Category Archives: Tax/Finance

What You Should Know About ‘The Cliff’

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Much has been written and said about the fiscal cliff. This summary and analysis from the Tax Foundation notes that the current situation "is the culmination of a decade of ‘temporary’ tax and budget bills that have postponed resolution of key policy differences." It looks ahead to the next steps. An example:

Estate Tax Increase
The estate of an individual who dies on December 31, 2012 will pay a federal estate tax (or death tax) of 35 percent on anything above $5.12 million. If the decedent instead passes away the next day, and Congress has not yet acted to change the law, the estate will instead owe a 55 percent tax on anything above $1 million. Even President Obama, no defender of estate tax repeal, considers this level too high: he has urged a compromise proposal of a 45 percent tax on estates over $3.5 million. Republicans generally support complete repeal of the tax.

There are few taxes that are as polarizing as the estate tax. A 2009 poll by the Tax Foundation found that the estate tax is viewed by taxpayers as the most "unfair" of all federal taxes but at the same time the estate tax seems to be a rallying point for those that agitate for redistribution through the tax code.[3] (In 2009, the estate tax raised about $20 billion, from a very small number of estates.) Opponents argue that the estate tax can break down family businesses while creating large compliance costs which are a drag on the economy.

Despite this seeming rift, there is a large and growing body of research by economists that generally lean left-of-center pointing toward repeal of the estate tax.[4] Nobel laureate economist Joseph Stiglitz, who served as chairman on Bill Clinton’s Council of Economic Advisors, authored a paper which argued that the estate tax actually increases inequality by reducing savings and driving up returns on capital (which largely benefit wealthy holders of capital).[5] Economist Larry Summers, former Treasury Secretary under President Clinton, co-authored a paper in 1981 that showed that the estate tax has severe impacts on the accumulation of privately held capital. Using Summers’ methodology, a July 2012 study by the Joint Economic Committee Republicans showed that since its inception, the estate tax has reduced the capital stock by approximately $1.1 trillion.[6]

The estate tax also encourages firms to structure as corporations instead of as family businesses, because corporations do not pay estate taxes when the person at the helm changes. Family businesses, however, can be subject to rates of over half the value of the estate when a deceased owner transfers the business to their heirs. This observation should be disconcerting to left-leaning voters, who recognize that smaller family businesses have ties to their communities. It should also concern right-leaning voters, who should see this as a distortion of the market process.

Perhaps the worst aspect of the estate tax is how uneven its impact is in practice. By utilizing careful estate planning, many wealthy taxpayers are able to shield much of their income from taxation upon their death. The people that tend to get hit the hardest are those that die unexpectedly, or, like farmers, have their assets tied up in illiquid holdings.[7] The estate planning industry has grown in size over the years as estate law becomes more complex. Three studies have even found that the compliance costs associated with the collection of the estate tax are actually higher than the amount of revenue the tax brings in.[8] Almost the entire estate planning industry can be thought of as economic waste, because it would not exist without the estate tax, and the high-skilled labor and capital utilized in that industry would be applied to other, more productive economic endeavors if the estate tax were repealed.

2011 and 2012 marked the first time in a decade that the estate tax rate and exemption level have been the same for more than one year. For 2010, the president and Congress (unintentionally) allowed the estate tax to expire completely, an outcome unexpected by most observers. While a repeat in 2013 may be desirable, exactly what happens remains to be seen.

New Woodward Book Chronicles Obama/Boehner Budget Battle

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Categories: Government, Tax/Finance

Bob Woodward, set to speak with Carl Bernstein at our Nov. 1 Annual Dinner, has a new book coming out next week that seems to document the cantankerous relationship between President Obama and House Majority Leader Boehner — at least as it pertains to the budget negotiations of 2011. ABC News reports (read the full article as it also includes excerpts about Mitt Romney’s VP choice Paul Ryan):

