Whole-Scale US Infrastructure Investments Funded by Foreign Earnings Repatriation Tax

For the remainder of 2011 and all of 2012, all US Multinational Corps would be allowed to repatriate their foreign earnings up to a total maximum of $20 billion for each company.

This foreign earnings repatriation would have a somewhat discounted US federal income tax rate on it. The largest US Multinational Corps repatriating some of their foreign earnings would have a much lower discount from the 35% US federal Income tax rate than would the other US Multinational Corps. Or another way to fairly do it is to apply a progressive effective federal income tax rate on the amount of foreign earnings repatriated, such as the following:

…..15% on the first $1 bil of foreign earnings repatriated
…..17% on the next $2 bil of foreign earnings repatriated
…..19% on the next $3 bil of foreign earnings repatriated
…..21% on the next $4 bil of foreign earnings repatriated
…..23% on the next $5 bil of foreign earnings repatriated
…..25% on the next $5 bil of foreign earnings repatriated

The entire amount of the US federal income tax from these foreign earnings repatriated would be transferred to a US Infrastructure Bank. All of these funds would be used only for wisely, objectively, and quickly selected US Infrastructure Projects, initiated right away on a whole-scale basis…..roads, bridge fix ups, school fix ups, public college fix ups, airport fix ups, rail fix ups, sewer fix ups, shore fix ups, federal/state/local government building fix ups, etc.

Also, if it is fair and also can be wisely implemented, there should be subsequent user fees charged for some of these US infrastructure investments.

There would be no CBO scored cost to the US Government from this initiative. In fact, the subsequent user fees charged should result in a significantly positive CBO scoring to the US Government.

Explosive Incentives to Spur Principal Write-Downs of Underwater Home Mortgages

The US housing crash has been devastating. Frankly, I think the related government financial rescue plans for this extremely complex issue have not been very effective, and also very costly.

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.

My proposal here has the US Government granting substantial incentives to financial institutions, with the result being that the principal balances of many underwater home mortgages will be written down.

I would give financial institutions both of two very attractive tax incentives. They both deal with granting very attractive accelerated loan loss provision federal income tax deductions. And they both shouldn’t cost the US Government a dime. The second tax incentive actually should result in substantially positive CBO scoring to the US Government over the next 10 years.

When you think about it, there are all kinds of wise tax incentives that the country uses to stimulate the US economy....100% tax expensing of equipment, bonus tax depreciation, accelerated tax depreciation (both method and life), R&D tax credits, just to name four. Incentivizing write downs of underwater home mortgages by providing Accelerated Bonus Loan Loss Provision tax deductions is consistent with this, and frankly, given the horrible housing crisis, much more of a job creator than the first three.

Under US generally accepted accounting principles, financial institutions must properly reflect in their audited financial statements, the economic amount of the Loan Losses on their home mortgage loans that they hold.

With all of the underwater first and second home mortgages that exist, the amounts of these Loan Losses is clearly gargantuan.

The problem is that even though they have booked these economic Loan Losses, these financial institutions have refused, for the most part, to write down the principal balance of these underwater mortgages.

In my first proposal here, to highly incentivize these financial institutions to write down underwater home mortgages, for the remainder of 2011, and all of 2012, financial institutions would be allowed a substantial Accelerated Bonus Loan Loss Provision federal income tax deduction for some multiple of the amount of principal underwater mortgages they write down, not to exceed the write down to below the value of the home.

The amount of this Accelerated Bonus Loan Loss Provision is clearly open to debate. I just think the focus must be on solving the horrible housing crisis as quickly as possible, which is weighing so very heavily on consumer spending, on consumer confidence, and even more importantly, on both unemployment and underemployment.

Thus, I would consider allowing smaller financial institutions a Triple Accelerated Bonus Loan Loss Provision federal income tax deduction, and larger financial institutions a Double Accelerated Bonus Loan Loss Provision federal income tax deduction for all underwater mortgage write downs in the remainder of 2011.

For write downs in 2012, I would consider allowing smaller financial institutions a Double Accelerated Bonus Loan Loss Provision federal income tax deduction, and larger financial institutions a Single Accelerated Bonus Loan Loss Provision federal income tax deduction.

And for any smaller financial institution in a federal income tax loss situation, I would make the tax benefit of these Accelerated Bonus Loan Loss Provision federal income tax deductions refundable on the front end.

Under my proposal, because of the magnitude of these front-end tax deductions, there are clear economic incentives here for financial institutions to write down underwater mortgages. So, given how huge these tax deductions would be, wouldn’t this just put a severe strain on the US Debt?

Well, I have a fair way to do it at no CBO scored cost to the US Government over the next 10 years.

For 2011 write downs of underwater mortgages, my proposal would also require this Accelerated Bonus Loan Loss Provision federal tax deduction to turn around and increase taxable income by 25% of the amount of the Accelerated Bonus Loan Loss Provision tax deduction to the financial institution in each of the years 7 through 10.

For 2012 write downs of underwater mortgages, my proposal would also require this Accelerated Bonus Loan Loss Provision federal tax deduction to turn around and increase taxable income by 25% of the amount of the Accelerated Bonus Loan Loss Provision tax deduction to the financial institution in each of the years 6 through 9.

Let me illustrate.

Say, a home is now worth $200,000. And there is a first mortgage at Financial Institution (FI) #1 of $240,000, and a second mortgage at Financial Institution (FI) #2 at $30,000. Assume that FI #1 is a small financial institution and FI #2 is a large financial institution.

In 2011, assume FI #2 elects to write off the entire principal balance of $30,000, and FI #1 elects to write down $40,000 of the mortgage.

In 2011, FI #2 would get a Double Accelerated Bonus Loan Loss Provision federal income tax deduction of 2 X $30,000, or $60,000. In each of years 2017, 2018, 2019, and 2020, FI #2 would increase its federal taxable income by 25% X $60,000, or by $15,000 per year.

Also, in 2011, FI #1 would get a Triple Accelerated Bonus Loan Loss Provision federal income tax deduction of 3 X $40,000, or $120,000. In each of years 2017, 2018, 2019, and 2020, FI #1 would increase its federal taxable income by 25% X $120,000, or by $30,000 per year.

I don't personally have an underwater home mortgage, but from a fairness standpoint, if the country can bail out big financial institutions, which played a major role in causing this horrible housing crisis, then I think it is only fair for the country to also provide wise, cost-effective tax incentives that can help at least some of these many unfortunate home owners, suffering desperately with underwater mortgages.

My second tax incentive is a bit more complicated.

The first part and bulk of this second 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 underwater home mortgages and also ones only slightly above water, which are less than 10% above water.

Toward the end of this post, I also have a proposal for the many underwater home mortgages in which there are second mortgages.

This proposal would apply to the remainder of 2011 and all of 2012, and relates to any financial institution that sells to the US Federal Government the entire portion of any mortgage loan that exceeds 90% of the FMV of the related home.

The selling price would be at the Fair Market Value of the principal balance transferred, and thus should approximate the excess of the mortgage loan principal balance transferred over the Cumulative Loan Loss Provision (or Expense) that the financial institution has already reflected related to this mortgage in its income statements through the most recent audited financial statements (Dec 31, 2010, 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 November 1, 2011, 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 6% 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 a related $90,000 in its Allowance for Loan Loss on its audited balance sheet at Dec 31, 2010.

The maximum amount of the principal loan balance transferred, or sold, under this proposal is $120,000 (i.e. $300,000 minus 90% X $200,000). The selling price would be approximately $30,000 (i.e. this $120,000 minus the $90,000 Loan Loss Provision).

