Monday, March 15, 2010

In my best Oprah voice -- And you get a tax break, And you get a tax break

I noted last year that the move to allow homebuilders to utilize net operating loss carrybacks for up to 5 years was a giveaway to the industry. For those without a law degree in tax theory, the basic idea is that if you lost $100 in 2009, you could carry those losses backwards for up to 5 years to offset previous profits. When your profits go away suddenly you are able to file an amended tax return and ask for a refund of the taxes you paid. Ain't life grand.
Well, take a guess at what years were the most profitable for home builders? 2004-2008 is a pretty good starting point. The rule change last year incentivized builders to have huge losses to offset previous profits and reap larger refunds. Consider this data on the most recent quarter for the housing industry.


Those large negative numbers in the "income tax" column are actually refunds received in the quarter. Pulte $800million, Lennar $320million, Hovnanian $291million....
In the grand scheme of our recent moves to save the economy this is a drop in the bucket, but that doesn't make it feel right.
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While on the subject of taxes consider this reminder from the New Yorker that private equity managers and hedge fund managers are able to reap huge paydays and pay a lower tax rate than your average teacher.
So a manager controls $100 million of assets and they charge a 2% management fee or $2 million. Now if there are any profits on the assets in a given year, the manager gets to keep up to 20% of the profits. In our example assume there were $10 million in profits.
So the manager pays the standard tax rates on first $2 million, but he or she pays just 15% on his share of the funds profits (the second $2 million) because they are treated as capital gains.
In my example this is a relatively small amount of money but in the real world this loophole costs the US billions/year in lost taxes. However, closing the loophole might just chase these managers offshore so I'll let Congress make that call.
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I don't have any unique insight into this story, but zerohedge has some pretty plugged in sources so when they say that "there was an arms shipment to Diego Garcia, which consists of "of 195 smart, guided, Blu-110 bombs and 192 massive 2000lb Blu-117 bombs...put in place for an assault on Iran’s controversial nuclear facilities." it is worth paying attention to.
Given the US financial situation, looming trade wars with China, the healthcare debate, etc., a couple of years ago I would not have been surprised by an effort to start a war to distract the nation from our troubles. I hope we've moved past that era, but I could be mistaken.
If Iran's on our hit list, it will make some banks that have been buying up all the black gold they can find very happy and it won't surprise me if gas hits $4.00 overnight.
However, I'll note that we have been known to move things around the world to make thinly veiled threats that never turn into anything. Only time will tell....
Cheers!

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