One of the cornerstone's of Obama's campaign was to invest in clean technology jobs. One of the companies that the government extended a loan to has filed for bankruptcy:
Despite receiving a $535 million federal loan and about $1 billion in venture capital, high-profile solar-panel maker Solyndra Inc. plans to file for bankruptcy protection, undermined by a weak global economy and competition from China.
Lots of venture capital companies bought into the hype, investing in green technology to piggyback their own capital on federal favoritism. Solyndra's relationship with the White House came under special scrutiny because of Solyndra backer and Tulsa billionaire George Kaiser's history as an Obama fundraiser. In a letter to Energy Secretary Steven Chu in February, the House Energy and Commerce Committee raised concerns about the loan, noting that the company had suffered "financial setbacks," and asking for information about "whether Solyndra was the right candidate" for the loan guarantee.
These points all lead me to wonder about a big company in this space, Solyndra. This is a private company. I don’t have any financials to look at as a result. Neither do you. But you should, this company is heavily indebted to Uncle Sam.
So what in God's name are they doing?
I don't want to get too much into chrony capitalism, using public funds to feed special interests or to benefit campaign financiers. There are better solar companies that are thriving. Why did Obama put it into that black box?
Arlington officials boast the project will save $14,000 in annual electricity costs, but the solar panels have a life span of no more than 10 to 15 years. So the feds spent $300,000 to shave at most $150,000 off the net present value of Arlington's electric bills. Some 3,000 counties across the country received federal funds for the same kind of negative-return energy conservation "investments." This is the kind of "clean energy" program the administration wants to expand.
He has no idea what he's doing. It makes no economic sense to put money into a technology that doesn't pay off. This is throwing money away. The construction jobs are temporary. This is wasted money. Without even getting into where the money is going, a rich county, it doesn't make sense to put solar panels on a roof when it doesn't make economical sense. That's not investing in clean technology. That's wasting money.
Investing in clean technology would mean growing the technology so that there are jobs to help advance the technology within the industry. Obama has been so out of touch with what really works and that's the problem. He keeps talking about stimulus and improving infrastructure, but all he's doing is creating temporary low-skill jobs. On top of that, when he's investing into new technologies, he's putting money into failing companies like Solyndra.
I think it's safe to say that Obama has not delivered on his promise to create clean technology jobs, but to go even further, I'm not sure he even knows what creating jobs is. The struggling economy and his failed policies only reinforce this belief.
If you've been paying attention to the markets recently, you would know that Warren Buffett recently bought shares of the struggling Bank of America. While it makes sense in theory to follow the investments of a man who has been dubbed the Oracle of Omaha, it doesn't, however, seem like the best investment.
It does give a certain credibility to the stock and the company:
"This helps with the credibility gap that I think has existed in the minds of some shareholders. It reiterates the point that the balance sheet is healthy. They needed an endorsement in the market and they got it," said Jon Finger, managing partner of Finger Interests in Houston.
It does not hide the fact that the company is in some sort of trouble. People put money into these companies because of Buffett's track record and his name. However, you're not getting the same deal that Buffett is getting. Before we get into the actual deals, consider this; you're buying after Buffett buys, probably at a higher price than Buffett, and you're selling after Buffett sells, probably at a lower price than Buffet. This means you're getting lower returns to begin with.
Now Buffett is investing in beleaguered Bank of America. He invested $5 billion in a special preferred stock and will be getting a 6 percent dividend, while the regular stock you can buy pays less than 1 percent. Now I don’t know whether Bank of America is a good deal at current prices. Maybe it is. But the point is, if you buy now, you’re not getting the same terms as Buffett. You’re just pumping money into his dividend payment and hoping for the best.
And it's not the first time he's gotten this type of deal; he did it with Goldman:
But Buffett had more than $12,000 to invest. He had $5 billion. So he negotiated a much better deal. He bought preferred stock that came with a special dividend. Instead of 1 percent, he negotiated a 10 percent dividend. So now every year he receives a check for $500 million. Then, only after he gets paid, do common stockholders get their paltry 1 percent.
