Donald Marron's take at CSMonitor

Post #323,731 by Another Scott 3/30/10 7:43:19 AM Reply	Donald Marron's take at CSMonitor http://www.csmonitor...or-destroy-wealth [...] The first law of loopholes is that every loophole benefits someone. If you close a loophole, someone will be hurt. ThatÂs whatÂs happening here. The extra subsidy for retiree prescription drug coverage provided an extra financial boost for AT&T, Caterpillar, et al. Eliminating the loophole will thus reduce the value of the companies and the wealth of their shareholders, just as the WSJ alleges. But itÂs hard to get too teary-eyed since that value and wealth were created by the loophole in the first place. [...] Tax policy. Congress had to make two decisions in creating this subsidy. * First, would the subsidy be treated as taxable income to recipients? Quite reasonably, Congress answered no. * Second, would for-profit employers still be able to deduct from their taxable income any spending on retiree prescription drug coverage that was covered by the subsidy? For reasons I donÂt understand, Congress answered yes. As a result, the AT&Ts of the world could spend $100 on coverage, receive a $28 subsidy, and still deduct $100 in expenses from its income for tax purposes (rather than, say, $72). In my view, the first decisionÂsubsidies arenÂt taxableÂmakes sense because it treats all employers equally. For-profit firms, non-profit organizations, and state and local governments would all receive the same 28% incentive to maintain retiree coverage. If that subsidy were taxable then either (a) we would have to extend income taxation to non-profits and state and local governments or (b) the subsidy would be smaller for for-profit employers. Neither of those makes sense. The second decision Â for-profit firms can deduct even those expenses that are covered by the subsidy Â appears peculiar for the same reason. That provision Â which I characterize as a loophole Â means that the subsidy is actually more valuable to for-profit firms than to other types of employers. They get the subsidy (without paying taxes on it) and they get the tax benefit of writing off those expenses. As the Joint Committee on Taxation recently noted, that treatment is highly unusual. In my view, itÂs right that the recent health legislation closed that loophole. Financial Accounting. This change doesnÂt actually go into effect until 2013. So why all the hullabaloo now? Two words: accrual accounting. Corporations must report the cost of future retiree health benefits as liabilities on their balance sheets. The associated tax subsidies show up as corresponding assets. The value of those tax assets got slashed by the new health legislation. Firms have to report that hit in the quarter in which the law was signed. ThatÂs why weÂve seen this rash of announcements warning shareholders of a surprise hit to first quarter profits. The charges are non-cash at this point Â no money is going out the door of these firms just yet Â but will turn into real cash (i.e., higher tax payments) in the future. Note: Another important question is how eliminating the loophole will affect the number of retirees who get drug coverage from their previous employer. Presumably the number will go down, but I havenÂt seen any estimates of how much. Armageddon!!!!111 :-/ FWIW. Cheers, Scott.
Post #323,738 by boxley 3/30/10 9:14:34 AM Reply	dumass doesnt understand a balance sheet ThatÂs why weÂve seen this rash of announcements warning shareholders of a surprise hit to first quarter profits. The charges are non-cash at this point no, but you have just increased your liabilities by exactly that much so lower net profits IS cash out the door If we torture the data long enough, it will confess. (Ronald Coase, Nobel Prize for Economic Sciences, 1991)
Post #323,741 by Another Scott 3/30/10 9:32:50 AM Reply	Um... Donald Marron Donald B. Marron is a visiting professor at the Georgetown Public Policy Institute and president of Marron Economics LLC. He previously served as a member of the President's Council of Economic Advisers and as acting director of the Congressional Budget Office. Care to try again? :-/ Cheers, Scott.
