Flash: Congress Tries to Recapture Bonuses Through Taxes

In what may prove to be one of the most asinine attempts at penalizing people for doing their jobs, each house of Congress has passed (or is considering) new bills that penalize companies that have received Stimulus (Porkulus) money and the employees receiving bonuses under contract.

If you missed the news, the House version of the bill (HR 1586) would impose a 90% tax on companies paying bonuses, and the Senate version would impose an excise tax of 35% each on the company and the employee, if the employee's household compensation exceeds $250,000. One would expect that state taxes would be at least 10%, thus taking away the entire bonus and returning it to government coffers, under the House version.

What the American people are not being told is that most of these bonuses are required as part of compensation packages that were negotiated and signed long before any bailouts occurred. The companies are legally obligated to pay these bonuses, and in some cases, the bonus comprises the majority of an employee's compensation.

The original Stimulus Package contained a provision that would have kept bonuses from being paid by Stimulus Package recipient companies. However, the Obama Administration didn't think that it would be legal to do this, so they removed the limitation from the package, over the howls of Republican lawmakers.

Now, the Administration is pushing for this new tax. Here is my question, "If it would have been illegal to block the bonuses, where is the legality of passing an ex-post-facto tax on this money?"

People have decried executive compensation models for decades. However, the reality is that companies cannot attract top performing executives without these compensation packages. The talent will simply go to another company that offers a better incentive package. This means that the companies that are already failing and that are desperately looking for new leadership will not find many takers.

Regardless of what version of this bill finally passes, look for a number of class-action lawsuits to be filed on behalf of the affected employees. The government will probably spend more money defending itself against the lawsuit than it would raise in new taxes. Since the government already owns 80% of AIG, it seems that Congress should be able to call a special Shareholders' Meeting, elect new Directors, and then voluntarily refund whatever amount of assistance they deem appropriate.

This is just a case of buyer's remorse, and it penalizes the wrong people. Should executives get a bonus for running a company into the ground? Of course not. However, in the AIG example, over 400 people are receiving bonuses. I have to think that not all of these people are in senior management positions of executive-level responsibility. Many of these people are probably regular working stiffs, who depend on this bonus to round out their incomes each year.

I have worked in businesses where I received a bonus based on what I accomplished during the year. I would always work hard to ensure that I qualified for my bonus. If the guys at the top screwed up the company by not doing their jobs, why should I get shafted, when I did the job I was hired to perform, and earned the bonus for which I was eligible? What if this was you?

I invite and welcome your comments.

How the Stimulus Package Hurts Real Estate

We all know that the economic stimulus package exists because real estate crashed. Now, I am working on another article that will detail and explain how we got here, but that is a story for another time. The Economic Stimulus (Porkulus) Package contains several key provisions that directly affect real estate.

Now, the National Association of Realtors feels that anything that reduces the prices of houses is a bad deal. Their argument has some justification, because when the price of a house reduces to a value less than the obligations (liens, mortgages) standing against it, then we have a recipe for foreclosure. However, that is not their real motivation. Lower housing prices mean lower commissions, as most commissions are based on a percentage of selling price.


Personally, I think that we should be looking at housing affordability. In other words, what combination of factors will allow MORE people to actually be able to OWN homes? We need a combination of low interest rates, favorable mortgage terms, and low housing prices.

The problem in all of this relates to how housing prices are set by the marketplace. The rental market has an impact on this, because most people who are looking to buy a first home currently rent a house or apartment, and they will be trading a rent payment for a mortgage payment. They will also be divesting themselves of some level of their personal savings for a down payment and/or closing costs.

A person who is accustomed to renting will take a look at the family budget, and determine what amount can be allocated toward a mortgage. Most people overlook all of the extra costs that go into owning a home, including taxes and insurance, maintenance, water, trash collection, etc., but we’ll ignore those costs for the moment.

If a family determines that they can afford $1,200 for a mortgage payment, they will volunteer this fact to their mortgage broker and Realtor®. In turn, a determination will be made as to how much house that family can afford. If interest rates are at 5.75% (a currently available fixed rate), then this relates to a principal amount of about $207,000. Assuming that the family has the proper down payment of 20%, this means that the family can afford a house valued at about $260,000.

Now, the Realtor’s job is to find a house for which the family is willing to spend $1,200 per month. So, the family will look at the marketplace of houses, and determine from the range of homes available, which is worthy of their $1,200 per month budget. As a result, all houses in the market that justify a monthly expenditure of $1,200 will be worth about $260,000. This is a simplistic depiction of how retail housing prices are set.

