The View From The Fiscal Gorge

fiscal gorgeHappy Fiscal Gorge[1] Day!

Guess who’s really happy from last night’s tax deal? Heirs, financiers, and people who live off their piles of money.

Guess who’s not saddened by the Fiscal Gorge tax deal? The top 2% of earners that Obama spent his campaign promising would pay a larger share of federal taxes if he won.

Let me explain what I mean.

All along this Fiscal Cliff discussion our leaders have focused our attention on top marginal tax rates and top income thresholds for taxing ordinary income, as if that was the most important way to raise revenue while simultaneously addressing growing societal inequality.[2]  The sticking point in discussions, at least in so far as most media followed it, appeared to be whether top income earners would pay the existing 35% income tax rate or Obama’s preferred 39.6% income tax rate, and where in the range between $250K and $1million in income that higher rate kicks in.

Why do wealthy folks celebrate the Fiscal Gorge?  Just this:  If you’re Sheldon Adelson[3] you really couldn’t care less about ordinary income.  What matters most are estate taxes, dividend taxes, and capital gains taxes.  Adelson makes $1 million a year in ordinary income, now taxed at a higher rate.  No big deal.  He makes billions of dollars in dividends and capital gains, now permanently taxed at 20% for Adelson.  Now that’s a big deal.  Now that’s cool.[4]

Did you notice what happened to those taxes?

Estate Tax: The estate tax exemption rises to $5 million, up from the $1 million it would have been without a Fiscal Cliff deal, and up from $675K when George W. Bush came into office.  The tax rate on inheritance locks in at 40%, down from 55% at the beginning of the Bush Administration.  Throughout the Bush administration the estate tax exemption stepped up each year or two, and the estate tax rate stepped down every year or two.  Under the Obama administration, with the new Fiscal Gorge law passed, the W. Bush-era generous estate tax rates become permanent. Richie Rich is so happy.

Dividends Tax: If you were Sheldon Adelson – which you are not, but let’s pretend you were – right now you would be celebrating a Happy New Year because you just took a special dividend payout in December 2012 from Sands Casino of an estimated $1.2 Billion, based on your ownership of 431.5 million shares and a declared dividend of $2.75 per share.  Adelson took the dividend in December fearing that his 15% dividend tax rate might rise to something like the 35% or 39.6% ordinary income tax rates, which would cost him close to $300 million in additional taxes in 2012.  He needn’t have worried.  The Fiscal Gorge law makes a 20% dividend tax rate permanent for folks in Adelson’s income range, a pillar of the Bush administration’s tax cuts.  The dividend rate stays at the 15% rate for those earning less than $450K.

Capital Gains Tax – This tax rises from 15% to 20% under the Fiscal Gorge law.  Given that top earners and top wealth holders benefit substantially from capital gains, the permanence of this change represents another victory for Bush-era tax cuts.

My logical mind tells me that political leaders and the media underplay the importance of these taxes because, firstly, they only somewhat affect the highest earning 10% of American citizens, and secondly, these taxes only substantially affect the highest earning 1% and above.  So the majority of the electorate and the majority of the media-consuming public doesn’t really know or care about these taxes.  It’s only logical they would ignore those taxes that are irrelevant to the majority of people, right?

My more paranoid mind[5] tells me that it’s convenient for political leaders on both sides of the aisle to ‘hide the ball’ when it comes to tax discussions because you can enact a devastatingly effective ‘win’ for Republicans while at the same time allowing Obama and the Democrats to point to higher marginal taxes on ordinary income as if they scored something important.

They didn’t.  They got rolled, at least when it comes to tax policy.

When it comes to spending, of course, they delayed any cuts in government spending.  Which I suppose makes Democrats feel smug as well.[6]

Which leads to the larger critique and larger structural issue highlighted by the Fiscal Cliff process.

  1. The Fiscal Cliff was an invented political crisis technique – which managed to hold the economy hostage – to force compromise and hard, responsible, fiscal choices from elected leadership.
  2. The resulting Fiscal Gorge law, in the end, involved no significant compromise.  Republicans got overwhelming tax cuts, permanently enacted, and Democrats got all their desired spending continued for a little while longer.  So we got the crisis, but no real compromise.  Thanks guys, awesome job.
  3. It’s easy to cut taxes.  Everyone’s happy.  It’s also easy to spend a lot of money because, again, everyone’s happy.[7]  The hard part is cutting spending or raising taxes, the two things required to, you know, pay our extraordinary debts.
  4. Hard choices like raising taxes or cutting spending require compromise and long-term thinking, of which we received no evidence of either throughout the Fiscal Cliff crisis.


One additional point about tax policy and my use of Sheldon Adelson as an example of a wealthy citizen.

I pick on Sheldon Adelson because, in the new era since the Supreme Court’s Citizens United decision, which allows for unlimited campaign contributions as a First Amendment-protected ‘free speech right,’ Adelson represents the paragon of a stated willingness – and most importantly ability – to use money to tilt the political process in his favor.  Multiples of those same campaign contributions then return to him through favorable tax treatment.

