"Not One Single Dime"

Today Congress is debating whether the Bush Tax Cuts should expire or be renewed. The fact that this is being debated at all amazes me. The worst thing you can do during a recession is raise taxes. Everyone knows that; even the most uneducated among us.

The second worst thing you can do is try to spend your way out of a recession. But of course we know the Obama Administration has already attempted that. And, as expected, it has failed miserably regardless of what the President and Mr. Geithner are saying at every opportunity.

During the Presidential campaign in Dover, New Hampshire on September 12, 2008, then candidate Obama stated the following:

"I can make a firm pledge. Under my plan, no family making less than $250,000 a year will see any form of tax increase. Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.... You will not see any of your taxes increase one single dime."

This sounds strikingly similar to George Bush’s claim in 1988: “Read my lips, no new taxes.” We all know he broke that promise. We all know he failed to get reelected. Hopefully, the same will happen here. When Obama allows the George W. Bush tax cuts to expire on December 31, 2010, it should be the final nail in the coffin for hope and change. All of us who are hoping for change may now actually get what we want.

It should also be noted for the record that President Obama has already broken this promise once before. The Health Care Reform Act contains a number of tax increases that originally were called penalties. After much chagrin, the Obama Administration finally had to admit these were taxes not penalties. Since that has been opined upon to death by commentators, I will not dwell on it here. Just suffice it to say he has already increased taxes on the lower and middle classes.

This article is primarily about the Bush tax cuts. And if they are allowed to expire, beginning in 2011, your taxes will increase by much more than one single dime as Obama stated. The raise will be much, much greater. Here's why:

Ryan Ellis wrote an article published July 1, 2010 on a website called Americans for Tax Reform. Mr. Ellis goes into some detail regarding what lays ahead if Obama and the Democrats get their way and allow the tax increase which, by the way, will be the largest tax increase in American history. Voters should arm themselves with this information now in order to make intelligent choices in the voting booth in November. By the way, it may not help regardless of who gets elected in November because a lame duck Democratic Congress with an angry Leftist President may be the most dangerous thing this country has ever seen. Beware mid-November through January!

Here are some facts on the tax increase scheduled for January 1, 2010:

• Personal income tax rates will rise...

- The 10% bracket will rise to 15%

- The 25% bracket will rise to 28%

- The 28% bracket will rise to 31%

- The 33% bracket will rise to 36%

- The 35% bracket will rise to 39.6%

• The child tax credit will be cut in half from $1000 to $500 per child.

• The standard deduction will no longer be doubled for married couples relative to the single level thereby bringing back the so called marriage penalty.

• The dependent care and adoption credits will be cut.

• There will be a 55 percent top death tax rate on estates over $1 million. (If this is allowed to happen, then George Steinbrenner saved his heirs almost half a billion dollars by dying this year).

• The capital gains tax will rise from 15 percent to 20 percent.

• The marginal rate on dividends will rise from 15 percent to 39.6 percent

• Health savings (HSA) and flexible spending accounts (FSA) can no longer be used to purchase non-prescription, over-the-counter medicines.

• A $2,500 cap on flexible spending accounts FSAs will be added.

• Tax on non-medical early withdrawals from an HSA will double to 20 percent.

• Small businesses will no longer be able to expense up to $250,000 in capital purchases. Instead, the allowance will be reduced by 90% to only $25,000.

• Large business will have their expense deductions slashed by 50%.

• The “research and experimentation" tax credit will be eliminated,

• The deduction for tuition and fees will be eliminated.

• Teachers will no longer be able to deduct classroom expenses.

• The student loan interest deduction will be eliminated.

• Charitable contributions from IRAs will be eliminated. Under current law, a retired person with an IRA can contribute up to $100,000 per year directly to a charity from their IRA.

