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In Defense of the Dividend Tax

14 Mar

A few weeks late to this conversation, I admit, but I finally had a chance to catch up with my long overdue writing “assignments” and have had a burning desire to write this piece.

“Seldom has there been a clearer example of a policy that is supposed to soak the rich but will drench almost all American families.”

Recently, the Wall Street Journal published an article railing against Obama’s 2013 budget, which included a proposal to triple the tax rate on corporate dividends. Not surprisingly, the author’s position was that this was an atrocity, an attack on the middle class and further “proof” that the Obama administration’s economic policy is stifling growth. The author essentially argues that the double taxation of corporate profits are an unnecessary burden on flag-waving Americans, the tax increase disproportionately affects older Americans reliant upon steady income streams produced by dividend-paying stocks, stocks are less valuable because they are now discounted, and that the correlation between dividend tax rates and corporate dividend payments implies that companies won’t pay out dividends now because of the change in tax policy.

I find this argument to be flawed on many accounts, mainly on the grounds that it assumes that dividends are essentially an unalienable right of investors that their payment is an assumed “business-as-usual” responsibility of corporations. Additionally, the argument completely ignores the bigger picture of the tax hike’s intended affect on the economy as a tool to indirectly encourage corporations to direct their funds towards investments other than to their shareholders’ bank accounts.

First of all, corporations have no obligation to pay dividends, and they will not be adversely affected by this tax hike. Dividend-paying organizations have been able to grow their revenues, go public, and pay dividends in the first place because they introduced products and services that met a market need; their success is due to the customer, not to the shareholder. Take Apple for example – the tech giant is sitting on  nearly $100 BILLION in cash and only now are analysts so sure of the fact that it “is likely to declare…a dividend before the year is out.” Apple didn’t become a $500B company by placating investor demands – and really it, or any other company with  any significant value proposition – so investors should be lucky to have dividends at all in the first place!

Additionally, the author tries to paint a picture of a sad, old wrinkly fart that is more or less going to be financially ruined because of this tax hike: “IRS data show that retirees and near-retirees who depend on dividend income would be hit especially hard. Almost three of four dividend payments go to those over the age of 55, and more than half go to those older than 65, according to IRS data.” This is partly true. The 55+ demographic obviously comprises a disproportionate amount of the stockholders in the U.S. because these are consumers at the acme of their income-earning years, but let’s be real: anyone who “depends” on dividend income doesn’t really depend on dividend income. If you are in a place financially to where 25% or less of your investment portfolio (surely you’re diversified to the extent that dividend-paying stocks account for  less than a quarter of your investments, right?!) is your main source of income, then I have to imagine that you’re not going to be that adversely affected by this tax increase; particularly if the companies in which you’re invested stop paying dividends and instead use that excess cash to buy back stock, or invest in their operations – which could in turn further increase the value of your portfolio!

The author completely misses the point – tax policy can drive economic growth. Regardless of the tax rate, the significant majority of shareholders of dividend-paying stocks are not going to take that windfall and immediately recirculate those funds back into the economy; however, if companies are de-incentivized to pay dividends, they have a stronger impetus to invest in initiatives that create value for their customers, themselves, their shareholders…in essence, the economy as a whole.

Increasing the dividend tax might force a niche demographic to rethink the allocation of its investment portfolio, but more importantly, this proposed change in tax policy has the potential to directly impact the economy. That’s a good thing, right?

 

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Temporary Urbanism – Innovative Uses of City Spaces

2 Dec

“Cities only learn to be innovative by trying and failing – you’re not trying hard enough if you don’t fail” – DC Office of Planning Director Harriet Tregoning

Park(ing) Day

I’ve always been fascinated with cities, and spend a lot of time thinking about how smarter urban planningcan foster innovation and drive significant social and environmental change. When I saw a lecture called “Temporary Urbanism” on the schedule for Digital Capital  week, I immediately signed up.

The engaging lecture at Washington’s National Buliding Museum this past Saturday discussed how cities can effectively activate empty storefronts, abandoned lots or even cultural institutions in order to create engaging neighborhoods, boost the local economy and push sustainability efforts – all noble goals for major urban areas.