An explosive mix of dysfunction, miscommunication, and misunderstandings inside and outside the White House led to the collapse of a historic spending and debt deal that President Obama and House Speaker John Boehner were on the verge of reaching last summer, according to revelations in author Bob Woodward’s latest book. The book, "The Price of Politics," on sale Sept. 11, 2012, shows how close the president and the House speaker were to defying Washington odds and establishing a spending framework that included both new revenues and major changes to long-sacred entitlement programs. But at a critical juncture, with an agreement tantalizingly close, Obama pressed Boehner for additional taxes as part of a final deal — a miscalculation, in retrospect, given how far the House speaker felt he’d already gone. The president called three times to speak with Boehner about his latest offer, according to Woodward. But the speaker didn’t return the president’s phone call for most of an agonizing day, in what Woodward calls a "monumental communications lapse" between two of the most powerful men in the country. When Boehner finally did call back, he jettisoned the entire deal. Obama lost his famous cool, according to Woodward, with a "flash of pure fury" coming from the president; one staffer in the room said Obama gripped the phone so tightly he thought he would break it.

Venture Dollars Up for Quarter, Down for Year

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Categories: Tax/Finance, Technology

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The optimist points to increased venture capital deals and dollar amounts in the second quarter of 2012 compared to the first three months of the year. The pessimist notes that both the second-quarter and first-half numbers for 2012 are lower than those figures in 2011.

The brief recap: January through June 2012 saw 1,707 deals worth $13.1 billion; for the same time period in 2011, it was 1,942 deals with a value of $14.7 billion.

Further numbers and analysis from one of the longest names/reports on record: The MoneyTree™ Report by PricewaterhouseCoopers and the National Venture Capital Association based on data from Thomson Reuters.

The number of Early stage deals reached the highest quarterly total since Q1 2001, with $2.1 billion going into 410 deals, an 18 percent increase in dollars and a 28 percent increase in deals from the prior quarter. The Internet-specific sector also saw increases during the second quarter, rising 22 percent in dollars and 31 percent in deals from the prior quarter to $1.8 billion going into 261 deals in Q2.  The Life Sciences sector (Biotechnology and Medical Devices), however, experienced a decline in funding in the second quarter, dropping 9 percent in dollars and 6 percent in deals from the prior quarter to $1.4 billion going into 174 deals in Q2.

“The concentration of venture capital dollars in the hands of fewer firms will increasingly dictate the flow of investment,” said Mark Heesen, president of the NVCA. “Currently, this translates into more funding for IT start-ups and less capital available for life sciences and clean technology.  We hope to see this investment mix rebalance over time as the start-up ecosystem is better served with more diversity, not less.  Additionally, we continue to watch the early stage and first time financing numbers as they are critical to the U.S. innovation pipeline.  We are encouraged that these numbers were stronger this quarter and hope that this signals an ongoing commitment on behalf of venture firms to make these longer term, breakthrough investments.”

“If funding levels in the second half of the year remain consistent with the first half of the year, VC investing in 2012 will fall short of the nearly $30 billion invested in 2011 but will exceed the $23 billion invested in 2010,” remarked Tracy T. Lefteroff, global managing partner of the venture capital practice at PwC US.  “Software and Internet companies continue to be attractive industries for VCs since most of these companies tend to be capital efficient and don’t require large amounts of capital to operate.  VCs also find the potential for profitable liquidity events to be attractive for these companies.  On the contrary, given the regulatory challenges currently impacting the Life Sciences industry and the amount of capital required to fund these companies, it’s no surprise that investments in this industry have declined for the fourth consecutive quarter.”

The Software industry received the highest level of funding for all industries with $2.3 billion invested during the second quarter of 2012, which is the highest investment total for the sector since the second quarter of 2001.  This level of investment represents a 38 percent increase in dollars, compared to $1.7 billion invested in the first quarter.  The Software industry also had the most deals completed in Q2 with 290 rounds, which represents a 16 percent increase from the 251 rounds completed in the first quarter of 2012.

Life Sciences investing declined for the fourth consecutive quarter, most notably in the Biotechnology sector where $697 million went into 90 deals, representing the lowest quarterly total for the industry since the first quarter of 2003. 

Seed stage investments rose 33 percent in dollars and 15 percent in deals with $199 million invested into 63 deals in the second quarter. Early stage investments also rose, climbing 18 percent in dollars and 28 percent in deals with $2.1 billion going into 410 deals, the largest quarterly deal total since the first quarter of 2001.  

First-time financing (companies receiving venture capital for the first time) dollars increased 24 percent to $1.1 billion in Q2, and the number of deals rose 27 percent to 282 deals in the second quarter.   

