Federal Budget Deficit

[Wingnut]

Just read an interesting article in the papers ... well, interesting to me, when I hear all the knee-jerk folks blaming this on the current administration.
"We got to this point through a combination of forces. The tax reforms of the Clinton years made the revenue system more progressive; that is, higher-income people paid more of the bills. And growing income inequality - the tenencies of the well-educated and highly skilled to make incresing multiples of what the less-educated and unskilled receive - compounded that effect.
As a result, the top 1% of taxpayers now furnish more than 1/3rd of the income tax receipts; the top 5% pay more than half; and the top 50% pay all but a small portion - 4% - of what the government receives in personal income taxes."
It goes on to say that the government made out like gangbusters during the 90's with all the high-income people getting soaked with capital gains and the like.
And now? Well, hmmm .... stock losses are gonna hit the budget hard. And I mean HARD.
And what are our highly paid "political leaders" doing about this .... well, they're ignoring the budget (Gephard and Dashle don't have time for the budget) and trying to raise taxes so that the senior citizens can get drugs from Canada.
Golly-gee, am I glad to see that. I was worried they'd be spending time earning their pay instead.
What I enjoyed the most this morning on the political talk shows was the laws that are being formulated to deal with Stock Options and how companies will now have to declare them as an expense ... changing their earnings.
OK ... someone educate me if I'm totally out-to-lunch here (yes, even you, Chuck) ... but ... aren't stock options nothing, nada, zilch, nichts unless they are used at some future time. How do you declare an expense (which is also a tax deduction in the industries that I work with ... an expense is a deduction during the current year) when you have created nothing except a potential sale of stock in the future.
And question number two -while this looks bad to those that don't have stock options - why is the government so upset (except on the basis of throweing christians to the lions) since they person who exercises a stock option is immediately liable for the difference between what they paid and what the stock is valued at on the "option day"??
Disclaimer ... I never have and never will receive stock options ... I ain't and never will be ... nor want to be ... that high up the corporate ladder.

 

[Gary_in_Indiana]

<font color=blue>"aren't stock options nothing, nada, zilch, nichts unless they are used at some future time"</font color=blue>

Nope, stock options are very real, tangible things. Stock options usually have a value, too. That value is the difference between the current value of the shares involved and the option price on those same shares.

If Acme Widget stock is currently selling at $60/share and I have an option on 1,000 shares at $50/share the difference between the $50,000 I would pay and the $60,000 market value is the value of the option I hold. I can assign that option to you for $10,000 and have a profit without ever having bought or owned the stock.

Normally options given to execs are at a price slightly below market price when they're given. In the above example, if I'm president of Acme Widgets and get the option on 1,000 shares of Acme Widget at $50 when the market is $52/share then that $2,000 difference is an immediate expense to the company because it represents $2,000 less the company would take in by selling the 1,000 shares at $50 rather than at the market price of $52/share.

The option I hold cost me nothing (well, actually it was given instead of cash compensation, but that's another issue). The reason it's usually done is the option acts as an incentive for me to do a good job and increase shareholder value and, in turn, the value of the company.

Options have a limited life governed by an expiration date. If the option is not exercised before that date it simply expires. The only reason for that to happen is if, in the above example, the market price falls below $50/share. It is then said to be "out of the money" and would have no value as no one would want the option to pay $50/share for a $48 stock.

I hope I've explained this correctly and well.

 

[ejb]

>>Well, hmmm .... stock losses are gonna hit the budget hard. And I mean HARD.


You got that right, and I really don't think most people, including most politicians really understand how hard and how bad its going to get before it gets better...here is why I think so:

First of all, imagine you make $50K per year every year for ten years with the normal say 3% increases in salary...if you are like most people, you adjust your spending to use up most, if not all of that $50K, i.e. you adjust your lifestyle to fit your budget and your future earnings (i.e. you may take out a $150K mortgage, but you are reasonable sure that you will continue to work and you'll be able to make the payments (in fact the bank will use a formula to determine based on earnings how much you are elegible to borrow).

Now say for example, you get lucky and this year you still make $50K, but you also buy a lottery ticket and win another $20K, so you have earnings of $70K...pretend by some extraordinary circumstances you win that lottery for 3 years in a row...