To make matters worse, the Alternative Minimum Tax (AMT) will now be levied on at least 28 million families. That's a seven-fold increase from last year when it was levied on 4 million. This “AMT” disallows many deductions and exemptions such as state and local income, sales tax, property tax, accelerated depreciation, medical expenses and other tax preference items such as Intangible Drilling Costs. Instead, it sets a minimum tax rate of either 26% or 28%.

And because the AMT is not indexed to inflation, the number of households affected by this tax will dramatically increase over time. This was predicted by the Congressional Budget Office way back on April 15th, 2004, when it issued this statement:

"Over the coming decade, a growing number of taxpayers will become liable for the AMT. In 2010, if nothing is changed, one in five taxpayers will have AMT liability and nearly every married taxpayer with income between $100,000 and $500,000 will owe the alternative tax."

In short, the AMT disallows deductions otherwise available under standard IRS rules, and is based upon a very complex set of criterions.

If these changes are allowed to happen, it will be disastrous for the economy. Small business will be stymied. Spending by private business will be substantially lowered or cease completely. What does that mean? Unemployment will go up. We will not only have a double dip recession, we will probably have an economy worse than that of the Great Depression.

Right now, every economic indicator shows that the economy is barely holding onto the ledge. Anything that would cause investors and/or private sector business owners to stop spending may be the straw that breaks the camel’s back. These tax increases contain a number of such straws.

For example, if you raise the Capital Gains and Dividend Tax Rate, you will be directly hitting investment. Investment is what drives the economy. For every dollar an investor pays in taxes, it is one potential dollar that will not be used to finance another company or to increase capital expenditures in an existing company. It also makes less dollars available to hire another few employees should the need arise. It also takes the incentive away to make more money. Remember the Lauffer Curve whether you agree with it or not.

The same is true if you increase the write-off period on big ticket items. If a company is permitted to expense $250,000 in capital expenditures each year, it may be more inclined to make purchases of big-ticket items than if it can only expense $25,000 per year. Anything over $25,000 would now have to be capitalized and charged off over a number of years. Private sector business will no longer make those purchases or they will decrease dramatically. Look at what happened after the Homebuyer Credit and Cash for Clunkers ended. It would be the same thing. Jobs will be lost and/or not created.

Middle Class homes will not make additional purchases as well. If you cause an average family to pay an additional 5% in taxes, that is 5% less discretionary income to keep the economy moving. Plus, if people lose faith in the economy, more money goes into savings which is also dangerous because money saved is not money spent. Personal savings rates are already up so this is already happening.

In addition, we are on the verge of a deflationary spiral which is considered a disaster to an economy in the sense the people do not tend to spend money when they think prices are going down because they are waiting for price decreases. Manufactures, then lower prices to stimulate purchases. This does not work because every price decrease is met with more expectations on the buyers for more price decreases. The last time this happened in the United States was in the 1930’s. We have now had three straight months of decreases in the Consumer Price Index. At what point are we officially in such a spiral?

When you couple the tax increases set for January, 2010 with the possibility of deflation, we are on the precipice of a disaster the likes of which this country has never seen. Also, by the way, does the printing of fiat money in the manner that the government has in the past 18 months scare anyone? Shouldn’t we be in the midst of the greatest inflation this country has ever seen? This is a doomsday scenario waiting to happen.

In closing, it is my opinion that this tax increase cannot be permitted. It is not the way to close the budget gap. Congress must find other ways to do so. They cannot rely on more taxes. They must limit the size of government by necessity even if that is not what they want. Governor Schwarzenegger has had to do it in California and it has made him extremely unpopular. Sometimes the tough decisions are the necessary ones.

Congress must reign in spending. Keep the tax cuts in place for another 4-5 years or make them permanent. Give the economy a chance to cycle its way out of this depression. Do not make it any worse.

Maybe we can start by eliminating some government programs. Maybe the Department of Energy which has proved useless should cease to exist? Maybe the Health Care bill should be left unfunded? There are many other ways to curb the spending even to the extent of privatizing the Post Office.