Wells Fargo should have no significant 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 6% 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.

The US Federal Government acquired this mortgage loan and 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 Federal Government 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 6% = $900, or $75 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 6% = $1,260, or $105 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% of the interest rate paid to Wells Fargo on the first mortgage, or 90% X 6% = 5.4%. The $30,000 is payable monthly with 5.4% interest compounded monthly as an annuity over 84 months (or 7 years), with the resultant monthly mortgage payment of roughly $438.

If all of these payments are made, the US Federal Government would net a positive cash flow over the next ten years of $8,952, 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 $8,952 related to this loan over the next ten years. Thus, the total interest income of $8,952 represents a cumulative 30% 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.

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 Federal Government 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.

And with its second mortgage, the Federal Government 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. And then this cushion will also grow for any subsequent home price appreciation over the ten-year period.

Wells Fargo gets no significant 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.

Now let me address the highly-charged tax incentive to get the financial institution to sale portions of these underwater home mortgages to the US Government. It would work similarly to how my first proposal works.

In this second proposal here, to highly incentivize these financial institutions to sell portions of these underwater home mortgages to the US Government, for the remainder of 2011, and all of 2012, financial institutions would be allowed a substantial Accelerated Bonus Loan Loss Provision federal income tax deduction for some multiple of the Loan Loss Provision on their books related to the portion of the underwater home mortgages they sold to the US Government.

Thus, I would consider allowing smaller financial institutions a Triple Accelerated Bonus Loan Loss Provision federal income tax deduction, and larger financial institutions a Double Accelerated Bonus Loan Loss Provision federal income tax deduction for the Loan Loss Provision recorded on their books for the portions of all underwater mortgages they sell to the US Government in the remainder of 2011.

For similar items in 2012, I would consider allowing smaller financial institutions a Double Accelerated Bonus Loan Loss Provision federal income tax deduction, and larger financial institutions a Single Accelerated Bonus Loan Loss Provision federal income tax deduction.

And for any smaller financial institution in a federal income tax loss situation, I would make the tax benefit of these Accelerated Bonus Loan Loss Provision federal income tax deductions refundable.

Under my proposal, because of the magnitude of these front-end tax deductions, there are clear economic incentives here for financial institutions to sell portions of their underwater home mortgages to the US Government. So, given how huge these tax deductions would be, wouldn’t this just put a severe strain on the US Debt?

Well, I have a fair way to do it at no CBO scored cost to the US Government over the next 10 years.

For 2011 sales of portions of underwater home mortgages, my proposal would also require this Accelerated Bonus Loan Loss Provision federal tax deduction to turn around and increase taxable income by 25% of the amount of the Accelerated Bonus Loan Loss Provision tax deduction to the financial institution in each of the years 7 through 10.

For 2012 sales of portions of underwater home mortgages, my proposal would also require this Accelerated Bonus Loan Loss Provision federal tax deduction to turn around and increase taxable income by 25% of the amount of the Accelerated Bonus Loan Loss Provision tax deduction to the financial institution in each of the years 6 through 9.

And the real beauty of this second proposal is that you not only get 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, my proposal also addresses 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 Federal Government for the Fair Market Value, which should be approximately the excess of the loan principal balance over the loan loss provision already recorded. The US Federal Government 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 give them the same Accelerated Loan Loss Provision federal income tax deductions explained earlier for the financial institution holding the first mortgage, and selling a portion of the underwater home mortgage to the US Government.

And then these Accelerated Loan Loss Provision federal income tax deductions would turn around just like I explained earlier for the financial institution holding the first mortgage, and selling a portion of the underwater home mortgage to the US Government.

I fortunately don’t have an underwater mortgage, but I think if the US Government can bail out AIG, Fannie Mae, Freddie Mac, and many other mainly financial companies, surely the US Government can also help out its many US citizens with underwater home 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.

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.

Homeowners with Underwater Home Mortgages 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 US job creation.

Explosive Incentives for Whole-Scale Green Building Retrofit Investments

It is very difficult to argue against wise US government policies, which encourage Energy Efficiency Investments to existing Buildings of all kinds….personal home residences; private commercial buildings; US, State and Local Government buildings; and Non-Profit Organization buildings.

Not only do you create a lot of US jobs by this wise initiative, but you help the US make significant strides in achieving its critical long-term goal to be energy independent, and you also save substantial amounts of future annual energy costs of these individuals and organizations.

Here are my proposals to really fire up these Green Building Retrofit Investments, and to do so without costing the US Government a dime.

Explosive Tax Incentives for Green Building Retrofit Investments on Personal Home Residences

For all home residence green building retrofit investments, as defined by the US Dept of Energy, made by individuals in the remainder of 2011, an additional upfront bonus energy tax credit of 30% of the cost of these green investments would apply, and for similar green investments made in 2012, the additional bonus energy tax credit would be 20%.

All of these individuals will also receive for many years the continuing lower energy costs resulting from making these wise green investments on their homes.

My recommendation to pay for the US Government energy tax credits granted to these individuals making these job-creating green investments on their homes is by having these individuals refunding to the US Government over each of the next 9 years, as energy cost saving rebates, the total upfront US government energy tax credit divided by 9. The overwhelming majority of this can be done by including it as an additional tax owed in future year federal individual income tax returns.

Explosive Tax Incentives for Commercial Green Building Retrofit Investments

For all commercial building green retrofit investments, as defined by the US Dept of Energy, made by businesses in the remainder of 2011, an upfront energy tax credit of 15% of the cost of these green investments would apply, and for similar green investments made in 2012, the energy tax credit would be 10%.

There would be no CBO scored cost to the US Government for large multinational corps making these green retrofit investments here, because I would require them to pay for it with a like amount of foreign earnings dividend repatriation tax, computed perhaps at a somewhat discounted federal income tax rate.

As one option to pay for these green building retrofit investments by other than large multinational corps, I would consider letting the US Infrastructure Bank supply the financing, at a somewhat favorable interest rate. The total interest received by the US Infrastructure Bank should far exceed the total bad debts here. And this excess cash inflow by the US Infrastructure Bank should be able to easily exceed the US Government Energy Tax Credit outflow.

As a second option to pay for the energy tax credit from these job creating green investments by these businesses other than large multinational corps, I would consider doubling this energy tax credit to 30% for 2011, and to 20% for 2012, and requiring these businesses to refund to the US Government over each of the next 9 years, as energy cost saving rebates, the total upfront Energy Tax Credit divided by 9.

I would make this Energy Tax Credit refundable on the front end.

In addition, I would give highly-charged accelerated tax depreciation for all Commercial Building Green Retrofit Investments, and to wisely do so without a CBO scored cost over the next 10 years.

Presently, real property tax deprecation is spread over many years, much longer than the ten-year CBO scoring period.

My proposal here is to allow businesses of all sizes that make commercial building green retrofit improvements in the remainder of 2011, or in all of 2012, to get first-year tax expensing of the entire first 9 years of tax depreciation allowed presently under the tax rules.

Then, the tax basis of the investment made gets reduced for the first-year tax depreciation taken. Thus, they wouldn't be allowed any tax depreciation deductions on this building improvement in the following 8 years.

And then, all tax depreciation taken after the first 9 years under present tax law, would be dramatically accelerated in some fashion, such as by cutting the remaining tax life in half, and thus doubling the annual tax depreciation starting in Year 10.

