Stimulating at a recession near you…

As a tax professional I am constantly being questioned by many of my colleagues, peers, and friends concerning this stimulus package everyone keeps talking about.  As many may already know, the bill was made law this past week  and a lot of people have no clue what it does or how it affects us.  Fear not, I have the perfect explanation, courtesy of an email my dad sent me earlier today.

Shortly after class, an economics student approaches his economics professor and says, “I don’t understand this stimulus bill. Can you explain it to me?”

The professor replied, “I don’t have any time to explain it at my office, but if you come over to my house on Saturday and help me with my weekend project, I’ll be glad to explain it to you.” The student agreed.

At the agreed-upon time, the student showed up at the professor’s house. The professor stated that the weekend project involved his backyard pool.

They both went out back to the pool, and the professor handed the student a bucket. Demonstrating with his own bucket, the professor said, “First, go over to the deep end, and fill your bucket with as much water as you can.” The student did as he was instructed.

The professor then continued, “Follow me over to the shallow end, and then dump all the water from your bucket into it.” The student was naturally confused, but did as he was told.

The professor then explained they were going to do this many more times, and began walking back to the deep end of the pool.

The confused student asked, “Excuse me, but why are we doing this?” The professor matter-of-factly stated that he was trying to make the shallow end much deeper.

The student didn’t think the economics professor was serious, but figured that he would find out the real story soon enough.

However, after the 6th trip between the shallow end and the deep end, the student began to become worried that his economics professor had gone mad. The student finally replied, “All we’re doing is wasting valuable time and effort on unproductive pursuits. Even worse, when this process is all over, everything will be at the same level it was before, so all you’ll really have accomplished is the destruction of what could have been truly productive action!”

The professor put down his bucket and replied with a smile, “Congratulations. You now understand the stimulus bill.”

So as you can see from the explanation it makes no sense.  It is like a picture I once saw of Darth Vader using a water purifier to make sea water drinkable, it makes no sense…Darth Vader can’t drink water, and you cant pay debt by being in more debt…sorry all who read this previously, when I pasted the story, it was a bit mixed…

Debt + Debt x Debt x 45 = 0

So for a while now we have all been hearing about this whole government bailout for financial institutions.  Well, the dust has settled and the Obama administration has left its mark on history.  While no disrespect is intended, Obama sure has provided some “change.”

For starters, he changed the record for most money involved in a bill passed by the United States.  He will change the way some companies books look.  He will change the value of our dollar by freely throwing another $800 billion into our economy.  Sounds fun doesn’t it?

Recently a friend of mine put together a blog concerning the plans many politicians have with how to go about taking care of this financial crisis.  I will tell you right now, the worst way to reduce debt is by creating more of it, and at an exponential rate might I add.

One of the speculations of what will be done with all this money is the re-purchase of some bad assets, bad debts, bad securities, and liabilities.  This sounds great to the average person, however, such transactions can have very negative affects on a companies financial statements.  What is more is that these money hungry institutions are the reason why our economy is in the toilet.  That and our fun-loving consumers who think making $30,000 a year and spending $120,000 is a way of living.

My only concern with this idea of giving banks funds for bad assets as well as buying liabilities/securities that have gone bad is the balance sheet effects these transactions would have. What will most likely happen to most of these banks is a large extraordinary loss will be reported on their income statements due to the fact that their is no way in hell that the government will be willing to give them anywhere near the adjusted basis of most of those assets, which is what translates into a negative result for company’s balance sheets and income statements.

To explain what was said above, say ABC Bank has an asset on their books in which the adjusted basis (book value after depreciation) is $2 million.  Then say the government looks at this asset and says, “$500,000”, well now what happens to this $1.5 million difference?  See my point?  Let’s not forget what effects this will have on the stock market, granted, their is no logic that can explain that psycho ward, but say we were actually using logic to explain the stock market, this loss would be a bad thing.

The plus to that is with the new stimulus bill, these institutions would be allowed to transfer NOLs to all the way back to 2005.  NOL is the acronym for Net Operating Loss.  This refers to any net loss from a business for a specific year of business.  Usually, NOLs can be carried back two years and forwards 20 years, the beauty of this is you can use a loss from this year, to amend a prior year’s income, reduce it, and receive the tax benefit of a refund on the amount of your NOL.  Granted, the amount of the benefit is dependent on the tax bracket in which the company in, however, something is something.  Obama’s bill allows companies to take 2008 and 2009 losses back to 2005.

With most companies reporting in the red last year and this year, this may all turn out to be good on paper, however, all this does is further reduce government revenue and force us to rely more on debt as a means for financing our stimulus bills and really expensive inaugurations.

