Monday, July 9, 2012

Jobs Report/FTE Dividend-Withholding Tax/Sold 100 METPRA at $24.95/Did Romney Raise Taxes as Governor?/

The Labor Department reported last Friday that the U.S. economy added only 80,000 jobs in June. Employment Situation Summary Private companies added 84,000 jobs and government jobs declined by 4,000. The average work week increased by .01 to 34.5 hours. Average hourly earnings increased 6 cents to $23.5 per hour. The U-6 number ticked up .1 to 14.9. Table A-15. Alternative measures of labor underutilization The Labor participation rate remained unchanged at 63.8. Stocks, Bonds & Politics: Causes for Labor Participation Decline

The German two year note fell to a negative yield on Friday.

When asked whether Romneycare's individual mandate was a tax, a senior advisor to Romney, Mr. Etch-A-Sketch himself (Eric Fehrnstrom), replied that it was a penalty rather than a tax. That comment was made after the Supreme Court decision on Obamacare. YouTube

In both Romneycare and Obamacare, a failure to purchase health insurance would be subject to a "fine" or "penalty". If Romneycare's "penalty" was a "tax", then Romney could no longer claim that taxes were not raised during his term as governor. That explains the predicament of Mr. Etch-A-Sketch. 

The rich benefactors of the GOP went into apoplexy about Fehrnstrom's characterization, since their PACs could use that "tax" label in attack ads aimed at Obama. Romney then scheduled an interview to rebut his senior aides claim. NYT

While Republicans want to repeal Obamacare in its entirety, replacing it with a secret plan to be revealed afterwards currently known as "patient centered reforms", they want to pin the tax increase label on Obama, and Mr. Fehrnstrom was interfering with the attack ads already in preparation by calling it a "penalty". Those ads have already started to air. It is hard to watch TV and avoid seeing one of them. Those commercials do  not start with a pleasant woman's voice saying "lower taxes on the super rich and eliminate regulations so that the top 1% can put more money in their pockets" before starting the attack ad.

There is a downside for Romney associated with labeling a "penalty" for refusing to buy health insurance as a "tax" increase. Romney is stuck with the same type of "tax" increase under Romneycare. It would consequently be even more difficult for him to assert that he never raised taxes while governor of Massachusetts.

Romney has claimed that he did not increase taxes while he was governor of Massachusetts. He campaigned on that assertion. Maybe he did not raise anything that was labelled a tax. In his first year as governor, he raised fees and closed corporate tax loopholes. 

The Massachusetts Taxpayers Foundation estimated that the increased fees and taxes raised about $740-$750 million per year, evenly dividend between increased corporate taxes and fees.  

I prefer keeping my nomenclature simple. I ask myself, "what is the substance", not  "what is the label". (e.g. are most republicans "conservatives"). A "tax" is money paid by me to any government. Consequently, an increase in my automobile license "fee" is just as much a tax as the one imposed by the federal government on my income. If a person is a renter, part of their rent is the real estate property tax paid by the landlord. The checks used to pay the tax do not seem to care whether politicians call the payment a fee, penalty or a tax. The money is transferred from me to the government regardless of the label.

I can avoid all or most of these taxes legally. For example, I could sell my car and acquire a bicycle which does not require a license tag. I could quit earning taxable income and invest all of my money in tax free Tennessee municipal bonds. I could avoid the property taxes on my home by selling it and moving into my 89 year old mother's house.

And, if I did not want to pay the Obamacare tax associated with the individual mandate, I could simply keep the insurance policy that I already have which seems easier than replacing my car with a bicycle, or selling all of my securities and buying only Tennessee municipal bonds yielding almost nothing. I will not comment on the option for avoiding property taxes.

{I would add just one twit about the Obamacare tax, without delving into details which would be boring. The Supreme Court actually held that this was not a tax under the Anti-Injunction statute and was a tax only within the purview of Congresses Constitutional taxing authority. (see discussion at PolitiFact for a simplified discussion of that issue) So, the Supreme Court held that it was not a tax within the meaning of the Anti-Injunction which prohibits challenges to a tax before the government starts to collect them but was a tax within the meaning of  the Constitution.}

Vanity Fair has an article exploring the many interesting features of the one tax return released by Romney. That return was for 2010, released only after considerable pressure from Romney's republican primary opponents. After reading that article, I understand why he would refuse to release any returns prior to 2010. There is a lot of fodder for critics in that one tax return. Romney is a major beneficiary of the favorable tax rates for "carried interest" and his hedge fund buddies are contributing large sums to his campaign in order to insure that tax loophole is kept. (see discussion of this tax rule at

David Koch hosted a fundraiser for Romney this past weekend.