This highly incentivized scheme doesn’t change total real property tax depreciation, it just accelerates it dramatically from Years 2 through 9 to Year 1. And it also accelerates it starting in Year 10. Because you are just moving total tax depreciation around among years, there shouldn’t be any long-term CBO scoring cost to the US government for this initiative.

And then to really help small and medium-sized businesses, as well as larger business in a federal income tax loss situation, particularly those in the Rust Belt, I would also let them choose a first-year tax equivalent refundable 35% investment tax credit, in lieu of the first-year real property tax depreciation resulting from this initiative. And if a company chooses this 35% investment tax credit option, it would not be allowed any tax depreciation deduction in the first 9 years, and after reducing the tax basis of the real property, it would start tax depreciation in the 10th Year, on a very accelerated basis.

In addition, these Commercial Building Green Retrofit Investments would be among those allowed as eligible property additions in my Explosive Jobs & Investment Tax Credit (EJ&ITC) combination proposal I previously offered in a recent earlier post.

US Government Green Building Retrofit Investments

A fair CBO scoring for US Government Green Building Retrofit Investments should be substantially positive.

The CBO has to score the US Government Green Building Retrofit Investments as cash outflows.

And logically, the CBO also has to score the subsequent years annual energy cost savings as cash inflows.

When I sketch out the rough math here, I get the subsequent years annual energy cost savings substantially trumping the initial cash outflows.

Thus what I would also do is to use the positive CBO scoring here to fund other wise US Government Infrastructure Investments, like roads, bridges, airports, and the like.

State and Local Governments, Schools, Colleges, Non-Profit Hospitals and Other Non-Profit Organizations Green Building Retrofit Investments

These organizations don’t pay federal income tax, for the most part. Thus, an energy tax credit incentive wouldn’t apply, and neither would an accelerated tax depreciation incentive, and also neither would my earlier proposal for an Explosive Jobs & Investment Tax Credit apply.

Thus, instead of an energy tax credit, I propose that the US Government grant substantial upfront subsidies to these organizations, which make building green retrofit investments, as defined by the US Dept of Energy. These subsidies should be substantial to encourage widespread building energy efficient investments, with the resultant job creation, along with the resultant significant strides in reaching the critical US goal of energy independence.

Thus, I propose that all of these organizations other than Non-Profit Hospitals get an upfront US government subsidy for 35% of the cost of these Green Building Retrofit Investments made in the remainder of 2011; and for similar green investments made in 2012, this US government subsidy would be 25% of the cost of these green investments made by these organizations.

In all fairness, Non-Profit Hospitals will be ponying in a substantial amount of money to reduce the US Debt level in the present Debt Ceiling negotiations in the US Congress. Thus, I think it would be wise to at least somewhat offset this substantial funding by the US Government giving Non-Profit Hospitals making Building Green Retrofit Investments highly-charged subsidies.

Thus, I propose that all Non-Profit Hospitals get an upfront US government subsidy for 45% of the cost of the Green Building Retrofit Investments they make in the rest of 2011, and for similar green investments made in 2012, this US government subsidy would be 35% of the cost of these green investments made by these hospital organizations.

All of these organizations will also receive for many years the continuing lower energy costs resulting from making these green investments.

My recommendation to pay for the US Government subsidies to all of these organizations making these job-creating green investments is by having these organizations refunding to the US Government over each of the next 9 years as energy cost saving rebates the total upfront US government subsidy divided by 9.

Explosive Jobs and Investment Tax Credit Combination

To immediately jump start the desperately needed US private sector job creation, I think there must be bold legislation that increases US business demand sufficiently for businesses to quickly create jobs. Also, there also must be certainty that this increased US business demand clearly and directly results in substantial private sector job creation. Further, this should be done optimally, so that it is paid for, as determined by very prudent CBO front-end scoring.

The best way to increase US business demand is to simply give US business customers lucrative investment tax incentives that directly do just this. Thus, the old investment tax credit is clearly the optimal way to create US business demand, when things are so bad on the job front.

The widespread Republican proposal of just reducing the top income tax rate on the “job creators”, both wealthy individuals and corporations, and expecting that to indirectly “trickle down”, is flat out crazy reasoning.

But I also think the widespread Democratic proposal to just continue to spend money on programs that are needed in the expectation that it will “trick up” and create jobs, is equally crazy reasoning.

Instead, I think the US Government should be designing wise tax incentives for US businesses to execute that clearly and directly create US jobs in the private sector.

Thus my proposal here is a highly-charged-to-the-maximum, truly Explosive Jobs Tax Credit and Investment Tax Credit combination (EJ&ITC), with the goal to both create good jobs and, at the same time, to enhance business innovative productivity.

Under my proposal, I would set the Jobs Tax Credit earned by a business for each net new full-time job added to be within a range.

The low of this Jobs Tax Credit range would be $10,000 for each net new job added by businesses of all sizes.

The preliminary high of this Jobs Tax Credit range would vary depending on business size. I would clearly offer a higher Jobs Tax Credit for smaller businesses than for larger businesses.

I think a preliminary high of this Jobs Tax Credit range for each net new job added might be:

…..Smallest Businesses…..$30,000
…..Smaller Businesses…...$27,500
…..Midsized Businesses….$25,000
…..Larger Businesses…….$22,500
…..Largest Businesses……$20,000

The Feds can decide the cutoffs for the businesses to be included in the above Five Tiers of business sizes.

The purpose for having this $10,000 Jobs Tax Credit per job minimum is to reward all companies taking the opportunity to enhance their productivity by hiring and training new highly-motivated employees, and to do so without adding much in the way of capital expenditures.

Now let me focus on the much more complicated maximum Jobs Tax Credit per job added.

First, the higher the new people added are paid, the higher the Jobs Tax Credit per employee added will be.

To encourage higher pay for the new hires, and also to discourage lower pay for new hires, I think this tax credit per job added cannot exceed a certain percentage X the actual average annual base pay for new hires for the company earning this tax credit in the current period.

And I would vary this percentage based on the size of the business, something like this:

…..Smallest Businesses…..60%
…..Smaller Businesses…...55%
…..Midsized Businesses….50%
…..Larger Businesses…….45%
…..Largest Businesses……40%

What this means is that for a Midsized Business, if the average annual base pay for new people hired this period is $55,000, then the ceiling for the Jobs Tax Credit remains at $25,000, since 50% X $55,000, or $27,500, is higher than the $25,000.

On the other hand, let’s say a Midsized Business is hiring new employees on the cheap, with the average base pay of new hires being only $30,000 per year. In this case, the ceiling for the Jobs Tax Credit gets reduced from $25,000 per net new job added down to $15,000, or $30,000 X 50%.

So we now have the maximum and minimum range of Jobs Tax Credit per net new job set.

So let me address the more complicated capital expenditure element, which turns this Jobs Tax Credit into an “Explosive Jobs and Investment Tax Credit” (EJ&ITC) Combination.

I think this EJ&ITC should be healthy enough to accomplish the US business demand goal, and also to accomplish it as quickly as possible.

Thus, I would set the credit at 15% of new US eligible property purchased from now until the end of 2011, and then reduce it down some to 10% for all of calendar 2012 eligible property purchases.

For maximum effect, this EJ&ITC should apply to all (yes, that’s by both large and small businesses) new property placed in service in the US that is depreciable under MACRS, and that has a Recovery Period of seven years or less (i.e. all Three-Year Property, Five-Year Property, and Seven-Year Property). When you check out the Tax Code, you'll see that.....wow, these three MACRS property categories are pretty all encompassing.

