Sunday, February 7, 2010

Job Creation Funding #4: Housing Crisis Financial Relief: “The Double Deduction 90% Double Drop Down”

The US housing crash has been devastating. I think the related government financial rescue plans for this extremely complex issue have not been very effective and also very costly, particularly the housing tax credit programs, which are nothing but temporary, very expensive, US federal deficit increasing, piecemeal band aids.

This proposal addresses financial relief for the housing crisis broadly and I think is an effective initiative in starting to get to the core of solving this devastating multi-faceted problem,which negatively impacts so many people, and which is intertwined with the very troubled jobless recovery picture, with both sky-high unemployment and underemployment, and with very little hope of much improvement on the horizon for quite a while.

All present US government housing crisis plans I am aware of cost the US government tons of money, with a lot more downside potential, but with no upside potential. My proposal here takes a different approach, and in fact, actually should reduce, by a substantial amount, the US Government Federal Deficit over the next ten years. And the potential upside to the US Government could well be off the charts. In fact, I think the total amount raised here could well be enough to cover the present projected TARP funding shortfall. Could that be possible? Read on.

The first part and bulk of this proposal relates to all financial institutions holding home mortgage loans on principal home residences, in which there aren't second mortgages, and where the principal balance of the mortgage loan is more than 90% of the Fair Market Value (FMV) of the home. Thus, this would include all under water mortgages and also ones only slightly above water, which are less than 10% above water. Toward the end of this article, I also have a proposal for the many underwater home mortgages in which there are second mortgages.

First, the US government sets up a US Federal Government Infrastructure Bank to facilitate this whole financing process.

This proposal would apply only to 2010 and relates to any financial institution that sells to this US Federal Government Infrastructure Bank the entire portion of any mortgage loan that exceeds 90% of the FMV of the related home. The selling price would be equal to the excess of the mortgage loan principal balance transferred over the Loan Loss Provision (or Expense) that the financial institution has already reflected in its income statements through the most recent audited financial statements (Dec 31, 2009, in most cases).

If this Loan Loss Provision reflected on the books doesn’t represent the financial institution’s best estimate of its loss on its mortgages, then this financial institution better clean up its books and also fire its external auditors.

Let me give an illustration of how this proposal would work.

Say on Jan 28, 2010, Wells Fargo has a mortgage loan receivable on its books with a principal balance of $300,000. The related home has a FMV of $200,000. The interest rate is say 8% fixed and the remaining mortgage term is say 15 years. Also, assume Wells Fargo has already recorded a Loan Loss Provision on this loan cumulatively of $90,000 in its audited income statements, and thus probably also has included $90,000 in its Allowance for Loan Loss on its audited balance sheet at Dec 31, 2009.

The principal loan balance transferred, or sold, which only can be the maximum under this Double Deduction 90% Double Drop Down proposal, is $120,000 (i.e. $300,000 minus 90% X $200,000). The selling price would be $30,000 (i.e. this $120,000 minus the $90,000 Loan Loss Provision).

Wells Fargo should have no income statement impact on this mortgage sale. It is very important to companies to not get income statement earnings hits for transactions like these. For you financial types, Wells Fargo’s accounting journal entry to record the sale is simply:

DR…Cash………………………….....30,000
DR…Allowance for Loan Loss…90,000
…..CR…Mortgage Loan Receivable……120,000

And after this sale, Wells Fargo is left with a first mortgage with a principal loan balance of $180,000, with the interest rate remaining at 8% fixed, with the term still for 15 years, and with as security, a home with a FMV of $200,000, and thus its initial loan principal balance after sale is precisely 90% of the FMV of the home….thus, the first 90% Drop Down.

The US Infrastructure Bank acquiring this mortgage loan gets a second mortgage on this same home, with a term of 10 years, which also is the CBO scoring period. It reduces the $120,000 loan principal amount down to $30,000, its purchase price. Whew, the homeowner here is elated. But there’s more to this story.

The US Infrastructure Bank charges no interest to the homeowner in the first year, when the US economy is so weak. In the second year, it charges only interest for 50% of the interest rate the home owner is paying to Wells Fargo. Thus, interest for the second year would be $30,000 X 50% X 8% = $1,200, or $100 per month. In the third year, it charges only interest for 70% of the interest rate the home owner is paying to Wells Fargo. Thus, interest for the third year would be $30,000 X 70% X 8% = $1,680, or $140 per month.

For the next seven years, when hopefully the housing crisis is completely over and the US economy is running on all cylinders, the interest rate is 90% (thus, the second 90% Drop Down) of the interest rate paid to Wells Fargo on the first mortgage, or 90% X 8% = 7.2%. The $30,000 is payable monthly with 7.2% interest compounded monthly as an annuity over 84 months (or 7 years), with the resultant monthly mortgage payment of $455.72.

If all of these payments are made, the US Infrastructure Bank would net a positive cash flow over the next ten years of $11,160, the cumulative interest received. And also the $30,000 loan principal was repaid. Thus, the US government would have a reduction in its federal deficit of $11,160 related to this loan over the next ten years. Thus, the total interest income of $11,160 represents a cumulative 37% return on the $30,000 loan bought.

If you wanted a higher total income return than that, then it would be necessary to step up the interest rates used over the 10 year term.

For instance, if you just matched Wells Fargo’s 8% interest rate over the entire 120 months (or 10 years), you would get total interest income of $13,678, or a 46% return. And then if you stepped up Wells Fargo’s interest rate to 9% over the entire 120 months, you would get total interest income of $15,603, or a 52% return.

Now let me address the front end CBO scoring of this entire program.

There will be some loans that won’t be repaid, and these would reduce the positive CBO scoring. However, for all loans combined, the US Infrastructure Bank should have substantially positive net cash inflow, and thus there should be some pretty substantively positive, in the aggregate, CBO scoring on the front end. The cumulative interest received should trump the cumulative loan losses....by how much?....by up to $50 bil, is my best guess.

And with its second mortgage, the US Infrastructure Bank has some very nice credit protection, particularly since after the sale, the first mortgage loan is initially only at 90% of the FMV of the home, and as loan payments are made, this 10% cushion will grow, thus also benefiting the credit protection of the second mortgage-holding US Government Infrastructure Bank. And then this cushion will also grow for any subsequent home price appreciation over the ten-year period.

Wells Fargo gets no earnings charge on its income statement from the partial mortgage loan sale. And economically, it benefits because it now has a Mortgage Loan Receivable on its books at 90% of the FMV of the home., and also pocketed $30,000 of cash.

If you wanted to incentivize the first mortgage holder even more, here’s what I would consider doing and it would be at no CBO scored cost to the US Government over the next ten years.

In the above illustration, if Wells Fargo hasn’t received a federal income tax deduction for the $90,000 Loan Loss Provision yet (which should be the usual situation), they should be allowed to deduct the $90,000 in 2010, the year the partial mortgage loan is sold. And then I would also consider letting Wells Fargo deduct it again in the same year….thus a Double Deduction…call it perhaps a Housing Crisis Financial Relief incentive. And then, in the tenth year, this second deduction of $90,000 would turn around and be added to Wells Fargo’s taxable income, or alternatively, 25% of this $90,000 is included in taxable income in each of years seven through ten.

Financial institutions certainly have large enough Allowance for Loan Losses to tax incentivize…..after all, Bank of America’s is now at $37 bil and Wells Fargo’s is at $25 bil…Whew! To be fair, these banks have already suffered their loan losses economically, they just haven't yet been allowed a related federal income tax deduction on these economic loan losses.

A very key control here relates to the verification of the amount of the Loan Loss Provision when the partial mortgage loan is sold. If a financial institution wants to game the system, it could try to minimize the amount of the Loan Loss Provision it claims it has already recorded on its books on this loan being sold.

Thus, I would require at least three checks. First, the financial institution’s CFO must sign a certification of the accuracy of the Loan Loss Provision already recorded on the books for this loan being partially sold and further that this amount also accurately reflects his best estimate of the loan loss related to this mortgage loan. Second, the GAO should audit the company’s computation. And third, the CBO should review and verify the GAO’s audited conclusion.

And then if these three checks weren't considered sufficient, a fourth check could be for a CPA firm to attest to the financial institution CFO's Loan Loss Provision assertion related to the mortgage loans sold.

A second option for this proposal would be to instead of setting Wells Fargo’s mortgage loan receivable after partial loan sale at 90% of the FMV of the home, it could be set at a lower 80%.

What this would do is to increase the selling price of the partial loan. On the downside, that would give the US Federal Government Infrastructure Bank more downside risk because it would be paying more. However, it would also give it more interest income upside. An additional advantage with using this lower 80% is that the Loan Loss estimate would be a bit more accurate.

And using this lower 80% would also be more beneficial to the homeowner because more of his loan would be transferred to the US Infrastructure Bank, which has more favorable interest terms than does Wells Fargo, the first mortgagor.

I think the incentives here would be very effective ones to motivate financial institutions to transfer a lot of these underwater mortgage loans to the US Infrastructure Bank. If even more of an incentive is needed, it would be really easy to accelerate, for federal income tax purposes, even more of these loan loss tax deductions. And when you design these additional accelerated tax deductions to turn around over the ten-year period, they wash out in CBO scoring.

And I would also consider front-loading the amount of the accelerated loan loss federal income tax deductions to spur early in the year 2010 home mortgage loan sales. To illustrate, if the 2010 annual loan loss deduction would normally be $90,000, the tax deduction could instead be sauced up for loans sold in the earlier quarters of 2010, in a quarterly pattern like this:

1Q 2010 mortgage loan sales.....$120,000
2Q 2010 mortgage loan sales.....$100,000
3Q 2010 mortgage loan sales.....$ 80,000
4Q 2010 mortgage loan sales.....$ 60,000

And then the taxable income turnaround of the above amount would occur in the latter part of the ten-year CBO scoring period.

This program would work not just for fixed interest rate mortgage loans, but also for floating interest rate loans. The US Infrastructure Bank would just apply the applicable above percentages to the floating interest rates charged by Wells Fargo, the first mortgagor.

I think I would set up this proposal so that smaller community banks are given an additional incentive to sell these partial mortgage home loans to the US Infrastructure Bank. One way to do this is for the US Infrastructure Bank to give banks below a certain total assets size, say a 5% to 10% price premium for their home loan sales made under this program. Thus, these smaller banks would be getting an attractive GAAP earnings uptick on mortgage loan sale. And this premium would not be passed on to the homeowner.

From an operational perspective, there could be several ways the US Federal Government Infrastructure Bank could work. All of the loan administration work could be done by new government workers at this new US Federal Government Infrastructure Bank. Or, the loan administrative work could be done by segregating all of this loan work by the financial institution making the mortgage loan sale to the US Infrastructure Bank. Or alternatively, the loan administrative work could be outsourced to Fannie Mae and Freddie Mac…..man, do they both ever need revenue bumps, or outsourced to any companies in the private sector.

