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Boeing: profits flying high! But “Return On Investment” for government, union givebacks is… not so great

Boeing DreamlinerBoeing announced its Third Quarter financials this morning.

net earnings increased 18% to $1.36 billion, or $1.86 per share.  The quarter’s results were strong enough that Boeing increased its full-year guidance: the company is now forecasting full-year earnings per share between $8.10 and $8.30 per share.

Think these better-than-expected profits are the result of skilled CEOing by Jim McNerney (who jokes about “cowering” employees)?

  • What about the record-setting $8.7 billion in tax breaks from the State of Washington?
  • What about the concessions accepted by Boeing’s unions? (who gave up their defined-benefit pension plan in an effort to keep jobs in the Seattle area?)

Think that rosy profit outlook has anything to do with Boeing’s decision to transfer 2,000 engineering jobs from the Seattle area to other, lower-cost places?

Or Boeing’s decision to assemble its Dreamliner exclusively in South Carolina (not Washington State)?

Presumably, this corporate maneuvering is “in the interests of Boeing’s stockholders”… whose dividends increased by more than 50% last year.

Stockholders including Jim McNerney… who at last report, owned more than 466,000 shares of Boeing stock… which, as I do the math, means he’s probably expecting about $340,000 in “unearned income” when Q3 dividends are announced.

Beginning to understand why he’s in a joking mood?

Read our previous Boeing coverage here.

“GOP VALUES” — How The GOP Shows Favoritism to Unearned Income over Hard Work

Something else I don’t understand about Republican dogma…

GOP rhetoric seems to idealize the virtues of hard work:  “Pull yourself up by your bootstraps.” “Just get a job.”  “Quit freeloading.” It’s like they actually believe the Horatio Alger myth.

But look at our federal tax structure, and the changes Republicans have forced through since Ronald Reagan.   There is no reward for hard work.  Instead, our current tax system is tilted strongly in favor of those who already have money.  Investment income — unearned income — is now taxed at about half the rate of wage income.

Flashback to the 2011 debt-ceiling crisis: “Even an architect of the Bush tax cuts, economist Glenn Hubbard, tells Rolling Stone that there should have been a ‘revenue contribution’ to the debt-ceiling deal, ‘structured to fall mainly on the well-to-do.’ Instead, the GOP strong-armed America into sacrificing $1 trillion in vital government services – including education, health care and defense – all to safeguard tax breaks for oil companies, yacht owners and hedge-fund managers. The party’s leaders were triumphant: Senate Minority Leader Mitch McConnell even bragged that America’s creditworthiness had been a ‘hostage that’s worth ransoming.’ ”

Now, let’s look at the impact that this VERY ODD tax preference has had on the US economy.

What happens, when our tax system rewards investment income, rather than actual work?

  1. Private equity “investors” use acquired corporations to borrow money – and then use that borrowed money to pay themselves dividends.  “Investment”?  Not hardly.  The acquired corporations go belly-up when they can’t pay pack the debt, leaving hundreds (or thousands) of workers unemployed.  Read “What Mitt Romney Taught Us about America’s Economy.”
  2. CEOs take more compensation as dividends, rather than wages.  Even accounting for inflation, top-tier taxpayers took home six times more dividends in 2009 than in 1992.  “But each dollar paid to the CEO in dividends costs the company (and the economy) a whole lot of money that could have been reinvested. Going back to Fred Smith as an example, his 15 million shares in the company represent only a fraction of the outstanding stock. For Mr. Smith to receive $8.5 million in dividends, personally, the company has to pay out well over $100 million in total dividends – money that could have been invested in new hires, or new planes, or new facilities (or improved employee benefits).”
  3. Some of those CEOs “invest” that money in politics.  And the cycle repeats itself.

“Pull yourself up by your bootstraps”??!? Bootstraps are getting very hard to find, these days.