Post #323,742 by boxley 3/30/10 9:41:43 AM Reply	those that cant do teach so he isnt a dumass, he is a liar. Lower net profit IS money out the door. Oh wait. Its the peoples money not the corporations money If we torture the data long enough, it will confess. (Ronald Coase, Nobel Prize for Economic Sciences, 1991)
Post #323,745 by Another Scott 3/30/10 9:57:40 AM 3/30/10 10:27:14 AM Reply	Hmm... (Edit) http://www.investope...noncashcharge.asp What Does Non-Cash Charge Mean? A charge off, made by a company against earnings, that does not require an initial outlay of cash. Note, they're taking a non-cash write down. No money is going out the door. Armageddon!!!!111 :-/ [edit:] Did GM spend $39 B when it took a non-cash charge of that amount in 2007? No, it didn't. http://www.thetrutha...assets-explained/ HTH. Cheers, Scott. Edited by Another Scott March 30, 2010, 10:27:14 AM EDT Expand All History
Post #323,750 by boxley 3/30/10 10:41:29 AM Reply	is their quartley profits higher or lower? if lower it is cash out the door If we torture the data long enough, it will confess. (Ronald Coase, Nobel Prize for Economic Sciences, 1991)
Post #323,752 by drook 3/30/10 10:50:56 AM Reply	Here in the real world ... There's a difference between cash and the expectation of cash. If I spend cash I don't have yet, then it doesn't come in, that's bad. When I apply for a loan, if I tell the bank I'm going to have a million dollar payday next year, they tell me to come back when I have a receipt for it. If I write a check for money that is going to be in the bank by the time the check clears (I hope) that's a crime. Normal people have to follow simpler rules than corporations. When we say "cash on hand" it means actual cash, actually on hand. That really is different from expected future earnings, no matter how many economists say that "on paper" it's the same thing. -- Drew
Post #323,753 by boxley 3/30/10 11:09:26 AM Reply	okay real world you receive a susidy of $100 a month for your mortgage by a local housing authority. They determine you no longer meet their income guidelines as of next month. Since you have to cough up an extra hun does that mean no cash out the door? The above example is the poor mans explanation of what is happening to these corps If we torture the data long enough, it will confess. (Ronald Coase, Nobel Prize for Economic Sciences, 1991)
Post #323,754 by Another Scott 3/30/10 11:28:02 AM Reply	That's not what's happening. Read the TTAC link. This is an accounting issue, not a "real world" money issue. Remember, it's a "non-cash charge". Cheers, Scott.
Post #323,755 by boxley 3/30/10 11:57:56 AM Reply	reread it yourself, its exactly whats happening If we torture the data long enough, it will confess. (Ronald Coase, Nobel Prize for Economic Sciences, 1991)
Post #323,767 by beepster 3/30/10 12:41:31 PM Reply	Fundamental misunderstanding while it is currently a "non-cash" item, over the next couple of years it will become a cash item. So, what will a company now do? They have 2 years to figure out a way to reduce the cash impact. How will they do this? Cut benefits to retirees. When that doesn't get them all the way there, what will they do? Cut jobs. They will get back to the level of shareholder return that they feel necessary (and this is generally a management team/board level decision)...in other words, that "non cash charge" will be treated like any other expense. So the initial link...and your claim of Armageddon in jest...are making light of an issue that you clearly don't understand. I will choose a path that's clear. I will choose freewill.
Post #323,768 by Another Scott 3/30/10 12:57:26 PM Reply	Not so. I didn't say there would be no impact. Business management has to adjust to changing circumstances all the time. That's their job. GM didn't pay $39B when they took their non-cash charge. They made an accounting change. The world will change a lot by 2013. If AT&T cuts benefits, it could be due to reasons other than this change in the tax rules (say, losing exclusivity on the iPhone and losing customers). The charge is a convenient whipping boy that they're hoping to use to sway changes in Congress. If they cut benefits, perhaps they'll lose important employees and have to spend more to recruit and train than they would have had they not made the benefits cuts. In short, this isn't Armageddon!!!!111, no matter how much Rep. Boehner claims it is. Life, and business, isn't binary. Tax law changes that close loopholes aren't always bad. Why should non-profits not be treated the same way as large corporations when it comes to health benefits? AT&T and other big companies taking a charge for a change in the tax rules isn't going to destroy their business nor their employees. Maybe we'll see how strong the arguments on both sides are at Waxman's hearings on April 21. Cheers, Scott.
