State of the Shelanman

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April 14, 2005

Evil Dr. Bush and his Tax Cut for The Wealthy

I recently saw yet another claim that Evil Bush's Tax Cut gave the "average schmo" $300 and saved "the wealthy" Billions and Billions.

Not all that long ago, I heard another individual saying "The average guy got one month's car payment on his Chevy, the Wealthy got a free brand new Lexus..." (Note: Not an actual quote -- those quote marks are really paraphrasemarks)

So, I decided to waste a half hour and do the research so that my rebuttal could be more accurate (and therefore meaningful). Here's what I found.

Let's assume for the sake of argument that the definition of "the wealthy" is any family who earns more than $320,000 per year. (I am using the "Married Filing Jointly" status for this comparison. There are significant differences (unmarried individuals can earn $320,000 before entering the highest bracket, but married couples can total no more than the same $320,000 -- or about $160,000 each))

Let's also assume that the "average schmo" is family earning, oh... $58,500 per year. (Remember, that's the couple's total, not the individual -- for this calculation, individual is $29,050)

I am using 1999 as the standard for "before the tax cut" and 2004 as "after the tax cut". For the purposes of this calculation, I am assuming income to be the taxable income, if only to simplify calculations. I am aware that there were a myriad of little credits and deductions added to the tax code in the last several years, and that ignoring them decreases the accuracy of my comparison.

Feel free to do more in-depth research to get more-accurate numbers.

The Wealthy:
in 1999, they earned $320,000 of taxable income, and were taxed as follows: (calc from the 1999 IRS Form 1040 Instructions)

Income over $283,150: Tax 90,200.50 + 39.6% of all income over $283,150.

$90,200 + (.396)*(320000-283150) = $104,793 in taxes.

In 2004, they earned the same $320,000:
Income over $319,100: Tax: $86,328 + 35% of all income over $319,100.

$86,328 + (.35)*(320000-319100) = $86,643

$104,793 - $86,643 = $18,150 in tax cuts, a 17% decrease in income tax.

That's right, the family earning $320,000/yr pays 17% less now than before! Let's check out our "average schmo" family.

1999:
If you make less than $100,000 you use the tax table instead of the rate schedule. In 1999, the tax table said married couples earning $58,500 in taxable income owe: $10,791

2004:
Same rules apply, in 2004 the married couple owed: $8,106.

That means the tax cut saved them
$10,791 - $8,106 = $2,685. This means that they owe 24.8% less tax today than they did before the tax cut.

That means the average couple saved over 24%, the wealthy couple saved about 17%. Not quite so unfair-to-the-average-schmo as you might think.

If you disagree with my definitions of average and wealthy, feel free to plug in your own numbers. I used these because they were near the cutoff points for different tax brackets, and I assumed that the government's definition of average and wealthy were based on those numbers.

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There will be an immediate response of "bah, percentages, average-guy saved under $3k, wealthy-guy saved over $18k!" to which I can only say, you can hardly consider it fair to decrease taxes on the average individual so far that they are being *paid* by the government...

— The Shelanman

Posted by andrew at 01:43 PM | Comments (0) | TrackBack

April 08, 2005

Fool says: BUD get's KO'ed

I've decided that my blog is the perfect forum for me to comment on some of the investment stuff I've been reading lately. Seems my latest hobby has been learning how the various markets (mostly, the U.S. markets) work, and all of the interesting mysticism that surrounds it.

Today, I read an article on The Motley Fool that whines about Anheuser-Busch, and how they don't understand why "value" investors like it so much. They recommend Coca-Cola instead.

As new as I am to this game, I have an answer... Read on for my very first on-line stock analysis. (And best yet, you get two for one click!

Anheuser-Busch (symbol: BUD) makes beer. Coca-Cola (symbol: KO) makes soft drinks. Certainly they are in the same general industry, though beer and coke (the drinking kind) aren't directly competing.

The author of the Motley Fool article, Stephen Simpson, exclaims: "Frankly, I've never quite understood why so many value investors love Anheuser-Busch so much. I certainly can appreciate the virtues of the company's wide economic moat, but where's the growth?" He goes on to explain that Coca-Cola is growing at about twice the rate of Anheuser-Busch.

But Mr. Simpson, Growth investing is about finding the companies that are growing rapidly and paying whatever price necessary to buy them. Value investors like myself instead look at the companies prospects for earnings and earnings growth in comparison to the price of the stock.

Assuming that Yahoo Finance's estimated growth rates and the like are close (this isn't necessarily always a good assumption in my mind, but for now...), Coca-Cola is growing its earnings at a rate of about 11.5% per year, on revenue growth of about 4.5%. In order to buy this large stable company undergoing 11.5% earnings growth, you must fork over $21.10 for every $1 of earnings (in 2004 — given 11.5% growth in '05, that would mean a forward P/E of about 18.60)

Anheuser Busch, on the other hand, is expected (again by Yahoo! Finance) to grow its earnings about 7.9% this year, on a revenue growth of about 5.6%. Today, $1 of Anheuser-Busch earnings can be bought not for $21.10 looking backward or $18.60 looking forward, but instead only $16.60 looking backwards, and about $15.50 looking ahead. This means that while the company is growing much slower, it's earnings are "on sale" — $3.10 less than those from Coca-Cola.

Now, granted, Anheuser-Busch's prospects for growth don't look as good right now (this is primarily due to a decrease in the American appetite for beer (or perhaps just cheap crappy American beer)). So, let's compare these two companies:

What does this mean? Even if the growth rates for these two companies remain the same for 5 years, looking at buying 2009 earnings, it would still be cheaper to buy Anheuser-Busch!

That's why value investors prefer it to Coca-Cola. By buying BUD, you get future earnings of a large beverage maker on sale (at least relatively speaking... I think $11.15 for a potential $1 earnings 5-years-out is expensive).

Also, how long can we expect these growth rates to remain accurate. Companies regularly miss expectations of quarterly earnings — and that's when the estimates are made the day before earnings are released! Who can say that the next generation won't be the Bud-Lite generation (let us pray that this is not the case!) — All-in-all I think Anheuser-Busch is a decent, but still moderately expensive long-term investment.

(As always, if you want an opinion on it's quality as a short-term investment, find a chartist!)

— The Shelanman

Posted by andrew at 02:13 PM | Comments (0) | TrackBack

First Post!

Well, it's the first post in a really long time anyway!

I'm still here, working on the InsideWork website.

I'm still looking for a place to live in Irvine, CA. If you have a nice place, or are looking for a nice place, leave me a comment or send me e-mail, and we'll talk!

If you will be anywhere near Orange County, CA on Monday April 11th, you should consider attending the first meeting of the Libertarian Social Club of Orange County. Especially if you're a libertarian (or wish you were).

I'll try to come up with interesting stuff to post here a bit more frequently... so keep checking back, or grab the RSS. (It's off to the right somewhere)

Posted by andrew at 10:20 AM | Comments (0) | TrackBack