(But please don’t shop for them at Walmart.  The corporation’s “Lowest Prices” policy has had a devastating effect on the US economy.  “Wal-Mart has the power to squeeze profit-killing concessions from vendors. To survive in the face of its pricing demands, makers of everything from bras to bicycles to blue jeans have had to lay off employees and close U.S. plants in favor of outsourcing products from overseas.”   Meanwhile, Walton family members – who receive about half of all dividends paid by Walmart – are doing just fine.)

America’s “Race to the Bottom”: Boeing is still outsourcing

Boeing DreamlinerYesterday, the Boeing Company announced it would “create engineering centers for future work in South Carolina and possibly in Kiev, Ukraine.”

The perspective from Seattle, Washington:

The engineering union here — the Society of Professional Engineering Employees in Aerospace (SPEEA), which represents nearly 26,400 engineers and technical staff — has long decried Boeing’s outsourcing of engineering work to its design center in Moscow.

Boeing internal documents obtained by The Seattle Times in 2004 after the Moscow center was set up show the company could employ high-quality Russian engineers there at ‘approximately 1/3 to 1/5 of the U.S. cost.’

Remember, this is the Boeing Company – manufacturer of the problem-plagued Dreamliner 787. Read “Boeing Learns the Hard Way that Outsourcing Hurts in the Long Run” here.

Most of us would think that “lessons learned the hard way” would maybe change a corporation’s modus operandi.

Most of us would think that maintaining – or restoring? – a reputation for quality workmanship would be particularly important to an airplane manufacturer.

But right now, the American economy is caught in a race to the bottom. These days, CEOs aren’t interested in long-term corporate reputations. They’re interested in profits. And Boeing’s executives have been producing good profits – despite the Dreamliner mess, and despite lower sales.

How? They’ve been so very, very proficient at “controlling costs” – costs such as engineering and skilled manufacturing labor. Read “Boeing profit beats estimates despite 787 problems” here.

And Boeing has rewarded its executives handsomely for their ability to “control costs”. Last year, “key executive” compensation was up almost 55%. And the guy at the top? CEO Jim McNerney received almost $27.5 million. One person. One year. Almost $27.5 million.

(And that doesn’t even include what McNerney receives in Boeing corporate dividends. According to SEC filings, McNerney owns a few hundred thousand shares of Boeing stock, mostly received as part of his executive compensation. That means McNerney receives almost another quarter-million dollars, every time Boeing issues quarterly dividends. And guess what? Those dividends are taxed at a much lower rate than ordinary wages and salaries.)

So yes, America’s economy is still racing toward the bottom. Boeing is hiring engineers at 20 cents on the dollar — and planning even more outsourcing.

How much lower can we go?

————-

More on McNerney’s dividends:

Not that long ago, dividends were taxed as ordinary income. It didn’t matter whether someone’s income came from wages or stock holdings, it was still taxed the same.

One of the many “Bush tax cuts” changed that – and now, stock dividends are taxed at roughly half the rate as CEOs’ salaries.

This morning, I finally added it all up. According to Congress’ Joint Committee on Taxation, over the past decade the “reduced rates of tax on dividends and long-term capital gains” have cost the federal government more than a trillion dollars in revenue ($1,020 billion, since FY2004).

That means almost 6% of the country’s total federal debt is directly attributable to this bizarre tax preference for unearned income.

Now that the stock market is booming, the impact is even greater: expect another $1.3 trillion loss of federal revenue over the next 10 years. And according to the Congressional Budget Office, the top 1% of taxpayers receive almost 70% of the benefit of this tax preference for unearned income.

The rest of us in the 99% get…?

 

Meanwhile, down in DC, Simpson and Bowles Work To Wreck Social Security

It’s probably going to get lost in today’s news, now breaking out of Boston, but…

SocialSecurityposter1Down in DC today, Erskine Bowles and Alan K. Simpson are scheduled to announce yet another of their “debt reduction” plans. Yes, it includes chained-CPI; yes, it includes cuts to Medicare. What is doesn’t include is much in the way of new revenues. Here’s how the Washington Post describes today’s plan:

“seeks far less in new taxes than the original, and it seeks far more in savings from federal health programs for the elderly.”

