As a Penn State Alumni, I have been shocked by the scandal now ravaging my University. My first reaction was much like everyone else's. They all need to be fired now. I still believe the only way to repair the image of the University is to remove everyone involved, including Joe Paterno and Graham Spanier, simply because of the extent of the crimes involved and the negativity of the news coverage. However, my initial outrage has been replaced with sadness, as I have read through the facts of the matter and tried to make sense of what took place. I also have to wonder whether the lynch mob currently after Paterno and Spanier are really justified. I personally only see three villians in this situation.
Keep in mind that, with the exception of Jerry Sandusky, none of the people involved in this are truly bad people. In fact, they have all lead relatively exemplary lives. Paterno and Spanier are bastions of their fields. Curley and Schulz were highly respected. So why did the 2002 incident go unreported? For that you need to start with Jerry Sandusky.
This was no stranger. This was someone they all knew and respected. All accounts of Sandusky were that he was a highly likable guy who was trusted by everyone. He was the friend, neighbor and coworker that everyone got along with. He had dedicated his life to helping out the under privileged. He helped little boys who were in trouble, not molested them. There is no proof out there that anyone suspected there was this dark side to this individual.
Keeping that in mind, we need to look at the actions of each person in turn, starting with Mike McQuery. Many commenters have questioned why he didn't rush in and beat up the rapist and save the boy. But this was not just a rapist. It was his coach, friend and mentor of over 10 years that he saw in there. It was probably as much a shock who was doing the act as what the act was. He staggered off to his office and called his dad and his dad advised him to go home and contact Coach Paterno in the morning. We can all quibble about whether he did the right thing, but in the heat of the moment, it is hard not to understand it.
McQuery then talked to Joe Paterno about what he saw. We don't know yet what exactly was said here. It's a sensitive subject, so he likely said something like Jerry was molesting a little boy in the locker room. Again, this is someone Joe Paterno has known for 35 years. It's one of his closest friends. Someone he has to feel he knows really well. The natural reaction of anyone who is told that someone they know so well was doing something so incomprehensible is to say "no way Jerry would do that" and simply believe that McQuery didn't really see what he thought he saw.
Nevertheless, Joe agreed to set up a meeting with McQuery and both the head of the Athletic Department and the head of the University Police. In fact, he called them the very next day. People say Joe passed the buck, but clearly an investigation was warranted. This is a prominent member of the community and also a good friend. You don't want this to be done improperly. Maybe Joe should have called the police at that point. Maybe he should have called Sandusky and confronted him. However, you can't truly say that what he did at that point was unreasonable.
This is where I believe the actions become harder to justify. McQuery came to Paterno with an issue that needed to be investigated. Paterno sent him to two people whose job it is to investigate things within not just the Athletic Program, but the University as a whole. According to McQuery, they asked him about the details of what he saw and he described them in all their graphic gore. This certainly seems credible to me when conducting an investigation. Since they waited a week and a half to set up the meeting, they had time to get over the shock of who was being accused. At least one of them also know there had been a previous allegation against this same person.
So why did they end up doing nothing? Frankly I don't know. Their explanation that they didn't think it was serious just doesn't wash. Still, we have to come back to the fact that the accused was Jerry Sandusky, bastion of the community and the man who had supposedly dedicated his life to helping out underprivileged youth. This is a difficult person to accuse of such a heinous crime. The only proof is the word of a single graduate student who has no evidence to corroborate what he says he saw. They obviously had little compassion for the victim.
Accusing Sandusky invites a media circus they probably want to avoid. However, I don't believe they were protecting the University as much as themselves and Sandusky. Accusations that a former coach is a child molester are tough, but accusations that the University covered this up would ultimately bring down the entire institution. If they were thinking about the University or the victims, they would have called the police.
In the end, it is hard to justify their actions. Maybe they ultimately just couldn't get themselves to believe what they had heard. Though if they didn't believe McQuery, why did they ban Sandusky from bringing more boys into the locker room? Their obvious lapse makes them the most obvious targets of our scorn. Of course, their names are not as juicy as that of Joe Paterno.
Then we get to Graham Spanier, who was told that they have banned Sandusky from bringing Second Mile kids into the locker room and signed off on it. Was he told what the nature of the incident was? Was this in a private meeting about this action or part of a routing weekly meeting where he learns what every department is doing? Any mention of naked boy in shower should have set off alarms in a person with Spanier's background.
However, it is possible that he was just told there was an incident with a Second Mile kid and we decided to ban them from the facilities. Was he negligent in not enquiring further into what the incident was? Probably. But if it was part of a routing meeting where he hears hundreds of such statements, it is understandable if this one slipped though. We need more facts on this one.
Finally we get back to Joe Paterno and Mike McQuery. Once it was clear that no action was going to take place against Sandusky, wasn't it their duty to report it to the police anyways? First Paterno. Again, we are missing many of the actual facts here. Keep in mind that he probably didn't want to believe his life long friend was capable of doing this. If he went to Curly and asked what happened with the accusation of McQuery and Curly said they investigated it and determined it wasn't serious his very preinclination to trust Sandusky would probably let him stop at that point. Whew, it turns out Jerry isn't a pervert after all. McQuery just over reacted to something minor. Is this the right move? Probably not. However, it is understandable. Hopefully, Joe will get a chance to explain his actions at some point.
Mike McQuery is the saddest link in this chain. He saw a little boy getting sodomized in the locker room and reported it to a person he figured could do something about it. He knows it got reported all the way up to the University President and yet nothing was done about it. He has no pictures. He doesn't know who the boy is. If he goes to the police now it is his word against five of the most powerful people in the community. His career will likely be over and Sandusky will continue to go free. Should he have said damn the consequences, I want to help out those little boys? In a perfect world, the answer to that is obviously yes. However, ask yourself what you would have done in that circumstance and you might find yourself sympathizing with him instead of damning him.
So there we have all of the principles in this drama that has traumatized an entire community. Let us not forget that the worst of the lot is Jerry Sandusky, who abused his position to ruin the lives of far too many children. Assuming he doesn't do the honorable thing and kill himself, he is destined to rot in jail the rest of his life. Next on the list are Tim Curley and Gary Schulz, who will likely never work in their fields again and may well spend time in jail for perjury. It's hard to feel sorry for them. Finally we get to Joe Paterno, Mike McQuery and Graham Spanier. They made mistakes and children suffered because of it. They are going to have to live with that. But can we truly say those mistakes were not understandable? This is a sad ending for everyone involved.
Wednesday, November 9, 2011
Wednesday, December 8, 2010
Stimulating those Small Businesses
President Obama and the Republicans just agreed upon 900 Billion dollars in tax cuts to be given out over the next two years and to be financed completely through an increase in our national debt. The reasoning behind this deal is that the economy needs a stimulus and these tax cuts will encourage small businesses to expand and hire more people. Let's set aside for the moment the debate about whether incurring an additional 900 Billion dollars in debt is a good idea, and just look at whether this is the best way to spend that money. To do that, let us look at your typical small business and see how this all impacts the owner's decision making.