Gigerich Breaks Down U.S. Chamber Enterprising States Report

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Larry Gigerich of the highly respected site selection firm Ginovus penned a column for Inside INdiana Business, in which he relays and analyzes a recent report from the U.S. Chamber of Commerce (to whom we have no direct affiliation) listing the top enterprising states. Interesting stuff:

The Chamber breaks policies down into five major areas.

1. Exports and International Trade
2. Entrepreneurship and Innovation
3. Taxes and Regulation
4. Talent Pipeline
5. Infrastructure

The report combines metrics for the different policy areas to measure performance, which has allowed the Chamber to evaluate the top states based upon quantifiable measurements. Please find below a list of the measurements used to rank the states.

1. Long-term job growth
2. Short-term growth
3. Overall expansion of gross state product
4. Productivity – state output per job
5. Productivity growth – growth in output per job
6. Income growth – growth in per capita personal income
7. Livability – median income of four-person households, adjusted for state cost of living

Based upon the metrics used by the U.S. Chamber of Commerce, here are the top performing states and a brief summary of why they rank in the top 10.

1. North Dakota: The state ranked in the top 10 in six of the seven measurements. The state ranked first in short-term jobs, long-term jobs, gross state product and per capita personal income. The energy boom in the western part of the state has led the growth of the economy in the state.

2. Wyoming: The state ranked in the top 5 in five different categories. The state is second on long-term job growth and gross state product and third in productivity growth and income growth. Energy, chemicals and metals helped drive the performance of the state’s economy.

3. Virginia: The state has the highest income in the nation, after adjusting for cost of living. In addition, Virginia ranks in the top 25 in all seven categories. The state’s growth in professional services and information technology jobs has helped led to excellent results.

4. Alaska: The state ranked in the top 8 in three key areas: overall productivity, long-term job growth and gross state product. Alaska’s economy has been driven by energy, mining and tourism activities. The growth of these sectors has led to the significant growth of retail support entities in the state.

5. Maryland: The state ranked in the top 25 in all seven measurements. Maryland ranked the highest in adjusted family income, followed by productivity growth. The growth in government jobs in the Washington D.C. area, high technology growth and corporate headquarters helped to propel the state.

6. Texas: Texas ranked second in short-term job growth and fifth in long-term job growth. In addition, the state fared well in the growth of gross state product. Its energy sector, affordability, and business climate fueled economic growth throughout Texas.

7. South Dakota: The state ranked fourth in growth in gross state product and per capita income. Long known for its back-office finance operations due to its well educated workforce, South Dakota can credit growth in manufacturing and professional services for propelling its economy today.

8. Washington: The state of Washington jumped five spots from 2011 largely due to rapid short-term job growth. In particular, aerospace and transportation equipment manufacturing has been growing rapidly. Professional services and technology have also been growing significantly.

9. Iowa: The state ranked fifth in growth in economic productivity, sixth in per capita income growth and eleventh in gross state product. Iowa’s finance and insurance industries have grown by nearly 30 percent. Transportation and warehousing are also growing rapidly.

10. New York: The state ranked in the top 25 in six of the seven measurements. The state jumped eleven spots in this year’s rankings due to the rapid growth of gross state product and per capita income. The rebound in the financial services sector, coupled with the growth of educational entities have assisted New York in these rankings.

Fiscal Cliff: How Steep Are We Talking?

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The Bush tax cuts, set to expire after this year, represent only the tip of the fiscal iceberg before Congress. Unfortunately, considerable political attention is being focused on only the highest individual tax rate bracket. What’s actually at stake is of much, much more fiscal significance and can be divided into two parts.

"Taxmageddon," a nearly $500 billion per year increase in taxes starting day one of the New Year and federal spending cuts totaling more than $100 billion.

The list below outlines the variety of tax and fiscal matters that will require congressional action before the end of 2012.

To illustrate the scope of the potential dilemma: The so-called Buffet Rule to tax millionaires at a minimum effective rate of 30 percent would generate a relatively minuscule $5 billion annually. That number pales in comparison to the dollars involved with any one of the issues outlined. Examples: The payroll tax holiday costs $117 billion, the sequestration is $110 billion and another Alternative Minimum Tax (AMT) patch is $92 billion, while the extenders account for $78 billion. Or compare that potential $5 billion in new revenue to the amount of tax that simply goes uncollected each year – estimated by the U.S. Treasury to be $450 billion a year.