And the real beauty of this overall proposal is that you not only get tons of Job Creation Funding from the substantially positive CBO scoring, but you also get a substantial amount of Juice added to the US Economy….just think of all the cash going to the banking system from these sales of clearly troubled part of these mortgage loans. This cash will be available to be lent out to businesses, particularly to smaller businesses, and also will be available to finance new and existing home sales. Further, the private banking system gets significantly strengthened by getting rid of the toxic parts of so many of its mortgage loans.

To be able to move the needle on these many underwater home mortgages even more, I think I also would consider addressing all home mortgages that have second mortgages and where either the first mortgage alone, or where in combination with the second mortgage, create an underwater situation. If their accounting is proper, the financial institutions holding these second mortgages should have already recorded a 100% loan loss provision for most of these underwater loans. Thus, they would have no income statement accounting hit if they were to forgive the entire principal balance of the second mortgage loan. In those cases where there is not a 100% loan loss provision already on the books, then my proposal would be to permit the financial institution holding the second mortgage to sell this loan to the US Infrastructure Bank for the excess of the loan principal balance over the loan loss provision already recorded. The US Infrastructure Bank would then roll this homeowner loan acquired into the loan acquired from the first mortgage holding bank. To incentivize the second mortgage financial institution to totally forgive, or in some cases to sell, the loan amounts of these underwater mortgages, I would consider giving these financial institutions some amount of additional upfront federal income tax loan loss deduction for the loans they forgive or sell. And then these amounts deducted upfront in the first year by the financial institution would turn around and be taxable income in say the latter four years of the next ten-year CBO scoring period. Therefore, these financial institutions would receive a significant economic benefit to forgive or sell these loans and at no CBO-scored cost to the US government. And by eliminating the second mortgage on the loans, this will permit many more partial principal loan sales of first mortgage loans to the US Infrastructure Bank. Thus, by also including home mortgages with second mortgages, the total positive CBO scoring should increase to substantially above $50 bil.

I fortunately don’t have an underwater mortgage, but I think if the US Government can bail out AIG, Fannie Mae, Freddie Mac, General Motors and many other mainly financial companies, surely the US Government can also help out its many US citizens with underwater mortgage loans, who have been financially devastated by the housing market crash, caused in large part by the very same companies the US Government bailed out. And if this proposal here is handled properly, with very strong incentives, I think the CBO scoring upside to the US Government over the next ten years could be up to a total of $50 bil. And if these large financial institutions unreasonably and greedily decide to not participate in this program, then I think the US Government should consider stepping up their Tax Deposit percentages and/or accelerating the dates of the required tax deposits of these companies’ open IRS tax audits, both included as part of Job Creation Funding #3.

Further, I think this proposal would be dynamite to the very troubled US jobless recovery, and particularly light a fire to the very depressed housing market, and to the smaller bank community, as well as to many small businesses. Underwater homeowners are not doing much in the way of consumer spending now. With the fiscal relief provided by this proposal, these homeowners will be much more likely to step up their consumer spending, thereby spurring the US economy.

And frankly, I really can't understand why the US Government isn't doing more to help these economically desperate homeowners, who are scared to death of losing their homes.....and many have even already lost their homes. If the US Government would just apply some wise real-world business creativity on this critical issue here, it could solve a huge chunk of this problem. I am certain that my proposal here is just one of many out there that would help. The fact that the US Government is dragging its feet on this issue, is just not right.

Saturday, February 6, 2010

Job Creation Funding #3: Large Corp Deposits on Open IRS Tax Audits

Under GAAP, public companies are required to disclose in their footnotes included in their annual reports, their best estimate of what they owe in total to all taxing authorities for all of their open tax audit years. The bulk of these amounts disclosed relate to the amounts owed to the US Federal Government. Also included in this total are amounts owed to State Governments and to Foreign Governments.

I did a very quick review of some US large corporation footnotes and from just my very limited review, I found 106 companies that had amounts owed for all open tax audit years in excess of $300 mil each, that in the aggregate totaled $176.8 bil at the most recent year end, which for the majority of these companies was December 31, 2008. This total amount owed for these 106 companies was up 13.4% from the $155.9 bil owed one year earlier. And that 13.4% increase was registered in a year where taxable income of corps was severely hampered by a deep recession.

It takes a very long time for these companies to settle their tax audits with the IRS and other taxing authorities. For these 106 companies, there was an average of more than 8 years of open tax audit years.

My proposal here is for all companies which have estimated liabilities to all taxing authorities for all open tax audit years of in excess of $100 mil, for these companies to make estimated income tax payments, or deposits, to the IRS each year on all open tax audits, such that these cumulative tax deposits as a cumulative percentage of what they claim they owe the IRS at the following calendar year-end dates, are at least equal to:

By Dec 31, 2010….2%
By Dec 31, 2011….4%
By Dec 31, 2012….6%
By Dec 31, 2013….8%
By Dec 31, 2014…10%
By Dec 31, 2015…12%
By Dec 31, 2016…14%
By Dec 31, 2017…16%
By Dec 31, 2018…18%
By Dec 31, 2019…20%

Thus, if a company estimates that it owes the IRS $200 mil in total for all open tax years at Dec 31, 2010, then the cumulative tax deposits by that date must be equal to at least 2% of $200 mil, or at least $4 mil.

And then if a company estimates that, before considering the related tax deposits already made, it owes the IRS $500 mil in total for all open tax years at Dec 31, 2019, then the cumulative tax deposits by that date on these open tax audits must be equal to a total of at least 20% of $500 mil, or $100 mil.

When you think about it, this very modest tax deposit of only 20% of what a large corporation admits it owes is an absolutely incredible deal to this corp. Presently, large corps make quarterly estimated tax payments equal to 25% of what they owe annually in their tax return as filed. Thus, after their 4Q estimated tax payment for a year, the cumulative tax deposits for the year are equal to 100% of what is owed.

Let me roughly estimate what I think is a fair CBO scoring for this proposal.

For my limited sample of these 106 companies with total estimated liabilities above $300 mil each, the aggregate tax liability for the most recent year, or mostly at December 31, 2008, was $176.8 bil. Projecting that amount out eleven years using the same 13.4% annual increase of 2008 over 2007, the estimated total tax liability, including accrued interest, at Dec 31, 2019 would be $705 bil. My estimate is that the US IRS piece of that total would be somewhere between $500 bil to $600 bil. Contributing to this high US IRS portion is the tendency of some large multinational corps to shift income from the higher-taxed US to lower-taxed international tax havens, with the resultant US tax exposure upon subsequent IRS tax audit.

And then I would need to add the companies I excluded from my sample, including the many companies with estimated liabilities to all taxing authorities for all open tax audit years ranging from $100 mil to $300 mil, and also the many foreign corporations operating in the US and owing at least $100 mil for their open tax audits. Thus, the total US IRS tax liability piece would be at the very least in the range of $600 bil to $700 bil at December 31, 2019.

And it should also be pointed out that this Dec 31, 2019 tax liability on open IRS tax audits projection assumes the present extremely low interest rate environment will continue for the entire decade. In reality, interest rates will rise (later I talk about the very steep variable interest rate used by the IRS), and thus any reasonable interest rate used would drive this tax liability close to $1 trillion.

The positive CBO scoring here for the ten-year period would be 20% of this $600 bil to $700 bil, or $120 bil to $140 bil…..that I think should be used first to fund only real, measurable, desperately-needed Job Creation, that can be objectively CBO confirmed as clearly worth the cost, unlike some of the projects included in the present US House Main Street Jobs proposal and some included in last year’s Economic Stimulus Plan. And if there are any excess funds, I think they should all be used to reduce the US federal deficit.

And then there is always the opportunity to kick up this 20% to say 50%…..after all, this is not the large corp’s money, it belongs to the US Government, and thus it’s the US citizens’ money. This 50% assumption would result in positive CBO scoring in the range of $300 bil to $350 bil.

And I think this money should be used first to fund only long-term job-creation initiatives, properly designed and CBO objectively confirmed; and second to fund a substantial reduction in the US federal deficit.

After first allocating the substantial portion of this money to these two critical country needs (i.e. focused like a laser on just true, measurable job creation and on US federal deficit reduction), I would then consider allocating some of the excess funds to carefully selected infrastructure projects. At the very end of this post, I have an example of one very wise infrastructure invesment...in High Speed Mass Transit Systems.

And then I would also consider allocating some of the excess funds to well-designed, specially-tailored employment training programs for military veterans (perhaps, let Jack Reed design it) and for prison rehabilitation (let Jim Webb design it). Also, there should be special hiring programs for both military veterans and for released prisoners. I also would consider allocating some of the excess funds to targeted and very healthy tax incentives to employers for hiring and retaining military veterans and released prisoners. Whoa, the unemployment rates for these two groups are just too unacceptably high, even when the economy is strong.

For these companies making these tax deposits, there would be no earnings charge to them since these estimated liabilities are already recorded on the books. These companies would be simply partially paying, on a staggered-in basis over the next ten years, a small portion (20% to 50%) of what they agree they owe the IRS.

Also, there should be no negative economic impact to these companies. Further, these tax deposits made would stop the subsequent accrual of interest. In fact, nearly all of these large companies will be able to obtain financing for these tax deposits at a much lower interest rate than they would ultimately have had to pay to the IRS. Believe it or not, the IRS presently charges large corps interest at the federal short-term interest rate plus five percentage points.

Stockholders of these companies should buy into this Job Creation Funding proposal since they should want their companies to obtain the much cheaper outside financing on their debt than that provided by the steep financing required by the IRS.

In addition to the very favorable company financing mentioned above, another economic benefit here will accrue to the US States, since they could choose to require a somewhat similar tax deposit scheme for companies for all of their open state tax audits, and thus the present dire financial status of States could thereby be improved from the accelerated state tax deposits the States will be receiving.

Given how large US corporations will benefit greatly from the various Job Creation and Stimulus Proposals, I think it is only fair that these large corps make tax deposits that total only a very modest 20% to 50% of the amounts they agree that they owe to the IRS, staggered-in over the next ten-year CBO scoring period.

For the 106 companies I sampled, here is a listing of the 44 companies that had estimated tax liabilities, including accrued interest, of in excess of $1 bil each owed in total to all taxing authorities for all open tax audit years at their most recent balance sheet date.