Most small businesses are set up as a flow through tax entity such as an LLC. This fancy term simply means that the business itself does not pay any income tax. All of the net income from the business flows directly to the owners of the business and they then pay personal income tax on that money. In essence all of the profits your business makes go directly into your pocket. It may not surprise you to know that most small business owners are in it to make money. The more money their business makes, the more they personally make since they are personally making all of the profits. So in order to know how this plan affects small businesses, we need to put ourselves in the shoes of a small business owner. To make this easier to imagine, I am going to use that most ubiquitous small business the pizza parlor.
The new tax plan essentially says to the owner of a highly profitable small business that your current tax rate is staying at 32%, but in two years it has a good chance of going up to 38%. Let's say your pizza parlor owner is thinking of purchasing a new $20,000 pizza oven. If he is looking simply at the tax implications of that purchase what is his logical response? Put off that purchase for two years of course. Since that $20,000 comes directly out of his pocket, if he can delay that purchase for two years he will basically save $1,200 off that purchase in tax breaks alone. How? Because $20,000 taxed at 32% is $6,400, while $20,000 taxed at 38% is $7,600, so by delaying that expense two years and instead taking that as profit today he actually saves himself some money. This is our stimulus plan?
Of course, the reality is that the owner of that pizza parlor will only minimally consider the tax implications when deciding to do anything with his business. If he needs a new pizza oven, he is going to buy it no matter what his taxes are. That is because a reasonable business owner does whatever it takes to maximize his profits. As I said earlier, people own a business to make money for themselves and they do whatever it takes to make the most money possible out of their business. To do this, they must keep their customers happy and coming back. They do this by hiring the optimal number of people and giving them the minimum salary and benefits to keep them happy and productive. They additionally do this by investing the optimal amount of money back into the business to make it productive. No more and no less.
Giving this business owner a tax break will certainly make him happy. It increases the amount of profits he gets to keep, which he can then invest in a tax free Sep IRA plan towards the day he can sell his business and retire. It doesn't make him hire anyone else though. He already has the exact number of people working for him that he needs to maximize his business profits. It also does not encourage him to spend more on his business, since he is already spending what it takes to make the business optimally profitable. So if the idea is to encourage that person to hire more people and stimulate the economy, what can we really do? Simple. Get him more customers. If he suddenly starts to sell more pizzas, he will need to hire more people to make them. Moreover, he will buy more ingredients and equipment which will stimulate the business of his suppliers to force them to hire more people to keep up with that demand. Now that is a stimulus.
How do we get that pizza parlor more customers? Giving extra money to his current customers so that they eat out more often is one way. The tax bill includes a payroll tax deduction that will give people who currently have jobs on average an additional $1,000 a year for each of the next two years. While that is a start, I personally wonder how much of that additional $2,000 will go towards buying extra pizzas, and how much will go towards paying down that customer's credit card debt. Paying off debt is a great idea and ultimately will greatly stimulate the economy as less of people's paychecks go towards the ridiculous interest rates banks impose and more goes towards buying real stuff. But it is certainly not a short term solution. Therefore, I am not sure having the U.S. government borrow money from China and give it to the taxpayers to pay off Citibank really makes that much sense.
How about finding that pizza parlor more customers? To do that we need to figure out who is not buying pizza and get them out buying stuff again. For that we can look no further than the current unemployment rate. I think it is safe to say that people with no jobs are not out there buying pizza, but if you can get them a job they will not only start buying pizza, but clothing, groceries and lots of other things too. You are essentially adding a brand new consumer to the economy. Now we're talking stimulus. Increase that pizza parlor's business by 10% and he will have no choice but to hire more people and buy more inventory. Moreover, with low unemployment, he might even have to pay higher wages to keep his current employees from leaving for better jobs. That may ultimately give working people far more than the $2,000 slated to come their way in this current tax plan. It's a pretty good deal for that small business owner as well, as his expanded business is probably going to make him more money than ever before.
A small part of the current deal (approximately 1/3 of the amount that goes to the very wealthy) does include an expansion of unemployment benefits, which is a good thing. Keeping people from becoming homeless makes both moral and economical sense. But instead of giving the unemployed money, why not give them jobs? Most of our national infrastructure was built in the 50's and 60's and has only had limited maintenance since then. Imagine a house built in 1950 that has been only minimally maintained. 900 Billion dollars is a lot of money. If we are going to spend that much, why not spend it on improving our country. Fix our bridges, improve our water systems, and expand our highways. In addition, a large number of those unemployed are teachers and police and fire fighters who have been laid off by local governments whose funding got cut off by the feds. Wouldn't it make more sense to spend that money hiring them back and improving the education of our kids and safety of our streets? Instead of spending that money indirectly hoping it somehow results in more jobs, why not just spend it to actually create real jobs?
I can hear the conservatives screaming that this is just more big government spending. To this I reply, spending 900 Billion dollars is spending no matter how it is done. If we are determined to borrow that much money and invest it into America, then shouldn't we look at the most optimal way to get something for it? Giving someone who is already employed a little more money may help out a little. Giving money to the wealthy doesn't help at all. But giving someone who is currently out of work an actual job adds a brand new consumer to the economy. Adding consumers to our economy adds to the bottom line of all businesses by increasing their customer base, which ultimately will force them to hire more people, which adds even more consumers to the economy. Sheer logic tells you this is the better option. If doing that also helps modernize our many antiquated systems, upgrades the quality of our country's infrastructure, and educates our future generations, then we really get two benefits for the price of one. That's a stimulus package I can get behind.
Most small businesses are set up as a flow through tax entity such as an LLC. This fancy term simply means that the business itself does not pay any income tax. All of the net income from the business flows directly to the owners of the business and they then pay personal income tax on that money. In essence all of the profits your business makes go directly into your pocket. It may not surprise you to know that most small business owners are in it to make money. The more money their business makes, the more they personally make since they are personally making all of the profits. So in order to know how this plan affects small businesses, we need to put ourselves in the shoes of a small business owner. To make this easier to imagine, I am going to use that most ubiquitous small business the pizza parlor.
The new tax plan essentially says to the owner of a highly profitable small business that your current tax rate is staying at 32%, but in two years it has a good chance of going up to 38%. Let's say your pizza parlor owner is thinking of purchasing a new $20,000 pizza oven. If he is looking simply at the tax implications of that purchase what is his logical response? Put off that purchase for two years of course. Since that $20,000 comes directly out of his pocket, if he can delay that purchase for two years he will basically save $1,200 off that purchase in tax breaks alone. How? Because $20,000 taxed at 32% is $6,400, while $20,000 taxed at 38% is $7,600, so by delaying that expense two years and instead taking that as profit today he actually saves himself some money. This is our stimulus plan?