Yeah, this public policy debate is going in the wrong direction.

Here’s a better suggestion: Let’s return to the good ol’ days when investment income was taxed at the same rate as wage income.

Why does US tax policy give preferential tax treatment to dividends, just because investors don’t have to get their hands dirty in order to receive the income? America is supposed to be the land of Horatio Alger (“pull yourself up by your bootstraps, work hard, and you’ll get ahead”). If our tax code is going to have different standards for earned versus unearned income, shouldn’t the “hard work” type of income be the one we prefer?

Instead, ever since the Bush tax cuts, dividends have been taxed at a much lower rate. And that economic distortion has led to all sorts of bad outcomes. (Read “What Mitt Romney Taught Us about America’s Economy” here.)

According to Congress’ Joint Committee on Taxation, this backwards tax preference will cost $616 billion in revenue over the next five years. (It’s one of the largest “tax expenditures” in the tax code.)

So, let’s call that $1.2 trillion over the next decade… and we’re well on our way toward debt reduction – without any cuts to Social Security or Medicare. Toss in another $516 billion worth of estate taxes (I’m doubling the five-year cost of that tax preference, as calculated by the Joint Committee). Maybe throw in $315 billion from ending the special tax treatment for life insurance annuities. And we’re well over $2 trillion in deficit reduction—all without a single cut to a single government program.

Now let’s apply a little “dynamic scoring”. (Haven’t heard of it? It what the GOP used, back in 2001, to argue that the country could afford the Bush tax cuts. Just assume that the tax code changes will improve the economy, and that will generate even more tax revenues.) Ok, you’re right… “dynamic scoring” didn’t work so well with the Bush tax cuts. But remember the Clinton tax hikes? Remember how the economy improved and the budget went from deficit to surplus?

Add in a little “dynamic scoring” (of the tax-HIKE variety) and… Presto Change-o! Suddenly, we’re doing a whole lot better than Simpson-Bowles.

——————–

Also in the message mix, today: a great, big “oops!” for the two Harvard economists whose research has bolstered the GOP’s austerity agenda. Turns out they made a mistake in their spreadsheet analysis. Yes, this is the very same analysis that Paul Ryan used, during last year’s presidential campaign, to argue that our slow economy was caused by national debt. [Hello? Most of us out here in the real world think the economy’s hurting because so many people are out of work.] Yes, these are the same two economists who testified before the Simpson-Bowles Commission.

Here’s the kicker: their mistake was discovered by researchers at the University of Massachusetts Amherst. Yes, public-funded higher education still works!

——————–

Watching the news this morning, we’re seeing incredible acts of dedication and bravery. Special thanks to everyone whose jobs take them into danger, all those who protect the rest of us. Thoughts and prayers are with the family of the MIT Police officer who was killed; with the MBTA officer who was injured; and with everyone else whose lives have been forever altered by the events of the past few days.

Writing this from the security of my own home, I salute you all.

What a choice! One year of investment tax cuts equals 10 years of Social Security cuts?

Choices to surviveBudgets are all about choosing priorities.  And here’s one choice: chained CPI?  Or eliminate the tax break for investment income?

When I looked at the numbers this morning, I was stunned.

Chained CPI is a way of recalculating – and permanently lowering – everyone’s Social Security benefits.  It has been a top Republican priority for years.  The White House Budget Director estimates that changing to chained CPI would save the federal government $150 billion over the next decade.

And how much does the federal government spend on tax breaks on investment income?  According to Congress’ Joint Committee on Taxation, tax breaks on investment income will cost $161 billion this fiscal year alone.

Go back and read that again.

Tax breaks on investment income cost the federal government more – in just one year – than chained CPI would save over an entire decade.

Budgets are all about choices.  For many American families, the choices are between food and heat, medicine or mortgage?  For Congress, as it debates this budget, the choices are about who pays – and who benefits.

I’m still stunned.  One year of treating investment income as if it was wage income would pay for ten years of the Republicans’ proposed cuts to Social Security benefits.

I’m still at a loss for words.  It is morally wrong, that this choice is even being considered.