1 Wells Fargo……………….. $9.1 bil
2 Pfizer/ Wyeth…………….. $8.2 bil
3 JP Morgan Chase………… $8.2 bil
4 GE………………………….... $8.0 bil
5 ATT………………………….. $8.0 bil
6 Merck/Schering Plough. $6.6 bil
7 Microsoft…………………... $6.0 bil
8 Bank of America…………. $5.9 bil
9 Exxon Mobil………………. $5.6 bil
10 IBM…………………………. $4.2 bil
11 Citigroup………………….. $4.1 bil
12 AIG………………………….. $3.8 bil
13 Morgan Stanley…………. $3.7 bil
14 Verizon…………………….. $3.2 bil
15 Cisco Systems………….... $3.1 bil
16 General Motors………….. $3.1 bil
17 Chevron………………….... $3.0 bil
18 Procter and Gamble……. $2.7 bil
19 Oracle……………………..... $2.7 bil
20 Edison Intl (Cal)…………. $2.4 bil
21 Comcast………………….... $2.2 bil
22 JNJ…………………………... $2.2 bil
23 Time Warner……………... $2.2 bil
24 PepsiCo…………………..... $2.1 bil
25 News Corp……………….... $2.1 bil
26 Hewlett Packard……….... $2.0 bil
27 Fannie Mae………………... $2.0 bil
28 Dell………………………...... $1.9 bil
29 Ford………………………..... $1.9 bil
30 Boeing…………………….... $1.7 bil
31 Nortel Networks………... $1.7 bil
32 Abbott Labs…………….... $1.5 bil
33 Exelon…………………….... $1.5 bil
34 Goldman Sachs………. $1.5 bil
35 WalMart………………….... $1.3 bil
36 Apple……………………..... $1.3 bil
37 Amgen…………………...... $1.2 bil
38 American Express……... $1.2 bil
39 Conoco Phillips……….... $1.2 bil
40 Eli Lilly………………….... $1.2 bil
41 Johnson Controls……... $1.1 bil
42 First Third Bank………... $1.1 bil
43 Kraft……………………...... $1.0 bil
44 Schlumberger…………... $1.0 bil
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In reviewing the above list, I’ll make two very brief observations.

First, wow, look at all the financial companies located at the top of this list. Paul Volcker and Maria Cantwell are right on target in trying to rein in Wall Street. I think the one, at least, somewhat bright spot here is Goldman Sachs. Check out its income tax aggressiveness number here versus that of the rest of Big Wall Street Financial.

So the financial foundation of Big Wall Street Financial includes as one key ingredient the following financial firms disclosing that this is what they owe mostly the US Government upon IRS audit, but only assuming the IRS auditors can find it? These companies have to understand that the IRS is working for the US Government, and thus for US Citizens, who are the ones being financially harmed here. The US Citizens are shouting out that their money here is needed for wise investing in real, sustainable private sector Jobs, rather than invested by Big Wall Street Financial firms in risky financial strategies:

Wells Fargo………..$9.1 bil
JP Morgan Chase…$8.2 bil
Bank of America….$5.9 bil
Citigroup…………...$4.1 bil
AIG…………………...$3.8 bil
Morgan Stanley…..$3.7 bil

When there is this much carryover questionable financial sludge built up in one industry over many years, I think it might be time for a US Federal Government Infrastructure Bank.

Second, look at all the large multinational corps on the list. Given the International Tax Catch 22 many of these multinational corps are in here related to their income shifting and also given the deep crater the US economy continues to be in, I think that it might be wise for the US government to consider temporarily, on a one-time basis, permitting all multinational corps to repatriate at least a good chunk of their unremitted foreign earnings existing as of Dec 31, 2009, with a compromise dividend received deduction of say perhaps 40%, from now until Dec 31, 2010.

These multinational corps can’t pay the IRS what they owe them when they are audited, if their money is locked up in international tax havens like Ireland.

The past Administration left the current Adminstration with a country in a gigantic economic crater. But when the current Administration’s most, or perhaps second most, effective economic initiative so far is the "Pay Fors" program, which includes the highly successful implementation of a mandatory CBO scoring system, which is religiously followed and analyzed by all interested parties, it is no wonder that the country has only climbed about 10% out of this still very deep economic crater.

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Here is my specific proposal on spending some of the excess funds on High Speed Mass Transit Systems. To offset this high build out cost some, I think I would include in the proposal here some funding of the build out cost by all customers, including businesses, to be charged a bit of a System cost build out federal fee as a separately stated portion of the total ticket charge each time they use a High Speed Mass Transit Systems. Since customers, including businesses, will love using these systems, it is only fair that they pay for a substantial part of the build out cost. If you design this customer fee portion of the build out cost program on the front end, you'll get the positive CBO scoring for it. And frankly, I'd set this customer fee at a fairly high percentage of the total estimated build out cost of the High Speed Mass Transit System.

I would then consider allocating some of the excess funds on a fair-minded, logical, objectively ranked basis as down payments on some of the following long-term job-creating, economy juicing, energy independence abetting, upper education enhancing, and both medical treatment and scientific research facilitating, worker productivity improving, and yeah, even quality of life enriching (particularly applicable to retirees in places like Florida, Southern California and South Carolina) High-Speed Mass Transit Systems all over the country, again assuming that CBO can objectively confirm that the resultant job creation is worth its cost. Some of these systems are already partially built and thus the incremental cost to complete them won’t be nearly as substantial as ones where you are starting from scratch:

…From San Diego to Long Beach to Anaheim to Riverside to Claremont to San Bernardino to Las Vegas
…From USC and UCLA and Hollywood in LA to Caltech in Pasadena to the Jet Propulsion Lab to Santa Barbara to Monterey to San Jose to Silicon Valley to Stanford to San Fran to Oakland to U Cal: Berkeley to Sacramento
…From Redmond, WA to Bellevue to U WA: Seattle to Tacoma to Olympia to Vancouver to Portland, OR to Salem, OR to OR State U: Corvallis to U OR: Eugene
…From Cleveland Clinic to Toledo to Notre Dame: South Bend to Gary to Chicago
…From Ft. Wayne, IN to Detroit to U of Mich: Ann Arbor to Flint, MI to Mich ST: East Lansing to Grand Rapids, MI
…From New Orleans to LSU: Baton Rouge to Shreveport, LA to Jackson, MS to U of AL: Tuscaloosa to Birmingham to U of MS: Oxford to Memphis to St. Louis to Chicago to Milwaukee to U WI: Madison
…Indianapolis Spokes to all of Purdue: West Lafayette and on to Gary and Chicago; to Notre Dame: South Bend; to Ft. Wayne; to Columbus, OH; to Louisville, KY; to Evansville, IN; to St. Louis, MO; and to U of IL: Champaign-Urbana and on to Chicago
…Columbus, OH Spokes to all of Cleveland and on to Akron and Pittsburgh; to Wheeling, WV and on to Morgantown, WV; to Dayton and on to Cincy; and to Indianapolis, IN
…Nashville, TN Spokes to Louisville and on to Lexington, KY; to Knoxville; to Chattanooga and on to Atlanta; to Huntsville, AL and on to Birmingham; to Memphis; to Clarksville, TN and on to Evansville, IN and St. Louis, MO
…Atlanta Spokes to Chattanooga and on to Nashville; to Greenville, SC and on to Spartanburg, SC and to Charlotte, NC; to U of GA: Athens; to Augusta, GA and on to Columbia, SC; to Macon, GA and on to Savannah; to Macon, GA and on to Orlando, FL; to Columbus, GA and on to Montgomery, AL; to Birmingham
…Orlando, FL Spokes to U FL: Gainesville; to Daytona Beach and on to Jacksonville,FL and to Savannah, GA; to Jacksonville, FL direct; to JFK Space Center and on to Port St. Lucie and further to Ft. Lauderdale and Miami; to Miami direct; to Naples and on to Cape Coral, St. Pete and Tampa; to Tampa direct
…From St. Louis, MO to Springfield, IL to IL State U: Normal to Peoria to Quad Cities, IL/IA to U of Iowa: Iowa City to Cedar Rapids to Northern IL U: DeKalb to Rockford to Chicago
…From Houston to San Antonio to U TX: Austin to Dallas to Little Rock to U ARK at Fayetteville to Bentonville to Branson to U of MO: Columbia to Kansas City to U of KS: Lawrence to U Neb: Lincoln to Omaha to Des Moines to Mayo Clinic in Rochester, MN to Minneapolis/St. Paul
…From Myrtle Beach, SC to Charleston, SC to Columbia, SC to Atlanta to Chattanooga to U TN: Knoxville to Nashville to Louisville to Lexington, KY to Huntington, WV to Charleston, WV
…From Miami to Ft. Lauderdale to Naples to Ft. Myers to St. Pete to Tampa to Orlando to U FL: Gainesville to Jacksonville to both Tallahassee and to Savannah, GA and on to Charleston, SC and Myrtle Beach SC
…From Myrtle Beach, SC to Charlotte to Winston-Salem to Greensboro to Duke: Durham to UNC: Chapel Hill to Raleigh to Virginia Beach to Norfolk to Richmond to DC Metro Area
…From DC Metro Area to Baltimore to U of MD: College Park to Wilmington to Philly to Atlantic City to Trenton to Princeton to Newark to NY City Metro Area
…From NY City Metro Area to Yale: New Haven, CT to Providence, RI, to Boston, to MIT and Harvard: Cambridge, to Nashua, NH to Manchester, NH to Portland, ME
…Boston, MA Spokes to Lowell, MA and on to Nashua, NH and Manchester, NH; to Portland, ME; to Providence, RI; to Worcester, MA and on to Springfield, MA; to Worcester, MA and on to Hartford, CT; to Cambridge (MIT and Harvard)
…From Yale: New Haven, CT, to Hartford, CT, to U CT: Storrs, to Springfield, MA to U Mass: Amherst, to Albany, NY to U of Syracuse, NY to Cornell U: Ithaca, NY to Rochester, NY to Buffalo, NY
…From Fort Collins, CO to U CO: Boulder to Denver to Colorado Springs
…From U of AZ: Tucson to AZ State U: Tempe to Phoenix
…From Wichita, KS to Oklahoma City, OK to both U of OK: Norman and to Tulsa, OK to Dallas/Ft. Worth
…From Los Alamos, NM to Santa Fe, NM to Albuquerque, NM to U of NM: Las Cruces to El Paso, TX

Job Creation Funding #2: Pecking Order of Foreign Earnings Repatriation Tax Tranches

Here is my proposal for how total foreign earnings repatriation tax tranches should be applied for foreign earnings repatriated by a US multinational corp in 2010:

…..First, to the Jobs Tax Credit, with a 40% (?) Dividend Received Deduction (Job Creation Proposal #4)
...Second, to the Research Tax Credit, with a 40% (?) Dividend Received Deduction (Job Creation Proposal #6) (This is a late insertion)
…..Third, to the Manufacturing Tax Credit, with a 40% (?) Dividend Received Deduction (Job Creation Proposal #5)
…..Fourth, next $1 bil of Foreign Earnings Repatriated, with a 40% (?) Dividend Received Deduction
…..Fifth, next $1 bil of Foreign Earnings Repatriated, with a 25% (?) Dividend Received Deduction
…..Sixth, next $2 bil of Foreign Earnings Repatriated, with a 10% (?) Dividend Received Deduction
…..Last, remainder of Foreign Earnings Repatriated, with No Dividend Received Deduction

This should be considered a one-time, temporary foreign earnings repatriation program, driven by the horrible US jobless recovery, by the depressed US manufacturing sector, by the US housing crash, by many other economic stresses on the US economy, and also by a sense of measured fairness to US multinational corps, which have over $1.1 trillion of unremitted foreign earnings at the end of 2009, with much of it locked up overseas because of the very expensive income tax cost of repatriating these foreign earnings back to the US.

