault" on dividends. (Sub. required; thanks to Paul Caron for the link.)

Mr. Obama is proposing to raise the dividend tax rate to the higher personal income tax rate of 39.6% that will kick in next year. Add in the planned phase-out of deductions and exemptions, and the rate hits 41%. Then add the 3.8% investment tax surcharge in ObamaCare, and the new dividend tax rate in 2013 would be 44.8%—nearly three times today's 15% rate.

Keep in mind that dividends are paid to shareholders only after the corporation pays taxes on its profits. So assuming a maximum 35% corporate tax rate and a 44.8% dividend tax, the total tax on corporate earnings passed through as dividends would be 64.1%.

The numbers are pretty shocking, but consistent with Obama's core philosophy. Obama is campaigning in 2012 as a populist Robin Hood. As many have noted, the 2013 budget is a political document at its core.

[3] I'm actually more interested in the "knock on" effects of the dividend tax increase. The WSJ editors argue that increased dividend tax rates will "make stocks less valuable." Maybe so, but probably not.

The WSJ article includes a graph that tracks reported dividend payments from 1990 through 2009. The graph suggests that corporations increased dividend pay outs in response to a dividend rate cut in 2003. Let's assume that the relationship is causal, i.e., the decrease in tax rate on dividends caused corporations to increase dividend pay outs.

What happens if tax policy changes, and dividend tax rates are increased (for those "rich" families that earn $250,000 annually and their distant cousins, the mega-millionaires and uber-billionaires)?

If there is a causal relationship between dividend tax rates and corporate distributions, we'd expect corporations to reduce distributions. However, corporations have two ways to return cash to shareholders. They can pay dividends, which is arguably good for retail investors on fixed incomes (traditionally, "widows and orphans"). And they can engage in stock repurchase transactions, which is arguably good for other investors who want capital appreciation without dividend income (and current tax leakage).

A dividend tax increase does not impact the cash from operations available for distribution to a corporation's shareholders. It simply impacts the form of distribution. Ironically, this flexibility at the corporate level makes static budget forecasts unreliable. A dividend tax rate increase may raise immaterial revenues if corporations shift gears and increase stock repurchase activity. So what's the point? Political distraction. And, if nothing else, President Obama gets to wear his Robin Hood tights and cape for his political admirers.

[4] Finally, let's assume that higher taxes on dividend income do, in fact, take some air out of the market for public equities. In other words, assume that Obama's assault on dividends "make stocks less valuable." Would this be bad for the "tens of millions" of Americans that own stock "through pension funds"?

In fact, lower equity valuations would probably benefit pension funds and their individual beneficiaries. Ironically, lower equity valuations may provide a silver lining for their private equity advisors.

I won't get into a full-blown discussion of the relationship between pension funds and private equity. Suffice to say, despite all the hype about private equity, a substantial majority of the capital for private equity managers is invested by pension funds.

Unlike high-income individuals, pension funds generally pay no income tax on dividend income (or interest income, or other forms of passive income). If increased dividend tax rates decrease equity valuations, private equity managers will have "cheaper" opportunities to deploy their investment capital. They can improve the performance of portfolio companies, strip out operating cash flows through tax-exempt interest and dividend payments, and flip investments at slightly lower earnings multiples.

Big pension funds win. Private equity fund managers win. Only small individual retail investors lose. But what else is new when government interferes with capital markets?

Back in Action

For readers that paid attention to this blog in the second half of 2011, I apologize. I intended to take a one-month hiatus in December. The one-month hiatus turned into two months and then three months.

Meanwhile, there has been no shortage of "tax news." Most of it is politically motivated rubbish. Team Obama continues to hype its class warfare fantasy that increased taxes on the "rich" will solve virtually every social, economic and environmental problem that has surfaced in the past decade. The political right has countered with its own policy lies and distortions. It's going to be a long year for us political independents.

I can't possibly "catch up" on the barrage of tax news clippings over the past 10 or 11 weeks. So I'll jump back into the fray as developments catch my eye.

* * * * *

As I've previously observed, Team Obama is completely incoherent when it comes to tax policy. Sometimes, Obama talks the talk of common sense tax reform. Mostly, Obama walks the walk of a populist Robin Hood. Sure, he wants tax simplification ... but he also wants to expand tax incentives for "favored" industries and activities. Sure, he wants to improve the competitiveness of U.S. businesses ... so long as the government can use tax policy to shape the winners and losers in the domestic business landscape.

The President's fiscal 2013 budget proposal reflects his irreconcilable tax priorities: simplification; competitiveness; corporate welfare; income redistribution. The former two goals would be good for all of us. The latter two goals are good for politicians seeking annuities -- in the form of political donations -- from corporate lobbyists, unions, and other special interest groups. Martin Sullivan puts it this way:

As it is trying to promote tax reform [in its fiscal 2013 budget proposal], the Obama administration is defying the logic of real tax reform -- the economic logic that tax neutrality is best for growth and job creation except in extraordinary circumstances.

What administration incentives hinder true tax reform efforts? A conversion of the already complicated section 199 manufacturing deduction into a two-tiered incentive. A temporary incremental wage credit for small business. A tax credit for investment in communities that have experienced a job loss event. A tax credit for moving expenses when companies move jobs to the United States. New tax credits for alternative energy to replace the existing ineffective and outdated ones.

This is big government through tax policy. The complexity of these new tax breaks is extraordinary even by the standards of our tax code... And as for the coming corporate tax reform, there is no more place for them there than there is for a fox in the henhouse. (134 Tax Notes 922 (Feb. 20, 2012))

In his 2008 election campaign, President Obama vowed that he would renounce "politics as usual." That empty promise, like so many others, was simply "politics as usual." No surprise that, come 2012, we're getting more "politics as usual."

Team Obama is not interested in, nor committed to, fundamental tax reform. The existing system creates winners and losers, and the Obama administration believes that the government exists to create winners and losers. Team Obama is very comfortable with the status quo, so long as it can influence the choice of winners and losers.

The media and the blogosphere will spill much ink on the topic of "fundamental tax reform" this year. The Obama administration will give a wink to simplification and a nod to increased competitiveness. But it's all about distraction in 2012. Any debate about "tax reform" takes some of the focus off trillion dollar budget deficits as far as the eye can see. It's savvy "politics as usual" from a master of smoke and mirrors.

Hypocrisy and McMansions

Happy Thanksgiving Weekend!

With the national economy sputtering and unemployment around 9%, many Americans will need to tighten their belts this holiday season. Meanwhile, Democrats and Republicans in Washington teamed up to serve up a big order of Hypocrisy on a silver platter.