Post #323,787 by Another Scott 3/30/10 5:47:00 PM Reply	More... Let's look at what happened to GM when it took that $39B charge on November 7, 2007. GM's stock prices from Yahoo: 11/1 $37.25 16.66 M shares 11/2 $36.99 12.57 M shares 11/5 $36.00 15.47 M shares 11/6 $36.16 13.21 M shares 11/7 $33.95 35.12 M shares 11/8 $33.15 29.27 M shares 11/9 $31.28 21.04 M shares 11/12 $30.79 16.53 M shares 11/13 $31.62 11.98 M shares So, the stock took a bit of a hit. I can't find the GM's market cap on 11/7/2007, but on October 30, 2006 it was about $19.19 B - http://en.wikipedia....of_General_Motors That day the closing stock price was $34.53, so a ballpark guess is that the market cap didn't change much as of 11/7/2007. So they took a $38B charge in the quarter when the whole company was worth about $20B, and the stock price only dropped about 7% from the previous day. Does that sound like they really lost $38B that day? Of course not. They made an accounting change. Similarly, AT&T made an accounting change because tax law required they do so when the health care reform act was signed. Oh, let's look at what happened to AT&T's share price since the act was signed (on Tuesday the 23th): March 1 - $25.00 March 8 - $25.28 March 15 - $25.78 March 22 - $26.40 March 23 - $26.55 March 24 - $26.26 March 25 - $26.15 March 26 - $26.24 March 30 - $25.95 Yeah, they really lost $1B on the 23rd. Not. They took an accounting charge. Eventually it may have a real impact on their bottom line, but so far it's just a number. The stockholders are ignoring it, just as they did in GM's case. Q.E.D. Cheers, Scott.
Post #323,790 by boxley 3/30/10 6:14:08 PM Reply	what does the price of stock have to do with P&L? Let me see if I can find a free accounting 101 program for you. It would help your understanding of these things. thanx bill If we torture the data long enough, it will confess. (Ronald Coase, Nobel Prize for Economic Sciences, 1991)
Post #323,798 by beepster 3/30/10 8:51:56 PM Reply	Nearly nothing and all that the value is saying is that investors expect these companies will make the adjustments to benefits or staffing that will keep them whole. I will choose a path that's clear. I will choose freewill.
Post #323,800 by Another Scott 3/30/10 9:06:35 PM Reply	GM's stockholders expected a $38B "adjustment"? <boggle>
Post #323,802 by boxley 3/30/10 9:37:19 PM Reply	they dont build all those pretty buildings in vegas by giving away money nother, stock market is no different. Its no difference than blackjack, craps or roulette or indexed stock If we torture the data long enough, it will confess. (Ronald Coase, Nobel Prize for Economic Sciences, 1991)
Post #323,807 by Another Scott 3/30/10 9:56:27 PM Reply	We're talking past each other. Yes, stock prices are based on expectations and hunches - in a way, it's very similar to playing Vegas. But it's *also* tied to something tangible - a share of ownership of the value (over some future period of time) of the company and its profits. Compare GM's stock price in November 2007 with its price in April 2009. $30-ish versus $1-2-ish. Stock prices collapse when companies have huge losses. WorldComm, Enron, GM, Chrysler, etc. GM's stock price being in the $30s shows that its $38B charge was not "real money". If that charge were real, the company would have had to be liquidated and the stock would have been worthless. AT&T's $1B charge is *presently* in the same category. It's a "non-cash charge". It's not a "loss" and doesn't impact P&L. Nobody knows what AT&T's stock price is going to be in 2013, so saying that any changes then are going to be the result of this charge is silly. The stock market said it has no impact on the stock price. What does the stock price have to do with P&L? See the first paragraph. A company that is bankrupt does not have a high stock price and a high market capitalization. HTH. Cheers, Scott.
Post #323,813 by beepster 3/31/10 12:32:50 AM 3/31/10 12:39:07 AM Reply	No, you're still not there the $1B charge does not hit the P&L >yet<. An accrual is a balance sheet item that is essentially a forced savings account for something that will hit the P&L in the future. The charge is real and will eventually come from revenue in a P&L. Post edit: not entirely accurate...it will come from revenue now, and impact P&L now...but the nature of the accounting entry at this point is internal..it comes from revenue and transfers to the balance sheet...(non cash meaning the cash isn't going out the door yet)...it will become a cash item when the expense is realized in 2013. I will choose a path that's clear. I will choose freewill. Edited by beepster March 31, 2010, 12:39:07 AM EDT Expand All History
Post #323,822 by boxley 3/31/10 8:48:35 AM Reply	nit If you increase liability now it impacts net profit now If we torture the data long enough, it will confess. (Ronald Coase, Nobel Prize for Economic Sciences, 1991)
Post #323,827 by beepster 3/31/10 11:14:31 AM Reply	Ayup which is why I added the edit. I will choose a path that's clear. I will choose freewill.
Post #323,791 by drook 3/30/10 6:15:26 PM Reply	Two words for you: Boo Yah! -- Drew
Post #323,811 by Another Scott 3/30/10 10:43:11 PM Reply	I thought I knew what that meant... http://www.urbandict....php?term=boo-yah Bwahahaha. :-) Cheers, Scott.

Welcome to IWETHEY!