Now pretend instead of living on $50K , you have adjusted your spending (and your borrowing) to reflect the fact that you "salary" is actually $70K per year...all of a sudden you buy new cars more often, you take out a $250K mortgage instead of a $150K one etc etc....all with the beleif that this "windfall" will continue to last and thus you can actually afford to spend as if you actually *earned* $70K per year which you don't, $20K is a windfall....

Picture what happens when you stop winning that lottery each year...all of a sudden those mortgage and car payments start to seem awfully expensive...you get the idea...all those financial committments you made as if your salary is $70K are now going to be hard to meet....

Anyway, this is pretty much what federal and state governments have done over the past few years...since they were all flush with cash, they continued to spend every penny that came in (and then some) and these expendentures are not things that can just stop...they are long-term committments to provide services that once started are very difficult to scale back...and unfortunately, those break-neck tax revenues are not coming back any time soon...there is no one that thinks that after this slowdown in the economy is over, that the markets are going to suddenly roar back and generate the kind of revenue that is needed to get back to the late 90's level...the cuts in services and rasing of taxes has only just begun...I for one believe massive tax hikes and/or massive services cuts are going to occur...and it is going to be very painful.

A second and just as important fact has to do with the how capital gains are taxed. Again, by example, pretend you had $100K in taxable stock market gains in 97, 98, and 99. In each of those 3 years, you paid roughly $33K in taxes (for simplicity sake lets assume 1/3). The gov't got that money and spent that money as if it was going to come in for years (as I just described above)...but now lets assume that you then lost $100K in 2000, 2001, and 2002. Now, not only did the government *not* get the additional $99K in tax money (3 x $33K), but to make matters much worse, you as the taxpayer can't deduct the full loss against regular earnings. (i.e. if you made $75K in salary and lost $100K in equtites), you still pay the taxes on the $75K, but you can only deduct a tiny fraction of the loss ($3000)...the rest is carried forward and either to be used at $3000 per year offset against regular income, or else deducted against future capital gains...the bad part of this (for tax collectors), is again, assume you have $99K in carry-forward losses, and you use up $3K per year for 3 years(because you don't make any money in the market) so in year 4 you still have $90K in carry-forward losses...then finally, the market roars back so in year 4, 5 and 6 you make $30K in stock market gains...suprise, suprise, you don't have to pay any federal taxes on those earnings because you had $90K of losses in previous years...

So, you know all those trillions of dollars that have been lost in the market the last few years??...well for the most part, even as the market comes back, investors will need to almost all those trillions back, plus one dollar, before taxes become due (i.e. taxes on the first dollar earned after all the losses have been burned off).

So as you see, the prospect of the revenues to the fed's goin up any time soon, is very, very unlikely.

Keep in mind that this is a simplistic explanation and there are many "but"'s and exceptions to these examples, but it does underly the magintude of the problem with which we are faced.

Pretty bleak outlook imo. Hope I explained my thinking clearly...

 

[Chuck52]

Wingnut,

You want ME to explain anything having to do with the stockmarket? Sheesh. You really are desparate. My investment scheme is to keep on tything to my 403b in the not-so-certain hope that the ten plus years I have to go before retirement will be long enough for the market to recover. I don't even read the quarterly reports anymore...who needs the pain?

I also have no clue about stock options. I do wonder if there's not some kind of analogy to athletes betting on their own games. Seems like the folks who can profit from inflated stock prices are the very folks who can manipulate the factors which determine stock prices. I guess that's capitalism?

Chuck

 

[Wingnut]

<font color=blue>Nope, stock options are very real, tangible things. Stock options usually have a value, too. That value is the difference between the current value of the shares involved and the option price on those same shares.</font color=blue>

nope, sorry, don't follow thsi at all .... maybe because I'm trying to apply my (bizarre?) common-sense and logic to it.
A Stock Option is a "future event". Until it is exercised ... it is a POSSIBLE future event. Note that I'm not talking here about something that would make an exec do something illegal to make the stock value go up .... I'm simply (simplistically) looking at it as an expense. The company may need to "plan" for a "loss" since it is possible that the option will be exercised and they will sell it for less than market value. And it may just as well happen that the option will not be exercised and no "loss" will be incurred.
Until the option is actually exercised ... how has the company incurred a real "expense" (which I translate as a cost that the IRS allows you to deduct ... and must therefore be declared)?