On November 18, President Obama signed into law a bill that reinstates higher conforming loan limits for the Federal Housing Administration through 2013.

In plain English, home purchasers can now receive cheaper financing on home loans up to $729,750. The financing is "cheaper" because it's effectively guaranteed by the federal government (i.e., taxpayers). The interest rate on non-conforming jumbo loans is roughly 0.75% higher that the interest rate on conforming loans.

Hypocrisy...

Gee, isn't this a sign of progress? Team Obama was finally able to hammer out a bipartisan consensus with Republicans. The House passed the bill with a healthy 298-121 majority. Of the dissenters, 101 were Republicans and 20 were Democrats.

The main progress here was the blatant display of hypocrisy. Politicians didn't hold their noses against the stench and enact this bill in the dead of night. They transparently abandoned their "core principles" in broad daylight.

Let's start with the Democrats. The Obama administration and Congressional Democrats have relentlessly spun the following narrative:

The Great Recession was brutally difficult for lower- and middle-income Americans. But upper-income Americans emerged largely unscathed. And many of them actually profited from the economic downturn. The top 1-2% have "unclean hands" because they have not suffered the harshest effects of the economic downturn. And it is time to "spread around" some of their wealth by creating or expanding government programs funded by increased taxes on the top 1-2%.

Rhetoric aside, these tireless advocates for the middle class understand where their bread is buttered. The most expensive real estate in the United States is concentrated in Democratic strongholds on the East and West Coasts. Wealthy liberal enclaves provide enormous financial support to Democratic politicians. Note that House Democrats overwhelmingly supported the legislation.

A middle-class American cannot afford a million-dollar McMansion. She does not need a $700,000 jumbo loan, conforming or non-conforming. This legislation was nominally intended to keep an ailing real estate market on life support. But the main people hurt by a softer real estate market are the affluent real estate brokers and financial institutions that service upscale local markets. To quote tax blogger James Maule, "boo hoo" for affluent real estate brokers. Democrats howl about cuts to services for the "most vulnerable" Americans. Yet when push comes to shove, they prioritize subsidies to affluent real estate brokers by propping up home values in the wealthiest communities.

How about the Republicans? Most Republicans argue that free markets work, and that government intervention tends to cause more problems than it solves. Many Republicans have criticized government policy for exacerbating the housing bubble that burst in 2007 with such a devastating effect.

But Democrats do not have a monopoly on wealthy political donors in expensive homes. The "crony capitalism" that riled up the Occupy Wall Street crowd has deep roots on both sides of the political aisle. The main Republican advocate of the bill was John Campbell (R-Calif), whose constituents in Orange County have taken large haircuts on million-dollar homes. Republicans lose all credibility when they argue that certain sectors of the economy should remain on taxpayer-funded life support.

Republican also like to play the "certainty" card. They frequently argue that the economy is sputtering because individuals and businesses are uncertain about the future of government policy. But in this case, Republicans reversed course on a prior aspiration to scale back the federal government's role in residential housing finance. The acting director of the Federal Housing Authority bluntly criticized the legislation as "sending the wrong signal."

...and McMansions

The federal government (i.e., you and me as taxpayers) provide two main subsidies to the residential housing market. The first involves federal loan guarantees, which shift risk from private lenders to the government and, ultimately, taxpayers. Federal loan guarantees make it cheaper for homeowner to borrow money, which means that they can bid more for homes.

The second involves the deduction for home mortgage interest. Effectively, the mortgage interest deduction is a tax subsidy for home owners. Although the mortgage interest deduction is capped, it has the same overall effect as the federal loan guarantees. By reducing tax liabilities, the mortgage interest deduction frees up cash to service home mortgage principal and interest payments.

Here's the funny thing about the federal subsidies. They are nominally intended to make home ownership more accessible. But they don't make housing more affordable. On the contrary, the subsidies make housing less affordable, because they permit home buyers to qualify for bigger mortgages and pay for more expensive homes than would be possible without the subsidies.

Okay, if homes aren't more affordable, then who benefits from the subsidies? In other words, who benefits from government policies that increase the cost of housing above market rates?

Primarily the housing lobby, comprised of home builders and real estate agents. The former group (home builders) employs large numbers of union and other blue-collar workers in the construction industry. No surprise that Congress might want to direct economic subsidies to this group. In addition, local governments benefit from higher real estate prices, which translates into higher property tax revenues. Many local governments jumped on the bandwagon during the bubble years, assuming that real estate prices and property taxes would increase in perpetuity. They developed long-term budgets and entered into contractual obligations with service providers (teachers, police officers, bureaucrats) that have become unsustainable after the bubble popped.

The deduction for mortgage interest is second largest tax expenditure (estimated to cost $99 billion in 2012). Eliminating it would tend to make housing more affordable over time (by reducing the inflation-adjusted value of residential real estate). That's a bad result for many existing homeowners, but a good result for new homeowners. If political actions mirrored rhetoric, we would expect that Democrats and Republicans could agree on a plan to phase out the deduction over time. Home prices would become more affordable for the 99%. And individuals would re-allocate capital away from (subsidized) housing into more productive activities.

But political hypocrisy is just as certain as death and taxes.

Free Lunch Politics

I've been critical of the tax and economic policies advocated by Team Obama and its cheerleaders on the political left. However, for the last 30 years, Republicans in Congress have been complicit in the debt-fueled expansion of the federal budget.

Despite their public animosity, Democrats and Republicans have each promoted a "free lunch" philosophy to the voting public. Of course, their marketing of the "free lunch" philosophy is slightly different.

Democrats target their message to middle- and lower-income taxpayers. They argue that increased taxes on "millionaires and billionaires" can finance larger entitlements and higher discretionary spending. The middle-class can enjoy a "free lunch" courtesy of income redistribution. The harsh reality -- which most Democrats won't acknowledge publicly -- is that we cannot plug the long-term budget gap through increased taxes on "millionaires and billionaires." To fund Democratic spending initiatives, we'll need higher taxes across the board. Today, the political left defines the "wealthy" as working professional families with $250,000 in taxable income. How low will they go to finance tomorrow's spending initiatives?

Republicans target their message to middle- and higher-income taxpayers. Under Team Bush, they cut taxes while increasing entitlement spending for seniors. Lower taxes, higher spending? Sounds like a "free lunch" to me. Except for that little problem with deficit financing. Today's deficit spending will increase future interest expense and impose higher tax burdens on future generations of taxpayers. I'm not suggesting that all deficit spending is problematic. But Republicans have been disingenuous by attempting to kick the can permanently down the road.