He did it with General Electric:
Buffett made a similar deal with General Electric. In 2008 he bought $3 billion in preferred shares with a 10 percent dividend. But you wouldn’t have done well to follow him. The stock was selling at around $21 a share in the fall of 2008. Now it’s running between $15 and $16, a loss of over 20 percent. But remember, unlike regular investors, Buffett’s been collecting that 10 percent dividend. He’s still ahead of the game.
Even when the stock was losing, Buffett was gaining. Does this sound like the kind of deal you want to get into?
A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.
The precise details as to the structure of preferred stock is specific to each corporation. However, the best way to think of preferred stock is as a financial instrument that has characteristics of both debt (fixed dividends) and equity (potential appreciation). Also known as "preferred shares".
Buffett is essentially getting a much better deal than those of us who invest in common stock.
Following Buffett might have its advantages. Bank of America shares surged on news that Buffett had invested in the company. However, you need to realize that you're investment returns will be different from Warren's and your needs might not be the same as a result. He has built in advantages which will enable him to make a lot of money. These advantages are not available to the general public. It's important to see through to the details before making an investment following someone like Warren Buffett.
I'm not saying following Warren Buffet is a bad idea. I just think its important to know what you're getting into and how your returns might not be what you expect. The most important thing in investing is information: make sure you know what's going on.
With the pending debt crisis, the issue of taxes has become a much discussed issue. The biggest backlash in the debate seems to have been spurred by Warren Buffet, who says the ultra-rich should be paying more. A New York Post op-ed says that this is misguided:
Left unsaid is that much of that is taxed at 35 percent (via the corporate income tax) before he even gets his hands on it. So in effect, he’s paying taxes twice (that is, when his companies actually pay, anyway).
Counting both taxes, his effective rate would really be well north of 40 percent for a big chunk of his income.
In addition, Obama has propagated rhetoric against Corporate Jet Owners:
This, according to Republicans, has spurred a class warfare about who pays what taxes. The Daily Show pretty much explains it best:
This dialogue of shifting the burden of taxes from the rich to the poor has been a common thread from the Republican candidates. Fact of the matter is that the people who aren't paying taxes are amongst the poorest in our country. They live from pay check to pay check and can't afford to pay taxes without threatening their already low standard of living. Quite simply, it's a type of tactical rhetoric to enrage the contingency they're appealing to who tend to hate taxes and hate paying them. To these people, everyone should share the burden if there is a burden at all. Here's what Michelle Bachmann had to say:
"Part of the problem is today, only 53 percent pay any federal income tax at all; 47 percent pay nothing," said Bachmann. "We need to broaden the base so that everybody pays something, even if it's a dollar. Everyone should pay something, because we all benefit."
It's not just her saying this. Jon Huntsman is also in the we need more people paying taxes boat (8:11). I agree with Huntsman as saying we need people to have a stake in our spending. If you aren't paying taxes, what do you care how the government is spending those funds?
The problem though is that people are looking at it from a budgetary stand point. Taxing the poor shouldn't be seen as the way to increase tax revenues. It should be used more to make sure people have a shake in the government's spending. It should be to keep the government accountable.
Consider: Of those households that do not owe income taxes, about a third earn $10,000 a year and a slightly smaller share earn between $10,000 and $20,000. More than three-fourths earn $30,000 or less.
In addition, the notion that these households pay no taxes is flat-out wrong. They pay — leaving aside state and local sales, income and property taxes — federal gasoline and other excise taxes and, most significantly, payroll taxes on every dollar they earn. These taxes are regressive. Everyone pays the same share, regardless of income, so they hit the poor hardest, and they counterbalance the progressivity of the income tax code.
Let's not worry about taxes from a who pays stand point then. Let's worry about taxes from the stand point of the budget. Raising tax revenues is necessary in times where the budget is a concern. Deciding the budget isn't as simple as cutting spending and increasing taxes though. It is important to also consider the effect that these changes will have on the economy.
The economy is struggling.
We need policies that encourage economic growth. Let's start with Obama's plan to raise taxes and see if it would positively affect the economy. We'll look at the UK for evidence. The UK raised the top tax bracket to 50% for the wealthiest:
The new rate will affect the 300,000 highest earners in the UK, out of the 29 million people who pay income tax.
It will be levied on taxable incomes greater than £150,000 a year and aims to raise an extra £2.4bn by next year.