DC Office of Planning Director Harriet Tregoning, RTKL architect and 24 Hour City participant Kashuo Bennett, and Christine Ewing, Regional Fine Arts Officer at the U.S. General Services Administration shared their ideas and insights around the subject, and discussed examples in which vacant spaces have been effectively utilized to build better cities. Here are a few highlights, many of which could easily be adopted in urban areas around the world:

Park(ing) Day is an internationally celebrated event “that invites citizens everywhere to transform metered parking spots into temporary parks for the public good.” The event is particularly fascinating given the traffic, pollution and danger to pedestrians that cars create in urban environments. Tregoning suggested that more than 80% of the estimated $8,000 it costs to keep a car in the city each year – including gas, insurance, parking, etc. – leaves the local economy; extrapolating those statistics, she postulates that more than $125 million could be added back into the local economy if just 15,000 people got rid of their cars.

In comparison to the markets in other cities across the U.S., DC real estate is relatively strong: retail vacancies are 4.5% versus the national average of 9.3%, and office vacancies are 11.1% versus national average of 16%. Still, that translates to a lot of empty space. If a small percentage of those vacancies were filled with pop-up stores or art spaces, there would be significant tangible value created for the local economy, as well as intangible value in the form of more vibrant and interesting neighborhoods. Temporarium is a great example. Open for 24-consecutive days between February 18 and March 13, 2011, the pop-up storefront in DC’s Mt. Pleasant neighborhood housed 34 local artisans and crafters. It grossed more than $31,000 in sales from 1,030 customers, 70% of whom reside in immediate area – the District’s Ward 1.

Another interesting local example of the creative use of vacant space is Truckeroo, a monthly festival held June through October in a DC parking lot showcasing food trucks and live music from the area. The event has drawn thousands of patrons to a space that would otherwise lie vacant.

DC’s Truckeroo

There are countless other examples of innovative ways that people in cities around the world have effectively leveraged existing outdoor, retail and office space, and I’m excited about the growing interest in doing so in our very own backyard. Given the countless artists and entrepreneurs in DC – not to mention the 180 missions and embassies in DC, many of whom I’m sure would love to introduce their culture, art, businesses, etc. – I have to imagine there is a healthy demand to occupy such spaces.

What about the supply? One of the biggest obstacles of introducing such interesting manifestations of “temporary urbanism” is the bureaucratic matrix of permits, insurance and lease agreements. Maybe it’s a matter of asking for forgiveness, rather than permission? DC Councilmember Tommy Wells weighed in on the subject, noting that the city’s unofficial stance is to often turn a blind eye to such community-enriching efforts, many of which are not technically legal; for example, camping on federal parks is illegal, yet when it comes to policing #occupyDC, the city leaders look the other way.

The takeaway from the discussion was that building more vibrant urban destinations can be an exercise from the bottom-up: build better blocks, which lead to more interesting neighborhoods, which are the hallmark of desirable cities.

For more information on DC’s Digital Capital week, including a schedule of events, click here.

Tax Reform – Key to “Winning the Future”

19 Aug

Oh no! It's so bad! Again!

I sure hope Andrew Ross Sorkin has been taking notes. Between the debt ceiling showdown and the downgrade of U.S. debt, the economic uncertainty and financial volatility of summer of 2011 is going to leave everyone from academia to the boardroom scratching his head for years to come, so you can rest assured that financial journalists are warming up their word processors, itching to pull the story together.

As the markets oscillate and photographers capture the quintessential “this is bad this is really bad” shot of Wall Street traders grasping at their faces with despair, one can’t help but wonder what leadership elected officials in Washington plan to do to improve the economic outlook. In the past I would trump the virtues of Adam Smith’s invisible  hand, but given the absurdly high unemployment rate and the juxtaposition of record cash levels on corporate balance sheets to the budget deficits of government at all levels,  I don’t think we can improve the economic situation without significant assistance from Washington.

At some point in the not too distant future,  difficult decisions regarding the U.S. government’s expenses and revenues will have to be made. This is a great time for members of Congress to put on their architect hat and envision what kind of U.S. they want to build. Do we want to have strong infrastructure and education systems, a significant percent of energy from “clean” sources, and low unemployment, among other desirable things? If that is the U.S. we want to live into, then we have to work backwards to the decisions we make now. As any homeowner knows, moving into the house of your dreams requires starting with a blueprint that defines the vision, and a roadmap of project milestones and to-dos that must be achieved along the way.

In order to achieve some semblance of fiscal health, I propose the following tax reform. Keep in mind this is by no means exhaustive, and please, feel free to weigh in on the discussion.