Today, Republicans oppose "tax increases" as a mechanism to reduce the federal budget deficit. Like obsequious courtesans in the House of Norquist, they conflate elimination of tax expenditures with marginal tax rate increases. But tax expenditures have the same impact on federal deficits as on-budget cash outlays. Lowering tax expenditures will increase taxes for some taxpayers, but may permit broader tax relief for all taxpayers. As Congress grapples to slow the accumulation of federal debt, Republicans should be aiming to reduce federal spending and tax expenditures.

The other problem with tax expenditures is the fact that they distort economic behavior. Tax expenditures provide government subsidies for activities that Congress wishes to encourage. Given his defense of tax expenditures, Grover Norquist must believe that members of the Ways and Means Committee are better capital allocators than the free market.

By distorting economic behavior, tax subsidies can lead to over-consumption of goods and services. For example, the exclusion from taxable income for employer-sponsored health insurance is a major contributor to the runaway inflation of health care costs. Employees with generous health care packages have no incentive to control costs. Absent a price transmission mechanism, they consume more and higher-cost health care services. The excessive demand outstrips supply for medical products and services. The supply-demand imbalance translates into higher insurance premiums for individuals and businesses.

Tax expenditures can also lead to the mis-allocation of capital. For example, the mortgage interest deduction encourages taxpayers to "stretch" and purchase a little more home than they can otherwise afford. The behavior wasn't a problem during the real estate bubble. However, it had devastating consequences on thousands -- if not millions -- of homeowners during a period of high unemployment and real estate deflation.

Finally, tax expenditures can result in tax "windfalls" for high-income taxpayers that don't need the underlying tax subsidy. Take the home mortgage interest deduction. The home mortgage interest deduction has a higher value to a high-income taxpayer that pays a top marginal rate of 35% than a lower-income taxpayer that pays a top marginal rate of 25%. The lower-income taxpayer saves $250 in tax on $1,000 in mortgage interest expense. The higher-income taxpayer saves $350 in tax on $1,000 in mortgage interest expense. But capping the benefit of the mortgage interest deduction is no solution. If a taxpayer can afford a half million dollar home -- or a million dollar home -- why are we providing a tax subsidy at all?

I'm not the first to highlight the problems with tax expenditures, and I won't be the last. We desperately need fundamental tax reform, which I define as base broadening combined with marginal tax rate reductions. The first step towards any such tax reform must include an acknowledgement by Free Lunch Republicans and Free Lunch Democrats that tax expenditures are on the chopping block.

Searching for the Elusive "Fair Share"

On Monday, David Logan of the Tax Foundation issued a report summarizing the individual income tax data from 2009. Highlights (or lowlights, depending on your perspective):

- Nationally, average effective income tax rates were at their lowest levels since the IRS began tracking them in 1986. The average tax rate for returns with a positive liability went from 12.24% in 2008 to 11.06% in 2009.

- Incomes reported by tax returns at the high end of the income spectrum fell from 2008 to 2009, as did their share of the nation's income and income taxes paid. In 2009, the top 1% of tax returns paid 36.7% of all federal individual income taxes and earned 16.9% of adjusted gross income (AGI), compared to 2008 when those figures were 38.0% and 20.0%, respectively.

- Each year from 2005 to 2007, the top 1%'s constantly growing share of income earned and taxes paid set a record. The 2008 reversal of this trend continued in 2009. In fact, the income share for the top 1% of tax returns was lower in 2009 than in 2000, largely due to differences in capital gains.

- In 2009, as in 2008, the top 1% no longer pays a larger percentage of total income tax than the bottom 95%. This trend was exacerbated by the aforementioned precipitous drop in AGI in 2009. During 2009, the bottom 95% (AGI under $154,643) paid 41.3% of the total collected, a larger share than the 36.7% paid by the top 1% (AGI over $343,947).

- The top-earning 5% of taxpayers (AGI equal to or greater than $154,643), however, still paid far more than the bottom 95%. The top 5% earned 31.7% of the nation's adjusted gross income, but paid approximately 58.7% of federal individual income taxes.

- Since 2001, the IRS has also been presenting data on a small subset of the top 1%, the top 0.1%. In 2009, this top 0.1% filed 137,982 tax returns, reporting 7.8% of all adjusted gross income earned and paying approximately 17.1% of the nation's federal individual income taxes. The average income for a tax return in the top 0.1% was $4.4 million in 2009, while the average amount of income tax paid was $1.07 million, indicating an average effective individual income tax rate of 24.3%.

- Overall, these data on high-income tax returns appear to confirm that the continued economic stagnation had the same diminishing effect on income inequality that most recessions have, and that it occurred for the same reason: a sharp decline in income at the high end. This appears to contradict reports based upon Census data suggesting the opposite that the recession increased income inequality.

Logan's report is particularly timely, in the midst of ongoing Occupy Wall Street protests. However, that's a post for another day, if the protesters keep plugging away despite the blizzard approaching the East Coast.

For today, the data inspire several questions. President Obama and his cheerleaders on the political left want to "spread the wealth" around. They believe that "millionaires and billionaires," defined as working professional married couples with $250,000 in taxable income, aren't contributing their "fair share" to the federal government.

Three questions for the political left:

[Q1] In 2009, the top 0.1% of taxpayers paid 17.1% of all individual income taxes, the top 1% of taxpayers paid 36.7% of all individual income taxes, and the top 5% of taxpayers paid 58.7% of all individual income taxes.

What percentage of individual income taxes should be paid by each sub-group to be considered their "fair share"? The answer should be a simple percentage, for example, 25% for the top 0.1%, 45% for the top 1% and 65% for the top 5% (numbers are illustrative only, not my view).

[Q2] If we increase taxes on the top 5% as you recommend in A1, will that solve the short-term or long-term budget gaps associated with current spending projections? Or will we also be required to increase taxes on the bottom 95% of taxpayers to solve the fiscal imbalance?

[Q3] Do you really believe that increasing taxes as set forth in A1 and A2 will address the wealth imbalance between the wealthiest 1% and the remaining 99%? Note that increased taxes on the bottom 99% or bottom 95% will decrease their ability to accumulate resources and "catch up" to the top 1%.

Tax bloggers on the political left, I look forward to seeing the answers to these straightforward questions.

Bill Bradley on Tax Reform

This year marks the 25th anniversary of the Tax Reform Act of 1986. Whether you liked it, hated it, or come down in the middle, TRA 1986 was a monumental event in the history of U.S. tax policy.

To commemorate the anniversary, the editors of Tax Notes profiled several veterans of the 1986 tax reform effort this week. Nearly all of the interviews and personal recollections are worth a quick read. However, I wanted to spend a few minutes summarizing Meg Shreve's interview with Bill Bradley.