I think the maximum amount of foreign earnings that can be repatriated from now through Dec 31, 2010 to a US company should be the unremitted foreign earnings amount disclosed in that company’s income tax footnote to their Dec 31, 2009 or earlier audited financial statements.

Let me illustrate how the numbers would work for a US multinational corp.

Total amount of Foreign Earnings Repatriated by a US multinational corp in 2010: say $10 bil

…..#1: Jobs Tax Credit Earned….assume $300 mil, and also assume that applicable Foreign Earnings Repatriated to yield this Additional Federal Income Tax, with a 40% (?) Dividend Received Deduction, of $300 mil, is say $1.8 bil
...#2: Research Tax Credit Earned...assume $400 mil, and also assume that applicable Foreign Earnings Repatriated to yield this Additional Federal Income Tax, with a 40% (?) Dividend Received Deduction, of $400 mil, is say $1.5 bil
…..#3: Manufacturing Tax Credit Earned…..assume $200 mil, and also assume that applicable Foreign Earnings Repatriated to yield this Additional Federal Income Tax, with a 40% (?) Dividend Received Deduction, of $200 mil, is say $1.2 bil,
…..#4 Next $1 bil of Foreign Earnings Repatriated, with a 40% (?) Dividend Received Deduction
…..#5 Next $1 bil of Foreign Earnings Repatriated, with a 25% (?) Dividend Received Deduction
…..#6 Next $2 bil of Foreign Earnings Repatriated, with a 10% (?) Dividend Received Deduction
…..#6 Next $1.5 bil (i.e. $10 bil – $2 bil – $1 bil – $1 bil – $1.2 bil – $1.5 bil - $1.8 bil) of Foreign Earnings Repatriated, with No (No ? Needed Here) Dividend Received Deduction

CBO scoring here should be gigantically positive. Also, states will generate tons of additional tax receipts, mainly from the taxable dividends of the US multinational corps. Because the state tax amount is so huge, I think that the US Federal Government should consider hiring a bunch of exceptionally qualified state tax experts, who will be able to provide needed support to all of the States, on this very complex issue, and on multistate and other key complex issues.

Job Creation Proposal #5: Manufacturing Tax Credit Funded by Foreign Earnings Repatriation Tax

Just like my Job Creation Proposal #4 on Jobs Tax Credit Funded by Foreign Earnings Repatriation, this proposal also puts in some fair and measured tax incentives to make this foreign earnings repatriation much more economically attractive to US multinational corps. And its focus is on stimulating US capital expenditures of these US multinational corps early in 2010, and particularly so in the key manufacturing sector.

Under this proposal, a US multinational corp repatriating some of its foreign earnings in calendar year 2010, needs to first compute its preliminary manufacturing tax credit earned in each quarter of 2010. The resultant total manufacturing tax credit computed for the entire year 2010 cannot exceed the incremental federal income tax for 2010 caused by the foreign earnings repatriated in 2010, over and above the like amount caused by the Jobs Tax Credit Funded by Foreign Earnings Repatriation, in my Job Creation Proposal #4.

This proposal works quite a bit similar to the way my Job Creation Proposal #4 on Jobs Tax Credit Funded by Foreign Earnings Repatriation works. However, the manufacturing tax credit as a percentage of the cost of eligible property placed in service replaces the jobs tax credit.

Eligible property is all new property depreciable under MACRS that has a Recovery Period of seven years or less (i.e. Three-Year Property, Five-Year Property, and Seven-Year Property), all external computer software, all external computer software development costs, all external web site development costs, and all manufacturing plant facility costs. The property must be placed in service in the US in 2010. To be eligible property, all of the R&D work related to this property must be performed in the US.

The amount of a US multinational corp’s 2010 Total Manufacturing Tax Credit, before testing for Foreign Earnings Repatriation Tax, should be based on the following percentages of the cost of eligible property placed in service, applied to each 2010 quarter, as follows:

Manufacturing Plant Facilities and all Eligible Property Contained Therein:
…..1Q…..20%
…..2Q…..18%
…..3Q…..16%
…..4Q…..14%

All Other Eligible Property:
…..1Q…..10%
…..2Q….. 9%
…..3Q….. 8%
…..4Q….. 7%

Let me illustrate how this proposal would work for a multinational corp.

Assume that after applying all of the percentages to all of the eligible property placed in service in 2010, the total manufacturing tax credit comes to $200 mil.

Also, assume that the 2010 Total Additional Federal Income Tax due to the Foreign Earnings Repatriation is $600 mil and that the Federal Income Tax due to the Foreign Earnings Repatriation applied to the Jobs Tax Credit Funded by Foreign Earnings Repatriation is $350 mil.

Thus, the Total Additional Federal Income Tax due to the Foreign Earnings Repatriation to use in computing the Manufacturing tax credit is the excess, or $250 mil (i.e. $600 mil – $350 mil).

The final 2010 Total Manufacturing Tax Credit Earned is the lower of this $250 mil excess and the total manufacturing tax credit of $200 mil, computed before testing for Foreign Earnings Repatriation. Thus, the Manufacturing Tax Credit Earned in 2010 is $200 mil.

If instead this excess ended up being say $180 mil, the Manufacturing Tax Credit Earned in 2010 is $180 mil.

Another key benefit here is that these multinationals will also be able to take advantage of my Job Creation Proposal #1 on Bonus Tax Depreciation. And remember, I put a really nice favorable twist in my Job Creation Proposal #1 related to bonus tax depreciation on Manufacturing Plant Facility Costs.

Whoa! A Four Bagger....Manufacturing Tax Credit, plus Jobs Tax Credit, plus Bonus Tax Depreciation, plus getting to some locked-up Foreign Cash......and helping the country get out of its economic crater, to boot. The tax incentives are a bit better for these multinational corps than for pure domestic corps because the multinational corps' tax incentives are paid for by the foreign earnings repatriation tax.

However, for multinational corps repatriating foreign earnings in 2010, this Job Creation Proposal #5, along with my Job Creation Proposal #4 on Jobs Tax Credit Funded by Foreign Earnings Repatriated Tax, will be used instead of my Double Barreled or Triple Barreled Job Creation Proposals #2 and #3.

The CBO score of this proposal will be positive.

The total cost outflow of the manufacturing tax credit earned cannot exceed the additional federal income tax related to the foreign earnings repatriation.

And, in addition, States will be receiving substantial cash inflows from these multinational corps due to the taxable dividend resulting from the foreign earnings repatriation. And if States decide to include the Manufacturing Tax Credit in these multinational corps’ taxable income, they will receive even more funds. Because of the much improved State finances here, the US government will be able to reduce its funding for State Unemployment and Other Related State benefits.

Job Creation Proposal #4: Jobs Tax Credit Funded by Foreign Earnings Repatriation Tax

Presently, US multinational corps have more than $1.1 trillion of unremitted foreign earnings of their foreign subsidiaries, a very significant part of it earned in International Tax Havens like Ireland, Puerto Rico, Singapore, the Netherlands, China, and many more low-taxed places.

Further, these aggregate unremitted foreign earnings increased by 16.4% in the most recent year, in a year marred in a deep recession. When I do the mathematics using this 16.4% annual growth, if nothing changes, these $1.1 trillion of unremitted foreign earnings will grow to more than $3.2 trillion at the end of President Obama's second presidential term. It is pretty clear that something must be done to solve this huge problem.

Pundits keep talking about how small businesses create all the US jobs. Well, large US multinational corps create jobs too, it’s just that they are outside the country, mostly in countries with very favorable income tax incentives.

One of the areas where I think the economists in the Obama Administration have really been off target in their failed attempt at improving the dismal US job picture is in their myopic focus on small businesses. They continue to overlook the effectiveness of tax incentives to get large US multinational corps to invest in US capital expenditures and to create jobs in the US. One key area of small and medium-sized US businesses growth is that they can feed off of an economic expansion of large businesses in the US.

Of this massive $1.1 trillion of these foreign earnings parked overseas, 24% of these foreign earnings are of pure Drug and Medical US multinational corps and another 20% are of pure high technology US multinational corps.

To exhibit just how important international tax planning is to these two industries, three of the top five companies with the highest unremitted foreign earnings at Dec 31, 2008 were Big Pharma companies. Here at the unremitted foreign earnings numbers above $10 bil for Big Pharma companies at the end of 2008 :

Pfizer/Wyeth........................$76 bil
Merck/Schering-Plough........$30 bil
JNJ........................................$28 bil
Bristol Myers Squibb.............$15 bil
Abbott Labs...........................$15 bil
Eli Lilly...................................$13 bil
Amgen....................................$11 bil

And then here are the pure high tech companies with unremitted foreign earnings at the end of their most recent audited financial statements:

Cisco Systems........................$24 bil
IBM........................................$22 bil
Microsoft................................$18 bil
Hewlett-Packard.....................$17 bil
Oracle......................................$14 bil

And the unremitted foreign earnings numbers of high tech companies have recently been growing like weeds. For instance, Microsoft's unremitted foreign earnings number grew by $11 bil in just the past year. Now that is what I call an income shift.

That is why these two industries, and other huge multinational corps, lobby the US Congress so hard for the 85% Dividend Received Deduction when foreign earnings are repatriated.

Incredibly, these multinational corps were successful in 2004 during the previous Administration in getting this coveted 85% Dividend Received Deduction passed on a temporary basis.

The current Obama Administration is clearly aware of this US Big Multinational Corp boondoggle here and so far has shown that it will have no part of this 85% Dividend Received Deduction strategy.

Many of these multinational corps would love to get their foreign earnings repatriated to the US, along with the related cash and investments, which are parked overseas.

The major problem here is that to get these foreign earnings repatriated, the present US income tax consequences to US multinational corps are very expensive, because the grossed up dividend, related to the foreign earnings repatriated, is taxed in the US at a pretty stiff effective federal income tax rate.

This proposal puts in some fair and measured tax incentives to make this foreign earnings repatriation much more economically attractive to US multinational corps. And it is a three-fer, because also there will be a significant amount of US job creation by these corps, and further, the proposal substantially reduces the US Government’s federal deficit over the next ten years.

Seems too good to be true? Well, it is true. Read on.

Under this proposal, a US multinational corp repatriating some of its foreign earnings in calendar year 2010, needs to first compute its preliminary jobs tax credit earned in each quarter of 2010. However, this total jobs tax credit for the year 2010 cannot exceed the incremental federal income tax for 2010 caused by the foreign earnings repatriated in 2010.

