Amazon Reviews

Amazon changed what it shows for book reviews. Below a review asks whether or not the reader found the review helpful or not. The writer of the review could see how many people found the review helpful and how many did not. For example, it would say 6 people out of 10 found this review helpful, implying 4 did not. Now Amazon only shows how many people found it helpful, making how many did not unavailable.

I don't know why the change was made. I expect the folks at Amazon decided too many people checked 'did not' and they believed the lower star ratings made by the reviewers was enough to discourage purchases.

Tax Cuts and Jobs Act #2

I was a little surprised by AT&T and Comcast announcing they would pay most of their employees a $1,000 bonus after The Tax Cuts And Jobs Act becomes law. My surprise was only because such bonuses are rare. It's easy to expect that the money will be offset by lower future taxes. Indeed, considering only the amount of money, these bonuses will be easily covered by lower 2018 taxes only. Then I realized there is another reason for the bonuses being even more affordable.

AT&T says about 200,000 front line and non-executive employees will get the bonus. Comcast says more than 100,000 front line and non-executive employees will get the bonus. That means $200 million dollars for AT&T and $100 million dollars for Comcast. That's cash. The effect on the companies' financial statements will be driven by GAAP accounting, which isn't only the cash.

AT&T's 2016 provision for income tax was $6,479 million. Comcast's was $5,308 million. (Numbers from Morningstar.) Assuming the same pre-tax earnings in 2018 and a tax rate of 21% instead of 35%, the provisions for income tax will be $3,887 million for AT&T and $3,185 million for Comcast. The reduction for income taxes --  $2,592 million for AT&T and $2,123 million for Comcast -- dwarfs the amount of bonuses for both.

Moreover, the new lower tax rate will induce a big one-year earnings boost. It will reduce the amount of deferred tax liability on their balance sheets. AT&T's was $60,128 million ($60 billion) at the end of 2016. Comcast's was $34,854 million ($35 billion) at the end of 2016. Assume the same amounts at the end of 2017 and modify them for a tax rate of 21% instead of 35%. Those deferred tax liabilities fall to about $36 billion for AT&T and $21 billion for Comcast. Since a liability reduction increases income, it implies $24 billion extra income for AT&T and $14 billion extra income for Comcast. Although non-recurring, they are big numbers compared to AT&T's 2016 net income of $13 billion and Comcast's 2016 net income of $12 billion. AT&T's income nearly triples. Comcast's income more than doubles.

I wondered if anybody else thought of this. MarketWatch did.

Tax Cuts and Jobs Act #1

The U.S. Senate and House of Representatives have both approved changing the tax code. The Tax Cuts and Jobs Act now awaits President Trump's signature to take effect. The biggest change is the corporate income tax rate is reduced from (mostly) 35% to 21%. Personal income tax rates are modestly reduced for most people.

Chuck Schumer, Nancy Pelosi, and Bernie Sanders have attacked the Act as a give-away to the rich that won't benefit the middle class. Of course, they are demagogues, as usual. For example, AT&T and Comcast have said they will pay $1,000 bonuses to most of their employees after it becomes law. Fifth Third Bancorp said it will also hand out employee bonuses and raise the minimum wage, while Wells Fargo announced it is raising its minimum wage. Link.

The Federalist has quite a different opinion -- 4 Of The Biggest Myths About The Tax Cuts And Jobs Act.

In addition the demagogues ignore the many middle-class people who own stock in those rich corporations and share buybacks typically increase the value of a stock.

Senate tax bill #2

The US Senate passed its tax bill late yesterday (link). The final vote was 51 to 49, with one Republican and all Democrats voting against it. Another Washington Post article describes the major provisions.

The provisions are much like I described here. Two things I didn't mention there are the alternative minimum tax (AMT) -- the threshold is raised -- and the bill repeals the individual mandate from the Affordable Care Act. It reduces estate taxes. Deficit concerns curtailed prior efforts to eliminate estate taxes (in 2025) and the AMT.

A major change is reducing the corporate tax rate from (mostly) 35% to 20%. The Senate bill has this starting in 2019. The House bill has it starting in 2018. This and other provisions need to be reconciled with the earlier House-passed version before being sent to President Trump. Republican leaders still aim to get a final bill on Trump’s desk before Christmas.

End Corporate Income Tax? #2

My previous post briefly addressed what would likely happen if the corporate income tax were eliminated. Even lowering the corporate tax rate to the proposed 20% when personal income tax rates are higher can create disparities. The current corporate income tax rate being (mostly) 35% and the top personal income tax rate being 39.6% makes some disparities, but lowering the 35% to 20% makes disparities much larger. Like I said in my prior post, this is likely why proposals to change the taxation of pass-through entities have become a significant part of tax reform.