Bill Bradley is a former Senator (D-NJ) and Democratic presidential candidate. His popularity traces back to his career as a hall of fame basketball player with the New York Knicks. He was no intellectual slouch, attending Oxford as a Rhodes Scholar after a basketball career at Princeton.

Highlights from the interview:

[1] We need to define "tax reform."

Bradley emphasized that we can't do tax reform without defining tax reform. Do we close loopholes and use all the revenue from to lower rates? Or do we close loopholes and use only some of the revenue to lower rates (with some of the revenue dedicated to deficit reduction or new programs)? Alternatively, do we shift the paradigm by lowering income tax rates and offsetting the revenue shortfall with a consumption tax or some other source of revenue (e.g., a carbon tax)?

In 1986, political leaders defined tax reform as revenue-neutral loophole closers. Republicans wanted lower rates, and Democrats wanted fewer loopholes. In a sense, the stars were aligned to permit a political consensus. The Code was riddled with loopholes that were exploited by the highest earners, and top marginal tax rates were high. By eliminating loopholes, TRA 1986 increased taxes on the individuals and businesses that exploited the loopholes. The increased tax revenue was used to "pay for" lower tax rates across the board. The result was that "the top 5 percent paid a higher percent of the income tax revenue after tax reform than before tax reform even though the rate dropped from 50 to 28 percent."

Unfortunately, defining tax reform is more difficult today. Today's "loopholes" are tax expenditures that benefit tens of millions of middle-class taxpayers. Top marginal tax rates are lower today than in 1985. Even without the rancorous climate in Washington, it would be heavy lift for political leaders to adopt the 1986 definition of tax reform.

[2] We need a president that is "full square" behind tax reform and a Treasury Secretary with the gravitas to cut a deal.

Bradley recounted President Reagan's commitment to tax reform. Reagan "gave a couple of speeches," but delegated broad authority to former Treasury Secretary James Baker to cut a deal. Reagan "made it acceptable and led the charge." Baker ultimately brokered a tax reform deal with Bradley himself.

If Bradley is correct, we aren't going to see tax reform before 2013 or 2017. Meaningful tax reform is not a priority for President Obama. His priorities range from socialized health care and "spreading the wealth around" to green jobs and hybrid vehicles that will run 120 miles on a gallon of fuel. His Treasury Secretary, Timothy Geithner, is a bookish technocrat who has struggled to tread water due to economic conditions outside his control.

Bradley did not put a grade on Obama's efforts to drive tax reform. He suggests that Obama has been evasive for political reasons ("If the answer is 'we need to close loopholes to raise revenue and we don't touch rates' -- if that's what you mean, then say it.").

[3] Tax reform is too complicated for most people and will never be a "mainstream" issue. But political leaders need to articulate the principles guiding reform.

Bradley explains that the 1986 reforms were motivated by three simple principles. First, equal incomes should pay equal taxes. Second, the income tax should be progressive (those with higher incomes should pay more). Third, the market is more efficient at capital allocation than the Ways and Means Committee.

Team Obama has struggled to articulate clear, simple principles in respect to tax policy. Obama wants to increase taxes on "millionaires and billionaires," but defines millionaires as married working professionals with taxable income of $250,000. The income tax is steeply progressive, with the top 1% of taxpayers contributing 37% of income tax revenues. But he wants to "spread the wealth around" further, without defining what constitutes a "fair share." He has caught the "Buffett Bug," and become obsessed with the effective tax rates paid by the 400 top earning individual taxpayers. He sniffs at Bradley's quaint notion that the market is better at capital allocation than legislators and bureaucrats in Washington.

No wonder that individual Americans are confused and frustrated by the rhetoric around tax reform.

Steve Shay on Tax Reform

Earlier this week, Steve Shay published an article in Tax Notes with his observations on fundamental tax reform. See "Jobs, Deficit Reduction, Revenues, and Fundamental Tax Reform," 133 Tax Notes 213 (Oct. 10, 2011).

I always pay attention to articles written by Shay and Edward Kleinbard. Both are seasoned tax professionals with experience in private practice, government and academia. Shay practiced with Ropes & Gray for 20 years before jumping to Treasury in 2009. He served for two years as Deputy Assistant Secretary for International Tax Affairs. Kleinbard practiced at Cleary Gottlieb for 30 years before serving as Chief of Staff of the Joint Committee from 2007-2009. After grinding away as tax attorneys for decades, and then bashing their heads against DC gridlock for a couple years, Shay and Kleinbard both sought refuge in the ivory tower. Shay teaches and writes from Harvard Law School; Kleinbard from the USC Law School.

As tax attorneys who represented a wide range of domestic and multinational businesses in private practice, Shay and Kleinbard bring thoughtful voices to the dialogue over U.S. tax reform. Politics aside, we need more contributions to the tax policy debate from experienced practitioners who have a more balanced view of the relationship between the private and public sectors. We get way too much loaded rhetoric from business lobbyists and "career academics" on the political left.

A few highlights from Shay's article:

[1] Shay urges policymakers (presumably aiming towards the political right) not to take revenue increases off the table while considering tax reform options. Shay does not advocate "millionaire surcharges" or the "Buffett Rule," whatever his personal view on those proposals. Shay primarily focuses on tax expenditures, and the opportunity to increase revenues "by eliminating tax expenditures and rationalizing the income tax base, as part of an overall plan to restore a sustainable fiscal policy." He's basically following along a trail blazed by Kleinbard, among others.

[2] In Shay's view, fundamental tax reform "should make the income tax code a fairer and more efficient instrument suitable for the economy of today and the future."

The objective of fundamental tax reform should be a more comprehensive income tax base that is simpler and fairer and does not make losers of domestic manufacturers and winners of video game companies with offshore intangibles.

Funny how that theme keeps surfacing in discussions of fundamental tax reform. I outline the problem of "multinational princes" and "domestic paupers" in this post (discussing a tax reform proposal by Bill Parks).

[3] Shay gently scolds President Obama for his class warfare rhetoric:

[The President] has acknowledged a need for new revenues, but limiting shared sacrifice to those with incomes of $250,000 and above is inconsistent with rationalizing many wasteful tax expenditures that benefit middle-income earners as well as the very wealthy. In exchange for job-creating stimulus, Democrats should be open to sharing sacrifice more broadly, but without sacrificing a fair distribution of overall tax burden.

Shay doesn't define a "fair distribution of the overall tax burden," but he implies that "shared sacrifice" should include tax increases on all Americans. The top 1% of taxpayers currently shoulder 37% of the total income tax burden. If deemed "fair," policymakers could aim to keep that number constant, while increasing overall revenues from the tax system. By definition, such an effort would require an increased "contribution" by the bottom 99% of taxpayers.