Adelson has become – for me at least – a short-hand way of pointing out a glaring structural flaw in our electoral democracy.  I’ve got no particular animus against his wealth accumulation, and I really don’t blame the guy personally for pursuing his self-interest as he understands it.  But we haven’t figured out a way to prevent, for the sake really of systemic integrity, guys like him from tilting the table too far in their favor.

While acknowledging that I’m re-stating the incredibly obvious, I like to talk about Sheldon Adelson simply because he’s my way of showing we’re light on the whole ‘checks and balances’ thing when it comes to the influence of money in politics.

[1] My friend “The Professor” who recently wrote a guest post about Sheldon Adelson, deserves credit for the “Fiscal Gorge”, which naturally follows when you go over the Fiscal Cliff.  The actual name for the legislation passed yesterday by the House and Senate to address the Fiscal Cliff is The “American Taxpayer Relief Act of 2012.”

[2] I know, we don’t talk about growing inequality in a straightforward way when discussing tax policy.  But that is clearly what Obama had in mind when he campaigned on raising taxes on people who make more than $250,000 a year.  Yes, it would have a small effect on fiscal solvency, but it would have a larger effect on our notion of what’s fair in an increasingly unequal society.  One simple illustration of the increase in inequality in the United States is captured by the picture of the historical increase in the US’ Gini Coefficient measuring income inequality from 1947 to 2007.

[3] Obviously I’ve written about him already, but he’s an incredibly convenient stand-in for wealthy Americans and their successful capture of the political process.

[5] What!?  You don’t have multiple voices in your head debating tax policy at all times?  Am I over-sharing?  Why won’t you answer me, damn it?

[7] Which reminds me of one of my favorite Jack Handey quotes: “It’s easy to sit there and say you’d like to have more money. And I guess that’s what I like about it. It’s easy. Just sitting there, rocking back and forth, wanting that money.”

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Guest Post: Sheldon Adelson’s Israel Gamble

sheldon adelson in sun glasses

[ED: If Adelson represents in 2012 the new face of unlimited political ‘speech’ in US Politics following the Citizens United ruling, he’s even further along in influencing Israeli politics.  My friend The Professor presents a fuller picture of Adelson than I had painted earlier with his rational bet on the Romney campaign]

By: “The Professor”

In a post earlier this month, The Banker analyzed the personal financial math behind Sheldon Adelson’s vow to double down on his (losing) bets on Republican political candidates in the next round of elections, presenting a convincing case that any monetary investment Adelson might make in candidates who support his views on tax policy would be amply rewarded were enough of those candidates to win to make those policies a reality.

However, The Banker ignored Adelson’s stated primary reason for supporting Republican candidates, which has nothing at all to do with tax policy.  In an op-ed in the Wall Street Journal published days before the presidential election, Adelson dismissed the claim that his support for Republicans was the result of the “conservative caricature” of him as a tax-evading oligarch and insisted that it stemmed from the fact that “the Democratic Party has changed in ways that no longer fit with someone of my upbringing.”  His primary evidence of this change?  His claim that more Republicans than Democrats “sympathize with Israel” (for which he provides an uncited statistic), which he calls the “sole liberal democracy in the region.”

It seems to me that The Banker’s account of Adelson’s rationality in betting on Republican candidates is undercut by Adelson’s wholly financially irrational commitment to influencing both the American-Israeli relationship and, more importantly, domestic Israeli politics.  Setting aside the question of whether a country that arrests women for praying openly in public places and allows religious authorities to control questions of citizenship and marriage can be considered a liberal democracy, Adelson’s involvement in Israeli politics and his unqualified support for Benjamin Netanyahu (hereafter known as Bibi, which is how he’s pretty much exclusively referred to in Israel) defies both financial logic and his supposed commitment to Israel as a “liberal democracy.”

In July 2007, a new daily newspaper debuted in Israel.  Called Yisrael Hayom, or “Israel Today,” it was (and is) bankrolled by Sheldon Adelson and distributed for free around the country.  By 2010, only three years after its inception, it had a circulation of over 350,000 and by 2011 had surpassed all other daily newspapers in Israel in its share of readership.

According to the Israeli business site Globes, Adelson lost 250 million NIS (about $70 million) on the paper from 2007-2010.  While this amount is considerably less than what Adelson spent in just the current election cycle in the United States, it nonetheless represents a significant chunk of change.  More importantly, what Adelson bought with his investment is somewhat more significant than what he got out of the last U.S. election cycle.[1]

With a 40% share of the Israeli newspaper market, Adelson now has the ear of the Israeli public, and has caused a crisis in Israeli journalism, with the third and fourth most popular papers in Israel, Ma’ariv and Ha’aretz, facing serious questions about their futures.[2]

Yisrael Hayom’s dominance of the Israeli newspaper market has raised two serious questions in Israeli politics, both of which impinge on the liberal democratic character of Israel that Adelson himself extols: first, whether Yisrael Hayom, which has a clear ideological bent (Americans need only know that the day after the most recent presidential election the headline on the front page read, “The U.S. chose socialism” to know what that ideological bent is, at least with regard to American politics), is constraining public political discourse with its dominance of the newspaper market, a dominance won through free distribution and lower advertising rates.  Second, whether the money Adelson has poured into Yisrael Hayom essentially amounts to a shadow contribution to Bibi’s campaign coffers, since the paper offers propagandistic and one-sided support to Netanyahu and his policies.