  • Eliminate (many, but not all) tax deductions and credits. For instance, why are we still encouraging and incentivizing home ownership via mortgage interest tax deductions? If a consumer has the means and desire to own a home, that’s wonderful, but the government should not encourage living outside of one’s means. Also, to make the case for sustainability, urban economists such as Ed Glaeser argue that a suburban lifestyle has a much larger environmental footprint than an urban one, so we shouldn’t de-incentivize urban rentals in favor of home ownership
  • Institute a financial transactions tax for transactions over $1mm. The financial crisis of 2008 made it all too clear that reckless trading has severe implications outside of  the two parties executing a trade, but the public should not be held responsible for such recklessness. A tax as small as 0.25% would add tens of billions of dollars of revenues, and would not critically impact the liquidity of the market. Only institutional traders or high net-worth individuals are trading in these increments anyways, so it is not unreasonable to demand an insurance premium for a sense of market stability
  • ELIMINATE FARM SUBSIDIES. Because it simply does not make sense to subsidize obesity via cheap high fructose corn syrup.
  • Reform corporate tax code to the extent that effective tax rates are uniform across all corporations. A uniform effective tax rate would provide a sense of stability in the markets, and would give corporations a better sense of long-term liabilities. This can only be achieved if loopholes, tax credits and deductions are realigned as well. I think it would be feasible to increase the average effective tax rate through a combination of reducing the nominal corporate tax rate and eliminating tax loopholes
  • Legalize it. It is mind-boggling that Americans can legally purchase and consume 80-proof alcohol, cigarettes, and McDonald’s McNuggets, but they cannot legally purchase and consume marijuana. Legalizing and taxing marijuana at 8-10% would not only add billions to the government’s coffers, but it would also create thousands of (legal) jobs and drastically reduce the violence in Mexico and near the border.
These are just a few thought starters, but the point is that the path to a fiscally sound government, and therefore a healthier economy, is going to require additional revenues in addition to spending cuts.

Job stimulus? Look to Oregon and Jersey

10 May

It’s not that often that IYSMU ventures into public policy, but given the ridiculous budget proposals and arguments amidst the near-shutdown of the federal government, I find myself thinking more and more about innovative solutions that the government could propose to a) reduce spending and raise funds or b) create jobs. I’ll spare you my budgetary opinions for another day and another post- today, it’s all about getting Americans back to work.

Here’s one for your trivia night memory bank: what wacky post-war law do Oregon and New Jersey have in common? Answer: they both require that an attendant pump your gas. By law, it is illegal to fill up your Prius with $5.21/gallon gas in the Beaver and Garden states. The somewhat logical reasons that these states have for preventing their citizens from pumping gas (in summary, we are stupid and accident-prone) mean that there are thousands of extra Shell, BP, ExxonMobil, etc employees in these states than there would otherwise be. This is a really interesting instance where a state legislature has the power to create jobs for thousands of people- imagine the possibility if every Rick Perry (definitely not going to happen) and Jerry Brown (nope) across this great nation took a page from the Oregon and Jersey playbooks and miraculously pushed through policies that required gas stations to hire attendants to pump gas!

How much could we chip off the latest unemployment rates if the rest of America adopted such ludicrous laws? Time for a quick and dirty analysis.

According to the U.S. Census Bureau, there were a whopping 116,855 filling stations in the U.S. with paid employees in 2006; that works out to roughly one gas station for every 2,627 Americans. New Jersey and Oregon account for 2.84% and 1.25% of the U.S. population, respectively; assuming an equal distribution of gas stations across the country, it can therefore be estimated that there are roughly 4,770 gas stations in these two states, each one paying attendants to huff fumes and squeeze a metal handle all day. That calculation leaves 112,084 gas stations for the rest of us, all of which require us to pump our own gas like chumps!! If each state required a gas station attendant present for 20 hours of the day, 7-days-a-week, each station could potentially support at least 3 full-time (40 hours/week) employees. We’re talking 350,000 jobs at the blink of an eye here folks!

What would this mean? For starters, those 350,000 jobs would reduce Big Oil’s profits by a cool $7 billion each year. I don’t think the average American would be too upset with that, although it would logically follow that the oil industry would respond by raising prices, which in turn would lead to higher CPI, which in turn would probably be more ruinous to our fragile economy than any stimulus those jokers up on Capitol Hill could ever write.

Would the average unemployed American really want a minimum wage job pumping gas? Probably not. Will they complain and run for the hills when hard-working immigrants ask “regular, or premium?” Absolutely.