This proposal works quite a bit similar to the way the Double and Triple Barreled Manufacturing Tax Credits Tied to Payroll Count Increases (my Job Creation Proposals #2 and #3) work. However, the federal income tax from the foreign earnings repatriation replaces the manufacturing tax credit based on percentages of the cost of eligible property bought and sold.

Thus, I would set the preliminary Jobs Tax Credit here, precisely at the maximums set out in my Triple Barreled Manufacturing Tax Credits, which factor in both company size and the quarter in which the net increase in full-time US payroll counts occur. And then, these multinational corps that repatriate some of their unremitted foreign earnings in 2010, would use this Job Creation Proposal #4, as well as my Job Creation Proposal #5 on Manufacturing Tax Credits Funded by Foreign Earnings Repatriation Tax, rather than either the Double Barreled or Triple Barreled proposals.

Yeah, the job tax credit and manufacturing tax credit incentives here for multinational corps are a bit higher than those for pure domestic US corps, but then that is because the multinational corps' tax credits are completely funded by their foreign earnings repatriation tax.

Let me illustrate how this proposal would work for a multinational corp, with average consolidated annual revenues of $10 bil.

Assumed Increases in net payroll counts in each quarter of 2010:

..1Q..4,000 X Maximum Jobs Tax Credit of $27,000 = $108 mil
..2Q..3,000 X Maximum Jobs Tax Credit of $25,000 = $ 75 mil
..3Q..2,000 X Maximum Jobs Tax Credit of $23,000 = $ 46 mil
..4Q..1,000 X Maximum Jobs Tax Credit of $21,000 = $ 21 mil
= Total Full Year 2010 Preliminary Jobs Tax Credit..= $250 mil

If the 2010 Total Additional Federal Income Tax due to the Foreign Earnings Repatriation, assuming say a 40% (?) Dividend Received Deduction, equals or exceeds $250 mil, then the Total Jobs Tax Credit earned in 2010 is $250 mil.

If instead, the 2010 Total Additional Federal Income Tax due to the Foreign Earnings Repatriation is less than $250 mil, then the Total Jobs Tax Credit earned in 2010 is equal to the amount of the 2010 Total Additional Federal Income Tax attributable to the Foreign Earnings Repatriation.

To create a strong incentive for businesses to retain these new US full-time jobs for a reasonably long period of time, the number of US full-time employees of this US multinational corp earning the jobs tax credit must either remain the same, or keep rising, exclusive of those from business acquisitions, in each quarter of each year from the end of the quarter when the jobs tax credit is earned until the end of 2015. If the number of full-time employees drops below the 2010 quarter-end in which the jobs tax credited was earned, then recapture of this jobs tax credit would result. If this drop in payroll count occurs in the first three years, a 100% recapture will result; if this payroll count drop occurs after the first three years but before 2016, a pro-rata time portion of this jobs tax credit would be recaptured.

The CBO score will be substantially positive on this proposal for a number of reasons.

First, the current ten-year US Government budget should be assuming that none of these unremitted foreign earnings will be repatriated. This is consistent with multinational corps’ footnotes where they state that these foreign earnings are permanently invested in their foreign operations. Thus, if the US government decides to give temporary, one-time very attractive tax incentives for multinational corps to repatriate some of their unremitted foreign earnings, then this action will clearly increase the US Government financial coffers over the next ten years. I think the CBO can reasonably estimate the amount of the additional federal income taxes to be collected by the US government from this foreign earnings repatriation and thus should do so.

Second, the Total Jobs Tax Credit is an outflow in CBO scoring. However, there are direct US Government Bouncebacks…i.e. both the Federal Income Tax and the Federal Payroll Tax from the new hires. And this program is designed to highly incentivize these companies to retain their increased payroll counts for more than five years, through the end of 2015. Thus, the multiyear federal income tax and federal payroll tax inflows from the higher payroll counts, as well as any recapture of the Jobs Tax Credit, will substantially trump the first year Total Jobs Tax Credit outflow.

Third, States will be receiving substantial cash inflows from these multinational corps due to the taxable dividend resulting from the foreign earnings repatriation. And States also will be receiving substantial additional cash inflows of state individual income taxes related to the many new hires. And if States decide to include the Jobs Tax Credit in these multinational corps’ taxable income, they will receive even more funds. Because of the much improved State finances here, the US government will be able to reduce its funding for State Unemployment and Other Related State benefits.

Job Creation Proposal #3: Triple-Barreled Manufacturing Tax Credits Tied to Payroll Count Increases

My estimate of a fair CBO score on the combination of Job Creation Proposals #1 on Bonus Tax Depreciation and #2 on Double-Barreled Manufacturing Tax Credits came out so well (i.e. Total Federal Tax Receipts roughly triple the Total Cost of the Manufacturing Tax Credits), that I was curious to see how I think a fair CBO scoring would come out if I really juiced up the Double-Barreled Manufacturing Tax Credits initiative in order to move up the needle significantly on the desperately needed new job creation in 2010.

Thus, in this one, I am increasing the highly stimulative maximum average manufacturing tax credit for one job created from $20,000 in the Double-Barreled initiative to $28,000 in this Triple-Barreled initiative. And I am adding very stimulative, front-loaded sauce in order to maximize earlier in the year 2010 job creation. Also, I am retaining the minimum manufacturing/ jobs tax credit of $5,000 per new hire.

Also, in this Triple-Barreled initiative, I am energizing the manufacturing tax credit percentage scheme by expanding it and also making the percentages even more robust.

Companies are especially attracted to the manufacturing tax credit because it increases their reported GAAP earnings.

Also, I am increasing the maximum Bonus Tax Depreciation per 2010 job addition from $300,000 to $400,000.

End result, I think the number of new jobs created in 2010 would increase from a range of 2 million to 3 million under the Double-Barreled initiative to a range of 3 million to 4 million under this Triple-Barreled initiative.

As you can see below, in this Triple-Barreled initiative, I think a fair CBO score would yield Total Federal Tax Receipts, which range from $159 bil to $238 bil, roughly doubling the Total Cost of the Manufacturing Tax Credits, which range from $84 bil to $112 bil, still an exceptionally good result.

Below are the detailed numbers for the Triple-Barreled initiative.
=============================================

First, the new much more robust Manufacturing Tax Credit Percentage Scheme:

…………………Manufacturing Tax Credit % of Cost or Selling Price
Average Annual Revenues……..........For Each Quarter of 2010
…………………………………………................1Q……..2Q……..3Q……..4Q

Less than $10 mil…….Seller……….7.5%......7.0%.....6.5%......6.0%
$10 mil to $20 mil..….Seller……….7.0%......6.5%.....6.0%......5.5%
$20 mil to $30 mil......Seller.........6.5%......6.0%.....5.5%......5.0%
$30 mil to $50 mil..….Seller……….6.0%......5.5%.....5.0%......4.5%
$50 mil to $75 mil.…..Seller……….5.5%......5.0%.....4.5%......4.0%
$75 mil to $100 mil....Seller……….5.0%......4.5%.....4.0%......3.5%
$100 mil to $250 mil.Seller………..4.5%......4.0%.....3.5%......3.0%
$250 mil to $500 mil.Seller………..4.0%......3.5%.....3.0%......2.5%
$500 to $1 bil…..……..Seller………..3.5%......3.0%.....2.5%......2.0%
$1 bil to $5 bil..……….Seller….........3.0%......2.5%.....2.0%......1.5%
$5 bil to $20 bil..…….Seller………...2.5%......2.0%.....1.5%......1.0%
More than $20 bil..…Seller………...2.0%......1.5%.....1.0%......0.5%

Less than $10 mil……Purchaser...15.0%.....14.0%....13.0%....12.0%
$10 mil to $20 mil..…Purchaser...14.0%....13.0%....12.0%....11.0%
$20 mil to $30 mil.....Purchaser...13.0%...12.0%....11.0%....10.0%
$30 mil to $50 mil…..Purchaser...12.0%....11.0%....10.0%.....9.0%
$50 mil to $75 mil..…Purchaser...11.0%....10.0%.....9.0%......8.0%
$75 mil to $100 mil...Purchaser...10.0%.....9.0%.....8.0%......7.0%
$100 mil to $250 mil.Purchaser....9.0%......8.0%.....7.0%......6.0%
$200 mil to $500 mil.Purchaser....8.0%.....7.0%.....6.0%......5.0%
$500 mil to $1 bil….…Purchaser....7.0%......6.0%.....5.0%......4.0%
$1 bil to $5 bil..………..Purchaser....6.0%......5.0%.....4.0%......3.0%
$5 bil to $20 bil..……..Purchaser....5.0%......4.0%.....3.0%......2.0%
More than $20 bil.…..Purchaser….4.0%......3.0%.....2.0%......1.0%

Second, the much more robust Maximum Manufacturing/Jobs Tax Credit per Job Created:

.............Maximum Manufacturing Tax Credit /Jobs Tax Credit
................................1Q 2010.....2Q 2010.....3Q 2010.....4Q 2010

Less than $10 mil.......$36,000...$34,000...$32,000...$30,000
$10 mil to $20 mil......$35,000...$33,000...$31,000...$29,000
$20 mil to $30 mil......$34,000...$32,000...$30,000...$28,000
$30 mil to $50 mil......$33,000...$31,000...$29,000...$27,000
$50 mil to $75 mil......$32,000...$30,000...$28,000...$26,000
$75 to $100 mil......$31,000...$29,000..$27,000...$25,000
$100 to $250 mil...$31,000...$29,000...$27,000...$25,000
$250 mil to $500 mil.$30,000...$28,000...$26,000...$24,000
$500 mil to $1 bil.......$29,000...$27,000...$25,000...$23,000
$1 bil to $5 bil.............$28,000...$26,000...$24,000...$22,000
$5 bil to $20 bil..........$27,000...$25,000...$23,000...$21,000
More than $20 bil......$26,000...$24,000...$22,000...$20,000

Third, the above much sweetened percentage scheme, coupled with upping the maximum average manufacturing tax credit per job created, results in much more robust job creation:

………………………………………….........Conservative………Robust
........……………………………………………Estimate………...Estimate

US full-time jobs added
….......1Q 2010……………………………..1,200,000………1,600,000
….......2Q 2010……………………………….900,000………1,200,000
….......3Q 2010……………………………….600,000……….. 800,000
….......4Q 2010……………………………….300,000……….. 400,000
….......Total Year 2010…………………3,000,000……..4,000,000
.........When in Quarter Job Added....Mid-quarter…..Mid-quarter

Higher Average Number of Jobs in Year
...Resulting from 2010 Job Adds:
….......2011…………………………………2,700,000……….3,600,000
….......2012…………………………………2,400,000……….3,200,000
….......2013…………………………………2,100,000……….2,800,000
….......2014…………………………………1,800,000……….2,400,000
….......2015…………………………………1,500,000……….2,000,000