In addition, all new building costs and building remodeling costs should be eligible.

Also, to spice up the business innovation aspect of this proposal, any external computer software costs, any external computer software development costs, and any external web site development costs, should also all be eligible.

To further spice up US business innovation and US business competitive advantage, I think any US Research & Development Expenditures above the previous year comparable period amounts should also be eligible.

By combining together a Jobs Tax Credit and an Investment Tax Credit, this proposal substantially increases demand for US manufacturing and other businesses by providing very healthy tax incentives to US business customers to purchase innovative equipment and other property, along with providing an intertwined tax incentive for this business customer to also hire new employees.

And the merger of this property acquired with the key new employee element puts the company in a much better position to enhance its overall productivity, and to have its products and services better compete globally in the world economy.

Although this proposal focuses principally on enhancing the US manufacturing sector, all US businesses can benefit from the EJ&ITC, and thus can also benefit from it by having their productivity enhanced.

And in a twist that will make this proposal particularly explosive, the tax credit isn’t just on purchases of this property, but also on sales of this same property. Thus both sides of the transaction are highly charged to close the deal, and make the sale and purchase occur, and to do so expeditiously.

I would set the tax credit for the sale at precisely half of the tax credit on the purchase. Thus, I would set the credit at 7.5% of new US eligible property sold from now until the end of 2011, and then reduce it down some to 5% for all of calendar 2012 eligible property sales.

Let me illustrate the computation of the EJ&ITC for a Midsized Business.

Let’s assume that a Midsized Business places in service, from now until the end of 2011, total eligible property of $4 mil. The tentative tax credit on the purchase side for 2011, before testing for payroll count increases, is 15% X $4 mil, or $0.60 mil.

And let’s also assume that this same Midsized Business makes sales of total eligible property, from now until the end of 2011, of $6 mil. The tentative tax credit on the sales side for 2011, before testing for payroll count increases, is 7.5% X $6 mil, or $0.45 mil.

Thus this Midsized Business gets a tentative total tax credit for the total of the above two numbers, or $1.05 mil.

Now, going back to my earlier discussion on the Jobs Tax Credit range for each net new job added, let’s assume that there is an increase in US full-time jobs for this company for the remainder of 2011 of 50, and that the average annual base pay of all new hires for this company for the remainder of 2011 is $55,000.

For this Midsized Business, the maximum Jobs Tax Credit per new job added would be the $25,000 tentative ceiling, since this $25,000 is lower than $27,500 (50% X $55,000). And the total maximum Jobs Tax Credit for 2011 would be $1.25 mil, or $25,000 X 50 employees added.

The minimum Jobs Tax Credit per new job is $10,000. And the total minimum Jobs Tax Credit for 2011 would be $0.5 mil, or $10,000 X 50 employees added.

Since the tentative Tax Credit based on capital expenditures purchased and sold for the rest of 2011 is $1.05 mil, and it is also within the above $0.5 mil and $1.25 mil Jobs Tax Credit range, the final EJ&ITC earned by this Midsized Business for 2011 is $1.05 mil.

If instead, the total tentative total tax credit based on property both purchased and sold was $1.50 mil, the final EJ&ITC earned would be the top of the Job Tax Credit range, or $1.25 mil.

And if the total tentative total tax credit based on property both purchased and sold was only $0.25 mil, the final EJ&ITC earned would be the bottom of the Job Tax Credit range, or $0.50 mil.

The jobs added in 2011 would be simply the difference between the number of full-time employees when you start the tax incentive and the number of full-time employees at the end of the year, exclusive of those added from acquisitions.

The jobs added in 2012 would be simply the difference between the number of full-time employees from the beginning of the year and the end of the year, exclusive of those added from acquisitions.

This Tax Credit earned should be computed on a total US company operations basis. Thus, separate US companies controlled by the same US company should be combined.

To be eligible property purchased, it could be bought from any business, including from all retailers and wholesalers.

To be eligible property sold, it could not only be sold to any business, but also sold to any non-profit organization, such as a hospital.

For maximum effect, I would make this Tax Credit immediately refundable. Also, I wouldn’t reduce the tax basis of the property for the Tax Credit earned.

To make these jobs created remain for a reasonably long period of time, I would also include a tax recapture of this EJ&ITC if the increase in full-time jobs of this business doesn’t last for say four years. And I would have a 100% tax recapture for reductions in full-time payroll counts in the first two years, and a proportional time, pro-rata tax recapture for reductions in full-time payroll counts in years three and four. There would be no tax recaptured after four years.

It should be fairly simple to implement this tax credit program quickly. Its simplicity is enhanced by the ease in applying the payroll count requirements. Say it kicks in starting September 1, 2011. All you have to do is to count a company's overall combined US full-time payroll on that date and compare it with a similar count on Dec 31, 2011. The employee count change here is the relevant one used to compute the combined company tax credit earned for 2011.

And the same overall employee count change approach would be used to compute the combined company tax credit earned in 2012.

And for subsequent tax credit recapture computations, a company follows a similar overall combined company payroll count process. And if you thought it necessary to put in better controls, these counts could be made quarterly, or even monthly.

What makes this EJ&ITC particularly stimulating to US businesses is that the business adding employees will get not just an economic benefit, but also a highly desirable GAAP earnings increase, for this tax credit. And logically, this GAAP earnings increase will occur over each of the next 5 years, due to wise tax recapture provisions contained in the proposal. It effectively operates as a very desirable long-term effective income tax rate reduction for businesses.

Presently, there is also 100% first-year tax expensing for equipment purchases in the rest of 2011 and 50% first-year bonus tax depreciation for equipment purchases in all of 2012. I would keep these two provisions, but tweak them to make them much more effective job creators.

My proposal here is to allow the above faster tax depreciation only if there are also a sufficient number of net new jobs added in the period the equipment is placed in service. The Feds can decide the proper amount of accelerated tax depreciation to be permitted per net new job added.

Also, I would give all businesses a choice. They could either take the 100% first-year tax expensing in 2011 and the 50% bonus tax depreciation in 2012, or they could choose an upfront tax equivalent refundable tax credit, with the tax basis of the property purchased, for future tax depreciation purposes, dropping by the fair pretax amount.

When you combine this highly stimulative EJ&ITC with this 100% first-year tax expensing for the rest of 2011 and 50% bonus tax depreciation for 2012, particularly with the upfront tax credit equivalent option, you get an off-the-charts US economic surge, which is desperately needed.

So it sounds like a great program. It clearly will create a lot of jobs. But how do we pay for it?

Well, I think that under any reasonable fair CBO score, it more than pays for itself. How could that possibly be?

Well, for the handful of very large global US companies with Total Unremitted Foreign Earnings of $10 bil or more, I would let them earn the above computed EJITC only if it is also 100% paid for by a like amount of additional US federal income tax triggered by their foreign earnings repatriated to the US in the same period. I would consider granting these large global US companies an incentivized dividend received deduction of perhaps 20% to 30% on these foreign earnings repatriated used only to 100% fund their EJ&ITC.

For the many other smaller global US companies, I would give them a choice….they could either earn the EJ&ITC like pure domestic companies do, or they could instead elect to have it to be 100% paid for by a like amount of additional US federal income tax triggered by their foreign earnings repatriated to the US in the same period. I would consider granting these smaller global US companies a bit higher incentivized dividend received deduction of perhaps 40% or 50% on their foreign earnings repatriated used only to 100% fund their EJ&ITC.

