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For the most part, I’m fairly liberal in my beliefs. There are a couple of places where I diverge from the liberal dogma and one of those is the taxation of corporations. Every once in a while, you will hear a howl of protests from the left about how {insert evil corporation here} is not paying their fair share in taxes or that businesses as a whole are not paying enough taxes. On a state level, the latest protest comes from Rod Blagojevich, the Governor of Illinois, who is using the “big business as tax bogeyman” argument to push through his plan to quadruple taxation of businesses by instituting a gross receipts tax to replace the current net income tax.

Now, I’m not here to defend the use of tax strategies that shift income from state to state to avoid income taxes. I think they are shady and they’ve caused problems for every company that is not doing it (and it’s far from a majority that are using these strategies). I’m also not here to say that businesses shouldn’t pay taxes. I’m here to discuss the economic incidence of taxation and who really pays when business taxes are raised.

It was brought on by a discussion in a forum of people that I often disagree with, but respect (for the most part). They raised the idea that if corporations paid their fare share in taxes, we could have universal health care. That’s the basic idea of Governor Blagojevich’s plan, though he’s raising money for other pet projects along with health care. Again, I’m not arguing what we should do with health care (though it is a broken system).

Business entities don’t really exist. They’re a legal fiction created by governments so that individuals can raise money to expand their businesses easily and will take chances without putting all of their own assets on the line. In the end, businesses are really an extension of the owners and nothing more. For instance, if a business goes under what does the corporation itself lose? Nothing, because it had nothing to begin with. Who loses? The owners that put their money into the corporation and the employees that were employed. The economic loss of a business going under is borne by individuals, the owners and employees that will no longer generate income from that business. You can extend this to creditor in the above example. It’s the owners of the corporation that ultimately bear the loss through smaller returns on the money that they invested.

A similar situation happens with taxes. Let’s say that business taxes are immediately raised by 20%. Businesses have three choices: they can eat the tax, they can raise revenues to cover the increased tax, or they can cut costs to cover the increased tax. Let’s see what happens with each situation.

In the first option, the business decides to take a hit to its profits and simply eat the increased tax. This lowers profits and in a perfect market, the price of the stock is lowered to compensate for the fact that shareholders will receive less profit because more is going to the government. The lowered stock price hurts the individual investor, not the corporation itself. A private business works the same way. The owners of the business will realize less profit and therefore will have less income generated by the business. In the end, it’s the individual owners that take a hit.

In the second option, the business decides that it can raise revenues to cover the tax. How is it going to do this? By raising prices. Let’s take the example of Halliburton, a favorite of the left. Halliburton decides it is going to raise prices to compensate for the tax. It charges the oil companies more for its services in order to raise the revenue needed to cover the tax. The oil company will then raise its prices to not only cover the increased cost of business from Halliburton but to also cover its raised tax liability. So, now the tax increase is priced into oil twice. The refiner buys the oil from the oil company. It has to raise prices to cover the increased cost of the oil and the increase it sees in tax. Now the tax increase is in the fuel three times. Your local gas station buys fuel from the refiner. The gas station has to now price the fuel it sells to you for its cost plus the effect the tax has on them. The loser? The consumer that buys the fuel. The consumer has to pay for the increased cost at each step because the tax was raised. None of the business entities themselves are hurt. If one of the steps in the chain decides to not pass along the increase in cost, we’re back to scenario one and the individual owners of the firm bear the tax.

Now, let’s take a look at the last scenario. If a business wants to cut costs in order to cover the tax, what is the highest cost for most firms? Bingo, wages. The way most businesses would recoup the tax is through lower wages. Whether it is not hiring that next person, lowering annual pay increases, or cutting jobs entirely, wages would likely be lowered to offset the effects of the tax. It’s not hard to see who bears the true burden of the tax in this scenario.

Politicians like raising business taxes because they can use populist slogans and claim that they are not raising your taxes, just evil businesses that don’t pay their fair share. Next time you hear that claim, think about it twice before joining the chorus.

The big news in the financial markets this morning is the proposed IPO of Blackstone, the uber-private equity firm. Many market analysts are drooling over getting a look at Blackstone’s operations, which have essentially minted cash for the firm in the past few years. Media outlets have reported that the average Blackstone analyst has generated nine times more profits than the most profitable investment bank (Goldman Sachs, naturally).

Investors are looking to get in on the private equity action without having to be an accredited investor. Like I said, Blackstone has been able to mint money the past twenty years or so. Since 1987, Blackstone’s private equity funds have averaged a return of 23% per year after fees. Their real estate holdings have averaged a return of 29% per year since 1991, when they began buying real estate.