Of course, the reality is that the owner of that pizza parlor will only minimally consider the tax implications when deciding to do anything with his business. If he needs a new pizza oven, he is going to buy it no matter what his taxes are. That is because a reasonable business owner does whatever it takes to maximize his profits. As I said earlier, people own a business to make money for themselves and they do whatever it takes to make the most money possible out of their business. To do this, they must keep their customers happy and coming back. They do this by hiring the optimal number of people and giving them the minimum salary and benefits to keep them happy and productive. They additionally do this by investing the optimal amount of money back into the business to make it productive. No more and no less.
Giving this business owner a tax break will certainly make him happy. It increases the amount of profits he gets to keep, which he can then invest in a tax free Sep IRA plan towards the day he can sell his business and retire. It doesn't make him hire anyone else though. He already has the exact number of people working for him that he needs to maximize his business profits. It also does not encourage him to spend more on his business, since he is already spending what it takes to make the business optimally profitable. So if the idea is to encourage that person to hire more people and stimulate the economy, what can we really do? Simple. Get him more customers. If he suddenly starts to sell more pizzas, he will need to hire more people to make them. Moreover, he will buy more ingredients and equipment which will stimulate the business of his suppliers to force them to hire more people to keep up with that demand. Now that is a stimulus.
How do we get that pizza parlor more customers? Giving extra money to his current customers so that they eat out more often is one way. The tax bill includes a payroll tax deduction that will give people who currently have jobs on average an additional $1,000 a year for each of the next two years. While that is a start, I personally wonder how much of that additional $2,000 will go towards buying extra pizzas, and how much will go towards paying down that customer's credit card debt. Paying off debt is a great idea and ultimately will greatly stimulate the economy as less of people's paychecks go towards the ridiculous interest rates banks impose and more goes towards buying real stuff. But it is certainly not a short term solution. Therefore, I am not sure having the U.S. government borrow money from China and give it to the taxpayers to pay off Citibank really makes that much sense.
How about finding that pizza parlor more customers? To do that we need to figure out who is not buying pizza and get them out buying stuff again. For that we can look no further than the current unemployment rate. I think it is safe to say that people with no jobs are not out there buying pizza, but if you can get them a job they will not only start buying pizza, but clothing, groceries and lots of other things too. You are essentially adding a brand new consumer to the economy. Now we're talking stimulus. Increase that pizza parlor's business by 10% and he will have no choice but to hire more people and buy more inventory. Moreover, with low unemployment, he might even have to pay higher wages to keep his current employees from leaving for better jobs. That may ultimately give working people far more than the $2,000 slated to come their way in this current tax plan. It's a pretty good deal for that small business owner as well, as his expanded business is probably going to make him more money than ever before.
A small part of the current deal (approximately 1/3 of the amount that goes to the very wealthy) does include an expansion of unemployment benefits, which is a good thing. Keeping people from becoming homeless makes both moral and economical sense. But instead of giving the unemployed money, why not give them jobs? Most of our national infrastructure was built in the 50's and 60's and has only had limited maintenance since then. Imagine a house built in 1950 that has been only minimally maintained. 900 Billion dollars is a lot of money. If we are going to spend that much, why not spend it on improving our country. Fix our bridges, improve our water systems, and expand our highways. In addition, a large number of those unemployed are teachers and police and fire fighters who have been laid off by local governments whose funding got cut off by the feds. Wouldn't it make more sense to spend that money hiring them back and improving the education of our kids and safety of our streets? Instead of spending that money indirectly hoping it somehow results in more jobs, why not just spend it to actually create real jobs?
I can hear the conservatives screaming that this is just more big government spending. To this I reply, spending 900 Billion dollars is spending no matter how it is done. If we are determined to borrow that much money and invest it into America, then shouldn't we look at the most optimal way to get something for it? Giving someone who is already employed a little more money may help out a little. Giving money to the wealthy doesn't help at all. But giving someone who is currently out of work an actual job adds a brand new consumer to the economy. Adding consumers to our economy adds to the bottom line of all businesses by increasing their customer base, which ultimately will force them to hire more people, which adds even more consumers to the economy. Sheer logic tells you this is the better option. If doing that also helps modernize our many antiquated systems, upgrades the quality of our country's infrastructure, and educates our future generations, then we really get two benefits for the price of one. That's a stimulus package I can get behind.
Monday, November 8, 2010
How Taxes Work for the Wealthy
Now that the Republicans have gained control of the house again, we are hearing many of the same tax arguments they have spouted in the past. Lower the top tax brackets and eliminate capital gains and that money will trickle down to the rest of the people. As someone who has experience managing a large amount of money, I thought I would lay out a demonstration of what rich people pay in taxes. The numbers I am going to use are generic numbers, but I believe they are representative of a typical portfolio. I also know this is kind of dry reading, but I hope you get my point by the end.
Let us use a typical CEO. According to salary.com, the median CEO compensation plan of salary, bonuses and benefits is over 1.3 million dollars a year. To make the math easier, I am going to use 1.2 million. Let us assume that this typical CEO has accumulated 20 million dollars in personal wealth as well, which given that salary does not seem unreasonable. We'll use a fairly conservative allocation of their investment for that wealth and allocate 60% to stocks, 20% to government bonds, 10% to personal real estate and the last 10% to liquidity.
Let's see how this person is taxed. First the 12 million dollars in stocks. As long as you hang onto a stock for more than a year, the income from the sale of that stock is considered a capital gain and not personal income. Right now capital gains are taxed at 15%, and it is a long held Republican goal to eliminate capital gains taxes altogether. Of course, there is little reason for this person to sell any stocks other than to occasionally rebalance his portfolio, so he is likely to pay little or no tax on this over the course of a year. I realize stocks can go down in value as well, but held long enough they historically gain value averaging around 10% a year. Let's use only 5% to be real conservative. His stock value still gains $600,000 in value tax free over that year. In addition to the value inflation, a well balanced stock portfolio will typically pay at least 3% a year in dividends (again this number is very conservative). Dividends are also capital gains, and currently get taxed at 15%. 3% of 12 million is $360,000. 15% of that is $54,000, leaving a nice $306,000 in cash after taxes.
The other 8 million dollars of this CEO's portfolio is actually completely tax free. That is because 4 million is in government bonds and 2 million is in a liquid treasuries fund and the last 2 million that CEO's main line mansion. How much does this make? Typically, government bonds pay around 5% income per year, which means he will make $200,000 tax free from that investment. Treasuries pay very little now, but not too long ago they too were paying 5%, and we can assume that they will be back there soon. This is another $100,000 in tax free income. As for the house, as long as you purchase a new home, you can sell your old house tax free, no matter how much it increased in value. Despite the recent recession, housing historically goes up 5% in value over time, but given the current housing crisis I am just going to ignore this particular income. Imagine that homeowners. His house value is so little compared to the rest of his portfolio that we can just ignore it.