In a fair CBO scoring, the above proposal should more than fund itself whenever it is enacted in a horrible job environment like the present one, where there is so very little private sector job increases, and where there are also expected to be so few private sector job increases over the next couple of years.

Under this EJ&ITC proposal, the bulk of the upfront tax credits granted by the US government will directly trigger substantial future incremental payroll tax receipts (both individual and company matched…15.3% of the higher gross payroll in total) and also substantial future incremental individual income tax receipts (probably average about 10% to 15% of the higher gross payroll) from the resultant payroll count increases.

The salient point here is that a company can't earn the tax credit unless it also increases its US full-time payroll count. Thus if the CBO counts the tax credit as a tax outflow, which it should, it also must count as a future cash inflow the higher incremental US federal government tax receipts that directly result from, and are inextricably linked to, the tax credit.

Because of the present very dismal private sector US job situation, there will be millions of new hires who previously wouldn’t be paying, or expected to be paying in the next couple of years, these federal taxes who now will be paying them due to this EJ&ITC proposal.

Thus, the CBO, in scoring this proposal, has to estimate the future amounts of these additional US federal tax receipts triggered by this proposal. Further, the CBO, in scoring this proposal, has to estimate the future amounts of US federal tax receipts due to the tax recapture aspect of this proposal.

Granted there will be some companies that will earn the tax credits even though they would have increased their number of full-time employees even without this proposal. However, there won’t be many of these, given the horrible private sector US job situation.

Further, under this proposal, all of the tax credits earned by the very large global US companies must be 100% funded by their additional US federal income tax related to their foreign earnings repatriated.

Also, under this proposal, the many smaller global US companies can elect to have some or all of their manufacturing tax credits 100% funded with the tax from their foreign earnings repatriated.

Thus, for all global companies funding their tax credits with the tax from their foreign earnings repatriated, there is no front end cost here to the US government at all.

And there is substantially positive CBO scoring here from the future incremental US federal government payroll tax receipts and US federal government income tax receipts, both caused by the US payroll count increases of these global US companies, triggered under this proposal.

In addition, there will be positive CBO scoring for the movement of the uninsured to insured status, since they will be added to full-time job status, many of them with a company-sponsored health care plan, due to this proposal. This positive scoring comes from the resultant reduction of the total US health care costs payable by the US Government, included in the Affordable Health Care legislation.

Also, there will be positive CBO scoring from the reduction in Unemployment Benefit payments made by the US Government, due to the reduction in the number of unemployed citizens, caused by this proposal.

Further, US States will significantly improve their financial coffers from this proposal.

First, they will be receiving additional corporate income taxes from the higher dividend income of the global US companies repatriating their earnings.

Second, they will be receiving higher individual income taxes from the new hires.

Third, they could elect to include this EJ&ITC as additional corporate taxable income, which triggers additional corporate income tax receipts.

And fourth, their Medicaid costs will drop due to the movement of the uninsured to insured status, resulting from their new full-time employee status.

When I rough out the numbers, given the horrible jobless recovery we now face, and which we will continue to face for at least the next couple of years, I get substantially positive CBO scoring from this proposal.

Thus, I would use some of this excess funding to also make a heavy dose of very wisely selected mix of infrastructure investments…..roads, bridges, schools, colleges, non-profit hospitals, governmental buildings, rails, sewers, airports, etc.

Big US Defense Contractor Corps 2Q 2011 Earnings Growth Re-Accelerating

I found 14 Big US Defense Contractor Corps with Pretax Earnings above $100 mil each in either the 2Q 2011 or in the 2Q 2010. Not all of the sales of these 14 Big US Defense Contractors are made to the US Government, but a substantial portion of them are.

These 14 Big US Defense Contractors registered a Total Pretax Earnings increase of 16% in annual 2010. Then in the 1Q 2011, this earnings growth decelerated nicely to 5%.

So what happened in the most recent 2Q 2011? Well, this earnings growth re-accelerated, precisely matching the 16% growth in annual 2010.

Below here are these 2Q 2011 Pretax Earnings (PTI), along with a comparison with the prior year’s quarter amounts.

...........................................................................Increase
................................................PTI........PTI.......(Decrease)
.................................................2Q.........2Q..................
...............................................2011......2010....Amount....%
.................................................(millions of dollars)

United Technologies......CT.....2,079.....1,733.......346....20%
Boeing...........................NY.....1,425.....1,210........215....18%
Honeywell.....................NJ.....1,100.......767........333....43%
General Dynamics..........VA.......959.......945..........14.......1%
Lockheed Martin............MD.......909....1,010.......(101)..-10%
Northrop Grumman........CA.......788......675.........113....17%
Raytheon........................MA......641.......310.........331...107%
Precision Castparts.........OR.......419.......349..........70....20%
L-3 Communications......NY.......353.......365.........(12)....-3%
Goodrich........................NC.......265.......238..........27....11%
ITT.................................NY.......248......305.........(57)..-19%
Rockwell Collins..............IA.......227......204..........23....11%
Textron...........................RI.......135........99..........36....36%
Alliant Techsystems........MN.....104.......115.........(11)..-10%

Total all 14..............................9,652...8,325.....1,327....16%

I think it would be helpful to track the history of the Core Pretax Income of these 14 Big US Defense Contractor Corps.

In the first full year of the Bush/Cheney Presidency, in 2001, the Total Core Pretax Income of these 14 Big US Defense Contractor Corps was $10.8 bil.

By the end of the first term of the Bush/Cheney Presidency in 2004, this Total Core Pretax Income of these 14 Big US Defense Contractor Corps had increased dramatically to $16.0 bil, or up by a massive 47% in only 3 years.

This incredible profligate US Defense spending spree continued in the second term on the Bush/Cheney Presidency, with the Total Core Pretax Income of these 14 Big US Defense Contractor Corps growing monstrously to $35.8 bil in 2008, or by an incredible 124% in only 4 years.

Thus, when you focus on the last 7 years of the Bush/Cheney Presidency, the Total Core Pretax Income of these 14 Big US Defense Contractors grew from $10.8 bil in 2001 to $35.8 bil in 2008, or up an off-the-charts 230% in that 7 year period.

And we wonder how the US Deficit is so high now?

Clearly, there are wise steps we can take to reduce US Defense Contractor spending.

There is no way these 14 Big US Defense Contractors should be making the level of profits they are making, especially when the US Deficit is so huge.

I think one initiative that could help here is to substantially kill the Cost Plus Contracts the US Government enters into with Big US Defense Contractor Corps. It is just not right for these companies to be making such windfall profits, and particularly to do it when they don't have downside risk, since their losses are substantially protected by Cost Plus Government Contracts.

So how have these 14 Big US Defense Contractor Corps done since the Obama/Biden have taken over the reins?

Well, the Total Pretax Income of these 14 Big US Defense Contractor Corps has declined from $35.8 bil in 2008 to $32.9 bil in 2010, or down by 8%.

Much more needs to be done, but at least the Obama/Biden Administration has turned back somewhat the skyrocketing profits of the previous 7 years of these Big US Defense Contractor Corps.

Big Health Care Corps 2Q 2011 Earnings Growth Decelerate a Bit

I found 57 Big Health Care Corps with Pretax Earnings above $100 mil each in either the 2Q 2011 or in the 2Q 2010.

These 57 Big Health Care Corps registered a Total Pretax Earnings increase of 5% in the 2Q 2011, decelerating a bit from the 11% earnings growth in the 1Q 2011. Some of this earnings growth decrease is due to higher restructuring costs, which are so prevalent in the Health Care industry. And these higher restructuring costs have added significantly to US unemployment, and also have resulted in the loss of many higher-paying US jobs.