 

Another stalemate?
Or a chance to save the economy?

The days are ticking by, as our federal government heads toward sequestration (March 1st) and a possible shutdown (March 27th).

House Republicans have drawn the same line in the sand that they drew – and tried to maintain – at the end of last year. They have pledged allegiance to Grover Norquist: “No new taxes.” They would rather cut food stamps than cut military spending – but they would also rather cut the military than increase taxes. Read today’s NY Times story here.

Now’s a good time to step away from the right-wing rhetoric and take a closer look at some actual facts.

Each year since 1992, the IRS has published “information from the Top 400 individual tax returns.” The latest “Top 400” publication covers the years 1992 through 2009. (Remember 2009? According to economists, the 2007 recession ended in June 2009. Even though most of us are still dealing with the effects of that “longest and most painful downturn since the Great Depression.”)

Top400 AGIThe “Top 400” statistics clearly show what’s happening at the top of the economic scale. And despite the recession, and after accounting for inflation, those at the top are doing just fine: in 2009, the top 400 had income almost three times higher than in 1992.

(Yes, in 2009, the Top 400 taxpayers had an average income of more than $123 million. Wouldn’t it be nice if everyone’s income was three times higher than it was in 1992?)

Top400 Tax RateThe US has traditionally had a “progressive” income tax structure: those with more income pay taxes at a higher rate. But that’s not what has been happening.

(In 1992, the Top 400 paid taxes at an average rate of 26.4%. By 2009, the Top 400 average tax rate was only 19.9%. What happened over those 17 years? More money, lower tax rate for the Top 400. While the country’s economy came to a screeching halt.)

Top400 Dividend IncomeOne of the most revealing statistics from that IRS report is the amount of income the Top 400 takes as dividends rather than salaries. Since 1992, even accounting for inflation, the amount of dividend income has increased by 600%. In 2009, as the recession was bottoming out, the Top 400 took home an average of $16 million each in dividend income.

What’s the big deal about that? Unfortunately, the IRS doesn’t release statistics about how much dividend income the Top 400 receive from the same companies they control. But…

Remember what Mitt Romney taught us about America’s economy? How – rather than reinvesting corporate profits in new hires or capital improvements – many executives and investors have been wringing dividends out of their companies? (And often, like Sheldon Adelson, spending money on political influence?)

Remember that FedEx paid an estimated $8.5 million in dividends to CEO Fred Smith last year? Wonder how else that $$ could have been spent? (Read “FedEx and the Real Reason Why There’s No Jobs” in Forbes here.)

Yes, the fiscal cliff negotiations increased the tax rate on dividends from 15% to 20% – but that’s still significantly less than the tax rate on salaries. Which means CEOs are still going to prefer taking home compensation through dividends, rather than salaries.

But each dollar paid to the CEO in dividends costs the company (and the economy) a whole lot of money that could have been reinvested. Going back to Fred Smith as an example, his 15 million shares in the company represent only a fraction of the outstanding stock. For Mr. Smith to receive $8.5 million in dividends, personally, the company has to pay out well over $100 million in total dividends – money that could have been invested in new hires, or new planes, or new facilities (or improved employee benefits).

The low tax rate for dividends is a perverse economic incentive. It discourages hiring. It discourages reinvestment and long-term corporate planning. It discourages growth. It encourages concentration of wealth at the top of the economic scale.

Someone once said “don’t ever let a good crisis go to waste.”

As we head toward (and through) sequestration and shutdown threats, maybe we can hope. Maybe these latest Congress-created crises can have a happy ending.

Maybe whatever political “compromise” is eventually reached will include more changes in dividend taxation.

Maybe the country can end this vicious cycle of wringing profits out of the economy. Maybe the country can go back to growing our entire economy, not just the personal incomes of the top 400.

It’s going to be an interesting couple of months. Fasten your seatbelts for another bumpy ride.

What Mitt Romney Taught Us about America’s Economy

Mitt Romney ran on his record as a businessman.  But over the summer, when bloggers and journalists started taking a closer look at that record, they shined some light into the shadows of the private equity industry.