What can complicate this scenario and formula is when the government (or the Fed) steps in to try and affect the housing market. Here are some items in the budget, which are supposed to help the housing market. Analyze each, and try to determine what effect each will have on the cost of housing. Then, determine the effect each measure has on the affordability of housing:

1. An income tax credit for first-time home buyers of $8,000 2. A reduction in the mortgage interest deduction for families earning over $250,000 per year 3. $100 down payment mortgages on FHA loans to buy HUD repos

1) An income tax credit for first-time home buyers will increase the price of houses by making more money available for the purchase. In other words, no one likes to leave money on the table, and the sellers will grab whatever is there. The downside to the credit is that it is only applicable to purchases that occur by first-time home buyers in 2009, which eliminates a large part of the buyer pool. In addition, the credit won’t be received until 2010, so it is not available for down payment money.

2) Lowering the mortgage interest deduction will actually reduce housing prices, because the net cost of ownership in high-cost areas will increase, when those capable of making the higher payments have a higher net cost of ownership, due to this tax increase (Note: A reduction in tax deduction has the same effect as an increase in tax).

3) $100 down payment mortgages increase the prices of homes by increasing demand. The offset here is that this program only applies to homes that have lost value and been subject to short sale/HUD sale auctions. The lack of a down payment does not reduce the price of the homes, but this will help to provide a bottom for housing prices in some markets.

This gives us three proposals, all of which will increase the net cost of buying houses, and decrease the affordability of those same homes. If the government did not get involved, housing prices would continue to fall, thereby making homes more affordable for everyone. Oh well, at least the government tried to help out.

Can You Smell What the Prez Is Cooking?

Yes, my friends, the bacon is sizzling! The President's "porkulus" (stimulus) package passed with liberal colors during my absence. I'm not sure what kind of "change" this signifies. Democrats spending over $1.2 TRILLION over the next ten years with one swipe of the pen doesn't sound like change to me, unless "bad to worse" counts as change in the Obama dictionary.

I'm not sure what is the "real" crime in this bill. Could it be the fact that somehow they were able to compile over 600 pages of spending so quickly, or the fact that they expected lawmakers to fully digest the bill in about eight hours from delivery to voting? Of course, no one bothered to read the complete bill once it was printed, so just about anything goes as far as spending projects are concerned. Certainly, I have not had time to read the bill, but I hope to spend some time on it over the next couple of weeks. Of course, I have been waiting four days so far for it to finish downloading (just kidding), and I can promise that I will be spending more than eight hours reading and deciphering it.

What I really enjoy is seeing President Obama speak with a straight face and tell the American People that this bill does not have a single earmark in it! What a laugh! The definition of earmark is that money is allocated for a specific purpose, generally for a pet project of a senator or congressman, who brings money back home to the district, which will later result in reelection votes. Now, I'm not sure, but I heard that we are spending $8 billion to see if a mag-lev rail from Disneyland to Las Vegas would make any sense. (I'm sure that Harry Reid (NV) and Nancy Pelosi (CA) put this one together.) Give me half of that, and I'll give you the answer right now. (Uh, no!) See how easy it is to save money in America? I just cut $4 billion from the budget in mere seconds! Why can't the Democrats figure this one out? Now, before my Democrat-registered readers get up in arms, this bill was clearly a Democrat Party concoction, as less than a handful of Republicans supported the measure. I already have spoken on the failure of the previous bailout attempts, and why they were doomed for failure. What I find interesting is that we are going to have to borrow $2 TRILLION in order to fund all of this spending, between the new porkulus bill and the previous "bailouts." This money is going to have to come from the Chinese, to whom we already owe over $1 TRILLION from previous borrowing. What will happen when they foreclose? Perhaps, we should all brush-up on our Mandarin. By next week, I expect to have had some time to work on some of these issues. Perhaps, I will find a few issues to post sooner, so keep checking your inbox (if you are a subscriber) or check back here often.

---- On a personal note, please allow me a moment to thank many of my friends, fans, and readers who expressed condolences over the past week, since the passing of my mother. I appreciate all of the heartfelt support. Having been a financial planner for over ten years now, it is interesting that this is the first death claim I have had to handle in all that time. ----- Until next week, I wish you all well. Hang on to your wallets! It's going to be a bumpy ride!