Below here are these 2Q 2011 Pretax Earnings (PTI), along with a comparison with the prior year’s quarter amounts.

...........................................................................Increase
................................................PTI........PTI.......(Decrease)
.................................................2Q.........2Q..................
...............................................2011......2010....Amount....%
.................................................(millions of dollars)

JNJ(1)...........................NJ......4,413.....4,377........36.......1%
Pfizer(2)........................NY.....4,014.....4,021........(7)......0%
UnitedHealth Group......MN.....1,980.....1,782.......198.....11%
Abbott Labs(3)...............IL.....1,973.....1,740.......233.....13%
Bristol Myers Squibb.....NY.....1,790.....1,592.......198.....12%
Merck(4).......................NJ.....1,672........798.......874....110%
Eli Lilly..........................IN.....1,531.....1,737......(206)...-12%
CVS Caremark................RI.....1,342.....1,366.......(24)......2%
Amgen..........................CA.....1,339.....1,464......(125)....-9%
Wellpoint......................IN.....1,007.....1,130......(123)...-11%
Gilead Sciences..............CA.......983........993.......(10).....-1%
Medtronic(5).................MN.......918.....1,234.....(316)...-26%
Aetna..............................CT.......821.......764.........57......7%
Baxter.............................IL.......803.......670.......133.....20%
Humana(6).....................KY.......672.......566.......106.....19%
Cigna(7).........................CT........653.......603.........50.......8%
Covidien........................MA.......558.......512.........46.......9%
Medco Health Sols..........NJ.......558.......582........(24)....-4%
HCA(8)...........................TN.......542.......605........(63)...-10%
Express Scripts...............MO.......531.......489.........42.......9%
Becton Dickinson.............NJ.......461.......413.........48.....12%
McKesson........................CA.......416.......440........(24)....-5%
Stryker............................MI.......410.......443........(33)....-7%
Biogen IDEC....................MA.......399.......397..........2.......1%
Allergan(9)......................CA.......389.......334.........55.....16%
Forest Labs(10)...............NY.......386.......365.........21.......6%
Cardinal Health(11)..........OH.......341.......274.........67.....24%
Celgene(12)......................NJ.......341.......293.........48.....16%
St Jude Medical...............MN......300.......345........(45)....-13%
Zimmer Holdings(13).......IN.......299.......289.........10.......3%
Amerisource Bergen........PA.......298.......263.........35.....13%
Quest Diagnostics............NJ.......278.......330........(52)...-16%
Davita(14)........................CO.......212.......195.........17.......9%
Lab Corp of America........NC.......207.......260........(53)...-20%
Mylan Labs......................PA.......203.......101........102....101%
CR Bard(15)......................NJ.......199.......183..........16.......9%
Coventry Hlthcre(16).......MD......197.......281.........(84)...-30%
Assurant(17)....................NY.......190.......253........(63)...-25%
Universal Health Svcs.......PA.......182.......117.........65.....56%
Intuitive Surgical..............CA.......172.......144.........28.....19%
Hospira.............................IL........169.........92.........77.....84%
Boston Scientific(18)........MA.......158.........88.........70.....80%
Herbalife Ltd....................CA........152.......114.........38.....33%
Henry Schein....................NY.......148.......133.........15.....11%
Cephalon(19)....................PA.......147.......156.........(9)....-6%
Varian Medical Sys............CA.......141.......130.........11.......8%
Weight Watchers...............NY.......140.........92.........48.....52%
Commun Health Sys..........TN........138.......131..........7.......5%
CareFusion(20)..................CA.......130.........94.........36.....38%
Waters...............................MA.......116.......102.........14.....14%
Life Technologies...............CA.......115.......128........(13)...-10%
Perrigo...............................MI.......113.........66.........47.....71%
Kinetic Concepts................TX........112.........77.........35.....45%
Cerner................................MO.......111.........86.........25.....29%
Endo Pharma(21)................PA.......109.........96........13.....14%
Watson Pharma(22)............NJ.......103.........99..........4.......4%
Warner Chilcott plc.............NJ.........93.......175.......(82)...-47%

Total of all 57............................36,175...34,604...1,571.......5%

(1) JNJ 2011 PTI excludes Asset Impairment Charges and Net Litigation Losses and Other.
(2) Pfizer 2011 PTI excludes Asset Impairment Charges.
(3) Abbott Labs 2011 PTI excludes Acquired In Process R&D Charges and Intangible Asset Impairment Charges. Its 2010 PTI excludes Acquired In Process R&D Charges and Litigation Reserve Charge.
(4) Merck 2010 PTI excludes Gain on AstraZeneca's Asset Option Exercise.
(5) Medtronic 2011 PTI includes large Restructuring Charges.
(6) Humana 2011 and 2010 PTI both exclude Prior Period Medical Claims Reserve Adjustment Charges. Its 2010 PTI also excludes Asset Impairment Charge for Deferred Acquisition Costs.
(7) Cigna 2011 PTI excludes GMIB Fair Value Loss.
(8) HCA 2011 PTI excludes Loss on Debt Retirement. Its 2010 PTI excludes Asset Impairment Charges.
(9) Allergan 2011 PTI excludes Upfront Licensing Fee Charge.
(10) Forest Labs 2011 PTI excludes new Licensing Fee Charge. Its 2010 PTI excludes US Dept of Justice Investigation Charges and Licensing Payment Charge.
(11) Cardinal Health 2010 PTI excludes Litigation Recovery Gain.
(12) Celgene 2011 and 2010 PTI both exclude Upfront Collaboration Payments. its 2011 PTI also excludes Change in Fair Value of Contingent Value Rights.
(13) Zimmer Holdings 2011 and 2010 PTI both exclude Durom Cup Claim Charges.
(14) Davita 2011 PTI excludes Goodwill Impairment Charge.
(15) CR Bard 2011 PTI excludes Legal Settlement and Claim Charges.
(16) Coventry Healthcare 2011 PTI excludes Provider Class Action Credit. Its 2010 PTI excludes Provider Class Action Charge.
(17) Assurant 2011 PTI excludes Higher Casualty Losses at Assurant Specialty Property.
(18) Boston Scientific 2011 PTI excludes Goodwill Impairment Credit Adjustment.
(19) Cephalon 2011 PTI excludes Asset Impairment and Loss on Sale of Assets, and also Change in Fair Value of Investments.
(20) CareFusion 2010 PTI excludes Gain on Sale of Assets.
(21) Endo Pharmaceuticals 2011 PTI excludes Loss and Impairment of Assets. Its 2010 PTI excludes Intangible Asset Impairment Charge.
(22) Watson Pharmaceuticals 2011 PTI excludes Loss and Impairment of Assets.

I think it would be helpful to explain the role financial engineering plays in the Big Health Care Industry.

Whereas the above Pretax Income growth of these Big Health Care Corps in the 2Q 2011 is only 5%, the Earnings Per Share (EPS) growth in the same 2Q 2011 is at least double that. That's quite a favorable spread.

There are two reasons for this very favorable spread.....first, the substantially lower worldwide effective income tax rates prevalent in the Big Health Care Industry, and second, the large stock buyback programs of some of the huge Health Care Corps. The former increases the numerator in the EPS computation, and the latter decreases the denominator in the EPS computation.

And EPS, and EPS growth, is what drives stock prices, and also drives the total compensation of CEOs and of many other high-level executives of these Big Health Care Corps, because stock options play such a substantial role in the total employee compensation of these upper-level executives.