[4] Shay bluntly scolds Team Obama for its lack of leadership on tax reform. But let's face it, this administration has other priorities. President Obama focused on socializing health insurance during the worst economic crisis since the Great Depression. Now he's focused on his 2012 re-election despite a widespread economic malaise and 9% unemployment rate. I'd wager my $100 that Team Obama will not lead us to the Promised Land of Fundamental Tax Reform.

Get Serious about Jobs Creation

As I've previously discussed, President Obama launched his 2012 campaign by proposing a $447 billion stimulus proposal, the "American Jobs Act." He may not be able to bring the unemployment rate below 9%, but his main priority is to shift blame for the sticky unemployment rate to "obstructionist" Republicans. If he can't persuade Congress to "spread the wealth around," maybe he can persuade voters to "spread the blame around" and vote Team Obama.

The new stimulus proposal is heavy on payroll tax cuts ($240 billion total) and unemployment benefits ($62 billion). It also includes $140 billion in funding for state teachers ($30 billion) and first-responders ($5 billion), school modernization ($30 billion), road construction ($50 billion), an infrastructure bank ($10 billion) and neighborhood stabilization ($15 billion).

When talking about the ways to tackle the unemployment crisis, Obama loves to pull out the "infrastructure" card. If you took him at face value, you'd think the federal government could allocate funds to "infrastructure," load the funds into an enormous Jobs Vending Machine, and order up a few hundred thousand jobs over the next 12 months. Please deposit $1 billion and punch A1 for jobs in Alabama, A2 for jobs in Alaska, A3 for jobs in Arizona...

Unfortunately, infrastructure spending does not occur with the snap of a president's fingers. Major infrastructure projects involve years of lead time and millions of dollars in up-front costs. Project managers cannot get "shovels in the ground" until they have surmounted an exhaustive list of hurdles. To name a few: developing budgets and time lines; arranging engineering studies; procuring licenses, easements, land rights; procuring other state and local permits; environmental reviews; obtaining RFPs from prime contractors and/or subcontractors; resolving potential litigation and environmental remediation; navigating state, local and federal labor regulations; arranging committed financing; and paying legal and consulting fees for each step forward in the regulatory labyrinth.

The ugly truth is that local, state and federal regulatory hurdles significantly delay the infrastructure development process. When it comes to federal spending on infrastructure, President Obama talks a good game, but hasn't backed that up with meaningful legislative or regulatory proposals to accelerate investment in public or private infrastructure. A $10 billion "infrastructure bank" is a silly drop in the bucket. Moreover, banks and other financial institutions have plenty of capital. We don't need a new government bank to fund infrastructure development.

So how can President Obama get serious about jobs creation?

First, scrap the $447 billion stimulus proposal. It's another round of political gamesmanship that distracts from the problem at hand. In the real world, we're suffering from a slow-burning unemployment crisis. President Obama and his advisers should have trouble sleeping at night, because the unemployment crisis has largely unfolded on their watch. They should wake up every morning and get worked up into a slather over fresh ideas to improve the conditions for investment, development and job creation.

Second, the crux of my proposal. The Obama administration should use its platform to blast the following message to the private sector:

Private sector businesses and developers, we want to help you accelerate the development of your capital-intensive projects.

We will be shifting all resources necessary from other administrative functions into development-support functions until we have measurably decreased the unemployment rate.

Our goal is to accelerate $250 billion [or $500 billion, stretching for the biggest number realistically possible] in capital spending into the next two years.

You bring us a credible development plan for a project involving capital investment of $250 million or more. We will twist arms and use all executive powers available to ensure that your project is "shovel ready" no later than year end 2012. We will provide federal overrides of state and local red tape, relax environmental regulations for projects that do not pose an imminent danger to human life, and mediate settlements with litigants who seek to delay the start of construction.

We acknowledge that jobs creation is driven by private investment and private enterprise. Government regulation and frivolous litigation has been an impediment to jobs creation for too long. For now, we need to address the unemployment crisis. We can revisit the overall regulatory environment after we put millions of Americans back to work.

Here's the interesting thing. Although I've been noodling on this idea for some time, someone within the administration shares my perspective. The administration recently announced that it would "fast track" 14 infrastructure projects to accelerate jobs creation. My question for administration officials is: why limit this to 14 public infrastructure projects? You have just conceded that red tape delays public infrastructure development and jobs creation. Why not extend the "fast track" principle to private development projects (infrastructure, technology capex, industrial capex, utility capex, etc.)? Sure, it's a tacit admission that liberal regulatory objectives can impede economic growth. But we're in the middle of a crisis, so let's deal with the political blowback at a later date.

Do I think that President Obama is ready to get serious about jobs creation? All evidence suggests that he is not. So I'm not holding my breath, but I'd love to be wrong on this one.

Moe Money, Moe Problems

In today's Wall Street Journal, Randy Noonan offers a portrait of an American success story, Moe the Millionaire.

Moe is an insurance salesman with a minority equity interest in his employer, a mid-size insurance business organized as a C corporation for tax purposes. Moe is retirement age (around age 65, having worked in the insurance business for 40 years). His ending salary, including bonus, was $200,000. In the year he retired, Moe tagged along with a sale of the insurance business, selling his minority interest at an $850,000 gain.

Moe's net worth in the year before retirement was:

Cash in bank: $100,000. Investment in business to be sold: $950,000 [cost basis $100,000]. Value of Moe's home: $450,000 [cost basis $95,000]. Total assets: $1,500,000.*

* Noonan posits that Moe would receive $75,000 in annual pension benefits from the insurance company's defined benefit pension plan, but does not include the "value" of the pension benefit in the calculation of Moe's net worth in the year before retirement.

The year of his retirement, Moe recognized $1,050,000 in total income: $200,000 in salary and bonus; and $850,000 in capital gain from the sale of his interest in the insurance business. Noonan inquires:

Is Moe the "millionaire" that Obama wants to tax? Is it "fair" that his once-in-a-lifetime capital gain of $850,000 be taxed at top tax-bracket rates? Even assuming that the current 15% capital-gain rate would be raised to only 25% for this one-time millionaire (so that his tax rate would not be less than those "middle class" taxpayers), the tax would still be $212,500, more in tax than Moe ever made in salary and bonus in any one year.

A few observations:

[1] Big picture, Noonan is framing the correct issues. The political left believes that we should increase taxes on the "wealthy." The left sometimes defines the "wealthy" as "millionaires and billionaires" (the Buffett view). President Obama takes it further, consistently defining the "wealthy" as married couples earning $250,000 and single individuals earning $200,000 in a year.