Many economists fear Taxmageddon alone would plunge the nation into another recession. Yet politicians continue to fight over philosophy, thus ignoring the big (dollar) picture that could have so much impact. The issues are many, the dollars are huge and the time is short. Little is likely to get done before the election. This leaves only a limited number of weeks in November and December for a lame duck Congress to resolve a collection of massive fiscal issues that have been stymied by the Washington gridlock for over two years. On the positive side, these are not new problems. They have been debated many times and a lot has been hashed out previously.

On the negative side, persistent disagreements remain. These are all politically sensitive matters, with middle grounds elusive and few details considered minor. It will entail much debate, necessarily involve negotiation and maybe even require some (dare I use the word) compromise. Can some kind of "grand bargain" be struck, or will they drive us off the fiscal cliff?

Although there are differences in viewpoint, philosophy and principle, there is a bipartisan recognition that these items must be addressed. And there is even some level of consensus on many of them. Sadly, the most probable result is that Washington policy leaders will take the approach that has been applied too many times already and choose to kick the can down the road by passing more temporary measures. But in this case that would still be far better than their other favorite practice – doing nothing. Perhaps by buying some time this go-around, policy makers can set the stage for making broad, comprehensive reforms next year. Eventually, they must take that step if they hope to avoid an even more treacherous and bigger fiscal cliff that looms somewhere on the horizon.

FISCAL ISSUES CONGRESS NEEDS TO ADDRESS

The Bush Tax Cuts
Expire, revert back to higher rates at year’s end
Current rates of 10, 15, 25, 28, 33 and 35% go back up to 15, 28, 31, 36 and 39.6 percent

Alternative Minimum Tax (AMT)
No patch in place for this tax year (2012)
Some 30 million taxpayers will pay more unless exemption amount is adjusted for inflation

Capital Gains
Revert back to higher rate at year’s end
Current rate of 15 percent goes back up to 20 percent

Qualified Dividends
Special rate expires
Current rate of 15 percent goes away, will be taxed at ordinary income rates

Estate, Gift Taxes
Revert back to higher rates and lower exclusion
Current maximum rate of 35 percent with $5M exclusion goes back up to 55 percent with only $1M exclusion

Extenders/Numerous Other Tax Provisions
Some 80 changes to deductions, credits and exclusions expire
Business examples: research and experimentation credit, $179 enhancement of the deduction for equipment. Individual examples: marriage penalty relief, child care, earned income credit

The “Doc Fix”
No extension in place
Medicare reimbursements to physicians will drop 27 percent

Federal Budget
No 2013 budget or appropriations bills have passed
Poses the threat of government shutdowns

Sequestration
The Budget Control Act of 2011 goes into effect
Will cause indiscriminant 10 percent cuts to defense and 8 percent for other non-discretionary spending

Payroll Tax Cut/Holiday
Terminates at year’s end
Rates will go back up by 2 percent

Unemployment Insurance
Extended benefits end 1/1/13
Long-term benefits scaled back when temporary benefits end

Debt Ceiling Limit
Will have to be raised by year’s end (or very early next year)
Jeopardizes credit rating and unnerves stock market

Affordable Health Care Act Taxes
Go into effect next year
Imposes 0.9 percent Medicare tax on high income individuals and a 3.8 percent Medicare contribution tax on unearned income; also a substantial new tax on medical device manufacturers

Cashing In On Unused Coupons

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I love coupons … in theory, that is. Right now, 15 or 20 clippings are awaiting their escape in a handy little blue case. But despite the best of intentions, they probably won’t see the light of day.

Here’s why: I always forget them in my car when I’m at the grocery store. Why not go back and get them, you ask? Too inconvenient (pathetic, I know). Fair enough, you say. But why not keep the coupons in your purse? I counter, with a raised eyebrow, “Do I really need to add another item to the Great Abyss?”

