Sheldon Adelson Should Bet Even More on the GOP

By The Banker | Blog Posts
7 Dec 2012
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Two things you can count on with a casino entrepreneur like Sheldon Adelson: he knows the odds better than you do, and the house always wins.

In a recent Wall Street Journal interview, Sands Casino owner Adelson shares his left-of-center political beliefs, including support for abortion rights and stem-cell research, the DREAM act, and socialized medicine.  So why would he pour a reported $150 million[1] in 2012 into losing Republican candidates in the last election?  And why would he vow to double that amount in the next go around?

The answer clearly lies in his odds-based analysis of tax policy, and his views of expected value.

I’m going to assume some simple numbers for Adelson’s net worth and annual income, and go through a quick analysis of the kind of odds Adelson works with in his head that leads him to be so generous to GOP candidates.

Let’s assume Forbes Magazine’s estimated $20 Billion net worth for Adelson, and my estimate of $2 Billion for Adelson in annual income.[2]  To begin by stating the obvious, when you make $2 Billion a year[3], tax policy matters quite a bit.

Throughout the Presidential election, I’m going to assume Adelson knew the odds of a Romney victory were always around 40%.[4]  I’m going to further assume a 25% chance that a Republican Presidential victory can lead to lower taxes.[5]

These seem like reasonable assumptions about the odds of influencing different tax rates, but of course you’re free to disagree and propose your own.[6]

Ordinary Income Tax

Adelson pays himself $1 to 2 million a year to run his Sands Casino empire. [7]

If I assume a GOP victory influences the highest marginal income tax rate by 5%, the expected value to Adelson of a GOP victory becomes his highest marginal income (I’m going to use $1,000,000 for easy math again) multiplied by the change in tax rate, multiplied by the odds of a GOP victory, multiplied by the odds of successfully influencing the tax rate.  In other words:

$1,000,000 x 5% x 40% x 25% = $5,000

So…When Obama talks about raising income taxes on people earning more than $250,000 a year, Adelson really couldn’t give a flying whoop about the marginal tax rate on ordinary income.  You might care, but believe me, Adelson doesn’t care.  Retaining an extra $5,000 a year is not why Adelson gives to the GOP.

Dividend Tax

The qualified dividends tax rate currently stands at 15%, but will jump to 39.6% without a new provision to favor this type of income by January 2013.  As I wrote earlier, wealthy folks care more about dividends and capital gains taxes than taxes on salaries.  A GOP victory could have as much as a 20% effect on the marginal tax rate.

To avoid that, and in a move that should be surprising to precisely nobody, Adelson just announced a special dividend of $2.75 per share to be paid on December 18, 2012.  With 431.5 million shares of Sands, Adelson will be sending himself a nice $1,186,625,000 holiday present.[8]  This dividend supplements the typical 25 cents per share per quarter that Sands pays, or $431,500,000 per year that Adelson earns in ordinary dividends even before this special dividend.

If Adelson plans to make himself an estimated $1,500,000,000 qualified dividend payment annually, his expected value of a GOP victory is:

 $1,500,000,000 x 20% x 40% x 25% = $30,000,000

Now that is something worth trying to influence through political donations.  Heck, he could have made his money back in 6 months if Newt Gingrich had gone all the way to the White House.

 

Long Term Capital Gains Tax

Adelson, like the rest of us, pays 15% on his long term capital gains, from harvesting gains in securities that appreciate in value.  With no deal before January 2013, that rate jumps to 20%, still comfortably better than the kind of suckers-rate of 35% that high salary earners pay for working for a living.[9]

I assume Adelson’s got about $100,000,000 in long term securities gains he can harvest, and a GOP victory could influence that rate by 5%, leading to an expected value of:

$100,000,000 x 5% x 40% x 25% = $1,000,000

Corporate Tax

Corporations the size of Sands Casino pay a 35% rate on corporate profits.  For a number of non-crazy reasons either a Democratic or Republican tax regime might lower this, but let’s assume the GOP’s ability to lower this top rate by 5%.  Just for kicks, to reflect the fact that corporations can greatly influence the amount of ‘profit’ they declare domestically in any given year, and to come up with round numbers, I’m going to assume a scenario in which Adelson’s proportionate share of Sands’ corporate profit is $399,000,000 annually.[10]  His potential tax savings from a GOP victory therefore are:

$399,000,000 x 5% x 40% x 25% = $1,995,000.

Corporate profits may be voluntarily reduced or heavily managed through off-shoring earnings,[11]  offsetting earnings against previous year tax losses, or by incurring new, costly expansions to eat up profits in the current year.

It’s obviously nice to lower corporate taxes, but nothing is as nice as being able to influence the estate tax.

Estate Tax

Now it gets REALLY interesting for Adelson.  Bush-Cheney managed to eliminate the Estate Tax for one year in 2010,[12] but that kind of success is like flopping a low st when the other guy thinks he’s sitting pretty and ready to go in on pocket Aces…in other words, it happens rarely and it’s the greatest feeling in the world.[13]  Realistically, a 10% change in the estate tax rate would fully satisfy Adelson.  Because if he dies with a $20,000,000,000 estate, those numbers still multiply out for the following expected value:

$20,000,000,000 x  10% x 40% x 25% = $200,000,000

An expected value of a $200,000,000 million one-time payout upon his death certainly justifies a large investment in GOP candidates!