Those numbers are simply eye-popping. However, anyone looking to get an idea of how Blackstone does what it does will be sorely disappointed. Investors will essentially be buying sight unseen. On Page 62 of the S-1 (as pointed out by Footnoted), investors will have limited voting rights and no right to select management of the firm. Basically, you’ll be buying the right to profits and hoping for the best.

The bigger question is why private equity is going public now? My guess has something to do with the flood of money coming into these entities. Returns are likely to drop in the future as they have to put more money to work (internally generated funds as well as new money). People are throwing money at them begging them to take it. This is a chance for senior management to cash out. When senior management wants to cash out, I start to worry. Especially for an entity that has so avoided the limelight and tried to keep its financial information so secret.

Part of the allure of being purchased by the Blackstones of the world is that management generally makes out like bandits with ownership percentages and payouts. I doubt that the managers at Blackstone would cash out unless they expect returns to drop and they have decided now is the best possible time to maximize their payout. I certainly don’t blame them for that, but I don’t necessarily want to be on the other end of the transaction.

I think this is a buyer beware transaction, but I highly doubt Blackstone will have any trouble finding buyers for the $4 billion in shares they are selling to the public.

UPDATE: Marketwatch points out another issue with the investment. It’s structured as a limited partnership, which means that your share of income will be taxable whether or not you actually get any cash from them. Because of the complexity of the business, Blackstone estimates that they will not get the Federal K-1 to investors in time for them to file their returns and all Blackstone investors should plan on filing Federal and State extensions every year they own a share of the firm. It’s not a big deal if you are holding the shares (they should be called “interests”) in a tax deferred account or if you are used to owning partnerships, but for the general public it could get confusing.

Reuters has a story that Sirius and XM have made a federal filing stating that the merged entity will allow more a la carte options, meaning that customers could subscribe to a lower price point than the current $12.95/mo each company charges.

After Mr. Karmazin’s switcharoo earlier, this actually worries me. The great part about it currently is that my $12.95/mo gets me almost everything that XM has. My concern is that they’ll put baseball up in a premium price point and I won’t be able to get it for the current price that I am paying. The wording of the statement according to Reuters seems like exactly the same winkwink, nudgenudge Karmazin pulled on us initially.

After the merger, customers may elect to receive fewer channels at a monthly price lower than $12.95; substantially similar programming at the existing $12.95 price; or more channels … at a modest premium to the cost of one service, and considerably less than the cost of subscribing to both services

Reading that quickly, one would think that I’ll get the same programming I am currently getting for my $12.95. However, notice that the statement says “substantially similar” programming. What is substantially similar? I’d argue that removing baseball from my package would not be giving me substantially similar service despite the fact that it is a small percentage of the overall channels. That would obviously be what XM/Sirius would argue, that I am only losing a few channels whether or not that is the whole reason I subscribe.

I’m still iffy on the merger at best. I don’t feel like Mel Karmazin has been forthright with anybody, especially the customers. I have a serious problem with that.

See my previous merger coverage here, here, here, and here.

I’m not sure what it is with NASCAR, but the three other major sports sure could learn a thing or two from them on how to market their stars. With the exception of Peyton Manning’s ads for various products, how many other commercials can you name with athletes?

Maybe it has something to do with how the sponsors are integral part of the sport rather than seen as crass ways for the leagues/networks to cash in? Maybe it has something to do with the general perception of race car drivers as nice, clean cut young men (Danica’s in the wrong league to get major exposure)? Maybe it’s because the France family owns NASCAR (literally) rather than having 30 squabbling owners all looking out for themselves?

Whatever the reason, NASCAR has figured out how to market their stars. Exhibit A is the Nextel commercial with Jimmie Johnson and Elliot Sadler. Johnson is the reigning series champion and Sadler’s the one with the bad facial hair (seriously, dude). The ad cracks me up every single time I see it. Exhibit B is the series of ads that began last season with Kasey Kahne where he tries to outrun a cadre of, um, obsessive female fans.

Jeff Gordon, Dale Earnhardt Jr, Tony Stewart, really all of the big NASCAR names appear in ads for their sponsors on race day. Watching a football game, you get 95 ads with Peyton Manning and maybe an ad for that poster company with the big freaking decaled players. Watching baseball, you get maybe a Visa ad with Derek Jeter. I don’t really watch basketball, but I can’t think of a major national campaign featuring a baller that doesn’t involve shoes.

NASCAR’s marketing goes way beyond that. All of Mid-Missouri is aflame with Carl Edwards fever. He’s the local boy done good and many people who were not NASCAR fans have begun obsessively tracking his every move. He comes back to his hometown and does a lot of charitable work and takes time for the fans. Not “I’ll sign a ball for $85″ time for his fans, but time that people really can meet and greet him.