For example, suppose a C corporation and a pass through entity each earn $10,000 more pre-tax. If the C corp simply retains it, the extra tax is $2,000. If the C corp pays it as compensation, the C corp pays no extra tax and the recipient(s) pay tax on it at whatever rate applies, which could be up to 39.6%. Very likely it will be higher than 20% and in some cases 39.6%. It could be taxed an additional 0.9% (as wages) or 3.8% (as investment income) for Medicare. For 2017 the 39.6% tax bracket starts at $500,000 for each filing status. $500,000 may seem like a lot for personal consumption, but quite often the income is planned for business purposes (link, link). If the C corp opts to pay it as a dividend, the $2,000 tax still applies, since dividends are not deductible, leaving $8,000 as dividends. The recipients pay whatever tax rate applies to dividends, which may be somewhat lower than applies to compensation. 

The tax bills proposed by the House of Representatives and the Senate Finance Committee are yet more complicated because they (a) limit interest deductions in computing income and (b) split income between capital and wage-related and apply a lower tax to the former or exempt a portion of total income (link).

End Corporate Income Tax? #1

Occasionally I read or hear there should be no corporate income tax, “corporations don’t pay taxes, people do”, and similar assertions. Examples:

“As most good economists and knowledgeable others understand, the world would experience a better allocation of resources and more job creation if the corporate income tax was abolished. … The so-called revenue loss would be made up by taxes on the dividend and capital gains increases, and by the extra economic growth and employment that would result from ending the corporate tax.” Link #1.

“Rather, the corporate income tax is actually “paid” by workers in the form of lower wages, and consumers in the form of higher prices. Cut this tax, and workers will both earn and spend more.” Link #2.

Neither source recognizes what would likely happen if the corporate income tax were abolished. With no other changes, it would be foolish to not incorporate and corporations would become tax havens. The corporation could spend its earnings on actual capital investment, pay higher wages, etc., very soon or it could retain the money for any indeterminate use for years. The last one would make an attractive tax haven.  A pass-through entity would not have the last alternative -- the ability to retain earnings. All earnings pass through to the owners, and they pay the income tax on them at whatever rates apply. Profits being retrospective and investment spending plans being prospective compounds the problem.

Under current tax law it’s important that amounts passed through to owners be categorized as dividends, capital gains, ordinary investment income, or compensation (wages or bonuses) because the tax treatment for each is different. For example, capital gains tax rates are lower, and compensation is subject to FICA taxes for Social Security and Medicare, whereas the others are not. (There is some extra income tax that goes to Medicare when income exceeds $200,000 for single filers or $250,000 for married filing jointly.)

The current proposal to reduce the corporate tax rate from 35% to 20% is likely why proposals to change the taxation of pass-through entities have become a significant part of tax reform. I will say more about this in my next post.

By the way, the corporate income tax is not a huge revenue source for the federal government. In 2016 the federal government’s income tax revenue was about 16% corporate and 84% personal. Link #3.

Senate tax bill

The U.S. Senate Finance Committee revealed its own tax bill, and it differs from the House bill (which passed) in several respects. The following are the major differences.

1. The Senate bill has 7 tax brackets ranging from 10% to 38.5% versus the House bill's 4 brackets ranging from 12% to 39.6%.
2. The Senate bill preserves the estate tax while doubling the current $5.49 million exemption for individuals. The House bill ends the estate tax after 2024. Until then, the current $5.49 million exemption for individuals would be doubled.
3. The Senate bill preserves the existing mortgage-interest deduction for home purchases for up to $1 million of debt. The House bill would reduce the maximum to $500,000 of debt for new purchases and would limit the deduction to one principal home, ending the deduction for second homes.
4. The Senate bill preserves the deduction for medical expenses. The House bill ends it.
5. The House bill would not change taxation of capital gains. The initial Senate bill would, and investors protested. Currently, if an investor buys shares of stock in the same company at different times and then sells part of them, the investor can choose which ones are being sold. Selling the highest cost shares would minimize capital gains, and thus the tax. The Senate bill proposed first in, first out, or FIFO, which would in many cases be the lowest cost shares, resulting in the largest gain and tax. This would apply to individuals and mutual funds (including exchange-traded funds or ETFs) selling individual company shares. Individuals selling mutual fund shares would compute the capital gain using the average cost of the shares held.
     An tax annoyance for people who invest in mutual funds is capital gains distributions. This occurs on  "taxable" accounts (not IRAs, 401k's, etc.) when the mutual fund sells shares even if the holder of  the mutual fund shares doesn't sell. The holder gets a 1099 form from the fund or his/her broker reporting the amount of capital gains, which must be included on the holder's next federal income tax return. Such amounts in the future would generally be larger with the FIFO treatment for the mutual fund.
   After protests from some mutual fund companies, the Senate bill was modified to not apply FIFO to mutual funds.

Sources: CNBC, Bloomberg, Fox Business