September 27, 2020

Americans Spent More and Made Less, Data Shows

WASHINGTON — Consumer spending rose in January as Americans spent more on services, with savings providing a cushion after income recorded its biggest drop in 20 years. Other economic reports showed consumer sentiment and manufacturing activity higher.

The Commerce Department said Friday that consumer spending increased 0.2 percent in January after a revised 0.1 percent rise the prior month. Spending had previously been estimated to have increased 0.2 percent in December.

January’s increase was in line with economists’ expectations. Spending accounts for about 70 percent of American economic activity. When adjusted for inflation, it rose 0.1 percent after a similar increase in December.

Though spending increased in January, it was supported by a rise in services, probably related to utilities consumption. Spending on goods fell, suggesting some hit from the expiration at the end of 2012 of a 2 percent payroll tax cut. Tax rates for wealthy Americans also increased.

The impact is expected to be larger in February’s spending data and possibly extend through the first half of the year as households adjust to smaller paychecks, which are also being strained by rising gasoline prices.

Income tumbled 3.6 percent, the largest drop since January 1993. Part of the decline was payback for a 2.6 percent surge in December as businesses, anxious about higher taxes, rushed to pay dividends and bonuses before the new year.

A portion of the drop in January also reflected the tax increases. The income at the disposal of households after inflation and taxes plunged a 4 percent in January after advancing 2.7 percent in December.

With income dropping sharply and spending rising, the saving rate — the percentage of disposable income households are socking away — fell to 2.4 percent, the lowest level since November 2007. The rate had jumped to 6.4 percent in December.

In another report on Friday, the Institute for Supply Management said its index of national factory activity rose to 54.2 points from 53.1 in January, topping economists’ forecasts for a pullback to 52.5. It was the highest level since June 2011, a sign that manufacturing is picking up as new orders continue to accelerate.

A reading above 50 points indicates expansion in manufacturing. The sector lost traction in the second half of last year and contracted in November in the wake of the damage in the Northeast caused by Hurricane Sandy.

The new orders index jumped to 57.8 from 53.3, making for the highest level since April 2011. The gauge of production gained to 57.6 from 53.6, while inventories edged up to 51.5 from 51.

But the employment component slipped to 52.6 points, from 54.

Separately, a survey released Friday showed that consumer sentiment rose in February as Americans were more optimistic that the jobs market would improve, even as confidence in fiscal policy was near all-time lows.

The Thomson Reuters University of Michigan’s final reading on the overall index on consumer sentiment rose to 77.6 points from 73.8 in January, topping expectations for attitudes to hold steady with February’s preliminary reading of 76.3.

Fewer Americans expected unemployment to rise, with survey respondents feeling slightly better about prospects for the economy.

The barometer of current economic conditions rose to 89 points from 85, while the gauge of consumer expectations gained to 70.2 from 66.6.

At the same time, 43 percent considered government economic policies to be poor and just 15 percent said the administration was doing a good job.

“Consumers find the blame-game for policy inaction a very unsatisfactory substitute for a concerted effort to improve the economy,” Richard Curtin, survey director, said in a statement.

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High & Low Finance: Dell’s Ups and Downs With Options

Now, nearly 25 years after it went public, Dell Inc. is reported to be considering leaving the public arena by going private in what would be the largest leveraged buyout in years. The company is no longer viewed as a leader, and its share price is less than it was a decade ago.

For most of its history, Dell appears to have followed advice from investment banks — advice that ill-served long-term shareholders to the benefit of corporate executives. The company paid out billions of dollars to buy back stock, and only last year began to distribute some of the money to shareholders who chose to stick with it rather than bail out.

It has spent more money on share repurchases than it earned throughout its life as a public company. Most of those repurchases were at prices well above current levels.

Here’s the breakdown so far: Cash paid by the company to shareholders who were bailing out: $39.7 billion. Cash paid in dividends to shareholders who chose to hold on to their shares: $139 million. Current market value of the company: about $22 billion.

Along the way, profits for Dell executives from stock options soared to amazing levels, and Michael S. Dell, the founder, chairman and chief executive, evidently concluded he had erred by not taking options during the company’s early years.

In 1994, the company’s proxy stated “Mr. Dell does not participate in Dell’s long-term incentive program because of his significant stock ownership.” That changed in 1995, and in 1998 he received more than 20 percent of the options the company issued. His options eventually produced profits of more than $650 million for him.