Let me focus specifically on how some of the Big Health Care Corps have increased this critical favorable spread between their Pretax Income growth and their EPS growth.

Big Pharma

In the 2Q 2011, JNJ had Core Adjusted Pretax Income growth of only 1%. However, its after tax Core Adjusted Net Income growth was a much higher 5%. It lowered its effective income tax rate from 22.7% in the 2Q 2010 to only 19.6% in the 2Q 2011. It's mainly about having larger portions of their worldwide income moved to lower taxed foreign jurisdictions.

In the 2Q 2011, Merck had Pretax Income of $1,672 mil. What was its Income Tax Expense? Well, actually it wasn't income tax expense, but rather income tax benefit, and to the tune of $382 mil. This increased its after tax Net Income to $2,054 mil. Its effective income tax rate was reduced from a positive 37.1% in the 2Q 2010 to a negative 22.8% in 2Q 2011.

What caused this monstrously lower effective tax rate? Mainly very favorable income tax settlements on tax audits. And it's not just Merck, and it's not just Big Health Care Corps. When I review Big Corp income tax footnotes, I see large favorable tax settlement after large favorable tax settlement.

But yet Generally Accepted Accounting Principles (GAAP) requires companies to have already included on their books the tax amounts the company has determined it owes.

So why the huge favorable tax settlement? It could be several reasons. First, companies aren't following GAAP, and instead are booking estimated tax liabilities on open tax audits at conservatively more than they think they owe. And second, the IRS isn't doing a very good job in settling these tax audits of Big Corps.....they are leaving way too much money on the table.....and this is US taxpayers money, not money of the IRS.

This is another case where the Big Corps have a major economic advantage over small businesses.

From first-hand experience, the IRS will doggedly pursue, in an incredibly bungling, clearly dishonest, and Gestapo-like manner, a small business owner in a tax audit, and will not offer one iota in the way of settlement offers of clearly gray areas in the IRS code. And the small business owner can't afford to pay high-priced tax talent needed to help him in his IRS tax audit.

However, the Big Corps can afford to have the very best tax minds, both inside and outside their organization, defending them, and thus the IRS is no match for the extremely brilliant, experienced tax talent of Big Corps, and clearly the IRS loses out to them on tax audits, with the resultant substantial favorable tax audit settlements being subsequently booked to earnings by the Big Corps, especially by multinational ones.

And the other side here of how the US government helps Big Corps vs Small Businesses, is that the substantial, very lengthy and bungling IRS harassing of small businesses in widespread Gestapo-type audits is taking up loads of critical time of small business owners, with the resultant reduction of US real GDP growth, and more importantly, of US job creation.

When I spread all the time I had to spend, defending myself against the IRS in their clearly unnecessary, lengthy, bungling, menacing tax audit, over the universe of what has to be happening to thousands and thousands of small businesses being audited by untrained IRS agents all over the US, I am certain that this intensive IRS tax audit practice has caused an increase in the US unemployment rate of at least 1%.

The Republicans are right when they assert that there is some over-regulation hampering the US economy and US job creation. One key example is that there are way too many IRS auditors, and their IRS support personnel, handling small business and self-employed tax audits.

You cut the number of IRS tax auditors of small and self-employed businesses in the field, along with the legions of IRS support personnel, and you get a two-fer on US Debt reduction.

First, you get a wise cut in annual US government costs from the reduced head counts.

And second, and much more importantly, you free up the time of small businesses, which can be used to both grow their businesses organically and to create US jobs.

Another wise approach would be for the US Government to move a substantial amount of its funding for their so many, and so lengthy, harassing IRS tax audits of small and self-employed businesses to its funding for the tax audits of Big Multinational Corps.....that is the fertile area for substantially raising US tax revenues.

Going back to Big Pharma, Pfizer's Reported Pretax Income decreased by 6% in the 2Q 2011. Its after tax Net Income increased by 5%. Why the 11% favorable spread? Again it's the lower worldwide effective income tax rate, which was reduced from 37.5% in the 2Q 2010 to 29.7% in the 2Q 2011.

In the 2Q 2011, Abbott Labs' Reported Pretax Income increased by 7%. It's after tax Net Income increased by 50%. Why? It reduced its worldwide effective income tax rate from an already extremely low positive 17.1% in the 2Q 2010 to an off-the-charts negative 16.0% in the 2Q 2011.

How was this possible? Well, it was just like Merck. Abbott Lab had an extremely favorable tax audit settlement with the IRS.

In the 2Q 2011, Amgen's Reported Pretax Income declined by 9%. Its after tax Net Income declined by only 3%. Why? Amgen reduced its worldwide effective tax rate from an extremely low 17.9% in the 2Q 2010 to an even lower 12.6% in the 2Q 2011.

And Eli Lilly lowered its effective income tax rate on what it calls its Adjusted Pretax Income from 22.5% in the 2Q 2010 to 20.9% in the 2Q 2011.

Big Health Insurance

In the 2Q 2011, WellPoint's Pretax Income declined by 11%. Amazingly, its after tax Net Income declined by only 3%. Why? A lower effective income tax rate.....36.0% in the 2Q 2010 vs. only 30.4% in the 2Q 2011. This lower tax rate was due to favorable IRS tax audit settlements. Where have we heard that one?

And UnitedHealth Group lowered its effective income tax rate from 37.0% in the 2Q 2010 to 36.0% in the 2Q 2011.

Big Medical Products

Medtronic lowered its worldwide effective income tax rate from an already very low 22.6% in the 2Q 2010 to an even lower 15.5% in the 2Q 2011.

Now let me address another financial engineering vehicle used by some Big Health Care Corps.....Stock Buybacks, which reduces the number of common shares outstanding. Stock Buybacks are particularly economically attractive to Big Corps in the current very low interest rate environment, which has been clearly driven by US Government actions.

As I earlier mentioned, in the 2Q 2011, Pfizer's Reported Pretax Income declined by 6%, but its after tax Net Income increased by 5%, due to the use of a lower effective tax rate. But to pile on, Pfizer's Reported EPS increased by 10% in the 2Q 2011, due to stock buybacks. Let's see, Pfizer has magically gone from a Pretax Income decline of negative 6% to a EPS increase of a positive 10%.....that is a massive 16% favorable spread......that is what I call some snazzy financial engineering.

Amgen had a Reported Pretax Income decline of 9% in the 2Q 2011. This 9% decline was totally wiped out on an EPS basis, where EPS was the same 25 cents in both years. Amgen had 3% fewer common shares outstanding, due to stock buybacks.

Medtronic also had 3% fewer common shares outstanding in the 2011 quarter vs. the 2010 quarter.

Turning to Big Health Insurance, UnitedHealth Group's Pretax Income increased by 11% in the 2Q 2011 over the 2Q 2010. It's Net Income increased by 13%, due to a lower tax rate. But to substantially pile on, UnitedHealth Group's EPS increased by 17% in the 2Q 2011. Why? Because it had 4% fewer common shares outstanding in the 2Q 2011.

But clearly taking the cake here is WellPoint. It's Pretax Income declined by 11% in the 2Q 2011. Its Net Income declined by a lower 3% in the 2Q 2011, due to a lower tax rate, mentioned earlier. But to really pile on, WellPoint's EPS didn't decline, but actually increased by 11% in the 2Q 2011. Why? Because of its massive stock buyback program, it had 12% few common shares outstanding in the 2Q 2011.

