Daily Investment Interpretations

October 4, 2010

2010-10-4 (Monday Night):  The markets fell today: Earnings fear grips Street, U.S. sues credit giants. The NASDAQ Composite declined  26.23 points (-1.11%) to 2,344.52 The Dow dropped 78.41 points (-0.72%) to close  at 10,751.27, and the S&P 500 gave back 9.21 points (-0.8%) to end at 1,137.03. Oil closed little-changed at  $81.38 a barrel, while Gold settled at $1,315. The VIX ended the day at 23.53.
    Mark Hulbert writes this about investing in Apple and Google: None of the above..
    Bernanke calls for tougher budget rules.
    Productivity drop may spark job growth. This sounds interesting. Productivity remained high as unemployment rose, but recently, it peaked and began to fall, implying that employers had squeezed all they could get out of the current work force.
    Nick Godt comments on the fact that the individual investor has largely exited the equity markets, leaving the big guys to duke it out with each other.
    I've reprinted Friday's commentary (below) regarding Rex Nutting's article.
    What I want to add to Rex Nutting's article,
America’s choice: Hypocrites or cowards, are some recollections and observations regarding U. S. federal income tax. As I recall, the maximum tax bracket on unearned (e. g., investment) income was 70%. This meant that the wealthy paid 70% of their declared income above the 70%-threshold to the federal government in the form of income tax. The maximum tax bracket on earned income was 50%. And these tax bites came at fairly low levels, Ruth and I were in the 55% tax bracket (for investment gains) on my GS-15 salary. Tax loopholes were all the rage. Naturally, when Ronald Reagan came along and offered serious tax cuts, high net worth individuals were ecstatic. During the summer of 1980, there was a televised debate between the wizened Democratic spokesperson and the tall, handsome, charismatic Republican spokesperson over whether the Reagan tax cuts would pay for themselves through enhanced economic growth and cutbacks in federal programs (supply-side economics), or whether they would boost the federal deficit. The Republican spokesperson argued that benefits would "trickle down" to the American public. The Democratic spokesperson maintained that they could only lead to lower tax revenues.
    Today, we know what happened. The U. S. federal deficit, as a percentage of Gross Domestic Product, after falling since the 1940's rose higher and higher for the next 12 years throughout the Reagan/Bush administrations. It fell during the Clinton administration, and then rose again during the second Bush administration, culminating in the (in my opinion, necessary) $770-billion Republican TARP program. (The Obama administration federal deficits have been absolutely unavoidable, given the economic legacy from the Bush administration, just as the early George Bush deficits and the 2002-2003 recession were an unavoidable economic legacy for GWB from the Clinton administration.)
    The Reagan tax cuts reduced the tax burden for the very-wealthy from a 70% marginal tax bracket to a 33% total tax rate, with only a 20% tax, and since 2001, a 15% tax on capital gains. There's a 38% catch-up tax bracket, but the total rate of taxation can't exceed 33%.)
    This would have been a monumental tax improvement for the wealthy.

(To be continued)

    At the time of the Bush tax cuts in 2001, the Republicans made an effort to eliminate the federal estate tax altogether. This move was blocked by a filibuster (presumably by Democrats), so a compromise was struck in which the estate tax relief crafted into the Bush tax cuts would expire on January 1, 2010. Everyone expected that tax law revisions would be enacted before the end of 2009, but somehow, that hasn't happened. Consequently, for this one year, the federal estate tax is (sort of) zero. As it stands right now, it will revert in 2011 to a threshold of $1,000,000, with a 55% tax rate above that figure. If it reverts to what it was in 2009, the threshold for the payment of estate taxes would be $3,500,000. Anything above that amount would be taxed at 45%. But right now, its in limbo, and will probably stay that way until the mid-term elections one month from tomorrow (Tuesday).
    Only about 1 person in 400 actually paid estate taxes in 2009, amounting to about 5,500 people.
    Looking at this information (for the first time), I can see how these tax law changes could have fed the fortunes of high net-worth individuals.