The Root to all Evil

So maybe the picture I made is a bit of a stretched hyperbole, however, you get the idea.  According to a recent article on Yahoo Finance, should Congress pass Obama’s stimulus bill, it will make the U.S. government’s total for trying to solve our financial crisis a sum of about $9.7 trillion dollars.  Conincidently, this same amount is enough to pay off 90% of the nations mortgages, which in essence gives you an idea of how much liability is floating around the U.S.

So ask yourself this question:  We have heard of the $700 billion bailout, this new $826 billion stimulus, and last year’s $168 billion stimulus payment, what happened to the other $8 trillion?  Makes you stop to think doesn’t it? Supposedly most of that money has gone to pledges made by our U.S. government to help get us through this financial crisis, but you know our government, and that lie “fact” can be taken to the bank, which isn’t the best place to go as they might use whatever to take to them to payoff their CEOs.

Still don’t understand the magnitude of our debt, let me break it down even further.  This massive amount of money is equal to paying each person in the U.S., man, woman, child, a sum of about $1,430 and is about 13 times the amount spent in Iraq and Afghanistan.  Ridiculous isn’t it?  And they said this war was what was expensive; think again.  In fact I think the war is a good thing.  Just ask Roosevelt what he thought about the war?  What do you think got us out of the Great Depression, yeah you guessed it, the war.

I do admire one group of individuals over at Bloomberg who have decided to sue The Fed.  Yes you heard right, sue The Fed.  Basically they want some more disclosure on the amount of lending and to who the money has been going to.  I myself wouldn’t mind knowing too, as in case you didn’t already know, when I say $9.7 trillion, I mean $9.7 trillion taxpayer dollars.  Want more fuel?  They plan on spending another $200 billion in asset protection for banks and other financial institutions and have pledged more money to the Bank of America and Citigroup securities.

Call me crazy, but how is it logical to try and fix debt with more debt?  That is like having two maxed out credit cards, and paying half of each by using a third credit card.  Granted this is normal practice to save on APR, however, in the government’s case, they are then going back and maxing out the first two cards again and maxing out the third newly acquired card.  Obviously this analogy is a bit simplistic, however, the general idea is the same.

I know we have to spend money to make money, however, when does it stop? When do we begin to realize that while taxcuts are a nice security blanket to sleep under, as well as a nice pacifier for the American people to suck on so we can somehow feel at ease with everything else that is going on ,taxcuts are not the answer.  Taxcuts just make us taxpayers feel warm and fuzzy and reduce government revenue, causing them to seek funds elsewhere, and I can’t imagine who they would turn to.

The topic of the bailout may be over played and over heard at this point, however, with good reason.  Should the government continue down this path, expect the dollar to be worth peanuts, expect inflation to kick into 5th gear, expect unemployment to continue rising, expect the going rate to slowly creep its way back up and expect the supply of money to either become scarce due to more government issued lending or due to the simple fact that it just won’t exist.  See if that makes you feel warm and fuzzy….yeah didn’t think so.

Bailouts, Bankruptcies, and another “B” word I can’t say…

This all to familiar image above is but a taste of things to come.  With cash becoming more and more scarce and banks still dubious to release funds to anyone, it is no wonder more articles are springing up about companies going out of business.

Obviously Circuit City is the most well known company to declare chapter 7 bankruptcy, however, so many other businesses out there are headed in the same direction.  When you see a company declare chapter 11 bankruptcy, expect 2 things: They will either downsize and cut costs and try to come up with a fresh source of financing to aid in the process of rebuilding, or after time passes and little changes, declare chapter 7 bankruptcy.

What I don’t understand is how despite the fact that the government threw $700 billion dollars at financial institutions, banks are still finding it difficult to loan money.  I know that rules and regulations are more stringent than they were in the past, in the past all you needed was a first name and a pulse and you had a loan for anything, even if it was funding your lacadisic tendencies(Which seems to be the case for most), however, their needs to be some type of structure in place in order to make sure the right people are getting the money they need to continue doing business.

I don’t want to get into a discussion about the bailout, as it would lead to  a post about how Bank of America is talking about nationalizing itself and how the government is rewarding failing firms for failing, instead of helping those who are doing well continue to do well in these hard times, but let’s be honest here, where is all this money going?  And why do I hear more about CEOs using golden parachutes and splitting with millions, while the unemployment rate soars above 7.8% soon to be 10% by 2010.