Yeah, that's correct, Wellpoint had an incredibly favorable spread of 22% in the 2Q 2011.....a negative 11% Pretax Income decline to a positive 11% EPS increase.....now, that is taking financial engineering to a completely different level.

In the case of the Big Health Insurance Corps, where did the money come from to pay for these massive stock buybacks? From the people and businesses paying the insurance premiums.

These Big Health Insurance Corps receive the insurance premiums on the front end, and pay the claims as late as they can. This early cash inflow from these premiums is invested in their own stock, through stock buybacks.

Thus, insurance policyholders are facilitating this Big Health Insurance financial engineering by their money, being paid on the front end in insurance premiums, being used by the Big Health Insurance Corps to buy back their own common stock in order to bump up their EPS, and thus the company's stock price, and the related value of the stock options held by their top executives. Whew! It makes me mad just keying this in to the computer.

And then these Big Health Insurance Corps demand that they need substantially higher insurance premiums since they are making so little profit.

That's absurd.

Here's the Core Pretax Income percentage increases of the Big Health Insurance Corps for the first 7 years of the laissez-faire Bush/Cheney Presidency, from 2000 to 2007:

WellPoint..........+1493%
Humana............+1031%
Aetna...................932%
Coventry..............875%
UnitedHealth.........532%
Assurant...............421%

Gosh, just how greedy can you be?

And now a Big Health Insurance Corp like Wellpoint demands that its insurance premiums get significantly raised because its profits decreased by 11% in the 2Q 2011.

But that is clearly being clever by half. That 11% decline is just in their Pretax Income. Their EPS increased by 11% in the same period. The EPS growth is the relevant one to WellPoint's CEO and its top executives. A huge portion of their total compensation is stock price based, due to the massive number of stock options they are awarded each year. And the stock options they hold, plus company stock they also hold, is what they are most concerned about economically.

And the last bit of financial engineering performed mainly by Big Pharma is their financial disclosure, and clear emphasis, of the substantial amount related to the additional items that are needed to convert their GAAP Reported Net Income to their Non-GAAP Adjusted Net Income.

Included in these questionable items, that bump up these Non-GAAP Adjusted Earnings, is Amortization Expense of Intangible Assets acquired...gosh, this is what Big Drug firms are all about.....their intellectual property.

Also included is Amortization of the stepped-up Inventory purchased in an acquisition, as if the acquisition didn't occur.

In addition, all kinds of restructuring charges are also included, even though they frequently recur every year.

Further, loss on early debt retirements is included, which it should be, but the subsequent year amortization of this loss is not included.

And many companies also include stock compensation expense from stock option grants to executives and other company employees.

And there are many more.

The point is that I don't think it is wise to pay for a stock if the amount you pay for it is based on a company's Non-GAAP Adjusted Earnings, because many of the items that a Big Corp uses to convert its GAAP earnings to its Non-GAAP Adjusted Earnings are of very questionable quality.

And brokers and other financial pundits who push stocks with low P/E's, where the low P/E is based on artificially high Non-GAAP Adjusted Earnings, are not doing stock investors any favor, nor the US economy as a whole any good. That's how you get stock bubbles.

Big Misc Industry Corps 2Q 2011 Earnings: Nice Total Growth, but Mixed Bag

I found 32 Big Corps in 12 smaller Miscellaneous Industries. These 32 Big Corps each had Pretax Income of at least $100 mil in the either the 2Q 2011 or in the 2Q 2010.

These 32 Big Corps generated Total Pretax Income growth of 11% in the 2Q 2011. However, it is clearly a mixed bag.....some with very nice earnings increases, and others not so nice.

Below here are these 2Q 2011 Pretax Earnings (PTI), along with a comparison with the prior year’s quarter amounts.

...........................................................................Increase
................................................PTI........PTI.......(Decrease)
.................................................2Q.........2Q..................
...............................................2011......2010....Amount....%
.................................................(millions of dollars)

Apparel and Footwear
Nike..............................OR......773.......683..........90.....13%
VF.................................NC......171........151..........20.....13%
Polo Ralph Lauren.........NY......275.......170........105.....62%
Cintas............................OH......117.........90..........27.....30%
Hanesbrands.................NC......108.........84...........24.....29%
Total of all 5..........................1,444.....1,178........266.....23%

Engineering and Construction
Fluor.............................TX......281.......259..........22.......8%
KBR...............................TX......166.......191.........(25)...-13%
URS...............................CA......146.......130..........16.....12%
Jacobs Engineering........CA......141.........37........104....281%
Total of all 4.............................734.......617........117.....19%

Electric Equipment
Rockwell Automation....WI......221.......156..........65.....42%
Cooper Industries(1).....TX......199.......172..........27.....16%
Whirlpool(2).................MI......152.......227........(75)...-33%
Molex............................IL......109.........61..........48.....79%
Total of all 4............................681.......616...........65.....11%

Waste Management
Waste Management(3)...TX......381.......387..........(6).....-2%
Republic Services(4).....AZ......291.......270..........21.......8%
Total of 2.................................672.......657..........15.......2%

Publishing and Printing
McGraw-Hill.................NY......359.......326..........33.....10%
Gannett........................VA......209.......235.........(26)...-11%
RR Donnelley(5)............IL........89.......122..........(33)...-27%
Total of all 3............................657.......683.........(26)....-4%

Education and Training
Apollo Group(6)...........AZ......343.......433.........(90)...-21%
ITT Educational............IN......130.......157.........(27)...-17%
Devry...........................IL.......109.......101............8.......8%
Washington Post...........DC........75.......158.........(83)...-53%
Total of all 4............................657.......849........(192)...-23%

Cogeneration Power Producer
AES..............................VA......625.......556...........69.....12%

Advertising Agencies
Omnicom Group...........NY......461.......392............69.....18%
Interpublic Group........NY......156.......146............10.......7%
Total of 2................................617........538...........79.....15%

Forest and Paper Products
Intl Paper(7)................TN......422.......229..........193.....84%
Meadwestvaco.............VA......132.........89............43.....48%
Total of 2................................554........318..........236.....74%

Packaging and Containers
Crown Holdings............PA......210.......201............9.......4%
Ball Corp.......................CO......209.......177..........32.....18%
Owens-Illinois(8)..........OH......134.......194.........(60)...-31%
Total of all 3............................553.......572.........(19)....-3%

Natural Gas Transmission and Distribution
EQT...............................PA......138........47..........91....194%

Building Materials
Owens Corning..............OH......107........94..........13.....14%

Total of all 32 Big Corps.........7,439...6,725........714.....11%

(1) Cooper Industries 2010 PTI excludes Loss on Contribution of Net Assets to Apex Tool.
(2) Whirlpool 2011 PTI excludes Charges for Brazilian Collection Dispute and for Embraco Antitrust Matters.
(3) Waste Management 2010 PTI excludes Ligitation Settment Gain.
(4) Republic Services 2011 PTI excludes Loss on Debt Extinguishment.
(5) RR Donnelley 2011 PTI excludes Loss on Debt Extinguishment and Asset Impairment Charge.
(6) Apollo Group 2010 PTI excludes Litigation Loss.
(7) Intl Paper 2011 PTI excludes Loss on Asset Impairments and Sales of Business.
(8) Owens-Illinois 2011 PTI excludes Loss on Debt Retirement.

To go full circle here on 2Q 2011 earnings, since I won't be covering Utilities, I only have two more Industries left to address.....Big Health Care and Big US Defense Contractors. Both should be interesting.