This is, in effect, similar to what Obama wants to do in taxing those making $250,000 or more. So did it work?
The most likely explanation is that higher income tax receipts partially represent the new 50p rate kicking in and rasing revenue. How else to explain the figures? Receipts are up way in advance of earnings or employment growth.
So it has worked in raising revenues. The big question then becomes has it helped the economy? It seems not:
"We always said that recovering from the deepest recession that we've had for many decades, with the largest budget deficit that we've seen for a very long time was going to be choppy and I think probably the waters have been choppier than anyone expected. We've seen big headwinds in the global economy, rising oil prices, rising commodity prices. All those things have an impact on the British economy."
Those same variables would seemingly have the same effect on the US economy. Raising revenues won't be worth it if you have events like this going on:
A solution that also addresses the economy would be the best case scenario. So what other options are there? Michelle Bachmann has proposed that we cut taxes:
Representative Michele Bachmann promised Saturday that as president she would turn things around within one economic quarter, in part by cutting corporate taxes and eliminating capital gains and inheritance taxes. Painting President Obama as doggedly antibusiness, Mrs. Bachmann asked, “Why in the world wouldn’t we do what we know works to create jobs in this country?”
Why would we want to cut taxes when we need to raise revenues? This doesn't seem intuitive does it? Well, a lot of companies have a lot of cash on their balance sheets, but they aren't using it:
Tax policy is driving much of this trend. For multinational corporations, cash earned abroad cannot easily be remitted to the United States. If it is paid back to the United States, it is subject to a dividend tax that can rise to as much as 35 percent. Companies are loath to pay this tax because while they can offset it with taxes paid abroad, the companies still end up paying a relatively high tax rate.
However, lower taxes won't solve the problem completely:
Five companies alone — Pfizer, Merck, Hewlett-Packard, Johnson & Johnson and I.B.M. — repatriated $88 billion, But the repatriation did not result in increased investment. Instead, companies largely repatriated the money and used their current United States holdings to pay out dividends or engage in share repurchases. This was contrary to what Congress had intended.
While the cash was not used for investment, this does not mean it did not have an overall positive effect on the American economy: shareholders went on to spend this cash. The study’s authors acknowledged this, stating that “presumably these shareholders either reinvested these funds or used them for consumption, thereby having indirect effects on firm investment, employment or spending.”
How can this be fixed?
A permanent tax reduction would not only cut taxes but actually raise revenue, allowing for Republicans to vote for it. And it should be a holiday without restrictions — trying to force companies to invest the money rather than pay dividends is a useless exercise that will create only more bureaucracy.
Even if the money were largely spent on buybacks and dividends and a large portion were kept abroad, it would still be reasonable to expect $300 billion to $600 billion to be repatriated. This money would flow into the economy, making the dividend tax cut a stimulus package that Democrats could support.
Lowering taxes isn't the complete solution, but there are ways to combat corporate loopholes and encourage the return of that money into the United States. Tax-friendly areas have been known to do well, as was chronicled in the WSJ documenting the success of the Swiss region Zug:
Developed nations from Japan to America are desperate for growth, but this tiny lake-filled Swiss canton is wrestling with a different problem: too much of it.
Zug's history of rock-bottom tax rates, for individuals and corporations alike, has brought it an A-list of multinational businesses. Luxury shops abound, government coffers are flush, and there are so many jobs that employers sometimes have a hard time finding people to fill them.
Zug provides an example where lower taxes has helped grow the economy and grow tax revenues. This is because as the economy has grown, there's been more wealth to kick back to the government. The government are getting lower percentages of incomes, but those incomes are growing because of the burgeoning economy.
We've actually seen this work in the United States before, when Reagan cut outrageous taxes leftover from the Carter administration. While this didn't rejuvenate the economy immediately, it helped the economy regain momentum through the 1990s, while the Clinton administration operated at a budget surplus.
Government officials need to take a hard look at this. The debt crisis is clearly an important issue. The solution, however, must make long-term sense. To me, this means that the government should encourage economic growth to raise in the future tax revenues. The shortfall from lowering taxes can be done by cutting spending.
The answer to our problems is addition by subtraction. The economy needs a boost. This is the way to do it.