I'm unaware of any data that suggests a high proportion of married couples earnings $250,000 (or individuals earning $200,000) are "millionaires and billionaires." I'm sure that Obama would concede that an individual's taxable income during a given year is not a proxy for his or her "wealth." And an individual's "wealth" is not necessarily reflected in his or her taxable income during a given year. I will explore this basic theme in a later post (or posts).

[2] Back to Moe the Millionaire. I believe that Noonan was mistaken in assuming a 25% tax rate on the $850,000 capital gain. President Obama wants to tax a millionaire's entire income at a 30% or higher federal effective tax rate. Tack on another 5% to reflect state income taxes, and the tax leakage on $1,050,000 in income is around $368,000. In other words, Moe would bring home around $683,000 after the payment of taxes on his retirement-year income.

When the dust settles, Moe is still a millionaire, but not by much. His liquid assets of $783,000, if invested conservatively, might yield around $40,000 annually before taxes. Almost everyone on both sides of the political would agree that this is a modest pre-tax income, even if the recipient is a "millionaire" on paper.

From a tax perspective, the main "problem" here is the lack of income averaging. Arguably, Moe should not be penalized for an extraordinary one-time gain. I'm sympathetic to Moe's plight, but I'm hesitant to endorse income averaging because I favor tax reform that will streamline -- not further complicate -- the tax code.

[3] Despite framing the correct issues, Noonan's hypothetical contains a couple of flaws. The first relates to his assumed savings balance upon retirement. Noonan stipulates that Moe earns $200,000 in salary and bonus after 40 years in the insurance business. Let's assume his salary increased no slower than the rate of inflation between year 1 and 40. He purchased a modest home for $95,000 decades ago, and had a $100,000 bank account the year before retirement.

Moe must have suffered from a drug or shopping addiction, because he should have had more than $100,000 in a bank account upon retirement. Noonan stipulates that Moe made "regular but modest" charitable contributions at church (deductible for tax purposes). Moe would have paid taxes at an effective tax rate around 20% (perhaps 25% including state income taxes). During the decade before retirement, with a six-figure income, 20% effective tax rate, "modest" charitable donations and negligible housing costs, Moe's savings account should have increased substantially.

Moe's net wealth is foundational to Noonan's analysis, so Noonan should have been more careful with his assumptions about Moe's spending and savings profile.

[4] Noonan also fumbles with respect to Moe's pension benefits. According to Noonan, the insurance company's defined benefit plan will provide Moe with $75,000 annually. Noonan characterizes $75,000 as "enough to live on but only just."

We know that Moe lives in a relatively affordable community, because his home value in the year of retirement is $450,000. Moe owns his home outright, so has relatively low costs associated with outright home ownership (maintenance and property taxes). He's retired, so he won't have commuting expenses and a number of other expenses associated with life as a working stiff. He's presumably eligible for Medicare and Social Security. All in all, $75,000 in annual pension benefits should provide a comfortable existence for our retired friend.

Morever, the pension benefits reflect a substantial "asset" that we should not disregard in computing Moe's net wealth. However, in fairness, the political left disregards the value of defined benefit pensions when focusing on "income as a proxy of wealth." So I can't be too critical in this instance.

[5] Enough tax for a Friday post. Noonan's portrait of an American success story was almost certainly moe-tivated by a success story from the 1990s. Let's kick it to Notorious B.I.G:

One Job Saved?

Obama's much-hyped speech outlining the "American Jobs Act" did not seem to resonate with anyone except this guy and this guy on YouTube. His cheerleaders on the political left questioned why Obama would rely so heavily on tax cuts, given the "obstructionist" bent of Congressional Republicans. His critics on the political right questioned why another round of temporary stimulus proposals would translate into net, long-term employment gains.

Various observers suggested that Obama's speech was primarily intended to launch his 2012 election campaign. He framed the stimulus proposal as a "silver bullet" that would create millions of jobs and reduce unemployment. A cynic would argue that he is mainly trying to save one job: his own.

The total cost of the new stimulus proposals is estimated to be $447 billion. How would that get "spread around"?

[1] The proposal would pump $175 billion into the private economy by cutting employee payroll taxes in half in 2012. This measure should be politically popular, because most working Americans will benefit, temporarily, from the payroll tax holiday. But we've been down this path before. Like a night of hard drinking, a temporary stimulus might be fun while it lasts. But the next day, or the next year, we'll wake up with a hangover. One "temporary" stimulus leads to the next (the "hair of the dog") and the next, and the next. President Obama (the politician) is perfectly happy to kick the can down the road. The rest of us see a looming budget crisis and desire a permanent improvement in the conditions to economic growth.

[2] The proposal has $62 billion in targeted spending intended to help the long-term unemployed. Most of that ($54 billion) involves a series of fuzzy changes to the unemployment insurance system, including a $5 billion "pathways back to work fund." Although not broken out, I'm guessing that a big chunk of the other $49 billion simply represents an extension of unemployment assistance.

The $62 billion also includes a tax credit of up to $4,000 for hiring workers who have been looking for a job over six months (projected cost of $8 billion). Although the price tag is low, this type of credit is frustrating tax policy at its worst. Very few (if any) managers or business owners would hire new employees for a $4,000 (or smaller) credit. The credit would primarily be a windfall to businesses that were otherwise intending to hire employees (so no stimulative impact). It would create an additional audit burden for the IRS, which is already overwhelmed by new responsibilities enforcing social programs. As such, it virtually invites fraud and abuse (which plagues all these ill-conceived stimulus efforts). Perversely, it does not reward employers that have struggled to retain employees during the Great Recession.

[3] The proposal includes $140 billion in "stimulus" measures, including $35 billion for "teacher rehiring" ($30 billion) and "first responders" ($5 billion), $30 billion for "modernizing schools," $50 billion for "immediate surface transportation," a $10 billion "national infrastructure bank" and $15 billion for "neighborhood stabilization."

The $50 billion in transportation spending is infrastructure spending that should be part of the regular Congressional budgeting process. We need first-class infrastructure if we are to remain a first-class global economic competitor. The funding mechanism should be part of the regular Congressional budgeting process.

The state grants for "rehiring" and "modernizing schools" represents a bail out for undisciplined state governments. State governments do not need federal funding to address local education and security objectives. They need to prioritize state and local spending on education and security over other spending measures. For example, if a state legislature cannot adequately fund teaching salaries, the state could impose cuts on other state employees (or other spending programs) and allocate the "savings" to the teachers.