So let's break down this person's income versus taxes. First his income. His 1.2 million salary is taxed as normal income, which currently is at about 1/3 after all his deductions. That makes for $800,000 take home pay and $400,000 in taxes. His income is increased by the $306,000 he gets from the dividends after paying the capital gains tax and the $300,000 he gets from his tax free investments. Rounded off, that's 1.4 million in after tax cash income. Add in the $600,000 increase in his stock portfolio value (remember we are using only 5% for this number rather than a more likely 10%), and he has gained a nice 2 million dollars for this year from a gross income of about $2,450,000 (I am trying to round off to make things easier).
(Update, I had to recalculate since I used his net pay instead of his gross pay to calculate his tax rate. His tax rate is actually lower than my initial estimate). What did he pay in taxes? His salary was taxed for $400,000. His capital gains were taxed for $54,000. That is around $450,000 in taxes on $2,450,000 in gross income, which is a rate of 18%. That is less than the 25% income tax rate paid by someone - say a restaurant dish washer - making $35,000 a year. That is almost as low as the 15% someone making a mere $10,000 per year would pay. Of course a person making $35,0000 a year would end up with around $2,000 a month to pay things like housing, health care, transportation, food and everything else we need to pay for. The person making 10 grand better hope he has a spouse making more or he is probably living in the streets. Our hypothetical CEO, on the other hand has to make due with $115,000 a month to pay for his living expenses (the 1.4 million in cash divided by 12). Moreover, the CEO would have long ago paid off all his debt, while the dish washer likely has at the very least a mortgage or rent payment, a car payment and credit card debts. Ask yourself whether you truly think that these two people should be paying similar tax rates, much less that the CEO actually pays a lower rate than the dish washer.
Now just to be clear, I have nothing against people making lots and lots of money. I've done pretty well myself. But in an atmosphere where our national debt is soaring out of control, where 10% of Americans can't even find a job, where our infrastructure is 40 years old and crumbling and where our country is slipping competitively against the rest of the world, it makes no sense to me to give that CEO even more money to spend than he already has. Let's say we raised his tax rate to 40% and the capital gains tax to 20%. What would happen? His take home pay from his salary would drop from $800,000 to $600,000 and his take from his capital gains would drop from $306,000 to 288,000. He would still get his $300,000 tax free income. That means he would go from a little over 1.4 million in take home pay down to a little less than 1.2 million.
While that sounds like a pretty big drop, it still gives him $100,000 a month to play with. I defy you to think of how you could reasonably spend $100,000 every month, especially if you didn't even need to pay off any loans. Realistically, while $220,000 a year in additional taxes sounds like a lot, it will have absolutely no impact at all upon his life style. Also, this whole calculation only looks at a single year. Wealth compounds. Let's say he somehow manages to spend the ridiculous sum of $1,000,000 over that year (he buys a fleet of fancy Italian sports cars). The $400,000 left over added to the $600,000 gain in his stock portfolio means that he will actually be worth 21 million next year and all of these calculations go up an additional 5%.
This is not meant to demean the worth of this hypothetical CEO. I have run my own business and know that it is a lot of hard work. I've also washed dishes at a restaurant, and given the choice I would rather run a business for a living. Still, both the person making $1.3 million a year and the person making $35,000 a year work hard for their money. However, the simple reality is that the CEO won't really miss the extra tax money while the dish washer needs every cent he can get. And that 1.3 million number is simply the median. Half of America's CEO's make more than that. Not to mention the money made by all the other high paying professions out there. The U.S. has just come off a reckless 10 year spending spree and we need to pay for it some way.
Taxes are obviously not the only answer. Something needs to be done about social security, medicare and our military spending. Still, when the new Republican majority in the house starts to demand lower taxes for the rich and the elimination of the capital gains tax, we just need to sit back and do some simple math and ask ourselves whether we really want to jeopardize our childrens' futures so that a handful of Americans can buy a new fleet of Ferraris every year. I personally think asking some people to drop from $115,000 a month in spending money down to $100,000 a month is a perfectly reasonable request. What do you think?
Let us use a typical CEO. According to salary.com, the median CEO compensation plan of salary, bonuses and benefits is over 1.3 million dollars a year. To make the math easier, I am going to use 1.2 million. Let us assume that this typical CEO has accumulated 20 million dollars in personal wealth as well, which given that salary does not seem unreasonable. We'll use a fairly conservative allocation of their investment for that wealth and allocate 60% to stocks, 20% to government bonds, 10% to personal real estate and the last 10% to liquidity.
Let's see how this person is taxed. First the 12 million dollars in stocks. As long as you hang onto a stock for more than a year, the income from the sale of that stock is considered a capital gain and not personal income. Right now capital gains are taxed at 15%, and it is a long held Republican goal to eliminate capital gains taxes altogether. Of course, there is little reason for this person to sell any stocks other than to occasionally rebalance his portfolio, so he is likely to pay little or no tax on this over the course of a year. I realize stocks can go down in value as well, but held long enough they historically gain value averaging around 10% a year. Let's use only 5% to be real conservative. His stock value still gains $600,000 in value tax free over that year. In addition to the value inflation, a well balanced stock portfolio will typically pay at least 3% a year in dividends (again this number is very conservative). Dividends are also capital gains, and currently get taxed at 15%. 3% of 12 million is $360,000. 15% of that is $54,000, leaving a nice $306,000 in cash after taxes.
The other 8 million dollars of this CEO's portfolio is actually completely tax free. That is because 4 million is in government bonds and 2 million is in a liquid treasuries fund and the last 2 million that CEO's main line mansion. How much does this make? Typically, government bonds pay around 5% income per year, which means he will make $200,000 tax free from that investment. Treasuries pay very little now, but not too long ago they too were paying 5%, and we can assume that they will be back there soon. This is another $100,000 in tax free income. As for the house, as long as you purchase a new home, you can sell your old house tax free, no matter how much it increased in value. Despite the recent recession, housing historically goes up 5% in value over time, but given the current housing crisis I am just going to ignore this particular income. Imagine that homeowners. His house value is so little compared to the rest of his portfolio that we can just ignore it.
So let's break down this person's income versus taxes. First his income. His 1.2 million salary is taxed as normal income, which currently is at about 1/3 after all his deductions. That makes for $800,000 take home pay and $400,000 in taxes. His income is increased by the $306,000 he gets from the dividends after paying the capital gains tax and the $300,000 he gets from his tax free investments. Rounded off, that's 1.4 million in after tax cash income. Add in the $600,000 increase in his stock portfolio value (remember we are using only 5% for this number rather than a more likely 10%), and he has gained a nice 2 million dollars for this year from a gross income of about $2,450,000 (I am trying to round off to make things easier).