The companies’ names change, but the sequence of events is basically the same:

  1. Rolling Stone writer Matt Taibbi:  “Bain put up a mere $18 million to acquire KB Toys … Less than a year and a half after the purchase, Bain decided to give itself a gift known as a ‘dividend recapitalization.’ The firm induced KB Toys to redeem $121 million in stock and take out more than $66 million in bank loans – $83 million of which went directly into the pockets of Bain’s owners and investors, including Romney. ‘The dividend recap is like borrowing someone else’s credit card to take out a cash advance, and then leaving them to pay it off.’ “
  2. Pensions and Investments writer Aaron Elstein: Hospital operator HCA borrowed $2.5 billion in October to help finance a $1.2 billion dividend payout, 40% of which went into the pockets of private equity owners Bain Capital and KKR & Co.
  3. Bloomberg News blogger William Cohan: “Welcome to Mitt Romney’s America. This is the true story of how in October 1993 buyout firm Bain Capital LLC, which Romney founded and ran from 1984 to (roughly) 1999, and its partners bought a steel mill in Kansas City, Missouri, from Armco Steel Corp. for $75 million, merged it with other steel companies, loaded it with too much debt, paid themselves big dividends and ran the company into the ground.”
  4. San Diego Free Press writer John Lawrence:  “In 1994, Bain bought medical equipment manufacturer Baxter International. After a merger with another company, it became known as Dade Behring.  Bain froze the workers’ pension benefits … it used the projected savings as the basis to borrow $421 million…  Dade paid Bain and its partner, Goldman Sachs, the entire amount as a dividend. … Bain and Goldman had only put down $81 million to buy the company in the first place. Yet, in June 1999 they received $365 million from the dividend—a gain of 4.3 times their initial investment.”
  5. Forbes Blogger Peter Cohan: “Consider Bain Capital’s Thomas Lee Partners’ $26 billion acquisition of Clear Channel Communications — home of Rush Limbaugh … This takeover has turned a company that formerly earned net income of nearly $1 billion into a money-loser (almost $4.7 billion in cumulative losses), resulted in thousands of layoffs, extracted millions in fixed management fees, and recently resulted in a multi-billion special dividend for the two PE owners paid for by highly risky borrowing.”
  6. David Stockman, Former Budget Director for President Ronald Reagan:    American Pad and Paper was a 20-bagger—that is, $5 million was invested in 1992 for a $100 million profit, a miraculous outcome for Bain, but hardly so for the Ampad workers and shareholders left holding the bag when the company went bankrupt in 1999 with massive debt.  … Ampad generated barely enough operating income during the first six months of 1996 to cover its swollen interest payments… Yet since Bain Capital had now harvested a dividend that was 12X its original investment, it was basically home free.
  7. Bloomberg News writer Anthony Luzzatto Gardner:  What’s clear from a review of the public record during his management of the private-equity firm Bain Capital from 1985 to 1999 is that Romney was fabulously successful in generating high returns for its investors. He did so, in large part, through heavy use of tax-deductible debt, usually to finance outsized dividends for the firm’s partners and investors.

Time and time again, companies controlled by Bain Capital borrowed money to pay a dividend to Bain Capital.  [Bain Capital then passed the dividends through to its partners and investors, including Mitt Romney.  Want to see all the different ways that dividends were passed through to Romney?  Read his Personal Financial Report here.]

Dividends are supposed to be a method of profit-sharing.  Companies figure out what their income and expenses have been, and how much they will need to invest in growing the business.  Then the rest of the profit is divided among the stockholders (that’s why the payments are called “dividends”).

Dividends used to be taxed as “ordinary income” – and for a lot of years, high-income taxpayers paid a 90% tax rate on dividend income.  That tax mechanism tended to encourage corporate decision-makers to reinvest profits in growing their business, rather than paying profits out as dividends.

But the Bush tax cuts changed the law so that dividends are treated as “capital gains” – which are currently taxed at a 15% rate.  That tax mechanism tends to encourage corporate decision-makers to pay out as much money as possible in dividends.