[4] Finally, the proposal involves $65 billion in payroll tax cuts for employers (and $5 billion to extend 100% bonus depreciation into 2012). The main thrust of the proposal involves: a cut in the "employer portion" of the payroll tax from 6.2% to 3.1% in 2012; and a full payroll tax holiday for any expansion of payroll up to $50 million above the prior year. These proposals suffer from the same defects as the employee payroll tax cut and the $4,000 hiring tax credit. They are short-term in nature, are unlikely to "stimulate" hiring, and would primarily result in windfalls for businesses in growth mode.

President Obama's stimulus plan (ahem, "jobs bill") may save one job and get him re-elected. But its mix of short-term incentives and bad tax policy measures has failed before. Our political leaders should be focused on regulatory and tax reforms that will encourage private business investment and result in long-term employment opportunities. Short-term stimuli may appeal to a sitting President, but the rest of us will have to live with the hangover.

Robin Hood: Man in Speedo

President Obama has tried to position himself as a post-partisan Robin Hood, protecting the interests of the working class against rapaciously greedy working professional married couples with $250,000 incomes (bling-bling). He better stock up on Speedos, because his tax policies will leave us treading water for the next decade.

As I discussed yesterday, a dart-throwing monkey could put together a list of Obama's talking points for any given speech on tax policy. But, all fun aside, the posture of the U.S. political left on tax policy contains the seeds of its own undoing.

So what's the major flaw with the direction of Obama's tax policy?

The Obama administration and its cheerleaders generally believe that the solution to any budgetary issue is to "raise taxes on the wealthy" and to "close tax loopholes for greedy corporations." They make exceptions for favored industries and favored campaign donors, but they stay pretty consistent on message.

On the surface, this seems like good politics. If you convince 98% of the voting public that 2% of the voting public is not paying its "fair share," you can generate healthy majorities in favor of higher taxes on the 2%. At a minimum, you can use the Robin Hood card to get yourself elected or re-elected!

However, the political left harbors a desire to expand government and socialize the funding mechanism for various services (health care, green energy, affordable housing, etc.). The left's appetite for new programs requires new tax revenues. Mind you, we're not talking 'new tax revenues to reduce the trillion dollar budget deficit.' We're talking 'new tax revenues to pay for the President's new stimulus plan,' or 'new tax revenues to pay for Obamacare.'

Let me pause and note that politicians on the right have been complicit in the federal spending orgy that created our long-term budget crisis. However, the emergence of the Tea Party has created significant pressure on the right to end its complicity.

So the left needs new revenues, and it boldly declares class warfare on working professionals and their distant cousins in Martha's Vineyard and Sun Valley, the "millionaires and billionaires." In its thirst for revenues, it amends the Internal Revenue Code to create a series of "pay fors."

What do I mean by "pay for"? A "pay for" is a change to the Code that is projected to raise enough revenue to "pay for" a liberal spending objective. In recent years, Congress has enacted numerous "pay fors" without carefully weighing the consequences. One such folly was expanded 1099 reporting for small business (subsequently repealed). Another was the codification of the economic substance doctrine (which has left everyone, from the IRS to the tax practitioner community, scratching their heads).

Here's the thing about "pay fors." Tax policy driven by "pay fors" is no tax policy at all. "Pay fors" are a series of effectively random changes to the Code that are driven by political momentum to pay for a desired spending program. It is impossible to verify that the projected revenues from a given legislative change ever materialize.

And here's the other thing about "pay fors." When the political left closes a "loophole" to fund a new spending program, the revenues from that "loophole" are not available for deficit reduction. For example, President Obama would "pay for" the cost of his proposed stimulus act (ahem, "jobs plan") by raising taxes on the various bad apples described above (working professional married couples, millionaires and billionaires, oil and gas companies, private equity fund managers). However, if that proposal is enacted, we are still facing trillion dollar deficits as far as the eye can see. If the revenues of a new spending program are financed with a "pay for" that changes the existing tax rules, we're effectively trading water.

In this sense, the tax policy agenda of the political left contains the seeds of its own undoing. Sure, we can "pay for" new spending programs (the new stimulus act, Obamacare, whatever) by increasing taxes on the "wealthy" and "big corporations." But we're left treading water from a long-term budget perspective. Meanwhile, the Code gets more complex, and many businesses and individuals spend more time and money on non-productive tax planning and tax compliance activities.

The only way to finance the spending objectives of the political left and to tackle our long-term fiscal challenges is to increase taxes on everybody: rich, upper-middle class, middle class, lower-middle class, and poor. Maybe the left will convince voters and taxpayers that we should move in that direction. I wouldn't put money on that bet.

The Monkey, Millionaires and Billionaires

President Obama recently announced his latest stimulus proposal (ahem, "jobs plan"). To pay for the stimulus proposal, Obama went to the populist grab bag of tax "reforms," proposing tax increases oil and gas companies and on "millionaires and billionaires."

Oh, by the way, Obama defines "millionaires and billionaires" as "married couples earning $250,000" and "unmarried individuals earning $200,000." I still haven't thought of an easy way to describe this category of taxpayers, other than "working professionals." Apparently, in Obama's world, a working professional married couple that earns $250,000 is more similar to a billionaire than a working professional married couple that earns $249,999 or, for that matter, $149,999.

That's not my world, and probably not your world, but too much time in the Beltway scrambles all common sense. In any event, that topic is fodder for another post.

Obama tax policy would be infuriating if it were not so obvious that there is no policy behind the policy. Obama's solution to the nation's dysfunctional health care sector? Raise taxes on the "wealthy." Obama's solution to 9% unemployment? Raise taxes on the "wealthy." Obama's solution to the federal budget crisis? Raise taxes on the "wealthy."

Keep in mind, I'm a political independent and I support the notion that we should tax capital gains at the same rates as ordinary income. My problem is two-fold.

Number one, President Obama talks a big game about increased taxes on "millionaires and billionaires." But there aren't enough "millionaires and billionaires" to make a significant dent in any of his spending proposals. He is hiding behind class warfare rhetoric to make tax increases on working professionals seem like tax increases on the uber-rich. It's slimy behavior, regardless of the politics.

Number two, I want some policy debate around the idea that the "wealthy," including working professionals, are not paying enough tax. Let's slice and dice the distribution of income taxes at various income levels. Do we really want a society where half the population pays zero income taxes? (Yes, many are subject to payroll, and most are subject to sales taxes, but we're discussing income taxes.) Should the top 5% of taxpayers pay more taxes? The top 20%? The uber-wealthy in the top 0.1%? Let's have a national discussion about the numbers and whether different groups of taxpayers are paying their "fair share."

Instead, we get the same, tired proposals from the Obama administration. I suspect that President Obama has two large spinning wheels in a super-secret room in the White House (think 'Price is Right'). On one spinning wheel are a series of "stimulus" ideas: tax credits for this or that; infrastructure spending; cash grants to state governments. On the other spinning wheel are Obama's "tax policy" ideas: raise taxes on the "wealthy"; close "corporate loopholes" for multinational taxpayers that "send jobs overseas"; increase taxes on the "big oil and gas companies."