(Update, I had to recalculate since I used his net pay instead of his gross pay to calculate his tax rate. His tax rate is actually lower than my initial estimate). What did he pay in taxes? His salary was taxed for $400,000. His capital gains were taxed for $54,000. That is around $450,000 in taxes on $2,450,000 in gross income, which is a rate of 18%. That is less than the 25% income tax rate paid by someone - say a restaurant dish washer - making $35,000 a year. That is almost as low as the 15% someone making a mere $10,000 per year would pay. Of course a person making $35,0000 a year would end up with around $2,000 a month to pay things like housing, health care, transportation, food and everything else we need to pay for. The person making 10 grand better hope he has a spouse making more or he is probably living in the streets. Our hypothetical CEO, on the other hand has to make due with $115,000 a month to pay for his living expenses (the 1.4 million in cash divided by 12). Moreover, the CEO would have long ago paid off all his debt, while the dish washer likely has at the very least a mortgage or rent payment, a car payment and credit card debts. Ask yourself whether you truly think that these two people should be paying similar tax rates, much less that the CEO actually pays a lower rate than the dish washer.
Now just to be clear, I have nothing against people making lots and lots of money. I've done pretty well myself. But in an atmosphere where our national debt is soaring out of control, where 10% of Americans can't even find a job, where our infrastructure is 40 years old and crumbling and where our country is slipping competitively against the rest of the world, it makes no sense to me to give that CEO even more money to spend than he already has. Let's say we raised his tax rate to 40% and the capital gains tax to 20%. What would happen? His take home pay from his salary would drop from $800,000 to $600,000 and his take from his capital gains would drop from $306,000 to 288,000. He would still get his $300,000 tax free income. That means he would go from a little over 1.4 million in take home pay down to a little less than 1.2 million.
While that sounds like a pretty big drop, it still gives him $100,000 a month to play with. I defy you to think of how you could reasonably spend $100,000 every month, especially if you didn't even need to pay off any loans. Realistically, while $220,000 a year in additional taxes sounds like a lot, it will have absolutely no impact at all upon his life style. Also, this whole calculation only looks at a single year. Wealth compounds. Let's say he somehow manages to spend the ridiculous sum of $1,000,000 over that year (he buys a fleet of fancy Italian sports cars). The $400,000 left over added to the $600,000 gain in his stock portfolio means that he will actually be worth 21 million next year and all of these calculations go up an additional 5%.
This is not meant to demean the worth of this hypothetical CEO. I have run my own business and know that it is a lot of hard work. I've also washed dishes at a restaurant, and given the choice I would rather run a business for a living. Still, both the person making $1.3 million a year and the person making $35,000 a year work hard for their money. However, the simple reality is that the CEO won't really miss the extra tax money while the dish washer needs every cent he can get. And that 1.3 million number is simply the median. Half of America's CEO's make more than that. Not to mention the money made by all the other high paying professions out there. The U.S. has just come off a reckless 10 year spending spree and we need to pay for it some way.
Taxes are obviously not the only answer. Something needs to be done about social security, medicare and our military spending. Still, when the new Republican majority in the house starts to demand lower taxes for the rich and the elimination of the capital gains tax, we just need to sit back and do some simple math and ask ourselves whether we really want to jeopardize our childrens' futures so that a handful of Americans can buy a new fleet of Ferraris every year. I personally think asking some people to drop from $115,000 a month in spending money down to $100,000 a month is a perfectly reasonable request. What do you think?
Thursday, September 23, 2010
Fascinating Reading
I've just spent the past several hours reading a post by University of Chicago Law Professor Todd Henderson and several responses to it. Professor Henderson't post "We are the Super Rich" has since been deleted, but thanks to the wonders of google, can still be found here. The essence of his post is that despite having an income over $250,000, he and his wife -- who is a doctor -- are not really rich. Here is how he puts it:
This view was strengthened when I read a blog posting by Michael O'Hare, who attempted to break down Professor Turners numbers in greater detail. Click through the link to get the full breakdown, but Mr. O'Hare's well reasoned calculations conclude that based upon the taxes he pays, Professor Turner's family actually makes closer to $500,000 a year, lives in a million dollar house and is setting aside at least $33,000 a year towards retirement. By any accounting, that is the provence of the rich.
However, the most fascinating reading stemming from the Professor Henderson's blog was a response post made by Cal Berkley Economic Professor J. Bradford DeLong. This may be the single best comment discussion I have ever read on the internet, with surprisingly little in the way of personal attacks and lots of actual back and forth discussions. It almost makes me cry for the mostly wasted potential of the internet. I highly suggest you click through the link and read not only Professor DeLong's full post, but the many comments as well, but for those who are too lazy to surf, here's the conclusion:
"The biggest expense for us is financing government. Last year, my wife and I paid nearly $100,000 in federal and state taxes, not even including sales and other taxes. This amount is so high because we can’t afford fancy accountants and lawyers to help us evade taxes and we are penalized by the tax code because we choose to be married and we both work outside the home. (If my wife and I divorced or were never married, the government would write us a check for tens of thousands of dollars. Talk about perverse incentives.)"My initial reaction to this rant was dismay that this person is apparantly teaching law and economics at one of our most prestigious law schools. I don't doubt that he does not feel rich. However, just because you chose to put all of your money into a really high end house and several luxury cars does not suddenly mean you don't have any money to spend. Not to mention that anyone who is putting money into stocks when they have such a high debt load is a financial idiot. It is sad that this person does not understand how truly lucky he is and only dwells upon his shortcomings.
"Our next biggest expense, like most people, is our mortgage. Homes near our work in Chicago aren’t cheap and we do not have friends who were willing to help us finance the deal. We chose to invest in the University community and renovate and old property, but we did so at an inopportune time."
"We pay about $15,000 in property taxes, about half of which goes to fund public education in Chicago. Since we care the education of our three children, this means we also have to pay to send them to private school. My wife has school loans of nearly $250,000 and I do too, although becoming a lawyer is significantly cheaper. We try to invest in our retirement by putting some money in the stock market, something that these days sounds like a patriotic act. Our account isn’t worth much, and is worth a lot less than it used to be."
"Like most working Americans, insurance, doctors’ bills, utilities, two cars, daycare, groceries, gasoline, cell phones, and cable TV (no movie channels) round out our monthly expenses. We also have someone who cuts our grass, cleans our house, and watches our new baby so we can both work outside the home. At the end of all this, we have less than a few hundred dollars per month of discretionary income. We occasionally eat out but with a baby sitter, these nights take a toll on our budget. Life in America is wonderful, but expensive."
This view was strengthened when I read a blog posting by Michael O'Hare, who attempted to break down Professor Turners numbers in greater detail. Click through the link to get the full breakdown, but Mr. O'Hare's well reasoned calculations conclude that based upon the taxes he pays, Professor Turner's family actually makes closer to $500,000 a year, lives in a million dollar house and is setting aside at least $33,000 a year towards retirement. By any accounting, that is the provence of the rich.