This column is not about Dell’s business successes and struggles, which have been well covered elsewhere. It instead looks at the company as an example of financial management and mismanagement — and at the impact foolish accounting rules can have on corporate policies and behavior.

The primary accounting rule involved here was for stock options, but the general rule that companies do not need to record profits or losses on transactions in their own stock also played a role, allowing companies to routinely sell low and buy high without ever reporting a loss.

Until 2005, companies could pretend that stock options they handed out to employees and executives were worthless, and therefore not show them as an expense, as they would if they paid the employee in cash or even in shares of stock. The logic to the rule was that since the options would in the end be valuable only if the share price rose, there was no need to record an expense when the options were issued. Anyway, the companies said, this was a cashless expense. The company would not have to pay a penny, so why record an expense?

Accountants realized years ago that made no sense, and in the 1990s the Financial Accounting Standards Board, which sets American accounting rules, moved to change the rule. Companies, particularly technology companies, reacted as if capitalism itself were under attack. Make them account for options, they said, and people would stop buying their shares and America’s technological innovation would come to an end.

That argument did not persuade the accountants, but it — and a lot of campaign contributions — had more impact on Capitol Hill. In 1994, the Senate voted 88 to 9 in favor of a resolution threatening to put the accounting standards board out of business if it did not back down. The board surrendered, and it was another decade before it recovered its nerve.

One trouble with the argument that no cash was involved was that in practice it was far from true. Many companies, Dell among them, sought to reassure shareholders that they would suffer no dilution through the issuance of stock options, vowing to buy back as many shares as they issued through options.

Floyd Norris comments on

finance and the economy at

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Wealth Matters: The End of a Decade of Uncertainty Over Gift and Estate Taxes

For estate and gift taxes in particular, all but the richest of the rich will probably be able to protect their holdings from taxes, now that Congress has permanently set the estate and gift tax exemptions at $5 million (a level that will rise with inflation.)

“You could say this eliminates the estate tax for 99 percent of the population, though I’ve seen figures that say 99.7 or 99.8,” said Rich Behrendt, director of estate planning at the financial services firm Baird and a former inspector for the Internal Revenue Service. “From a policy point of view, the estate tax is not there for raising revenue. It’s there for a check on the massive concentration of wealth in a few hands, and it will still accomplish that.”

And while Congress also agreed to increase tax rates on dividends and capital gains to 20 percent from 15 percent for top earners — in addition to the 3.8 percent Medicare surcharge on such earnings — the rates are still far lower than those on their ordinary income. For the earners at the very top, whose income comes mostly from their portfolios of investments, and not a paycheck like most of the rest of us, this is a good deal.

The estate tax, once an arcane assessment, has been in flux and attracting significant attention since 2001. That was when the exemption per person for the estate tax began to rise gradually from $675,000, with a 55 percent tax for anything above that amount, to $3.5 million in 2009 with a 45 percent tax rate for estates larger than that. Estate plans were written to account for the predictable increases in exemptions.

Then in 2010, contrary to what every accountant and tax lawyer I spoke to at the time believed would happen, the estate tax disappeared. Congress and President Obama could not reach an agreement on the tax. So that year, for the first time since 1916, Americans who died were not subject to a federal estate tax. (Their estates still paid state estate taxes, where they existed, and other taxes, including capital gains, on the value of the assets transferred.)

At the end of 2010, President Obama and House Speaker John A. Boehner reached an agreement that was just as unlikely as the estate tax expiring in the first place: the new exemption was $5 million, indexed to inflation, with a 35 percent tax rate on any amount over that, and it would last for two years. The taxes and exemptions for gifts made during someone’s lifetime to children and grandchildren were also raised to the same level, from $1 million and a 55 percent tax above that.

As I have written many times, this was a far better rate and exemption than anyone expected. It also created a deadline of Dec. 31, 2012, for people who could make a major gift up to the exemption level or above the amount and pay the low gift tax.

Using the gift exemption was enticing because it meant those assets would appreciate outside of the estate of the person making the gift. Even paying the tax became attractive to the very rich because of how estate and gift taxes are levied. Take, for example, someone who has used up his exemption and wants to give an heir $1 million. The amount it would take to accomplish this differs depending on when it is given. In life, it would cost $1.4 million because the 40 percent gift tax is paid like a sales tax. If it was given after death, the estate would have to set aside about $1.65 million after the 40 percent estate tax was deducted. But this presented a conundrum: while it may make perfect sense to give away a lot of money during your lifetime and save on estate taxes, it means ceding control of cash, securities or shares now. What if you end up needing them? It wasn’t an easy decision, and it led to a fourth-quarter rush.

