Nobody that I have seen or read has picked up so far on the gaping hole that just appeared in General Motors' September 30th balance sheet - some $41 billion more or less. (At that level who cares about a billion or two?) The deficit net worth suggests that even if you added back the total of all GM dividends paid over the last 100 years, you would still have a deficit.Put another way, this suggests that, just like the airline industry, in 100 years General Motors has never made a true profit. Isn't that an interesting thought? Further, isn't it somewhat significant that no analysts have commented on the huge deficit? Just how important is the balance sheet, as compared to the profit and loss statement, if nobody is paying attention?

Yet the Financial Accounting Standards Board insists the balance sheet should have primacy, and that operating results for the year can best be measured by subtracting the beginning balance sheet from the ending balance sheet. FASB is pushing fair value financial reporting, but how can GM assert with a straight face that its deferred tax asset had a fair value of some $33 billion on June 30 and had zero value on September 30th? Things move quickly in the financial arena, but do they move that fast?

This writer has been strongly opposed to fair value financial reporting, and one of his major arguments is that valuation is inherently imprecise and potentially subject to manipulation. Here the imprecision, as between June and September 2007, is a modest $33 billion. This kind of imprecision is an open invitation, to those so inclined, to "manage" earnings. I submit that GM "managed" its earnings in its third quarter. This time it was to lower its reported earnings.

If the U.S. adopts International Financial Reporting Standards, it would only be a few quarters, however, before some companies start to write up their assets. At that point I defy any investor to understand the true economics of any business he or she has invested in. "Is or is not management 'managing' its earnings?" will be the $64 dollar question.

Alfred M. King

Vice chairman, Marshall & Stevens Inc.

Still no place for politics

In my letter to the editor ("No place for politics," Sept. 10-23, 2007, page 6), I asked you to please keep the politics out.

My reward was a column in the Oct. 22-Nov. 5, 2007, issue authored by your accounting standards experts, Paul Miller and Paul Bahnson ("The truth and the whole truth," page 15), lecturing me on the virtues of supply side, or trickle-down, economics.

Miller and Bahnson claim that I was upset that an article published in the July 23rd issue "made political statements he didn't agree with."

That isn't correct. I was upset that an article in Accounting Today made any political statements whatever. Regardless of whether I agree or disagree with the views expressed in the statement, I don't want political statements in my accounting and tax magazines.

Miller and Bahnson say that I used my "complaint about politics in the magazine to put politics in the magazine," which isn't true either. I don't have a party affiliation. This isn't about politics. This is about class. I simply demonstrated how the Bush tax cuts affected a middle-class taxpayer and contrasted that with the effect on a wealthy taxpayer.


In my September letter I explained how I used the tax preparation software I have in my office to compute the federal tax liability, including retirement tax, for a hypothetical young CPA who had recently opened an accounting practice and who had generated net income of $60,000. I computed this tax liability before and after the Bush tax cuts. I performed the same calculations for a hypothetical wealthy taxpayer receiving substantial dividend and capital gains income and demonstrated that, after the Bush tax cuts were in place, the tax burden (tax liability divided by taxable income) on the young CPA was twice that of the wealthy taxpayer.

Miller and Bahnson argued that my hypothetical wealthy taxpayer has too much dividend and capital gains income and that it is unlikely such an individual exists in the real world. The authors suggested that it's improbable that a wealthy individual would have a large portfolio in the $90 million to $500 million range.

Yes, the wealthy are few and far between, and I agree it sure is amazing that anyone could be worth from $90 to $500 million; nevertheless, thousands of Americans are that wealthy. To put this in some perspective, the threshold for entry to Forbes' ranking of the 400 richest Americans is $1.3 billion.

The authors go on to say: "We noted that his assumption that the hypothetical wealthy taxpayer had $2 million in capital gains skewed his results to the low side because of their low marginal rate." But capital gains are how the wealthy take their income. If you are a chief executive at a publicly traded company, for example, you would tend to take more of your compensation in the form of incentive stock options qualifying for capital gains treatment than in salary. If you're a hedge fund manager, your 10-figure income is taxed as capital gains.

Members of the upper middle class will sometimes conflate the upper middle class with the wealthy, thinking that what is good for the wealthy is good for them, but the Bush tax cuts didn't benefit the upper middle class any more than they benefited other non-wealthy taxpayers. My September letter to the editor defined wealthy as anyone earning at least $1.6 million annually. The profile I used in my example, with high dividend and capital gains income, is not an uncommon one for a member of the wealthy class.


Miller and Bahnson suggest my letter to the editor isn't fair and balanced, and is rife with value judgments.