However, the most fascinating reading stemming from the Professor Henderson's blog was a response post made by Cal Berkley Economic Professor J. Bradford DeLong. This may be the single best comment discussion I have ever read on the internet, with surprisingly little in the way of personal attacks and lots of actual back and forth discussions. It almost makes me cry for the mostly wasted potential of the internet. I highly suggest you click through the link and read not only Professor DeLong's full post, but the many comments as well, but for those who are too lazy to surf, here's the conclusion:
"Professor Xxxx Xxxxxxxxx's problem is that he thinks that he ought to be able to pay off student loans, contribute to retirement savings vehicles, build equity, drive new cars, live in a big expensive house, send his children to private school, and still have plenty of cash at the end of the month for the $200 restaurant meals, the $1000 a night resort hotel rooms, and the $75,000 automobiles. And even half a million dollars a year cannot be you all of that."Thank you Professor Delong. You definitely just educated me.
"But if he values the high-end consumption so much, why doesn't he rearrange his budget? Why not stop the retirement savings contributions, why not rent rather than buy, why not send the kids to public school? Then the disposable cash at the end of the month would flow like water. His problem is that some of these decisions would strike him as imprudent. And all of them would strike him as degradations--doctor-law professor couples ought to send their kids to private schools, and live in big houses, and contribute to their 401(k)s, and also still have lots of cash for splurges. That is the way things should be."
"But why does he think that that is the way things should be?"
"And here is the dirty secret: Professor Xxxx Xxxxxxxxx thinks that that is the way things should be because he knows people for whom that is the way it is."
"Cast yourself back to 1980. In 1980 a household at the bottom of the 1% rich households in America had an income equivalent in today's dollars $190,000 a year. They know of 1000 people--900 of them poorer than they are in income brackets 90-99% and 100 people richer than they are in the top 1% income bracket. The 900 people poorer than them back in 1980 had incomes from $85,000-$190,000 a year. Those are, if you are sitting at the bottom of the top 1%, the middle class who are not as successful as you. You don't look downward much. Instead, you look upward. Of the 100 above you, 90 in 1980 had incomes less than three times their incomes. And they would have known of 1 person of that 100 who was seven times as rich as they were."
"Thus Professor Xxxx Xxxxxxxxx in 1980 would have known who the really rich were, and they would on average have had about four times his income--more, considerably more, but not a huge gulf. He would have known people who were truly rich, and he would have seen himself as one of them--or as almost one of them."
"Now fast forward to today. Today a household at the bottom of the 1% rich households in America has an income of nearly $400,000 a year--the income of that slot in the labor market has more than doubled, while the incomes of those at the slot at the bottom of the 10% wealthy has grown by only 20% in two decades. The 900 people he knows in the 90%-99% slots have incomes that start at $110,000 a year. Compared to Xxxx Xxxxxxxxx's $455,000, they are barely middle class--"How can they afford cell phones?" Xxxxxxxxx sometimes wonders."
"But he wonders rarely. He doesn't say: "Wow! My real income is more than twice the income of somebody in this slot a generation ago! Wow! A generation ago the income of my slot was only twice that of somebody at the bottom of the 10% wealthy, and now it is 3 1/2 times as much!" For he doesn't look down at the 99% of American households who have less income than he does. And he looks up. And when he looks up today he sees as wide a gap yawning above him as the gap between Dives and Lazarus. Mr. Xxxxxxxxx doesn't look down."
"Instead, Mr. Xxxx Xxxxxxxxx looks up. Of the 100 people richer than he is, fully ten have more than four times his income. And he knows of one person with 20 times his income. He knows who the really rich are, and they have ten times his income: They have not $450,000 a year. They have $4.5 million a year. And, to him, they are in a different world."
"And so he is sad. He and his wife deserve to be successful. And he knows people who are successful. But he is not one of them--widening income inequality over the past generation has excluded him from the rich who truly have money."
"And this makes him sad. And angry. But, curiously enough, not angry at the senior law firm partners who extract surplus value from their associates and their clients, or angry at the financiers, but angry at... Barack Obama, who dares to suggest that the U.S. government's funding gap should be closed partly by taxing him, and angry at the great hordes of the unwashed who will receive the Medicare, Medicaid, and Social Security payments that the government will make over the next several generations."
"Do I wish that Professor Xxxxxxxxx had a little more self-knowledge? Yes. Is it pathetic that somebody with nine times the median household income thinks of himself as just another average Joe, just another "working American"? Yes. Do I find it embarrassing that somebody whose income is in the top 1% of American households thinks that he is not rich? Yes."
"Do I hope to educate him so that he has a better grasp on reality and better understanding of America and of public policy? Yes."
Wednesday, September 22, 2010
No Not Mike Vick!
Last week I suggested that the best thing the Eagles can do is to trade Mike Vick and try to get some value from him while he is hot. Now it seems the Eagles have instead drank the Vick cool aid and will soon be signing him to a long term deal and trading away Kevin Kolb. Noooooo! Don't make me root for Mick Vick. He may be an amazing football talent, but he is a disgusting human being.
Don't get me wrong. I am all for the idea that once you have done your time, you should be allowed to become a productive member of society again. Intellectually, I have no problem with Vick playing in the NFL again. That's his profession, and he should be allowed to work again now that he has finished his jail time.
That said, I don't have to like the guy, and I don't want to root for him every Sunday. These are some of the things he did to his dogs. He attached jumper cables to their ears and electrocuted them to death. He hung them from trees and let them slowly die of exposure. He slammed them to the ground over and over again until their skulls were crushed in. He strangled them with his bare hands. These are not the acts of a normal human being. These are the acts of a psycopath. Every time you read the story of a mass murderer, it starts with the explanation about how he loved to torture small animals as a child. This is a man one step removed from Jack the Ripper.
I have less problem with the dog fighting itself than the way he treated his dogs in between the fights. If I look at it in a twisted way, I can understand the viewpoint that dog fighting is a sport and these dogs are warriors. If he had treated his dogs with the pride and respect afforded a valuable athelete, I may have slightly understood the actual dog fights. But the fact that after having them rip each other to pieces in a ring he then took them home and continued to torture and kill them tells me he just enjoyed the spectacle of watching animals suffer and die. That is not normal. That is not someone I wish to invite into my living room every week.
Go back and look at all the things Vick has said since the Eagles signed him. At no point does he express remorse for doing these things to his dogs. His remorse if clearly for doing something illegal and getting caught, which cost him dearly in jail time, fame and fortune. When people say he is a changed man, they are referring to a renewed work ethic and dedication to football. I do not believe whatever it is inside him that made him enjoy torturing defenseless animals has really gone away.