The May edition of Harvard Business Review reveals that only 1% of all coupons are used – and says that isn’t a bad thing. In fact, businesses can reap more rewards from consumers who pitch the coupons touting the items or services they’re pitching (Get it? My apologies).

Unused coupons still pay off
In 2010, U.S. consumers redeemed 3.3 billion coupons, cutting roughly $3.7 billion from purchase prices. That’s a lot, particularly since only about 1% of all coupons are ever used. Conventional wisdom holds that little benefit is seen from the other 99%. But new research suggests that unredeemed coupons are highly valuable. In fact, the coupons that wind up in the trash ultimately deliver greater returns to a company than the coupons that are redeemed.

In an experiment with eight national retailers, consumers who received but did not redeem coupons still typically increased their purchases in the associated stores. In fact, as a group the nonredeemers accounted for 60% of the coupons’ "sales lift" – the additional amount spent on both promoted and unpromoted items.

How do coupons produce a lift among nonredeemers? They increase awareness of a brand or a retailer even when they’re not cashed in. This finding isn’t surprising, but the magnitude of the benefit is.

Coupons can serve as advertisements that attract new customers and inspire gratitude and loyalty among existing ones by delivering important messages about a company. Therefore, as much care should be taken with coupons as with other marketing materials, striving to delight customers, not simply to close a deal.   

Source: Harvard Business Review, May 2012    
 

Brewers Guild President Pushes for Lower Taxes for Small Breweries

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If you’re like me, you love beer. And you love beer made in Indiana the most. When I spoke with folks like Sun King founder Clay Robinson for this BizVoice article earlier this year, it became clear that local breweries were challenged with meeting the skyrocketing local demand for their product. Great news for the brewing industry, but it means obstacles must be removed. Brewers of Indiana Guild President Ted Miller is now in Washington, D.C., working to remove one of those barriers:

The president of the Brewers of Indiana Guild is in Washington, D.C. lobbying for a bill that would reduce excise taxes for Indiana’s growing small brewing industry. Ted Miller says the proposal, which would cut per-barrel taxes in half up to 60,000 barrels, would give beer makers more capital to upgrade facilities and create jobs. The bill is currently in committee, but Miller says he’s hopeful it will pass after the November election.

The proposal would also cut excise taxes from $18 to $16 per barrel between 60,000 and 2 million barrels.

Miller says larger breweries are fighting the bill, saying it would create an uneven playing field.

He says many small brewers in Indiana "can’t make enough beer," and the tax cuts would allow them to install new equipment and hire new employees. In addition, Miller says there would be indirect job creation as breweries hire electricians and plumbers to install the equipment.

Predictions: Focusing the Crystal Ball on 2020

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The year 2020 is creeping closer. But if you’re projecting economic forecasts and demographics for eight years from now, it seems like a lifetime away.

Neverthless, the fearless prognosticators at Kiplinger (the authors of weekly management decision-making letters and various other publications and products) consistently weigh in on future conditions. These are a few of their recent insights, in separate reports:

  • Don’t be shocked if inflation doubles, from 2% this year to 4% or a bit more by 2020. Higher interest rates will mean pricier mortages, about 8% compared to 4% now for a 30-year fixed rate loan. The homeownership rate will settle around 66%, higher than now but shy of the peak of 69% in 2006.
  • By 2020, health care will account for nearly one in nine U.S. jobs, adding more than 4 million jobs in the decade. Home health aides will be the fastest growth segment, but there will also be rising demand for registered nurses, physicians and surgeons.
  • Consumer spending in Africa will double by 2020 with the overall economy growing by 5% a year. Joining South Africa as growth hot spots will be Algeria, Egypt, Morocco, Nigeria and Kenya. Others to watch: Ghana, Tunisia and Botswana (with plenty of minerals and a stable government).
  • Staying global and extending the time out five more years (to 2025) will result in more megacities. Projected to have 20 million people within its borders by that time (no city today has reached that level) are Mexico City; Tokyo; Shanghai; Dhaka, Bangladesh; Sao Paulo, Brazil; and three Indian cities … Delhi, Mumbai and Kolkata. New York is listed as a possible ninth. Seven more Chinese cities will top 10 million each, according to the forecasters.

We might not remember to pull this or other predictions out eight years from now, but if we do I imagine the experts will be on target more than a few times.