Ehud Olmert, then still the prime minister of Israel, accused Adelson of political purposes in starting the paper and of supporting Netanyahu when he was still the opposition leader.  In Israel, Yisrael Hayom is commonly referred to as “Bibiton,” a portmanteau word that basically means “Bibi’s paper,” and writers and editors at the paper have strong ties to (and have sometimes been simultaneously employed by) the prime minister’s office under Netanyahu.[3]

There’s no question that Adelson is losing considerable amounts of money on Yisrael Hayom, and that his goal is to advance (perhaps to the exclusion of all others) the political viewpoints of Bibi Netanyahu and his government.

The political positions with which Bibi is now synonymous have two components: international and domestic.

Internationally, Bibi is a hawk who has advanced policies that have solidified the continued Israeli occupation of Palestinian territories, despite voicing his ostensible support for a two-state solution.  His government’s recent declaration of their intention to begin building in the disputed territory around Jerusalem known as E1, presumably in retaliation for the successful Palestinian bid for upgraded status at the U.N., is recent evidence of this policy.

Domestically, since his first stint as prime minister in the 1990s and his later turn as Finance Minister in the early 2000s (a post from which he resigned in protest against the unilateral Israeli withdrawal from Gaza overseen by Ariel Sharon), Bibi has been in favor of a variety of “pro-market” financial reforms that have been largely credited with strong Israeli growth even at times of international financial crisis but have also been largely reviled by the general Israeli public.  These include the reduction of income-tax rates, particularly for corporations and high earners, and the privatization of state-owned corporations.  Public opposition to these reforms (and other domestic policies supported by Netanyahu and his right-wing coalition partners, like continued government subsidies and military exemptions for the ultra-Orthodox) culminated in a series of protests in the summer of 2011 over the rising cost of living, housing and food prices, and the aforementioned subsidies.

Since Adelson doesn’t pay taxes in Israel, Bibi’s market and tax reforms do not affect him personally, and so unlike his contributions to Republican candidates in the U.S., who might be able to affect tax policy (if they were to actually achieve office) that would benefit him, his investment in Bibi via Yisrael Hayom cannot be similarly justified.  Clearly, Adelson’s ideological commitment to either Israeli military and political dominance in the Middle East and with relation to the Palestinians or to pro-capitalist market and tax reform (regardless of its personal effect for him) has been sufficient to justify his commitment of more than $70 million to the cause.

Paradoxically, however, since he has justified his commitment to Israel on the basis of its ostensible status as the only “liberal democracy” in the Middle East, Adelson’s meddling in the Israeli newspaper market, and in its politics, seems rather to have contributed to the illiberalization of Israel’s democracy.  If one agrees that a democracy cannot survive without a strong and diverse free press, then Adelson’s Yisrael Hayom, with its infiltration of the Israeli newspaper market and one-sided cheerleading for Bibi’s administration, has only contributed to the weakening of one of the pillars of Israeli democracy.  In addition, the right-wing parties with which Bibi has maintained a governing coalition (and which promise to move further to the right after the January elections) have continued the government’s strong support for the religious stranglehold on certain aspects of Israeli law governing marriage, divorce, and the right to worship freely, among other things, which have caused many people inside and outside Israel to question whether Israel is indeed a liberal democracy at all, or rather a democratic theocracy.

In this respect, then, Sheldon Adelson’s financial support for what he calls “the sole liberal democracy in the region” seems highly suspect, and his gamble on Israeli politics less like a gamble than a stake in a style and type of governance in accordance with a personal ideology that values a capitalist, theocratic, militarist Jewish state.  And unlike his commitment to Republican candidates in the U.S. in the last election cycle, Adelson’s investment in Israeli politics is likely to offer him highly favorable returns come January 22.


[1] breaks out the roughly $93 million Adelson made in PAC donations during the 2012 US election cycle.  The PAC names indicate that he dedicated at least some of his investment to Congressional campaigns, even if he unsuccessfully burned the majority on the presidential campaigns of Gingrich and Romney.

[2] In September Ma’ariv had to sell its printing equipment to make its payroll and was sold the same month.  Ha’aretz, Israel’s oldest daily, sold a 20% stake in the Haaretz Group to the Russian-Israeli businessman Leonid Nevzlin and in October, as a result of a strike protesting layoffs, the paper did not go to press one day, marking the first time since 1965 that they had missed an issue.

[3] NPR reports, “According to a report in Haaretz, Dror Eydar, a senior columnist at Israel Hayom, receives an additional salary from the prime minister’s office. And Netanyahu adviser Nathan Eshel left his job in the prime minister’s office to work at Israel Hayom during its launch, only to rejoin Netanyahu’s staff last year.”

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Sheldon Adelson Should Bet Even More on the GOP

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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