Well, it's a letter to the editor.

Miller and Bahnson go on to say that "perhaps the old rates were grossly unfair" and the Bush tax cut "made them more fair." Actually, under the Tax Code during the Clinton era, the wealthy and the upper middle class paid approximately the same percentage of their incomes toward federal income and retirement taxes. With the retirement tax factored in, some members of the middle class tended to pay a somewhat larger percentage, but the disparity wasn't as extreme as today.

You have to go back more than a generation to find a confiscatory tax applied to the wealthy, and I don't feel that I am responsible for redressing injustices, if they were injustices, that occurred in the distant past. More importantly, I don't think it is my children's responsibility to restore the wealthy to the position they enjoyed in the 1920s.

Under our current system, earned income is taxed at a higher rate than investment income. I work hard. I know other CPAs who work hard, and I have self-employed clients who work hard too, and whose marginal rate, when the self-employment tax and state income taxes are considered, approaches 50 percent.

Is it fair that earned income - the income requiring the most effort to generate - is taxed at the highest rate? I believe that this excessive tax on earned income is a drag on the economy, forestalls upward mobility, and presents a sometimes insurmountable barrier to young businesspeople getting started. It would be equally unfair to the wealthy if they were faced with a tax burden of this magnitude, but they aren't.


The Miller and Bahnson column is a rehash of the generally discredited trickle-down theory of economics.

For example, they say that the wealthy "support hundreds of thousands of other people's employment," and that imposing higher rates on wealthier taxpayers would jeopardize that employment. But the middle class, including small businesspeople such as myself, collectively generate employment for hundreds of thousands of individuals, and we manage to do this despite the higher tax burden we shoulder. Also, the positions we provide are domestic, while the corporations and the wealthy continue the trend to outsource employment to other countries. I do not feel that I am entitled to special tax breaks because I provide employment to U.S. citizens.

Continuing to propound supply-side economic theory, Miller and Bahnson trot out the tired concept that the relationship between taxpayer and government should parallel the one between customer and vendor, that a taxpayer should incur an income tax liability no greater than the fair value of the services that he or she receives from the government.

If income taxes were to take the form of an exchange transaction, value given for value received, who would pick up the tab for the poor? Do we agree that society, including members of both the middle class and wealthy, has some minimal responsibility to the disadvantaged? Do we have a responsibility to help disabled veterans, for example?

Here's another way to look at it. Military expenditures account for more than half of federal discretionary spending. How do you value the military protection our government affords, and how is that cost allocated among taxpayers? You might argue that every life has equal value and therefore the cost should be prorated evenly, but I submit that because the wealthy have more assets to protect, they receive more value (in asset protection) from the military than the middle class or the poor, and therefore should incur more of the cost, much as a homeowner with a more valuable house pays a higher insurance premium. Why not?

This makes as much sense as to suggest, as Miller and Bahnson do, that a tax payment is no different than the purchase of a consumer product. Miller and Bahnson would have us trade our patriotism for brand loyalty.


As a group, the wealthy are much like other human beings. There are good ones and there are the not-so-good. There's even an occasional saint.

In a middle group, you have wealthy taxpayers who do their best to minimize their tax burden but who play within the rules. For example, they may establish their principal residence in a state that does not tax capital gains or dividends, such as Florida or Wyoming. Although this requires them to live next to the best beaches and skiing in the country, I can't fault them for this, and I would be in this group if roles were reversed.

But there are a number of wealthy taxpayers who, through political donations and by establishing tax policy institutes and foundations, are doing their best to change the tax system in this country with the goal of minimizing and ultimately eliminating income taxes on portfolio income. This may not even be a very large group, but because of their considerable personal wealth, these individuals have an extraordinary influence on tax legislation in this country.


I wrote my September letter in response to an article by Ken Rankin titled "Experts: easing middle-class taxes won't help," which proposed that the tax burden on the wealthy after the Bush tax cuts is still too high. That article parroted the views of the Tax Foundation, one of the tax policy institutes whose goal it is to minimize income tax on portfolio income.

I showed in my letter how after the Bush tax cuts took effect, the federal tax burden on a middle-class CPA might be twice that imposed on a member of the wealthy elite. I suppose the implied question was: How much lower does the federal tax on the wealthy have to go, and what will be the effect on the middle class of yet-lower federal taxes on the wealthy? When the federal tax is assessed exclusively on earned income, which seems to be the direction we're headed, that may portend the demise of the middle class.

Harry Bose, CPA

Read & Bose PC

Pendleton, Ore.

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