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Why Tax Cuts are Disproportionate

Kevin Williamson writes Blue Voodoo in National Review.


 The cartoon version of conservative economic thinking — that we should subsidize gazillionaires in order to create work opportunities for yacht painters, monocle polishers, and truffle graters — is fundamentally at odds with the facts. The supply-siders may have wrong economic ideas, but they do not have those wrong economic ideas. President Ronald Reagan, for example, loved to boast of the number of poor and modestly-off Americans his policies had removed from the federal tax rolls entirely. George W. Bush promised that he’d take the poorest fifth of taxpaying U.S. households off the federal tax rolls; Heritage estimates that he succeeded in doing so for about 10 million low-income households.

One of the perverse consequences of conservatives’ success in lowering the federal income-tax burdens of those on the left half of the earnings bell curve is that we have finally arrived at the point where our critics are partly correct: Most conservative plans for tax cuts at this point in history do disproportionately favor the wealthy and the high-income, for the mathematically unavoidable reason that they pay a steeply disproportionate share of federal income taxes, making it very difficult to design a tax-cut plan that does not disproportionately benefit them. It’s hard to cut taxes without cutting them for the taxpayers.


The more progressive the tax system is the more that the economy is dependent on the wealthy and thus subject to the same volatility. Tax cuts will favor the rich if the lower income have paid no taxes.

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The Future of the Auto


I called the Tesla dealer in Atlanta for a test drive. Test drives were booked a week in advance; two weeks if you wanted to test drive on a Saturday.  If I ordered an S model it would be November before delivery.  The X Model had 12,000 deposits for a 2015 delivery.

It goes from 0-60 in 5.5 seconds.

It gets 300 miles to a charge at 55 mph, a little over 200 miles at 70 mph and over 400 miles at city driving around 30 mph. Unlike gas engines it is not dramatically inefficient at stop and go city driving.  The main power drain is speed.

The battery is guaranteed for 8 years.

The interior is elegant and simple. The console is essentially an iPad that easily controls everything.

It will recharge overnight at 220 but there are power stations being widely built that will recharge in an hour.  The Intercontinental in Buckhead, Atlanta  has several charging stations in its parking lot.

The car is one of the most beautiful on the market. Prices are about between $75,000 and $90,000.

This is the future of the auto.  It made me want to sell all of my shares of Exxon.

In three years Ford and GM will emulate this car.  It is the very essence of a disruptive technology.  No more big car lots.  This is the iPod of cars.

The state will have to rethink how it funds highways since the gas tax just became obsolete.  Will the greenies be willing to increase coal production to pay for the electricity to replace gasoline?

Did I tell how great looking this car is?

I want one.



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Virtue and Keynesian Policy


In a Charlie Munger interview he discusses the necessity of social virtue for Keynesian policies to work.  Societies like ours, the Germans, or the Japanese have the virtues required for Keynesian stimulus to work.  Greece on the other hand lacked these essential virtues, lost its work ethic and abused the government bounty let loose on the populace.  In such places Keynesian policies will not work.

To the extent we have lost some of our social virtues, Keynesianism works less well that it used to.  To the extent Krugman underestimates the ‘sin ratio’ his faith in Keynesianism is misplaced, though he remained generally complimentary of Krugman otherwise. (Perhaps he is referring to Krugman’s research on international trade more than his tirades at The New York Times?)

The looming question is what causes the decline in virtue.  Is it the secular transition so many western democracies experienced?  Is the growth in government transfer payments leading more and more to rely less on their individual abilities at fault?  Is it the rise of crony capitalism where government rather than consumers and entrepreneurs drive economic opportunity; using political power to allocate capital rather than market efficiency and effectiveness?

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Feeding a Culture of Envy


During the question and answer session of the annual Berkshire Hathaway meeting one from the audience asked about fuller disclosure of compensation of more than the top executives as required by the SEC.  Since there were so many managers getting top pay should this not be disclosed to the shareholders as well?

Buffet and Munger were in ready agreement that too many details on compensation should not be disclosed.  In their vast experience owning and actively involved on the boards of nearly a hundred companies such disclosure was not in the best interest of the shareholders.


Because the net effect was to ratchet up the pay. Rarely did an executive read about the high compensation of another executive and deem himself to be worth less.  As Munger so characteristically briefly noted, he saw no benefit in feeding the culture of envy that infects so many executive suites, including those owned by Berkshire Hathaway.

Few would think that less disclosure is better, but few have the wisdom and experience of Buffett and Munger.

Their pay, for the record, is $100,000 a year.  Each.

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A Business vs The Stock



One of the better questions submitted during the annual Berkshire Hathaway meeting concerned the poor track record of most conglomerates.  Few succeeded for any length of time.

Warren’s response was illuminating. Many conglomerates were just tricks played with the stock price creating an illusion of increasing shareholder value without addressing the underlying performance of the company.  ”The change in the stock price is more visible, but the change in the value of the business is more enduring.”

The value of a business is dependent on its ability to generate consistent and growing profits and cash flow.  It may or may not be recognized in the current stock price.  When you take a longer term approach as Berkshire does the fluctuation in the stock prices is largely irrelevant.

The culture at Berkshire is to buy great companies with great management and to finance them conservatively.  Must of the stock price games played by other consolidators entailed a tremendous amount of debt that left their business vulnerable to unpredictable market disruptions and put their companies in jeopardy.  Often excess or poorly timed debt caused conglomerates to sell their best companies at inopportune times to raise critical cash.  Berkshire is sitting on so much cash this never happens to them.

Warren refers to the businesses in his portfolio, not the stock. The value his conglomerate brings is allocate the substantial cash generated by their numerous businesses among the other businesses in his portfolio, but unlike so many other conglomerates he is less interested in flipping a company to take advantage of short term market swings.

The business is much more than the stock.