Before Obama decides to hit the road for the day, he assembles with his advisors in the super-secret room. His advisors trot out a monkey. Monkey seems to enjoy throwing darts at the spinning Price is Right wheels. Advisors spin the wheel. Monkey throws a few darts. Advisors track the landings and furiously scribble some notes. The darts plot out Obama's speaking agenda for the day. Obama slips into zen-like meditative trance as the Price is Right wheels turn and turn. Advisors break the trance with some fresh organic coffee ground by a Berkeley PhD. Monkey gets some fruit and tries to bite Berkeley PhD as a secret service handler leads him back to his monkey room for the day.

This is tax policy in the Obama administration.

Energy Subsidies for "Fat Cats" (Part One)

Among the many failures of the political class, our disjointed, haphazard and inefficient “energy policy” goes high on the list. I hesitate to use the phrase “energy policy,” because there seems to be no concerted effort to steer the U.S. energy sector in a coherent direction (“policy” is non-existent). Decisions about energy policy are dominated by short-term calculations of politicians who are primarily motivated by the next re-election campaign.

The policy mess reflects the influence of bizarre alliances. On the one hand, liberal politicians grandstand publicly about the perils of “climate change” (pandering to environmentalists), while protecting the coal industry against cleaner forms of energy (pandering to unions). On the other hand, conservative politicians trumpet the virtues of smaller government and free markets, while protecting irrational energy subsidies for local constituents (pandering to corporate welfare recipients).

A good example is the one-two punch of import duties on foreign-produced ethanol, and tax credits for U.S.-produced ethanol (see here). Do we want lower-cost ethanol and more ethanol consumption (arguably good for the environment but bad for U.S. farmers)? Or do we want higher-cost ethanol and less ethanol consumption (arguably bad for the environment but good for U.S. farmers)?

Meanwhile, President Obama has fostered a perception that he can ride around on unicorn shooting “green jobs” out of his orifices. (You pick the orifice; credit to Paul Begala for the imagery.) In truth, renewable energy development has slowed dramatically in the past two years. President Obama’s “green jobs” economy is a pipe dream. And, ironically, the “fat cats” on Wall Street are the primary beneficiaries of tax policy intended to subsidize the development of renewable energy production.

This will be a four-part blog post. In part two, I’ll provide a layman’s overview of the energy sector, from “traditional” fossil fuels to alternative energy sources. In part three, I’ll explain the anatomy of a deal. In part four, I'll describe why the “fat cats” on Wall Street are receiving a tax windfall to finance renewable energy development.

What do you get when incoherent energy policy meets bad tax policy? Energy (tax) subsidies for "fat cats." More to come.

Solar Fizzles; Green Jobs "Pipe Dream"

This week, I'm going to focus on the U.S. energy sector. I'll be discussing the landscape broadly, and then specifically discussing the tax policies intended to subsidize the development of renewable energy.

Before I get into the tax policy angle, a couple recent developments:

[1] Governments Lose Bets on Solar Manufacturing

Two U.S. solar manufacturers have recently filed for bankruptcy (Evergreen Solar and Intel spin-off SpectraWatt). The price of solar panels has fallen dramatically as China ramps low-cost manufacturing. That's good news for U.S. energy consumers and the environment, because the cost differential between solar power and power generation from fossil fuels is narrowing. If the trend continues, solar power will become a competitive alternative energy source without government subsidies.

However, the good news for consumers and the environment is bad news for U.S. solar manufacturers and their stakeholders (investors, employees, government benefactors). Despite federal and state subsidies directed at the solar industry, the cost of manufacturing in the United States far exceeds the cost of manufacturing in China and other emerging markets. Evergreen Solar made a losing bet on the wrong technology. SpectraWatt crumbled under market pricing conditions. Industry analysts predict more consolidation in the industry (i.e., more bankruptcies for U.S. and foreign manufacturers).

Along with investors and employees, taxpayers joined in the pain from the bankruptcy filings. Massachusetts directed $21 million in cash grants to Evergreen (along with tax incentives that are now moot). SpectraWatt's bankruptcy filing reported $6 million in "state economic inducements" as assets.

Talk about skewed incentives. Our politicians get to "bet" on business deals with other people's money. If the "bet" is successful, the politician takes the credit. If the "bet" is a bust, the politician blames China and suffers no consequences (because he or she has no skin in the game). Unlike a private enterprise, the "investment" process is so opaque that it's difficult to identify anyone to hold accountable.

[2] Green Jobs "Pipe Dream"

The collapse of the U.S. solar manufacturing industry is the latest bad news for advocates of a transformative "green" economy. On August 18, the New York Times published an interesting article discussing the dismal growth in the "green jobs" sector. (The article focused on the San Francisco Bay Area and California with some general observations about the sector nationally.)

In a development that will take few of us by surprise:

[T]he green economy is not proving to be the job-creation engine that many politicians envisioned. President Obama once pledged to create five million green jobs over 10 years. Gov. Jerry Brown promised 500,000 clean-technology jobs statewide by the end of the decade. But the results so far suggest such numbers are a pipe dream.... A study released in July by the non-partisan Brookings Institution found clean-technology jobs accounted for just 2 percent of employment nationwide [2.7 million jobs].

I suppose that we get the politicians that we deserve. If voters took these types of "pledges" at face value, they were bound to be disappointed. I have no problem with either politician's attempt to set "lofty" aspirations. However, at some point, a "lofty" aspiration starts to resemble the empty promise of a snake oil salesman. Let's see if anyone in the next election cycle tries to hold President Obama accountable for overpromising and underdelivering on his green jobs "pipe dream."

[3] Your Bus Driver Has A "Green Job"

One note on methodology. I skimmed the Brookings Institution report; the allocation of "green jobs" among industries is surprising. The largest two categories of "green jobs" are Waste Management/Treatment (386,000 jobs) and Public Mass Transit (351,000 jobs), followed by Energy-Saving Building Materials (162,000 jobs), Regulation and Compliance (142,000 jobs), Professional Environmental Services (141,000 jobs), Organic Food/Farming (130,000 jobs), and Recyling/Refuse (129,000 jobs).

I'm sure that many of the individuals working in these industries would be surprised that their position qualifies as a "green job." I understand the methodology, but most of these job "categories" have existed for decades -- long before politicians became obsessed with "sustainability." When you start looking at the numbers, it makes you wonder how President Obama kept a straight face when he pledged to create five million new green jobs over the next decade.