Avg Addtl Base Payroll per New Job.$40,000…………$45,000
Average Pay Increase per Year………………3%....................3%
Effective Federal Income Tax Rate…………15%.................15%
Combined Federal Payroll Tax Rate………15.3%..............15.3%

And then fourth, here is what I think a fair CBO score would be for this Combination of Job Creation, which includes the Triple-Barreled and the more robust Bonus Tax Depreciation initiatives:

Fair Estimate of CBO Score:

Cost
…Manufacturing Tax Credits in 2010...$84 bil……$112 bil

Federal Tax Receipts (Manufacturing Tax Credits Bounceback)
…..Federal Individual Income Tax Receipts
………………..2010……………………….....$11.3 bil..……..$16.9 bil
………………..2011……………………….....$16.4 bil..……..$24.7 bil
………………..2012……………………….....$15.1 bil..……..$22.5 bil
………………..2013……………………….....$13.5 bil..……..$20.4 bil
………………..2014……………………….....$12.0 bil..……..$18.0 bil
………………..2015……………………….....$10.3 bil..……..$15.4 bil
…..Total 2010 through 2015…………..$78.6 bil..……..$117.9 bil

…..Federal Payroll Tax Receipts
………………..2010……………………….....$11.5 bil..……..$17.2 bil
………………..2011……………………….....$16.8 bil..……..$25.2 bil
………………..2012……………………….....$15.4 bil..……..$23.0 bil
………………..2013……………………….....$13.8 bil..……..$20.8 bil
………………..2014……………………….....$12.2 bil..……..$18.3 bil
………………..2015……………………….....$10.4 bil…........$15.7 bil
…..Total 2010 through 2015…………..$80.1 bil..……..$120.2 bil

Total Federal Tax Receipts 2010-15…$159 bil..……$238 bil

Plus Total Reduction in Emergency
...Federal Funding of Unemployment
...and Other Related State Benefits
...(will be just huge, but I don't have
...sufficient data to reasonably estimate)....?....................?

=======================================

Simple Illustration of Triple-Barreled Manufacturing Tax Credits Tied to Payroll Count Increases

Let’s assume that Co. A, a US company, has average annual revenues of $31 mil and 100 US full-time employees at Dec 31, 2009. During the 1Q 2010, Co. A places in service eligible property with a total cost of $3 mil. Also in the first quarter 2010, Co. A had 12 new US full-time employee hires. Because two full-time employees also left during the 1Q 2010, Co. A had 110 US full-time employees at Mar 31, 2010.

The preliminary manufacturing tax credits, before payroll count testing, of Co. A in the 1Q 2010 is 12% X $3 mil, or $360,000. Co. A's maximum tax credits for the 1Q 2010 due to the payroll count test is $33,000 X 10 net increase in US full-time jobs added in the 1Q 2010 = $330,000. Thus, Co. A’s final manufacturing tax credits earned in the 1Q 2010 was the lower of these two numbers, or $330,000.

From the end of the 1Q 2010, Co. A’s manufacturing tax credit earned pool is $330,000 and its related US full-time employee count pool is 10, thus an average of $33,000 per payroll count in this 1Q 2010 pool.

Now let’s assume the following US full-time number of employees of Co. A at the end of each of the quarters through the end of 2016.

Dec 31, 2009…..100
Mar 31, 2010…..110
Each quarter end from 2Q 2010 to 3Q 2011…..110
Dec 31, 2011…..108
Each quarter end from 1Q 2012 to 3Q 2014…..108
Dec 31, 2014…..107
Each quarter end from 1Q 2015 to 3Q 2016…..107
Dec 31, 2016…..105

There will be manufacturing tax credit recapture tax in the 4Q 2011 of (2/10) X $330,000 X 100% = $66,000. There is a 100% recapture tax here because this reduction in US full-time payroll counts occurred within the first three years after the quarter end when the manufacturing tax credits were first earned.

Also, there will be additional manufacturing tax credit recapture tax in the 4Q 2014 of (1/10) X $330,000 X 5 (number of quarters remaining from 4Q 2014 to 4Q 2015) / 23 (number of quarters from the end of the 1Q 2010, when the manufacturing tax credits were earned, to the end of the 4Q 2015) = $7,174.

There will be no additional manufacturing tax credit recapture tax after Dec 31, 2015, even though there was a subsequent drop in US full-time payroll counts.

There will also be recapture of bonus tax depreciation (Job Creation Proposal #1), due to Co. A's drop in its number of US full-time employees, subsequent to Mar 31, 2010.

For many years after Mar 31, 2010, there clearly is a very strong tax incentive for Co. A to keep its number of US full-time employees at 110 or above.

If there was a concern that companies would game the system here, instead of testing for subsequent payroll counts at the end of each subsequent quarter end, these payroll count tests could be made at the end of each subsequent month end.

Companies should not be allowed to earn manufacturing tax credits in 2010 for payroll count increases arising from either business acquisitions or from simply turning any of their Dec 31, 2009 company temporary employees or independent contractors into full-time employee status in 2010. In similar vein, companies shouldn't be allowed to avoid any manufacturing tax credit recapture tax for the same actions.

Now let me make just one change to the above illustration. Let me make Co. A's total cost of eligible property placed in service in the 1Q 2010 $2,475,000, rather than $3,000,000.

In this case, the manufacturing tax credit, before testing for payroll count increase, is 12% X $2,475,000 = $297,000. This is lower than the $330,000 maximum manufacturing tax credit based on payroll count increase. Thus, the manufacturing tax credits earned in the 1Q 2010 would be the lower of the two, or $297,000.

The 1Q 2010 manufacturing tax credit pool is $297,000 and the related payroll count increase is $297,000 / $33,000 = 9.

Thus, for Co. A to get subsequent manufacturing tax credit recapture tax, Co. A's US full-time payroll count must drop below 109 subsequent to Mar 31, 2010, rather than the 110 payroll count it has on that same date.

Job Creation Funding #1: Double Barreled Manufacturing Tax Credits Pays For Itself 3 Times

The very talented CBO is extremely cautious in its CBO scoring of all legislative initiatives. So it could well be that the CBO would be more conservative here than me, but anyway, let me assess what I think fair CBO Scoring would be on my two-pronged combination Job Creation Proposal: the Bonus Tax Depreciation Tied to Payroll Count Increases and the Double-Barreled Manufacturing Tax Credits, with Minimum and Maximum amounts, Tied to Payroll Count Increases.

If the CBO were to score my proposals here, I think there would be several substantial US federal government tax revenue increases that the CBO wouldn't allow to count in its scoring because the resultant US Government tax receipt inflows, even though they will be very substantial, are either too indirect and/or a bit too difficult to estimate with sufficient reliability to score.

First, with the very attractive manufacturing tax credit percentages on both the sales and purchases sides, coupled with both the growth and improvement in the work force as well as the much higher level of capital expenditures, there should be a huge pickup in both revenues and gross margins of many businesses in 2010 and beyond. There also should be a dramatic increase in 2010 and subsequent years' federal taxable income of businesses, before considering the huge accelerated tax deduction for Bonus Tax Depreciation, which all turns around before the end of ten years, and thus washes out in CBO scoring. Thus, there should also be a substantial pickup in the related US federal income tax receipts of businesses in 2010 and beyond, before considering this Bonus Tax Depreciation accelerated tax deductions, and also before considering the first-year manufacturing tax credit cost to the US government, which will be separately scored as an outflow. The CBO would probably score none of the above positive, very substantial financial outcomes. However, it would score the first-year cost of the Manufacturing Tax Credits as an outflow.

And second, the full-time US job creation will put substantially more funds in the hands of the newly-hired consumers. This will stimulate the overall US economy and US federal income tax receipts will increase markedly from this, but yet there will probably be no CBO scoring here, because it is too indirect and also too subjective in amount.

Now let me turn my attention to what I think, in all fairness, should be scored by the CBO. I think all the estimates used below, necessary to derive US Government tax inflows, are directly related to the main purpose of this Combination initiative, job creation, and also can be reasonably projected, and are certainly much more precise than many of the estimates that have been used by the CBO to score the recent health care legislation.

I will show two different computations below of what I think a fair CBO score would be for this Double Combination of Job Creation: a Conservative CBO Estimate and a Robust CBO Estimate.

………………………………………….........Conservative………Robust
........……………………………………………Estimate………...Estimate

US full-time jobs added
….......1Q 2010……………………………….800,000……….1,200,000
….......2Q 2010……………………………….600,000……….. 900,000
….......3Q 2010……………………………….400,000……….. 600,000
….......4Q 2010……………………………….200,000……….. 300,000
….......Total Year 2010………………..2,000,000……...3,000,000
.........When in Quarter Job Added..Mid-quarter……..Mid-quarter

Higher Average Number of Jobs in Year
...Resulting from 2010 Job Adds:
….......2011…………………………………1,800,000……….2,700,000
….......2012…………………………………1,600,000……….2,400,000
….......2013…………………………………1,400,000……….2,100,000
….......2014…………………………………1,200,000……….1,800,000
….......2015…………………………………1,000,000……….1,500,000

Avg Addtl Base Payroll per New Job..$40,000…………$45,000
Average Pay Increase per Year………………3%...................3%
Effective Federal Income Tax Rate…………15%.................15%
Combined Federal Payroll Tax Rate……….15.3%..............15.3%

Fair Estimate of CBO Score:

Cost
..Manufacturing Tax Credits in 2010..$40 bil……$60 bil

Federal Tax Receipts (Manufacturing Tax Credits Bounceback)
…..Federal Individual Income Tax Receipts
………………..2010……………………….....$ 7.5 bil..……..$12.6 bil
………………..2011……………………….....$11.0 bil..……..$18.5 bil
………………..2012……………………….....$10.0 bil..…….$16.9 bil
………………..2013……………………….....$ 9.0 bil..……..$15.3 bil
………………..2014……………………….....$ 8.0 bil..……..$13.5 bil
………………..2015……………………….....$ 6.9 bil..……..$11.6 bil
…..Total 2010 through 2015…………..$52.4 bil..…….$88.4 bil

…..Federal Payroll Tax Receipts
………………..2010……………………….....$ 7.7 bil..……..$12.9 bil
………………..2011……………………….....$11.2 bil..……..$18.9 bil
………………..2012……………………….....$10.2 bil..……..$17.3 bil
………………..2013……………………….....$ 9.2 bil..……...$15.6 bil
………………..2014……………………….....$ 8.1 bil..……...$13.7 bil
………………..2015……………………….....$ 7.0 bil…........$11.8 bil
…..Total 2010 through 2015…………..$53.4 bil..……..$90.2 bil

Total Federal Tax Receipts 2010-15..$106 bil..….$179 bil

Plus Total Reduction in Emergency
.....Federal Funding of Unemployment
.....and Other Related State Benefits........?....................?