And maybe that is part of the perception on why drivers are more marketable than baseball players as well. They seem like regular people. Most people think “hey, I can drive for four hours on Sunday” even if they don’t think they can hit a Jason Schmidt fastball.

Whatever it is, kudos to NASCAR on marketing their stars. The other sports should be taking copious notes on what NASCAR is doing and find a way to replicate it with their own stars.

It wasn’t three days ago that I voiced jubilation at the fact that Mel Karmazin had said that price freezes would be in order for the XM-Sirius merger and that I was all for the merger with my last hesitation being overcome.

Well, not so fast. Kevin Martin, the current chairman of the FCC and the likely deciding vote on the merger, was interviewed by the NY Times in today’s article and shed some light on what Mr. Karmazin really meant.

As he sought to sell the proposed merger of Sirius Satellite Radio and XM Satellite Radio to Congress, and by extension to regulators like Mr. Martin, Mel Karmazin, the chief executive of Sirius, vowed last Wednesday that prices would not be raised and that listeners would benefit enormously by getting the best programming from both companies.

But in separate conversations with two people after Mr. Karmazin’s testimony to a House committee, Mr. Martin said that subscribers may be surprised to learn they may actually have to pay more than the current monthly rate of $12.95 if, for example, they want to receive all the games of Major League Baseball (now available only on XM) as well as all the professional football games (now only on Sirius).

Mr. Karmazin, reached on Tuesday, said his testimony was not misleading and that he meant to say two things: subscribers wanting to keep their existing service would not face a price increase, and listeners who wanted the best of both services would pay less than the combined rate of $25.90.

Whoa, wait a goshdarn minute. You were telling us that we would not pay more than we are currently paying, which is $12.95/month. Now, it’s we won’t pay more than the combined $25.90?

Mr. Karmazin is scheduled to appear before a second Congressional panel on Wednesday.

In the interview on Tuesday afternoon, he said he thought he had been clear that to get the best of both XM and Sirius, consumers would have to pay more than the monthly rate of $12.95, but less than the combined rate of $25.90. Consumers who just want to stay with their existing lineup would be guaranteed the same price, he said.

I won’t pay $25.90/mo (actually more because we have multiple radios) when I can plug my iPod in instead (there I helped your argument). Don’t tell us prices will be frozen and imply that we’ll get both services when that’s not the case. Tell us what the rates will be now instead of playing around and coming out with a $25.89/mo price point after the merger is approved.

I’ve now seriously cooled on the merger. Frankly, I’m not sure that I’ll trust them the rest of the way to tell us the truth if this main tenet of the merger can be so easily spun. I love my XM, but I have zero tolerance for companies that lie to me and I could easily live without my XM radio. I’m watching closely and will continue to watch and see. But right now, I’m not happy.

Michelle Leder of Footnoted gave out a rare gold star, not for the actual filing of compensation in the footnotes but for what the footnote said. Kinder-Morgan was more than happy to comply with the SEC’s new rules that force companies to further spell out exactly what executives are getting paid for perks like free jet travel and tax grossups on benefits (which can be more than the benefit itself).

Unlike many companies, we have no executive perquisites and, with respect to our United States-based executives, we have no supplemental executive retirement, non-qualified supplemental defined benefit/contribution, deferred compensation or split dollar life insurance programs. We have no executive company cars or executive car allowances nor do we offer or pay for financial planning services. Additionally, we do not own any corporate aircraft and we do not pay for executives to fly first class. We are currently below competitive levels for comparable companies in this area of our compensation package, however, we have no current plans to change our policy of not offering such executive benefits or perquisite programs.

Huzzah!

With the new rules, many companies are fully disclosing executive pay for the first time and squirming under the microscope. Apparently, the new rules led to the ousting of Home Depot CEO Robert Nardelli. He refused to take even a token pay cut that the Board demanded once they actually added up all of his perks. I’ll bet he won’t be the last to fall.

Looks like I was wrong on one item and correct on another in my initial analysis of the XM-Sirius deal from a customer’s perspective. XM and Sirius have reiterated that old radios will work with the new service per a letter that XM has sent to subscribers (I haven’t received it yet).

While on Capitol Hill this week defending the merger to Congress, Sirius CEO Mel Karmazin agreed that the companies would allow government set price controls to get the merger approved. Mr. Karmazin’s arguments were spoofed on public radio’s Marketplace program this week (I was so happy when this became a free podcast) as they don’t appear to be buying the “less is more” campaign.