As of this week, this is no longer an issue. The estate and gift tax exemptions are permanently set at the same $5 million level, indexed for inflation, and the tax rate above that exemption is 40 percent, up from 35 percent. With indexing, the exemption is already about $5.25 million per person — double for a couple — and it will rise at a rate that means most Americans will continue to avoid paying any federal estate tax.

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Common Sense: Comparing the Tax Bite With Obama and Romney

Would you pay more or less in tax? And how would that stack up against the richest Americans like Warren Buffett, who’s currently paying a lower rate than his secretary?

Considering how central these issues have been to the campaign, it’s curious how hard it is to come up with answers, perhaps because both candidates want voters to believe that someone’s else’s taxes may have to rise, but not theirs. Whether Mr. Romney’s math adds up and whether taxing the rich would make a dent in the deficit might make an interesting public policy debate, but those issues further obscure the most basic question, which is what effect the proposals will have on each of us.

I’m not saying voters should simply vote their pocketbooks. But I would at least like to know how much I’m being asked to pay and what I might expect in return. This has been especially true since I discovered this year that I paid a rate in federal income tax that’s nearly twice as high as Mr. Romney’s. As I said then, I’m not faulting Mr. Romney for taking advantage of the existing tax code, but that disparity continues to rankle.

Tax reform and the related issue of economic growth have been major themes in the campaign that will end on Tuesday. The economy has taken center stage, and both candidates have been making much of tax platforms that aim to spur growth and job creation while promoting fairness. Mr. Romney has been the more ambitious, calling for sweeping tax reform that would lower rates while broadening the base by limiting unspecified deductions and loopholes. “Tax policy shapes almost everything individuals and enterprises do as they participate in the economy,” he says on his “Mitt Romney for President” Web site.

President Obama has called for a return to the top rates that prevailed in the Clinton administration and higher rates on capital gains and dividends. “We can’t get this done unless we also ask the wealthiest households to pay higher taxes on their incomes above $250,000 — pay the same rate we had when Bill Clinton was president,” Mr. Obama said last month while campaigning in New Hampshire. “We created 23 million new jobs, and we went from a deficit to surplus. That’s how you do it.”

So what would the impact of their tax proposals be? After consulting several tax experts, I did the calculations both on my own returns for 2009 and 2011 as well as for the wealthiest 400 taxpayers.

For the Romney plan, I took the proposals from his Web site that apply to taxpayers with adjusted gross incomes over $200,000: a 20 percent cut in the top rate (to 28 percent from 35 percent); dividends and capital gains taxed at the existing preferential rate of 15 percent; and the abolition of the alternative minimum tax. Mr. Romney hasn’t said what itemized deductions he would abolish or limit, but he has said he might cap or eliminate those deductions for high-income taxpayers.

Mr. Romney has mentioned a cap on deductions of $17,000, and has also said: “One way, for instance, would be to have a single number. Make up a number, $25,000, $50,000. Anybody can have deductions up to that amount And then that number disappears for high-income people,” meaning high-income people would be allowed no itemized deductions.

So in the spirit of Mr. Romney’s comments, I eliminated all itemized deductions. I retained the self-employed health insurance deduction and the deduction for contributions to a qualifying retirement plan. So far as I can tell, Mr. Romney hasn’t proposed abolishing those.

I took Mr. Obama’s tax proposals from his proposed budget and subsequent campaign statements, in which he has called for a return to Clinton era rates of 36 percent (for single taxpayers in roughly the $200,000 to $400,000 bracket) and 39.6 percent for those earning over $400,000 for both ordinary and dividend income and a 20 percent rate on capital gains. While Mr. Obama has talked about repealing the A.M.T., he hasn’t actually proposed doing so and has only suggested indexing it to inflation, so I retained the A.M.T. in the Obama calculations.

I assumed the Obama proposals would raise my rate and the Romney plan would lower it. But the Romney plan actually increased my rate to 25.5 percent from 22.2 percent in 2011, and to 27.6 percent from 26.7 percent in 2009. The Obama plan raised it even more substantially, to 30.6 percent in 2011 and 29.3 percent in 2009.

Including the minimum tax in the Obama plan had a significant impact. If Mr. Obama abolished it, my rate under his plan fell to 29.7 percent in 2011 and to 26.7 percent in 2009 — lower than the Romney plan, in fact, in 2009. If Mr. Romney allowed me the $17,000 in itemized deductions he has mentioned, it would have only a negligible impact, lowering my rates 0.5 percent.

