Friday, November 30, 2012

Millionaires and Billionaires

President Obama wants to raise taxes on the “millionaires and billionaires” he railed against in his campaign.  So he targets those people who earn more than $200,000 a year in the  income-tax revamp he proposes, thereby conflating those “fat cats” with the millionaires and billionaires of his wrath.  A lot of people in New York City and Los Angeles (ironically, two of the bluest cities in America) must be wondering what their idol is smoking.

If you are a single filer in New York who is earning $200,000 a year, you probably don’t feel like a fat cat.  After paying State, City, and Federal taxes, there’s not much left.  $200,000 may be a comfortable wage in Wyoming, but it almost qualifies you for food stamps in Manhattan.  (Hey, here’s an idea that some legislators could embrace: Make income tax rates depend on where you live.)

There’s another problem:  Once inflation starts to roll, $200,000 will not seem like so much. In fact, the median income could quickly rise to six figures, and the tax meant to nail fat cats (like the Alternative Minimum Tax) will start hitting Joe Six-Pack.

Attempts to avoid the “fiscal cliff” may force Obama to swallow a higher break point – say $500,000.  New York legislators, worried that legions of executives will flee the Big Apple, may join Republicans in pleading the case for the $200,000 billionaires.  After all, New York is Obama country.  In Wyoming, he got only 28 percent of the vote.

Monday, November 12, 2012

The Fiscal Cliff

Today’s buzz is that President Obama and Republican leaders are huddling to cut a deal that will avoid “the fiscal cliff,” the very cliff that members of Congress built a few years ago to create an incentive to do the right thing.  My own view is that the dreaded fiscal cliff sounds like a reasonable palliative, an austerity program to match that being urged on certain European countries. But my point here is a quite different threat.

When and if Obama and the Congress make a deal, a lot of people will know about it before you and I do, and those people “inside the Beltway” will have the opportunity to make a fortune by buying stocks or options, because the announcement of the deal will almost certainly cause an enormous spike in the market.  No Congressman will actually call his or her broker, of course; that would be foolish. Spouses or other relatives will be the buyers. And there will be no whistle-blowers. Insider trading is something hedge-fund managers do, not politicians.

Of course, it is possible that no member of Congress or White House staffer ever uses advance knowledge of a news bombshell for his or her financial advantage.  It is also possible that the moon is made of green cheese.  But when we expand our view to include the staffers at the regulatory agencies and other government workers in a position to know market-moving information early, we have to conclude that this is the biggest story that never gets told – possibly because investigative journalists are in on the take.

Wonder why so many people spend so much money to keep their seats in Congress, or why so many live a life more comfortable than their salary would seem to justify? (That salary, for the House and Senate leaders, incidentally, tops out at $193,400 – just below the $200,000 single-payer mark that Obama targets for a tax increase.)  The answer: Washington is a money machine, whether you’re a Democrat or Republican.

Oh yes – what if the President and Congress fail to make a deal?  When that news breaks, the markets will dive.  Anyone with advance knowledge of that news can make money selling short.