A tax increase to allow uncontrolled spending to continue is not the answer, especially in light of the fact that President Obama will be breaking one his most solemn campaign promises. Of course with him that does not seem to be an issue. He is breaking promises ever day he is in office. Maybe that is why his approval rating currently stands at about forty-three percent.

© 2010 by Craig Covello and Frank DeMartini. Used with permission. All rights reserved.

Obama Swinging to the Right?

This is not going to be a formal post, but I think all of you should note three things that have happened in the last 24 hours:

1.  President Obama, while being interviewed by Fox News, stated that too much government debt could fuel a double dip recession;

2.  President Obama, in the same interview, stated that closing Gitmo is a lot harder than he thought and that it would remain open longer than he expected; and,

3.  Eric Holder, in a Congressional hearing this morning started using the word "War" when describing the current state with Terrorists.  He also guaranteed convictions of the Muslim Extremists.  This is actually odd.  I don't know any prosecutor at any level that would guarantee convictions.

Am I missing things here, or are these major flip/flops?

Or, maybe something deeper is happening here?  Maybe Obama is beginning to realize that the Republicans are correct on certain positions?  Now, if he could actually admit it, there would be a chance at bipartisanship.

Maybe, he can actually admit it on "Health Care", "Cap and Trade", and "Iran", and "North Korea," soon too.

Or, am I dreaming?

Copyright 2009 by Frank T. DeMartini

We Did This To Ourselves by George Wolke

George Wolke has been a friend of mine since High School.  That means I've know him for more the 30 years.  We are basically on the same side of the political spectrum but we disagree on a number of issues.  He wrote me an e-mail yesterday after my e-mail and this article was the result.  George is an electrical engineer working in the civilian defense industry.

We Did This To Ourselves

As I was driving to work this morning, I received a one line email from my friend Frank DeMartini entitled, ‘The Unemployment Rate’.

It read, “It’s at 10.2%....Need I say more….”

For the past several months, Frank and I have gone back and forth about the merits of the Stimulus Package, and of Kensyean Economics in general. After considering how lucky I am to not be a member of this rather unfortunate club, I wrote the following as a response to Frank. Please take a look and let’s talk about it.

The situation we have today is the confluence of several events which have created ‘the perfect storm’. If this were a ‘normal’ recession, we’d see the unemployment rate bottom out and then return to the normal 4-5% range. Unfortunately, I think what we’re going to see is a jobless recovery and the further destruction of the middle class.

1. We no longer build things. As Frank is so apt to point out, we cannot compete against other countries whos standard of living is below ours. This makes it impossible for company’s to invest in manufacturing in America unless state or local governments sweeten the pie though incentives. Even with this, the era of American Manufacturing is over. And with it the blue collar jobs that helped to create our middle class.

2. Power is more concentrated than it ever has been before. The disparity between the top and the bottom has never been wider. And those in power are going to do everything they can to distort the message to the masses in order to stay in power.

3. As a people, we have no appetite for long term thinking. This is the single most reason we are hosed. Wall Street DEMANDS quarter by quarter financial gains at the expense of long term investment. Multi-million dollar bonuses for creating wealth though debt. The idea that housing prices will never go down. Need I say any more?

We are hosed and there is nothing in the short term that is going to make it better. But let me ask you what you think we can do to improve the situation? In the 30’s it took FDR to create the CCC to get people back to work, and then WWII to turn the economy around.

I bet if you asked the millions who just can’t find jobs, they’d jump at the chance to do anything productive at this point. But are we as a country ready to accept that there is going to need to be a dramatic reduction in the standard of living in order to create new jobs? To think otherwise seems a folly to me. It’s a fact that not everyone is capable of invention. That’s why we need to build things!!!!

Now, maybe we ought to be investing money in ways that encourages new industries to emerge. But these things take LOTS of money and lots of time to develop. What to do in the meantime?