Oh, how I loathe John Ashcroft. This week he blasted the deal in a scathing letter to his successor at the Justice Department on behalf of the National Association of Broadcasters, a terrestial radio lobbying group. While he didn’t bring up any new issues, the letter was seen as a blow to the merger by a very well connected man in Washington.

Well, not so fast there. The Wall Street Journal ($) is reporting that Mr. Ashcroft actually approached XM to lobby on their behalf. When they turned him down, he went across the street to the NAB and they hired him instead. That led to the scathing letter that promised everything short of frogs raining from the sky if the merger went through. I guess Hell hath no fury like a woman scorned for Sega lobbyist scorned.

As I’ve written before, Ameren (the local electric utility) has some, shall we say, problems. For one, they’re simply not very good at keeping the lights on. They make public statements that say they are keeping up with maintenance while making regulatory filings asking for higher rates because they can’t keep up with maintenance. While they do respond to the lights going out very well, it happens way too often for a modern utility.

In Illinois they have a different problem. Not only can they not keep the lights on, but they have become known as gougers. Now I’m not a PR professional, but when you are having PR problems tripling electricity rates just because you can doesn’t seem like the brightest move. Offering affected customers a $20 million bribe to shut up makes it seem even worse.

The story is that Illinois was one of the first states in the nation to allow competition in electricity markets hoping to cut costs for consumers. As part of allowing competition rates were frozen for 10 years. The freeze ended December 31st. The problem is that much of the state still operates as a monopoly (whether Ameren or other providers). Monopoly - Regulated Rates = Disaster.

According to the St. Louis Post-Dispatch article, Ameren also phased out a program that a company that they bought out started to reduce electricity rates to homes that converted from gas heating to electric heating. The main reason that they phased the program out is that they are the main natural gas distributor in the area. It also happened on January 1st, so some people whose rates would have only doubled tripled because the subsidy was removed.

Oh, but they’ll fix the problem by hiring a recently retired news anchor to be their spokesperson. Because who can hate Karen Voss? Again, it seems to be a cheap ploy to reduce news criticism by hiring a highly respected newsperson to deflect questions about the lights going off again.

Seriously, Ameren, I don’t hate you.  I don’t think our relationship is completely broken (mainly because I like electricity and can’t dump you), I just want you to keep up your part of the relationship and keep the lights on, okay? Oh, and don’t gouge me. It’s never nice to abuse the other person in the relationship. Luckily, I live in Missouri who will lower your rates for poor performance and lying to the public.

Engadget has the goods on the presentation that XM and Sirius put together for shareholders on their proposed merger. They complained that the presentation was short on the goods for customers and long for the goods for shareholders. Well, it’s a presentation to shareholders first of all. Second, there are mentions of the items that they trotted out to the media: more bandwidth for more channels, increased services such as real time traffic, etc…

As I’ve said before, as a customer I’m excited about the merger. I like the possibility of having both services at my disposal. I’m a little worried about the effect on pricing, but I have faith that the FTC and the FCC will wring pricing concessions as part of the deal to get the merger approved. We’ll have to see what happens, but I plan on covering it through to the end.

See also the letter XM sent to customers.

Here is a copy of XM’s letter to subscribers regarding their merger with Sirius.

February 20, 2007
Dear XM Radio Subscriber:

We want to share with you some exciting news:  Yesterday, in Washington DC, we announced XM Radio will be merging with Sirius Satellite Radio to form the premier digital audio service.

The merger will create a satellite radio company that will provide consumers across the country with more and better premium radio programming. The combined company will be able to compete better in what has become a very complex and dynamic entertainment market.

Where today our exclusive contracts mean you had to choose between baseball and football or Oprah and Martha Stewart, the new company will seek to ensure that in the future, you will be able to access both companies’ programming.  And, once we are fully integrated, those of you who have factory-installed satellite radio will no longer be limited to the programming provided by the exclusive satellite radio service chosen by their car manufacturer.

This merger should be completed in late 2007 or early in 2008.  Throughout the year, we will provide updates on how the merger is progressing and information will be available at our website, www.xmradio.com.

Between today and the merger date, as well as during the period immediately after the merger date, all of your services will remain the same.  The channel lineup, the customer service number, the great music technology, and the XM Radio web site will all remain unchanged and there will be no disruption to service.  But, if you have questions, information will be available and maintained on our website, and you can contact our Listener Care team at 800-XMRADIO, with questions and concerns.

XM Radio continues to be committed to providing you the highest quality audio entertainment and customer service available today.  After the merger, our new company will be able to offer you the most exciting listening experience in radio.

Sincerely,

Hugh Panero
CEO, XM Satellite Radio

Not much new other than the fact that factory equipment should be able to handle the new signal. I’m guessing those of us with aftermarket equipment won’t get so lucky.