Of course, unlike the other taxes above, Adelson would only reap those rewards once, from the other side of the grave.

On the positive side, however, all of the other expected values for income, dividend, capital gains, and corporate taxes are annual expected values.  Meaning, to make this as perfectly clear as a royal straight flush, Adelson wins the expected value every single year that he can influence tax rates to go lower through a GOP victory.[14]

When I add up the annual expected value of changes in tax rates due to a GOP victory, I get to $33,000,000 per year, plus a one-time $200,000,000 estate tax win.  And for that kind of payout, you only need to invest $150 million every four years.  At that point, you’re playing blackjack after the gorilla has crossed his arms to signal the count is right.[15]  Or more plainly, those are some good odds.

In sum, Adelson should be investing even more in GOP candidates, as he’s getting back more in expected value than he’s giving.  Which, as a casino guy, he knows perfectly well.  Hence, the plan to double down next year.



[1] Included an estimated $100 million to help nominee Mitt Romney, a man he tried very hard to defeat during the primary by propping up Newt Gingrich’s chewing gum and paper bag campaign in the Spring of 2012.

[2] Adelson may very well average better than a 10% annual return on his assets, but I’m just going to estimate with round numbers to make my life and the math easier.

[3] I’m not at this point literally speaking from experience.  But like all Americans, I believe the fact that I am not yet earning $2 Billion per year is just a quirk of timing.  As John Steinbeck reportedly said: “Socialism never took root in America because the poor see themselves not as an exploited proletariat but as temporarily embarrassed millionaires.”

[4] I’m picking a single ‘average’ again to make my math easy.  This number is based on the Iowa political market’s implied rates.  I’m a big fan and participant in the online political trading markets supported by the Iowa Business School.  Between July 2011 and just a few days before the election, the implied odds of the Republican presidential candidate of winning fluctuated between 35-50%, with just a month above that range in the Fall of 2011, and a few weeks below that in September 2012, before the first televised debate.

[5] This may be too low.  The Bush-Cheney Administration, in gambling terms, managed to ‘run-the-table’ on lowering tax rates that mattered to people like Adelson. (I.e. dividends, capital gains, and estate taxes)  Other Republicans, especially in the face of today’s hefty deficits, would have a harder time reproducing their success.

[6] Heck, this being the interwebs and all, you’re free to put on your troll hat and call me either a socialist drone or a capitalist dupe depending on where your own views took root.  It’s a free country.  Or at least “it used to be a free country before those [fill in the blanks: Communist/Socialist/Corporatist/Fascist] jack-booted SWAT teams of the [fill in the blank: Bush/Obama] Administration started clandestinely snuffing our last remaining freedoms.  Uh, also, pass me the Cheetos.”

[7] Pffffhht, nothing more than enough to occasionally play the penny slots.

[8] Other similarly situated individuals will do the same before the end of the year, such as Oracle’s Larry Ellison. Founding entrepreneur-owned firms like Microsoft, Dell, Ralph Lauren, Nike and Gap may be expected to do the same.

[9] For more on how tax policy encourages or discourages work, see my post here.  To sum up: Your government would like you to earn a living through 1. Receive gifts and inheritance (0% taxes for the first $5 million) 2. Make money with your money pile (0% on Triple Tax Free bonds up to 15% taxes on capital gains and dividends) and 3. Earn a salary (up to 35% tax on ordinary income).

[10] I just picked this because that way I can say Adelson earns an even total of $2 Billion per year, which sounds about right.

[11] Earning money overseas and declining to ‘repatriate’ the earnings, something Microsoft, HP and other tech giants do successfully.

[12] New York Yankee’s irascible owner George Steinbrenner famously benefitted his family to the tune of hundreds of millions of dollars by dying in 2010, the best of all estate tax years to die.  Is it ok to mention here, apropos of nothing, that I hate A-Rod?  I’m going to answer my own question: “Yes.  A-Rod sucks.”

[13] Except for that part about your dead relative who left you money in the estate.  That part is still sad.

[14] I haven’t even got into State level taxes.  But in a discussion with my uncle about the value of paying for GOP candidate victories, he rightly pointed out the risk/reward for political investment and tax savings is probably even more attractive at the state and local level.  He said it best: “You think paying for a US Congressman is good value?  You should see how cheap it is to buy a state or city official!”

[15] Please remind me to do a Bankers Anonymous review of Bringing Down the House, which would make this analogy explicable if it doesn’t already make sense.

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4 Comments

  1. David Murphy says:

    I have just been party to the most subtle/obscure poker gloating in history. :)

  2. David Murphy says:

    … and it was awesome. :)

  3. David Murphy says:

    Hey– Banker’s Anonymous– do a review of Bringing Down the House.

    -d

    ps: the Gorilla doesn’t cross his arms. ;)

    • The Banker says:

      Yes, I was a little bit excited to write about poker this past week. Thanks for the BDTH reminder, clearly I need to re-read if I’m getting the nomenclature wrong.

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