The government isn’t doing anyone any favors.  They aren’t “stimulating” the economy; in reality, they are stimulating themselves.  I saw a clip of the John Stewart show a friend of mine sent me, and I have to say I agree with what he was saying.  His idea was to do a reverse stimulus, which would work its way from the consumer and then lead to the bank.  This makes sense, as most money spent by consumer to either pay bills or make purchases, ends up being deposited into the bank.

I honestly don’t see any of the bailout money being put to good use.  Obama’s stimulus bill, while yes it does look promising, carries a high price tag in that not only does it cost close to $900 billion, more importantly, it allows for more government regulation, something I am opposed to and something that usually borders socialism, depending on the magnitude of the regulation.

There does, however, exist a positive side to all this.  The fact that companies nationwide, specifically retail stores are doing poorly in sales means that consumers are beginning to understand the idea of living within their means, something we as Americans have lost sight of.  Part of this whole problem is people paying debt with debt and digging themselves deeper and deeper into a hole with a shovel they never owned and a lot of land that was never theirs.  

Don’t be dicouraged by the failing companies.  Recession is not always a bad thing.  For some it is an ideal buying opportunity.  Let us not forget too that recessions are a natural part of the economy.  The reason this recession is so painful is as a result of consumer spending with no concern for reality, major companies frivolously wasting money on bad investments and hopeless projects (Yes GM I am talking to you and your truck-line, being produced in a $2-3 a gallon of gas economy), companies amasing large amounts of liabilities, and banks throwing money at anyone with a first and last name.

It is almost like banks want government regulation.  Then again, who wouldn’t want the government to spoon feed them everything, in return for loyalty.  Good thing Bank of America isn’t nationalizi…..err….yeah it isn’t looking good….

Obama’s Tax Plan

So I have to say, inspite of the fact that I never was happy Obama became president, as a tax professional, I like where his plans are going for tax credits and the like.  Obviously their are two sides to the coin and what might be beneficial to you and I, may not be so beneficial to the reduction of our budget deficit of infinity trillions of dollars.

So everyone knows, I am majoring in accounting and plan on gettting a Masters in Taxation.  I work for a Liberty Tax Service, but consider myself to know more than the average tax professional.  To put it in other words, I spend my free time going on a tax forum at About.com and posting responses to people’s questions.  I also tend to read IRS publications and receive emails whenever tax laws are updated, yeah I am crazy.

Of course Obama’s tax laws are of the utmost importance to me, and recently doing some research on his latest act, The American Recovery and Reinvestment Act (HR 598), I was actually pleased with what I saw.

I obviously don’t want to go into any major detail because I could sit here and go on and on, however, I wanted to highlight the major changes that I found important.

Among some of the changes included increases to credits like the Hope Tax Credit, the Earned Income Credit, the new Homeowners Credit, the Child Tax Credit, and a few other things as well.  I found these important as far as credits were concerned especially since one of them directly affects me.  Obama wants to change the Hope Tax Credit (which is one of the educational credits given), and allow students to include the cost of books as qualifying expenses for the purpose of calculating the credit, in addition, he also wants to increase the credit and make 40% of it refundable, which to me is huge as this credit is nonrefundable and generally only benefits a person if they have any tax liability after all deductions have been taken.

One of the major tax changes that I especially enjoyed was the Marking Work Pay Tax Credit.  With this credit, a person receives a $500 credit for the first 6.2% of earned income and this credit would either reduce the amount of FICA taxes withheld throughout the year, or appear as a refundable credit on the person’s tax return.  The wording may seem a bit deceiving, like most tax laws do, but it would greatly benefit most people, as its phaseout doesn’t start until your Adjusted Gross Income reaches $75,000.

Other things like the revised Net Operating Loss Carryback rules are a big help for  businesses.  The new law would allow businesses to carryback 2008 and 2009 losses 5 years, rather than the current 2 year limit.  What this does is allows companies that had profit in the years of 2003-2008, to reduce their previous profit with losses they may have seen as a result of the current economic downturn, which would in turn yield a refund to them, and a hefty one for most as the corporate tax brackets start at 15%.

 Granted these are just some of the credits, but you get the idea, most of the changes are just like he said, help the middle to lower classes.  Of course this is the positive side to the argument, because remember that every credit we receive is money the government doesn’t see in revenue, which you may not care to much about, however, that doesn’t help our deficit.  We’ll save that conversation for another day.  Below is the article with the information, in case you get bored… Oh and if anyone ever has any tax questions, I offer a free consultation if needed.

The cost of this new tax act you ask?  A mere 550 billion dollars….chump change if you ask GM, Ford and Chrysler….

Link