Again, I acknowledge that he was probably punished more for this crime than anyone in history. I do not want him kept out of professional football. It is likely that the thought of further jail time and the loss of everything he holds dear is enough to keep his warped impulses locked inside and that he will never harm another being again. All this is true, but it still does not make me willing to like the guy. Now he is going to be quarterbacking my team for probably many years to come and every time I cheer for a big pass play, I will be cheering for a closet psycopath. I'm not really sure I can do that.
Why Andy Reid why? Why did you force this choice on us? Couldn't you at least have given Kolb more than a quarter and a half to win the job? In the end, I will probably keep rooting for the Eagles. 40 plus years of habit are hard to break. But they have definitely taken some of the joy out of the sport.
Don't get me wrong. I am all for the idea that once you have done your time, you should be allowed to become a productive member of society again. Intellectually, I have no problem with Vick playing in the NFL again. That's his profession, and he should be allowed to work again now that he has finished his jail time.
That said, I don't have to like the guy, and I don't want to root for him every Sunday. These are some of the things he did to his dogs. He attached jumper cables to their ears and electrocuted them to death. He hung them from trees and let them slowly die of exposure. He slammed them to the ground over and over again until their skulls were crushed in. He strangled them with his bare hands. These are not the acts of a normal human being. These are the acts of a psycopath. Every time you read the story of a mass murderer, it starts with the explanation about how he loved to torture small animals as a child. This is a man one step removed from Jack the Ripper.
I have less problem with the dog fighting itself than the way he treated his dogs in between the fights. If I look at it in a twisted way, I can understand the viewpoint that dog fighting is a sport and these dogs are warriors. If he had treated his dogs with the pride and respect afforded a valuable athelete, I may have slightly understood the actual dog fights. But the fact that after having them rip each other to pieces in a ring he then took them home and continued to torture and kill them tells me he just enjoyed the spectacle of watching animals suffer and die. That is not normal. That is not someone I wish to invite into my living room every week.
Go back and look at all the things Vick has said since the Eagles signed him. At no point does he express remorse for doing these things to his dogs. His remorse if clearly for doing something illegal and getting caught, which cost him dearly in jail time, fame and fortune. When people say he is a changed man, they are referring to a renewed work ethic and dedication to football. I do not believe whatever it is inside him that made him enjoy torturing defenseless animals has really gone away.
Again, I acknowledge that he was probably punished more for this crime than anyone in history. I do not want him kept out of professional football. It is likely that the thought of further jail time and the loss of everything he holds dear is enough to keep his warped impulses locked inside and that he will never harm another being again. All this is true, but it still does not make me willing to like the guy. Now he is going to be quarterbacking my team for probably many years to come and every time I cheer for a big pass play, I will be cheering for a closet psycopath. I'm not really sure I can do that.
Why Andy Reid why? Why did you force this choice on us? Couldn't you at least have given Kolb more than a quarter and a half to win the job? In the end, I will probably keep rooting for the Eagles. 40 plus years of habit are hard to break. But they have definitely taken some of the joy out of the sport.
Friday, September 17, 2010
Those Philly QB's
I'm a firm believer in trying to turn negative situations into positive results. Putting myself in Howie Roseman's shoes, I can see a way to turn Kevin Kolb's concussion into a windfall for the Eagles. This assumes that Michael Vick lights it up against a bad Detroit Lions team on Sunday, which seems likely. If he does, and Kolb is cleared to play on Monday, I would be making several phone calls. The first would be to Jeff Garcia telling him to start working out in earnest. The second would be to all the GMs out there saddled with dogs at quarterback. We all know how Vick treats dogs, and I'd be offering to let Vick kick theirs to second string status for a price. Then I would let the bidding wars commence. (If Vick needs to play another week, this just gets pushed back to the next Monday).
I can hear you now. Trade Vick? Are you crazy? He should be starting the rest of the season. First off, the Eagles didn't trade Donovan McNabb to make way for Michael Vick to be their quarterback. It is Kevin Kolb's job unless and until he unconditionally proves he is a bust. A half game doesn't do that. He needs to suck for at least an entire season, if not two, before Andy Reed will admit he made a mistake and draft another QB. By that time Vick will be long gone, playing for some other team with no compensation at all to the Eagles. Plus, I am not yet convinced that Kolb is a bust. Keep in mind that Aaron Rogers only won six games his first year as a starter.
Trading Vick accomplishes two important goals. First it gets the Eagles a draft choice, perhaps even a high round draft choice, which goes a long way towards justifying the awful choice they made in signing him in the first place. Second it takes a lot of pressure off of Kevin Kolb, who has enough to worry about without looking over his shoulder every game wondering when Vick will be trotted in to replace him. Garcia can be brought in as an insurance policy who is experienced enough to replace Kolb for a couple games if he gets hurt again, but old enough that nobody will be pushing to have him permanantly made the Eagles QB.
I can even give you the name of the team you should call first. Imagine how much better the New York Jets would be with Michael Vick at quarterback instead of Mark Sanchez. This is a team that is a mediocre offense away from a possible Super Bowl appearance. With Sanchez, their offense is just plain bad, but with a scrambling Mike Vick, they may well be good enough to keep up with their defense. Don't you think Rex Ryan might be persuaded to part with that late first or second round pick for the chance to get to the big game? Considering that Vick is gone at the end of this year no matter what, that Jets pick will look awfully good in Eagles green.
So there you have it Howie. You're the new GM in town. Prove to us you have the same sized cojones that Ruben Amaro has. Trading Vick would probably not be a popular move amongst the Eagles nation, but it would be the right move for the team. It might even help get the Eagles out of the Philly sports doghouse.
I can hear you now. Trade Vick? Are you crazy? He should be starting the rest of the season. First off, the Eagles didn't trade Donovan McNabb to make way for Michael Vick to be their quarterback. It is Kevin Kolb's job unless and until he unconditionally proves he is a bust. A half game doesn't do that. He needs to suck for at least an entire season, if not two, before Andy Reed will admit he made a mistake and draft another QB. By that time Vick will be long gone, playing for some other team with no compensation at all to the Eagles. Plus, I am not yet convinced that Kolb is a bust. Keep in mind that Aaron Rogers only won six games his first year as a starter.
Trading Vick accomplishes two important goals. First it gets the Eagles a draft choice, perhaps even a high round draft choice, which goes a long way towards justifying the awful choice they made in signing him in the first place. Second it takes a lot of pressure off of Kevin Kolb, who has enough to worry about without looking over his shoulder every game wondering when Vick will be trotted in to replace him. Garcia can be brought in as an insurance policy who is experienced enough to replace Kolb for a couple games if he gets hurt again, but old enough that nobody will be pushing to have him permanantly made the Eagles QB.
I can even give you the name of the team you should call first. Imagine how much better the New York Jets would be with Michael Vick at quarterback instead of Mark Sanchez. This is a team that is a mediocre offense away from a possible Super Bowl appearance. With Sanchez, their offense is just plain bad, but with a scrambling Mike Vick, they may well be good enough to keep up with their defense. Don't you think Rex Ryan might be persuaded to part with that late first or second round pick for the chance to get to the big game? Considering that Vick is gone at the end of this year no matter what, that Jets pick will look awfully good in Eagles green.
