Monday, October 18, 2010

Negative ads seem to be as American as AAPL Pie

I'll get to the negative ads in a second. Remember that Apple (AAPL) represents about 20% of the Nasdaq these days and for the first time in recent memory they served up a clunker of an earnings report. Lighter iPad sales and supply constraints seem to be taking the wind out of their sails right now. The stock closed around $318 today and is down about $20 after hours (however, that could reverse by the time the silicon traders get going in the morning). It's worth watching.

** Wow, they really can't keep Apple down. The trading has been a slow and steady march back from down over $20 last night to down just $6. It has all of the markings of the computers handing shares back and forth for a penny here or there. The last hour or so of trading in Apple today could get wild (they might ramp it hard or sell it off, no clear indication yet, but I wouldn't bet that things will just sit flat from here until 4pm).

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We are clearly entering the final stretch in all political races as the ads have become more negative and continue to play fast and loose with the facts.

Over the coming weeks I'll try to peel back some of the layers of the major issues facing the country today and offer my version of the truth as I see it on those issues.

Taxes - I don't think there is a more divisive issue. Everyone thinks their over taxed and they get nothing in return for those taxes. I even saw a former partial-term governor of a tiny state complaining about Federal taxes on TV today (I find this particularly ironic consider her former state is the biggest beneficiary of Federal Government pork).

However, the big issue on taxes today centers on extending the Bush tax cuts. By now you should know that we're really talking about a small difference between the democratic and republican proposals. If you are a couple earning under $250k (after deductions) you're tax bill would not likely change under either the democrats or republicans.

If you are fortunate enough to make between $250k and $1 million, the Democrats (sarcasm on) would tax the heck out of you (sarcasm off) to the tune of an extra $988/year. The Republicans feel that you will not just put that $988 in the bank but instead you will stimulate the economy by hiring extra employees (for three days?!?!?).

So again, if you make under a million/year in taxable income there really isn't that big of a difference between the two plans. Despite all of the charges flying across the screen if you make less than a million it really doesn't matter that much. So why all of the controversy?

The real change occurs for the top 0.1%, those making over $8.4 million. First a little context: $8.4 million isn't sales or net income. We're talking $8.4 million in taxable income. This isn't Joe the dry cleaner money (unless he has a huge grow shop in his basement), this is big boy income and while I don't have any tax data to back it up I'd bet there are fewer than a handful of individuals who live in NY-23 making that kind of income.

In the entire US we're talking about less than 300,000 people filing tax returns with this kind of income.

However, the annual tax hit for these people would be substantial under the Democratic plan. Their average tax bill would jump by more than $310k per year. The Republicans would like these top earners to keep this extra income in their pocket and hopefully hire an extra worker or two.

The flaw in the Republican argument is that it's just not true. Study after study has shown that for every dollar you sacrifice in tax cuts you are never able to recover a like amount in future tax revenues. If you take a person making $10 million and cut their taxes from $4 million to $3.6 million. They still have about $6 million in free cash flow so an extra $400k isn't going to change their life. If they chose to reinvest that $400k in their business you may eventually see some additional jobs but it takes too long to turn that money into tax revenue (many of the jobs they create tend to be low wage entry level jobs with limited tax obligations).

However, as we've seen a million times before we can't let facts get in the way of a good story.

Before you assume that I'm Nancy Pelosi in sheep's clothing, know that I think that the Democratic plan is too costly as well. When the Bush "TEMPORARY" tax cuts were enacted it was assumed that they would expire or else our budgets in the next decade would be screwed. Well, now the Democrats want to extend most of these TEMPORARY tax cuts costing us about $2 trillion in lost revenues. The Republicans want to extend them all costing us $2.7 trillion.

I'm okay with that as long as we offset that cost with other spending cuts. Where do you want to start? Defense, Social Security, Medicare? Those are the only real options for the kind of numbers we're talking about. Cut defense spending in half next year, close 3/4ths of our military bases and you can have all of the tax cuts you want.

You can see why no one is beating down my door to run for office :)

I'm an equal opportunity offender.

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