1. Sold 100 METPRA at $24.95 Last Thursday (see Disclaimer): This particular lot was purchased prior to starting this blog in October 2008. METPRA is a floating rate equity preferred stock that pays non-cumulative, qualified dividends at the higher of 4% or 1% over the three month LIBOR rate on a $25 par value. Prospectus

I sold the shares at 5 cents below the $ 25 par value. My average total cost per share was $12.03:

2012 METPRA 100 Shares Realized LT Capital Gain=$1,283.99
For the entire period that I owned these shares, I received the 4% coupon. That coupon is likely to remain in effect through 2014, as the Fed continues its Jihad Against the Savings class for an "extended period of time". The 3 month LIBOR rate would have to rise above 3% during the applicable computation period to trigger any increase in the coupon.

I wanted to harvest this capital gain when I knew that the LT capital gains tax would be 15%. I also prefer realizing than gain rather than continuing to risk it. The 4% dividend, which is close to a $100 per year on the 100 share lot, is less important to me than the $1,283.99 gain taxed at a maximum of 15%.

Although equity preferred stocks are technically part of a firm's equity capital and are not bonds, I classify them as bonds in my asset allocation.  An owner of those securities has no equity interest in the business, but only a superior right to dividends compared to the common stock owner. The bond characteristics of this type of security are more dominant than their equity features. Yet, the security would be junior in priority to all bonds. While non-REIT equity preferred stocks will generally pay qualified dividends, even that advantage will expire at the end of this year, and the extension may depend on the outcome of the November elections, both in Congress and for President.

Since my overall view of this sub-asset class is unfavorable, I have never devoted much money to it. Nonetheless, I have harvested since 2008 $9,895.11 in realized gains, mostly on 100 share or less positions.  Snapshots of trades can be found at the end of Advantages and Disadvantages of Equity Preferred Floating Rate Securities.

Floaters: Links in One Post

MetLife Inc. Floating Rate Non-Cum. Pfd. Series A (MET.PA) closed at $24.91 last Friday.

2. FTE Dividend:  I own 100 FTE shares in two accounts. In the following account, I received the dividend in cash, and Fidelity withheld $2.4 to pay a fee and 15% of the total for France's withholding tax:

I also own 100 FTE shares in a Sharebuilder account. I reinvested the dividend. This brokerage firm does not show the fee charged but the total amount of the dividend was reduced by the amount of the fee. However, that fee was slightly less at $2. Sharebuilder withheld 30% to pay France's tax:

I did email that firm and requested an explanation.  I really do not care given the amount. However, it would make a difference to me if I owned a 1000 or more FTE shares.

I am the trustee of a trust account at Schwab and that firm withheld 30%. I sent an email to Schwab reporting the disparate treatment and requesting an explanation. Schwab replied that the matter needed to researched and promised to get back to me. TD Ameritrade withheld 30%, and I am not going to fool with them.

Vanguard withheld 15% from my mother's account that I manage for her pursuant to a power of attorney:

I would never make the assumption that brokerage firms are doing things right.

Added 10/1/12: This subject is discussed further in two subsequent posts: Item # 3 Withholding Tax for Recent FTE Dividend and Item # 2 Sold 105+FTE. The percentage differences (15% or 30%) depend on whether the broker applies for "relief at source", see ‎ The current fee for that application is $.005 per ADR share or 50 cents for 100 shares. That fee would be included in the fee charged by the broker back to the client. 


  1. Reportedly, Romney has $100 mil in his IRA. How is that possible with the limitations?

  2. Look at St. Louis Stress chart divergence w/ S&P, yet complacency is at absurd levels.

  3. The Vanity Fair article explores how Romney probably grew his IRA to such absurd levels and that is one reason why he want release his tax returns prior to 2010. I would recommend reading that article. Basically, he would put common stock in his IRA from the companies taken over by BAIN. The valuation of that stock is key given the limitations on IRA contributions. Romney would not want independent auditors looking at those initial valuations, since they might be unjustifiably low. In any event, it points to one way that the super rich take advantage of tax provisions. He has a 15% tax rate while making millions per year, and part of that is due to the carried interest tax loophole which converts compensation into long term capital gains taxed at 15%. He also probably has more offshore trusts than all previous U.S. Presidents combined multiplied by 10.