There are no easy answers anymore. But, what needs to happen before we get this economy back on track is for people to get back to work. But, the catch-22 is that we won’t get people back to work until inventories are depleted, but….WE DON’T BUILD ANYTHING ANYMORE….plus, who can afford to buy anything anyway?

© 2009 by George Wolke. All rights reserved. Use by Permission.

SAG and The Independent

A few months ago I wrote a column about the effect IATSE’s wage increase in Michigan would have on future production in Michigan. Just recently, the company I have my first look deal with decided to produce another picture in Michigan and was informed my column made it impossible for IATSE to negotiate or help us in any way. They basically said this is the deal, take it or leave it if you want to shoot here; your employee ruined it for you.

My company then proceeded to disavow any knowledge of my column and said that what I write is of my own doing and not the policy of the company. This is true. It is my own doing. No one tells me what to write or censors my editorial content.

I still believe IATSE is harming the burgeoning film industry in Michigan. I believe that if IATSE was doing the right thing in Michigan, the state of Michigan would be putting all of the other tax incentive states out of business. Producers would be running there in droves.

Unions are supposed to be the mechanism to level the playing field for the working man. Their job is to protect the working man from “the man,” and to keep their members employed fairly. Isn’t employment what unions are really all about: Especially now when unemployment is so rampant all over the United States particularly in Michigan and California. You would think the unions would be bending over backwards to work with “the man” in a mutually beneficial situation. Let us all do whatever is necessary to keep employment in the United States; not Eastern Europe or Asia.

Unfortunately, this is not the case with IATSE in Michigan and with the Screen Actors Guild (SAG) anywhere. SAG does their best to stop movies from being made instead of helping the independent producer hire their mass of unemployed.

I will now give some examples of how SAG harms the independent. My first look deal is with Nu Image, Inc., one of, if not largest independent production companies in the business. In the last 10 years, this company has produced more than 150 films ranging in size from one million dollars to sixty million dollars. It has employed more than 1,000 actors; the majority of which are members of SAG.

Does SAG do anything to make life easier for this company? No. SAG does everything in their power to stop this company from making movies. In fact, over the past ten years, there have been many incidents where this company has had to threaten to shut a movie down and sue SAG in order to get any cooperation whatsoever.

This is a company that employs, pay actors millions of dollars and pays residuals to actors on a regular basis. Can you tell me one true independent that has been doing this since 1992? Probably not!

Just last week, Nu Image was about to shoot a thirty million dollar film and was held hostage the day before principal photography was to start over a dispute regarding the SAG Bond which is a “guarantee” that actors will be paid. SAG insisted on a bond in the approximate amount of $400,000 which was based upon erroneous SAG employment figures provided by the production staff on location. SAG did not care. They were going to call actors’ agents and shut the movie down the day before it was scheduled to start. The matter was resolved at the twenty-fourth hour, but not before threats were made from both sides that almost put the picture in jeopardy. At one point, a SAG employee told us, well if a production employee provided erroneous figures, you should fire him/her. Is this the way a union represents workers?

Another nightmare for the independent producer is the SAG security interest which is a lien on the film’s copyright for the life of the copyright. The theory behind this is to protect the actors against unscrupulous producers failing to pay residuals. Fine. It makes sense for one-off producers or producers with a bad reputation. But, is it necessary for a major independent production company with a history of paying residuals? Why must SAG demand cash - which is desperately needed to fund the production – be removed from the budget to pay SAG deposits? Why must the threats go back and forth every time any request is made?

Then after all of the stress with SAG during production, the independent must beg for the return of the SAG Bond after it has paid the actors in full. As you already know, this amount of cash can be substantial and for smaller companies is actually needed to complete the movie. Thank God, Nu Image has the capability to complete movies without this money. I have heard horror stories from other companies where the SAG bond has caused foreclosure on loans and investor liens because sometimes they will just not return it. Sometimes they unilaterally convert it to a residuals bond to guarantee the payment of residuals. Doesn’t that amount to conversion?