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You’re the Boss Blog: Giving Employees a Stake in the Outcome

Sustainable Profits

The challenges of a waste-recycling business.

Compensation is one of the most complex and challenging topics I have come across during my eight years as chief executive of TerraCycle. By definition, it is a highly personal topic that is charged with emotion for employees and can involve their personal aspirations, their sense of self worth and pressures they feel at home.

I have always been a proponent of offering employees a stake in the outcome. When I started TerraCycle, I couldn’t pay anyone. To get people to commit to full-time work, I gave them stock options. As a result, I succeeded in getting a lot of fine people to work for the company, and we ended up with lots of stock-option holders who are not involved with the company today (almost a decade later).

Stock options give employees the right to buy stock in the company at a set price but at a later point in time, presumably when the market price of the company’s stock has risen in value. Because TerraCycle is not a public company, the price of the stock options are determined by a 409A evaluation, which is done by an independent company. Once the stock is purchased, an employee can transfer or sell it if there is a liquidity event in the company, and they can earn dividends if they are declared.

A number of the early employees who were granted stock options have decided to exercise some of their options for stock. In other words, they paid the exercise price of the option and bought stock in TerraCycle, effectively giving them the same status as one of our traditional equity investors. In general, investors can gain a return through dividends (which we have not yet declared) and through a sale of their stock (so far TerraCycle has bought back about 3 percent of the business via stock-repurchase tenders).

While stock options allow companies to create incentives for employees that don’t involve cash, they also create a complicated and costly administrative burden. The law requires the company to engage a third party to run an annual analysis of the value of the shares. The company must also inform option holders when their stock options are about to expire and respond to requests for information. And if most of the option holders exercise their options, the company can end up with many small shareholders. If your company has too many, it automatically becomes a public company for regulatory purposes, subject to the rather costly and cumbersome burdens of Sarbanes-Oxley.

To put this administrative burden into perspective, TerraCycle has 100 employees and about 100 shareholders and our shareholder administration (employees and investors together) probably consumes the equivalent of two full-time employees plus five-figure annual legal fees.

If you give stock or options to large numbers of employees, as TerraCycle did, and have a large investor shareholder base (as TerraCycle does), you will eventually constrain the company’s ability to offer additional option packages to future employees who truly deserve a stake in the company. Each year, we  watch carefully as old options expire, which helps bring stock back to the business and reduces the list of potential shareholders. We are not anywhere near being at risk of being classified a public company, but we are constrained to the point where we can’t issue additional options to more than a few employees, and given that I want everyone at TerraCycle to have a stake in the outcome, that’s a problem.

That’s why I recently challenged my executive team to find an alternative solution that wouldn’t face these constraints, a way for TerraCycle to give all employees, now and in the future, the benefits of stock options without creating burdens and constraints for the company.

To offer a benefit that is similar to receiving dividends, we plan to implement a profit-sharing program in 2012 for all employees. To offer a stake in the outcome if and when the company is sold, we turned to an incentive plan called “phantom units” that gives employees the ability to participate in the sale of the company as if they are shareholders without actually being shareholders.

Phantom units are a contractual right the company gives an employee to participate in the sale of the company. Phantom unit holders don’t receive dividends or get to vote, but they do get a payment, equivalent to that of a common share, at the time of a change of control or sale of the company.

In lay terms, here is how our program will work: Employees will get a grant of phantom units proportional to their salary every year of their employment. Each unit will entitle them to receive a share of the company equivalent to what a common stockholder receives. If and when the company is sold, each unit of phantom stock will be equal to a common share. Financially, the employee doesn’t have to pay an exercise price for the phantom shares, but if the company is sold, the proceeds are taxed as ordinary income instead of as capital gains.

In other words, after eight years of figuring out how to give a stake in the outcome to all employees and creating a mess in the process, we have found a formula that gives employees the benefits of stock options with significantly fewer headaches.

Tom Szaky is the chief executive of TerraCycle, which is based in Trenton.

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Bucks Blog: Friday Reading: How to Avoid Impulse Moves in Retirement Investments

September 15

Should You Automatically Reinvest Dividends?

Reinvesting your dividends comes with several benefits, though some investors, including retirees, may want to consider a different strategy.

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Bucks Blog: Thursday Reading: Pay for Only 4 Years of College, Guaranteed

September 15

Should You Automatically Reinvest Dividends?

Reinvesting your dividends comes with several benefits, though some investors, including retirees, may want to consider a different strategy.

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