As for buying $60 stock for $50 .... I don't think it's such a gret deal as the public seems to think. The extra $10 per share is a benefit and therefore I get to pay real tax bucks now on a potential profit (or loss) in the future. If I sell those stocks within the first year, I get to pay higher capital gains ... I guess that the picture changes a bit if you have many millions in stoock options ... but then you need to also have interest-free loans from the company to afford those. All-in-all ... if we get rid of the unseemly perks (like those loans) ... and had legal accounting practices ... I don't see the options as a big, big, bogeyman problem. I see the usurious taxes as a far worse problem.

Again ... I have not and never will receive stock options - but I do buy company stock at a small discount and hang onto them forever because they actually pay dividends ... quarterly ...

 

[PitbullMidwest]

<font color=blue>Nope, stock options are very real, tangible things. </font color=blue>

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I was granted stock options with a strike price of $56 two years ago, more options last year at $36 and the stock is selling today at $24.

So as Wingnut stated they are worth nothing, nada, zilch, nichts unless they are used at some future time.

 

[Gary_in_Indiana]

<font color=blue>"A Stock Option is a "future event". "</font color=blue>

That's not correct but I think I see where the misunderstanding is for you. The exercise of a stock option, if it occurs, is an event after the issuance of the option, hence it happens in the future relative to the option being issued today (in the present).

The stock option itself, is a real, tangible thing just like an option to purchase real estate, for example.

Let's say that you're interested in buying some property adjacent to yours that I own. Further, let's say it's ten acres about which we agree the value is $6,000/acre.

You might not be able to buy it today, but believe you can soon. I need some cash now for something. I agree that if you give me $10,000 now I will give you an option to buy it any time in the next year for $50,000.

Now let's say six month's down the road someone comes along and thinks it's worth $10,000/acre and has $100,000 cash in hand to buy it. I can't sell it to them. You, on the other hand, can assign your option to them for a $50,000 fee and then they exercise the option and pay me the $50,000 I agreed to accept.

That option not only had a value, but it's value increased and the option holder (you, in this scenario) made $40,000 without ever exercising the option yourself. You never participated in the "future event" at all but you benefitted by $40,000 by assigning your real, tangible property (the option).

Further, the "future event" still doesn't have to ever occur. The option could expire without ever being exercised and you'd still have your $40,000 profit.

Now while I'm not able to show my sale of the option to you as a loss, it does effect my financial statement. I can no longer list the property as a $60,000 asset on my balance sheet. I have to list it at $50,000. Had I given away the option instead of selling it, then my balance sheet would have been short by $10,000. As it is, instead of $60,000 as a listing for real estate, I have $50,000 there and $10,000 cash on hand.

Does that explain it any better? If not, let me know.

 

[Wingnut]

hmmm ... yep .... let's my see it in a different light. Since my experience was with "stock" rather than "options" ... I had always understood it to be a "promise" rather than an actual document.
In that lighht, I can well understand why it should be declared as an expense ... although I'm still blurry on why it would still be an expense if the option to purchase the stock at a certain value were not exercised.
Stock is wiorth $50, option is for 10,000 shares at $45 ... expense is $50,000 ... because the company could have made $500,000 instead of $450,000. But ... if the stock price is listed at $40 on "option day" and the option is not exercised ... the company is now in the position of having declared a $50,000 expense that is invalid.
Talk about high-cost bookkeeping!

 

[ejb]

Wingnut, and easy way to get your hands around it to pretend the company was not giving you that stock option...you can by stock options on the open market...and if you want to buy an option today it would cost you real money to buy that option....I beleive that cost of the option is the same cost company may need to expense when the option is granted...when the company gives the option to you, it has value...it might depreciate before it is ever excersized, but none-the-less when you got it, it was worth something

 

[Wingnut]

... and all of this just helps me feel that there's something inherintly wrong with "us".
Stock Options, Futures ... Lotteries ... etc, etc ... I know Life's a gamble ... but ...
I'm overly simplistic .. but stock makes sense to me ... I'm buying into a company that's going to make products, sell them for a profit, and I get some cash every 3 months.
Futures, Options and the rest ... well ... just looks like a scheme to keep con-men (oops, stock "brokers") off the streets and in nice comfortable offices.

OK ... back to the off-topic-topic we set out to discuss ... the Federal Defecit and how the government is going to help by enacting new useless, ineffective laws ...

BTW ... Chuck ... notice that I, a lowly neo-conservative ... actually agreed that I was looking at stock options WRONG and stated that I LEARNED SOMETHING?