Sometimes the reason given for its non-return is absolutely asinine. For example, SAG has a document that must be completed on every film to show minority hiring. You must show the number of females and people of color hired by the production. This form is a survey and nothing more. There are no quotas in the SAG system and a producer may hire whoever they choose. However, if this form is not filed by the producer, the bond is not returned. The same is true of every piece of paper that SAG employees have on their checklist. No one will think out of the box. No one will pull the trigger and give the money back until this checklist is complete.

And, no one will give the money back with any interest that matters. Back in the day when CD’s were paying 4-5%, SAG was paying 1.5% or less on the bond. I’m sure now they are holding money in some cases for more than a year and paying 0% interest. I wonder what they do with the money they earn?

Lastly, the SAG arbitration system must be discussed. Talk about an uneven playing field! Prior to producing films, I was an entertainment attorney. In all, I have been in the business for 25 years give or take. During that time, I have not seen one SAG arbitration ruled in favor of the producer. In fact, some arbitrators on the SAG list have never ruled in favor of management. I can think of a few names that are on my strike list just because of personal experiences.

In one circumstance, a former SAG Board member, Seymour Cassel was hired by a company that I was involved with. Mr. Cassel, being on the SAG Board forced the union to pursue a grievance on his behalf. That matter was fairly simple. He believed he had a two week guarantee of employment and the employer felt there was no guarantee and paid him for the one week he actually worked.

The matter went to arbitration and Mr. Cassel won. He was given the second week. It seems like it should have been a swearing contest and the arbitrator just chose to believe the representatives of Mr. Cassel. Sorry, nope.

It was much more complicated than that. Mr. Cassel had actually signed both a SAG deal memo and a long form agreement, neither of which mentioned anything about a guarantee. In fact, they specifically stated there was no guarantee. But, there was an interoffice memo from Mr. Cassel’s agent that said the deal was for a two week guarantee. This document was not signed by anybody. In legal parlance, it not only was pure hearsay, but it violated the merger rule. It should not even have been entered into evidence.

This did not matter to the arbitrator, he ruled for Mr. Cassel based upon the interoffice memo.

By the way, Mr. Cassel was just thrown off the SAG Board last week for “conduct unbecoming a member,” and his membership was suspended. (Daily Variety – October 20, 2009). In the Daily Variety article, it stated that Mr. Cassel was considering filing for “financial core” status which would permit him to work on union and non-union films during the course of his suspension.

“Financial Core” is a really interesting animal. It is based upon a Supreme Court decision (Communications Workers of America v. Beck, 487 U.S. 735 (1988)) in which a union member sued the union because he did not want to be associated with the Union’s political lobbying activities. The Supreme Court found for the union member and stated that no one could be obligated to pay for the political positions of the union. They only had to be obligated to pay union dues for the “financial core” of the union.

Based on this Supreme Court ruling, any member of any union in the country can go “Financial Core.” All it requires is that they write a one sentence letter to their union stating that they have elected Financial Core membership. A “Financial Core” member of any union is still covered by all union benefits such as pension, health and welfare. They can then work on all union and non-union movies without being subject to any penalty from the union at all. The only things a “Financial Core” member of a union cannot do is vote in union elections or hold elected positions within the union.

Personally I am amazed that droves of actors, directors, writers and crew members have not chosen Financial Core membership. Maybe it’s because the unions all try to keep it a total secret and will do almost anything to avoid their members becoming aware of its benefits. Imagine – union members being able to decide for themselves who they will work for and under what conditions. It would mean they have to be treated as adults - not obedient children by their unions! It would certainly make life easier for independent producers and allow them to spend their hard won cash on making movies not paying for union bureaucracies. Maybe Seymour Cassel will start a trend – who knows! It may even help the employment situation for actors and all member of the entertainment industry. After all, isn’t that what we need to end this recession; more employment!

©2009 by Frank T. DeMartini. Permission to copy will be freely granted upon request.