In deriving the above Manufacturing Tax Credits of $40 bil and $60 bil, I simply took the number of jobs added in 2010 times the average maximum manufacturing tax credit per job of $20,000. I think these manufacturing tax credit numbers I am assuming here should be a bit too high. There are several factors causing this, which somewhat offset each other.

There will be quite a few jobs added that will result in manufacturing tax credits of much less than the $20,000 maximum average per new job. Labor intensive companies, with little capital expenditure action on either the buy or the sale side, will be getting only the minimum $5,000 per new hire. Also, any company could actually earn manufacturing tax credits based strictly on a percentage of sales price or purchase price, when the manufacturing tax credit based on the number of employees added multiplied by the $20,000 average maximum is much higher.

On the other hand, and going in the other direction, there will be companies, although not many, given this horrible economic environment, that would have increased their payroll counts in 2010 even without this Combination of Job Creation. These companies will be receiving manufacturing tax credits even though some of their job growth would have occurred anyway.

To be a bit cautiously conservative here, I just used the $20,000 maximum average manufacturing tax credit per job multiplied by the assumed number of jobs added in 2010 to derive the above Manufacturing Tax Credit Cost amounts.

I think that as a result of these two-pronged Job Creation initiatives, there are crystal-clear, directly-related federal individual income tax receipts, as well as crystal-clear, directly-related federal payroll tax receipts, that result from the addition of these US full-time employees in 2010. And I also think that the CBO should be able to make reasonable estimates to derive these amounts and thus should positively score them.

The main reason the total US Government Federal Tax Receipts substantially trump the Manufacturing Tax Credit Outflows relates to the way the initiatives were designed to maximize sustainable new jobs, most of which will last for at least five years.

The way the manufacturing tax credit program is designed (and really the Bonus Tax Depreciation too), the business must retain this 2010 increase in payroll counts for each quarter of the next five years, or else the manufacturing tax credit is recaptured. And since long-term employment should be the goal, I think there needs to be some minimum amount of time, like three years, where 100% recapture of the manufacturing tax credit would result from drops in payroll counts from the 2010 quarter end when they were first earned. Thus, there will also be higher payroll counts and thus additional federal income tax receipts and federal payroll tax receipts from 2011 to 2015, which can be reasonably estimated, and thus which I think should also be positively scored by the CBO. On the other hand, the federal income tax receipts from the much higher federal taxable income of businesses, and the related federal income tax receipts, even though very substantial in amount, cannot be sufficiently reasonably estimated for CBO to score them.

In addition to the Additional Federal Individual Income Tax Receipts and the Additional Federal Payroll Tax Receipts, there is one other item that I think should be positively scored by the CBO. And this item should result in very substantially positive CBO scoring.

With this Combination of Job Creation, there will be a significant drop in Emergency Federal Funding of Unemployment and Other Related State Benefits, since a lot more people will now be off the unemployment rolls, because they will now be employed. Also, state financial coffers will now be substantially improved from the markedly higher state taxable income of businesses, as well as the much higher state income tax withholdings from the increased payroll counts. And I think these state unemployment and related benefit costs should be considered in the CBO scoring of the US federal government here, since the US government is presently funding a lot of these state benefits, because the deep recession has caused the states to be under such severe financial pressure. I didn’t give a CBO score for this factor because I don’t have enough information to derive it. But it should be pretty large in amount.

End result…..The additional US federal income tax receipts and additional US federal payroll tax receipts, both derived from the increased payroll, triggered by the combination of the highly-charged effects of the Combination of Job Creation, will substantially trump the total cost of the Manufacturing Tax Credits included in the Double-Barreled initiative. Thus from any reasonable CBO scoring, this Combination of Job Creation is more than paid for and by quite a bit….. by at least 2.6 times, which grows to more than 3 times, when also factoring in the resultant estimated reduction in federal emergency funding for unemployment and other related state benefits.

Friday, February 5, 2010

Job Creation Proposal #2: Double-Barreled Manufacturing Tax Credits Tied to Payroll Count Increases

I don’t know about anyone else, but I am flat-out sick of this jobless recovery, where the deep recession has lasted for more than two long years. I think it’s high time for some Jimi Hendrix-playin-on-the-guitar, Bruce Springsteen-rockin-on-the-stage dose of economic juice.

Something is needed that will charge up all of US business, their employees, the many underemployed, and the many employee want-to-be’s, presently sitting on the employment sidelines. I think that is what this Double-Barreled Manufacturing Tax Credits initiative, particularly in combination with the Bonus Tax Depreciation initiative, just might do.

This proposal relates to manufacturing tax credits earned, computed both as a percentage of a business’s total quarterly manufactured sales of eligible property in each 2010 quarter, and also as a percentage of a business’s total cost of its eligible property placed in service in each 2010 quarter…..thus, Double-Barreled Manufacturing Tax Credits..... earned by both parties.

All businesses are eligible for these manufactured tax credits earned, but it is clearly targeted mainly at smaller US companies.

All the manufacturing of and R&D work on the eligible property must be performed in the US. Property manufactured in or sold to businesses located in Puerto Rico or other offshore tax havens would not be eligible.

Eligible property is all new property depreciable under MACRS that has a Recovery Period of seven years or less (i.e. Three-Year Property, Five-Year Property, and Seven-Year Property), all external computer software, all external computer software development costs, all external web site development costs and all manufacturing plant facility costs. This property must be sold to another US company or organization, with this property to be ultimately placed into service by businesses or by non-profit organizations in the US.

However, the amounts of these manufacturing tax credits actually earned by the above manufacturing sellers and buyers in a 2010 quarter cannot exceed a certain maximum dollar amount per new job added multiplied by the increase in US full-time jobs, exclusive of those jobs from business acquisitions, in the quarter the eligible property is sold or placed in service.

To create a strong incentive for businesses to retain these new jobs for a reasonably long period of time, the number of US full-time employees of this business earning the manufacturing tax credit must either remain the same, or keep rising, exclusive of those from business acquisitions, in each quarter of each year from when the manufacturing tax credit is earned until the end of 2015. If the number of full-time employees drops below the 2010 quarter-end in which the manufacturing tax credited was earned, then recapture of this manufacturing tax credit would result. If this drop in payroll count occurs in the first three years, a 100% recapture will result; if this payroll count drop occurs after the first three years but before 2016, a pro-rata time portion of this tax credit would be recaptured.

This maximum dollar amount per new job added (manufacturing/ jobs tax credit) in each 2010 quarter should be based on the following company size:

Average Annual Revenues

Less than $25 mil.....................$22,000
$25 mil to $50 mil...............$21,500
$50 mil to $75 mil...............$21,000
$75 mil to $100 mil.................$20,500
$100 mil to $250 mil...............$20,000
$250 mil to $500 mil...............$19,500
$500 mil to $1 bil....................$19,000
$1 bil to $5 bil..........................$18,500
More than $5 bil.......................$18,000

And because some companies are very labor intensive and not capital intensive, these labor intensive companies should be rewarded for adding new employees. Thus, the minimum manufacturing/ jobs tax credit is set at $5,000 times the number of net additions to US full-time jobs in the 2010 quarters.

I gave the smaller companies much higher manufacturing tax credit incentives than the larger companies. I dropped the percentage tax credit over time throughout 2010 to maximize earlier in the year hiring of new workers. I set the buyer manufacturing tax credit incentives at double the seller tax credit incentives. And then by making these manufacturing tax credits refundable, a company generating a loss in 2010 will still get a tax refund.

Thus, there will be super-charged incentives to both the manufacturing seller and to the purchasing buyer to close the deal, place the property in service, and to do all of this as quickly in 2010 as possible.

Perhaps a manufacturing tax credit percentage scheme something like the following might be one to juice up the economy and quickly add to US job hiring:

………………………………………...………...Manufacturing Tax Credit %
Average Annual Revenues…..............For Each Quarter of 2010
…………………………………………….........1Q……...2Q……...3Q……....4Q

Less than $25 mil…....Seller………...6.0%......5.5%.....5.0%......4.5%
$25 mil to $50 mil…...Seller………...5.5%......5.0%.....4.5%......4.0%
$50 mil to 75 mil...Seller..........5.0%.....4.5%......4.0%.....3.5%
$75 mil to $100 mil….Seller………...4.5%......4.0%.....3.5%......3.0%
$100 mil to $250 mil...Seller………..4.0%......3.5%.....3.0%.....2.5%
$250 mil to $500 mil...Seller………..3.5%......3.0%.....2.5%.....2.0%
$500 mil to $1 bil…….Seller………....3.0%......2.5%.....2.0%.....1.5%
$1 bil to $5 bil...........Seller..............2.5%......2.0%.....1.5%.....1.0%
More than $5 bil……...Seller………....2.0%......1.5%.....1.0%......0.5%

Less than $25 mil……Purchaser….12.0%.....11.0%...10.0%.....9.0%
$25 to $50 mil.....Purchaser..11.0%....10.0%....9.0%......8.0%
$50 mil to $75 mil….Purchaser...10.0%.....9.0%.....8.0%......7.0%
$75 mil to $100 mil..Purchaser.....9.0%......8.0%.....7.0%......6.0%
$100 mil to $250 mil..Purchaser…8.0%......7.0%.....6.0%......5.0%
$250 mil to $500 mil..Purchaser…7.0%......6.0%.....5.0%......4.0%
$500 mil to $1 bil…….Purchaser….6.0%......5.0%.....4.0%......3.0%
$1 bil to $5 bil...........Purchaser.....5.0%......4.0%.....3.0%......2.0%
More than $5 bil……….Purchaser…4.0%......3.0%.....2.0%.......1.0%

To illustrate, if a business with average annual consolidated worldwide revenues of $70 mil, generates sales of eligible property in the 1Q 2010 for a total of $2,000,000, its manufacturing tax credit, before minimum payroll count increase testing, is 5.0% X $2,000,000, or $100,000. If this business’s US full-time payroll count increased by five or more during the 1Q 2010 (i.e. $21,000 X 5 = $105,000), the entire $100,000 manufacturing tax credit would be earned. If instead, only two employees were added during the 1Q 2010, the earned manufacturing tax credit would be $42,000, or 2 X $21,000.

For another illustration, if a business with average annual sales of $45 mil, places in service in the 2Q 2010 eligible property with a total cost of $3,000,000, its manufacturing tax credit, before payroll count testing is 10.0% X $3,000,000, or $300,000. If this business’s US full-time payroll count increased by fourteen or more during the 2Q 2010 (i.e. $21,500 X 14 = $301,000), the entire $300,000 manufacturing tax credit would be earned. If instead, only ten employees were added during the 2Q 2010, the earned manufacturing tax credit would be $215,000, or 10 X $21,500.

A business can double dip and earn manufacturing tax credits on both the purchase side and on the sales side. This is another beauty of the Double-Barreled Manufacturing Tax Credit. And this same business can leverage its increase in payroll to also get accelerated tax deductions from Job Creation Proposal #1 on Bonus Tax Depreciation. Thus there’s a potential three-fer economic benefit to some businesses from the leveraging of the same new hires.