So there you have it Howie. You're the new GM in town. Prove to us you have the same sized cojones that Ruben Amaro has. Trading Vick would probably not be a popular move amongst the Eagles nation, but it would be the right move for the team. It might even help get the Eagles out of the Philly sports doghouse.
Thursday, September 16, 2010
Favorite Games from the Past Year: Majesty 2
Yes I know this game is a year old, but I just started blogging. When I left Zam and suddenly didn't have to play MMOs for professional reasons, I felt a sudden urge to set aside WOW and EQ2 for a while and try some other games. One of the first ones I picked up was Majesty 2. This was not a highly hyped game and many of you may not have heard of it, but if you enjoy Real Time Strategy games, this one is not to be missed.
Unlike most games, you do not play the heroes yourself. Instead, you play the role of the king and attempt to entice the heroes in your kingdom to do what you want through placing reward flags on the places you want them to explore, attack or defend. Part of the challenge is learning just how much is needed to entice someone to do something without bankrupting your kingdom in the process, particularly considering that your heroes are as a rule not particularly bright. While this may sound boring, it is actually a uniquely fun twist on the standard RTS format.
Money is the key to the game. Over time, you can expand the hero's guilds to sell them extra abilities and add things like market places and blacksmiths to sell them potions and armor. You can also add defensive structures to your town to help protect it from the steady stream of mobs that will be attacking it. Developing a financial infrastructure to let you pay for the improvements in your heroes and town defense before the more powerful mobs start to attack is crucial to winning the game.
What I particularly liked about Majesty 2 was its challenge and its story line. The original game comes with 16 scenarios that are tied together with a really amusing story line narrated by a dead on Sean Connery impersonator. An expansion adds 8 more high end scenarios. Once you get past the first few tutorial scenarios, they start to become really difficult. While there are certain things you need to do for every scenario to succeed, each scenario requires a different strategy to ultimaly avoid being wiped out. Thus it is not unusual to find yourself an hour into the scenario realizing that you had built your town and heroes all wrong and need to start over again. Getting your heroes powerful enough and your town defenses strong enough to fend off the final waves of boss mobs takes a precise and meticulous strategy which if not done properly will find you watching your town and castle torn to the ground by a swarm of powerful mobs while your heroes cower in their guild houses. How fun is that?
If you look up reviews on this game, you will find many people hating on it because of its difficulty level. I personally love a game that forces you to think through each step and admit when you screwed up and have to start over again. The further you get into Majesty 2, the more mind blowingly difficult each scenario gets. The last two scenarios were so hard I found myself screaming at the computer that this is impossible, turning the game off and then waking up in the middle of the night going "aha, I know what I can do to beat that". You know you are playing a good game when you start to dream about it.
Majesty 2 is not without its flaws. Its biggest flaw is a total lack of replay value. Once you have figured out how to beat a scenario, beating it a second time is really easy even on the most difficult setting. Why they didn't build in a random scenario generator is beyond me. I'd probably still be playing the game if there was one. The expansion introduced a scenario builder, but it is so hard to use that there are only a couple player made scenarios available. I'm still holding out hope that there is enough interest in another expansion to have this added in the future, but that is probably not realistic.
Its other major flaw is a bad AI. Your heroes are really stupid and single minded, and will often walk right past a target to get to something further away. Mob behavior is also way too predictable. The classes could be balanced better as well, with some classes such as Dwarves (yes in this game Dwarves are a class) being far too powerful in relation to the others.
Nonetheless, this is nitpicking, and despite these flaws, Majesty 2 is a game well worth playing. It is unique and compelling and should provide a challenge for even the most seasoned gamer out there. It definitely tops my list of favorite games I have played over the past year or more.
Unlike most games, you do not play the heroes yourself. Instead, you play the role of the king and attempt to entice the heroes in your kingdom to do what you want through placing reward flags on the places you want them to explore, attack or defend. Part of the challenge is learning just how much is needed to entice someone to do something without bankrupting your kingdom in the process, particularly considering that your heroes are as a rule not particularly bright. While this may sound boring, it is actually a uniquely fun twist on the standard RTS format.
Money is the key to the game. Over time, you can expand the hero's guilds to sell them extra abilities and add things like market places and blacksmiths to sell them potions and armor. You can also add defensive structures to your town to help protect it from the steady stream of mobs that will be attacking it. Developing a financial infrastructure to let you pay for the improvements in your heroes and town defense before the more powerful mobs start to attack is crucial to winning the game.
What I particularly liked about Majesty 2 was its challenge and its story line. The original game comes with 16 scenarios that are tied together with a really amusing story line narrated by a dead on Sean Connery impersonator. An expansion adds 8 more high end scenarios. Once you get past the first few tutorial scenarios, they start to become really difficult. While there are certain things you need to do for every scenario to succeed, each scenario requires a different strategy to ultimaly avoid being wiped out. Thus it is not unusual to find yourself an hour into the scenario realizing that you had built your town and heroes all wrong and need to start over again. Getting your heroes powerful enough and your town defenses strong enough to fend off the final waves of boss mobs takes a precise and meticulous strategy which if not done properly will find you watching your town and castle torn to the ground by a swarm of powerful mobs while your heroes cower in their guild houses. How fun is that?
If you look up reviews on this game, you will find many people hating on it because of its difficulty level. I personally love a game that forces you to think through each step and admit when you screwed up and have to start over again. The further you get into Majesty 2, the more mind blowingly difficult each scenario gets. The last two scenarios were so hard I found myself screaming at the computer that this is impossible, turning the game off and then waking up in the middle of the night going "aha, I know what I can do to beat that". You know you are playing a good game when you start to dream about it.
Majesty 2 is not without its flaws. Its biggest flaw is a total lack of replay value. Once you have figured out how to beat a scenario, beating it a second time is really easy even on the most difficult setting. Why they didn't build in a random scenario generator is beyond me. I'd probably still be playing the game if there was one. The expansion introduced a scenario builder, but it is so hard to use that there are only a couple player made scenarios available. I'm still holding out hope that there is enough interest in another expansion to have this added in the future, but that is probably not realistic.
Its other major flaw is a bad AI. Your heroes are really stupid and single minded, and will often walk right past a target to get to something further away. Mob behavior is also way too predictable. The classes could be balanced better as well, with some classes such as Dwarves (yes in this game Dwarves are a class) being far too powerful in relation to the others.
Nonetheless, this is nitpicking, and despite these flaws, Majesty 2 is a game well worth playing. It is unique and compelling and should provide a challenge for even the most seasoned gamer out there. It definitely tops my list of favorite games I have played over the past year or more.
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