Bain, and some other private equity companies, took things one step further: they had companies paying dividends using borrowed money, not profits.

Does anyone think Bain Capital would be operating that way if dividends were still taxed at 90%?

For the past decade, our country’s tax policies have provided the wrong incentives to corporate decision-makers.  The low tax rate on dividends has encouraged executives to wring as much money as possible out of companies (however they can!).

That’s not good tax policy.

Good tax policy wouldn’t provide a financial incentive for executives to mortgage their companies, inflate the books and pay bootleg dividends.

Good tax policy would encourage executives to invest in growing their businesses; to structure their companies to succeed over the long haul; and to borrow only for legitimate business needs.

As our nation teeters on the fiscal cliff, there is also an opportunity: Congress can get rid of this obscene tax incentive that we learned about from Mitt Romney.

 

Tax Policy: Time to go Back to the Future?

President Dwight EisenhowerRemember what it was like, back in 1952?  The nation’s unemployment rate was 3%.

Remember the days of annual raises? Back in 1952, the average family income was growing by about 5.4% a year.

Remember the days when one job was enough for a family to live on?  Back in 1952, 75% of American families had only one income.

Remember when our country had a solid middle class?  Back in 1952, CEOs were paid only 47 times as much as their average employee.  (These days, CEOs receive about 230 times what their employees earn.)

Back then, lobbying was an $8-million-a-year industry.   In 2010, lobbying reached an all-time high of $3.55 billion (even after adjusting for inflation, that’s about 46 times what corporations spent lobbying 60 years ago).

What else has changed?  Tax rates.  After all that lobbying, Congress has slashed the tax rates that apply to top-income individuals.  (The top tax rate used to be 90% — both for earned income and for dividend income.  Now, the top tax rate for wage income is 35%, while taxes on dividends are capped at 15%.  Back in 1952, corporate dividends were taxed as “income”; now they are considered “capital gains”.)

What else?  The structure of executive compensation has changed significantly, to reflect changes in the tax laws.  Back in the 1950s, most executives received salaries plus perks such as a company car.  Now, executives receive compensation “packages” that can dwarf their base salary — including “non-cash” awards of corporate stock, which takes advantage of the low capital gains tax rate.

What else has changed? As CEOs receive more of their compensation in stock, they have a bigger personal stake in decisions about what to do with corporate profits.  Should the company reinvest profits by expanding operations and hiring new employees? Or pay profits out to shareholders as dividends?   Implement a long-term growth strategy?  Or loot the company for as much immediate payout as possible?  When top executives own millions of shares, they have a huge personal stake in that decision.

Remember how casino mogul Sheldon Adelson pledged to spend $100 million on Mitt Romney’s campaign?  Wonder how he could afford it?  It was only a fraction of the amount Adelson received this year in stock dividends from his company – even though “Dividend payments to shareholders are not standard in the casino industry, as companies generally still prefer to spend cash on new growth opportunities.” (Are you wondering who made the decision to pay dividends rather than grow the business?)

That $100 million was also slightly less than what Adelson could have received – just in lower taxes on dividends – just in one year – if Mitt Romney had been elected President and had been able to implement his proposed tax policies.  (All told, Adelson could have received tax breaks totaling $2.3 billion, if Romney had been elected.)

Lots of things have changed, since 1952.  Sixty years ago, who would have dreamed that one person would try to buy a presidential election?  Or that a presidential candidate would propose tax breaks which would benefit a single campaign contributor to the tune of $2.3 billion?

Maybe it’s time to start asking whether all those tax cuts have actually benefited America’s economy?  Or have they only benefited America’s richest individuals?

Maybe it’s time to consider what effect those tax cuts have had on corporate decisions.

Maybe it’s time to consider what effect they’ve had on America’s middle class.

Maybe it’s time to stop giving CEOs tax incentives to loot their own companies.

Maybe it’s time to go back to the 90% tax on dividend income, at least for dividends paid to executives by the companies they control.

 

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