For the seller, the manufacturing tax credit ends up being effectively a very attractive gross margin enhancer.

To maximize the economic juice, I wouldn’t make this manufacturing tax credit taxable for federal income tax purposes to either the seller or to the buyer. On the other hand, states might elect to include both sides of the manufacturing tax credit in a business’s state taxable income, and thus this action would increase state tax coffers, which certainly are in dire need of an upward jolt.

In order to get the manufacturing tax credit, the manufacturer/seller doesn’t have to sell directly to the business putting the equipment or software in service. The manufacturer could also sell to a middle-man, such as a wholesaler, dealer or retailer. However, sales to consumers would not be eligible for the manufacturing tax credit. Sales to all non-profit organizations, including sales to federal, state and local governments, as well as sales to hospitals, schools and universities, would all be eligible. I think it would be very helpful to the overall US economy for these non-profit organizations to improve their productive asset infrastructures, and thus I think it would be wise to incentivize manufacturer/sellers to help these non-profit organizations best achieve this very desirable result.

In a similar vein, in order to get the manufacturing tax credit, the business purchaser doesn’t have to be buying directly from the manufacturer/seller. The business purchaser that places the equipment or software in service in his business, could be buying directly from a wholesaler or from a retailer like Costco, Sam’s, Best Buy, Home Depot, Lowe’s, or companies like automobile, truck or other dealers, and still be eligible for the manufacturing tax credit.

To maximize economic juice, I wouldn’t require the purchaser to reduce the tax basis of the equipment or software acquired for the amount of the manufacturing tax credit.

Both purchaser and seller will get a highly desirable increase in their reported GAAP earnings from manufacturing tax credits earned, which in the aggregate will be quite substantial.

With the deep recession of the past two years, many businesses have put off the direly-needed upgrade of their technology infrastructure, which would make them much more productive and much more competitive. This Double-Barreled Manufacturing Tax Credit initiative might have just enough additional oomph to trigger wholescale upgrades of technology all throughout US businesses. I can see Silicon Valley and the rest of US high tech licking their chops over something like this. And the Rust Belt and the rest of manufacturing would also benefit greatly from this. Its newly-hired, highly-charged-up, talented manufacturing work force could really drive up innovation all throughout US manufacturing.

On the downside, there will probably be a CBO-scored cost for this initiative. But given the moribund US economy, I think that this highly stimulative initiative is definitely worth its cost. I’d have the CBO score it. I think the CBO cost should be much less than $50 bil, but if the cost to the US government over the next ten years is north of $50 bil, it is easy to reduce this cost by either changing the Percentage scheme, or by fine tuning down a bit the average $20,000 maximum tax credit for one job created metric.

In an unusual twist, in paying for this, I would use mostly funding vehicles that also are effective stimulants to the near-term US economy, as I will explain in my future Job Creation Funding #s.

The reason the double barreled manufacturing tax credit works so much better than a pure jobs tax credit is that embedded in it, is also a jobs tax credit. And in addition, you are making the US economy much more productive with all of the new equipment and new computer software being utilized by all kinds of US businesses. And it’s much more exciting to businesses than the pure jobs tax credit.

When you combine this Daily Double of Job Creation Juice (Bonus Tax Depreciation and this Double-Barreled Manufacturing Tax Credits), you get a lot more aggregate bang for your buck than you would get if you just added up the economic juice and job creation impact of each one separately.

There should be a very nice near-term pickup in sorely-needed US hiring from both initiatives, which will be particularly powerful when these two are applied in unison.

Also, there should be a huge near-term pickup in US business development and purchases of highly innovative manufacturing equipment and also the development and installation of leading-edge high technology infrastructure in businesses all over the country. Thus, these initiatives will help the US achieve its goal of being an Economic Powerhouse on the world scene.

Some additional benefits of this Daily Double of Job Creation Juice are:

*****Benefits primarily Main Street rather than Wall Street

*****Adds nice numbers to the severely depleted US middle class

*****Increases significantly and quickly the number of US citizens receiving employer-based health care insurance

*****Lowers the cost to the US Government of the new health care legislation by causing many less to be uninsured

*****Improves substantially the severely distressed state government coffers by both dramatically increasing state taxable income of businesses, particularly assuming that states decide to disallow tax deductions for bonus tax depreciation, but include all manufacturing tax credits, in state taxable income of businesses, and also by the positive state individual income tax inflow from the many payroll additions

*****With the major technology and manufacturing equipment infrastructure upgrades, coupled with additions to their work forces, businesses should be better positioned to expand their export sales

There will be a lot of financing needed by businesses for these two Job Creation initiatives (the Double-Barreled Manufacturing Tax Credits and the Tax Bonus Depreciation Tied to Payroll Count Increases). On the positive side, both of these Job Creation initiatives will, in the aggregate, improve markedly the balance sheet, income statement and cash flow statement of most businesses taking advantage of these initiatives. Thus, with this improved financial strength, it should be a bit easier for most companies to obtain financing here. And then there’s always the SBA, Small Community Bank Incentives, TARP, maybe some US government loan guarantees, and perhaps even what I really would like to see....some financing provided by the establishment of a new US Federal Government Infrastructure Bank.

The total CBO score for these two initiatives (remember, the first one has ZERO cost) is miniscule as compared with the benefits received from the major juice that will be added to the US economy and the resultant quick and sustainable job creation.

Job Creation Proposal #1: Bonus Tax Depreciation Tied to Payroll Count Increases

The 50% bonus tax depreciation applied to both 2008 and 2009, but goes away, for the most part, in 2010. It’s pretty clear that this bonus tax depreciation hasn’t been a strong job creator in 2009, given the substantial rise in unemployment rates in 2009, while this 50% bonus tax depreciation has been in place. In fact, I think it backfires and tends to be one of the causes of higher unemployment since much of the capital spending here is to permit companies to be more productive, and thus this capital investment spurs them to reduce payroll.

I do think that this 50% bonus tax depreciation was a major player causing the very high 5.7% US GDP rise in the 4Q 2009. Keen CFOs were incentivized to make the capital expenditure purchase in the 4Q 2009 because the 50% bonus tax depreciation was going away, at least they thought. I find it interesting that pundits haven't picked up on this contributing cause of the unusual upward blip in the 4Q 2009 GDP. And then I think these same people who missed this, will also be unpleasantly surprised when the 1Q 2010 US GDP growth will be a bit lower, unless the US Senate and US House start doing their jobs and enact some meaningful job creation incentives, which start having an immediate impact in the 1Q 2010.

My recommendation here is to reinstate, on a more limited but also more targeted basis, an even more energized, sustainable job-creating bonus tax depreciation scheme for all 2010 purchases (yes, that’s by both large and small businesses) of new property depreciable under MACRS that has a Recovery Period of seven years or less (i.e. Three-Year Property, Five-Year Property, and Seven-Year Property), of any external computer software, of any external computer software development costs, or of any external web site development costs. When you check out the Tax Code, you'll see that.....wow, these three MACRS property categories are pretty all encompassing.

However, this bonus tax depreciation for 2010 would be earned only if the company also generates a minimum number of new US full-time jobs, exclusive of those from business acquisitions, in the 2010 quarter the eligible asset is placed in service.

And to create a strong incentive for businesses to retain these new hires for a reasonably long period of time, the number of US full-time employees of this business must either remain the same, or keep rising, exclusive of those from business acquisitions, in each quarter of each year from when earned in 2010 to the end of 2015. If prior to 2016, the number of employees drops below the 2010 quarter-end count in which the bonus tax depreciation deduction was earned, then the proportional amount of related bonus tax depreciation will be recaptured and the related subsequent tax depreciation would change back to its normal non-bonus tax depreciation pattern.

For maximum near-term job creation, here’s the way I would pattern out the bonus tax depreciation percentages in 2010, before testing for job creation:

Quarter Asset Placed in Service…..Bonus Tax Depreciation

………......1Q 2010……………………………….80%
………......2Q 2010……………………………….70%
………......3Q 2010……………………………….60%
………......4Q 2010……………………………….50%

Because I think we should really be pushing to build up our severely depressed manufacturing sector, I would also let new plant building facility costs incurred in 2010 be eligible for a bit tuned-down bonus tax depreciation. Under existing tax law, these costs are generally presently depreciated over more than ten years. I would compute the total first ten-year tax depreciation that applies presently, and accelerate that total tax depreciation over the first ten years as follows:

2010.....40%
2011.....20%
2012 through 2019 (8 years at 5% each year)


The result of the above accelerated tax depreciation over the first ten years would be no CBO-scored cost for the next ten years.

Further, for these plant facility additions, I would cut the number of years of tax depreciation after the first ten years in half, and thus the amount of the tax depreciation per year could be doubled, and also at no CBO-scored cost.

Next, we need to set a maximum bonus tax depreciation deduction earned in 2010 for each job created. I think that one job created in 2010 should generate perhaps a maximum bonus tax depreciation deduction of $300,000.

Let’s assume a company purchases and places in service eligible equipment in the first quarter 2010, and that the bonus tax depreciation, using the above 80% bonus tax depreciation amount, plus also the 2010 bonus tax depreciation on the plant facility cost, if any, is say a total of $1,000,000 for full year 2010, before testing for job creation.

If this company increased its number of US full-time jobs in the first quarter 2010 by four or more, this company would be entitled to the entire $1,000,000 of bonus tax depreciation deduction in 2010, due to these first quarter 2010 eligible purchases.

If instead, the company increased its number of US full-time employees in the first quarter 2010 by only two employees, this company would earn a lower $600,000 (i.e. 2 X $300,000) of bonus tax depreciation deduction in 2010, due to these first quarter 2010 eligible purchases.

If the company didn’t increase its number of US full-time employees in the first quarter of 2010 at all, it wouldn’t receive any bonus tax depreciation in 2010 for its first quarter 2010 eligible purchases.

The ten-year CBO scoring of this initiative should be a complete wash to the US government…i.e. ZERO effect on the Federal Budget Deficit. The total tax depreciation would remain the same over the entire ten-year period. It’s just that under this recommendation, more tax depreciation will be taken in 2010, and less taken in the later nine years.

And this Job Creation Proposal #1 initiative here, coupled with Job Creation Proposal #2 on Double Barreled Manufacturing Tax Credits, principally targeted at smaller businesses, would also go a long way toward helping the US achieve its goal of being an Economic Powerhouse on the world scene. I think that under these two initiatives, there will be a huge near-term pickup in US business development and purchases of highly innovative manufacturing equipment and also the development and installation of leading-edge high technology infrastructure in businesses all over the country.

Also, with this initiative, we get a three-fer….strong, near-term business incentives to both make productive capital investments and to hire, and at no CBO-scored, ten-year cost to the US government, to boot.