Bad Math

“Lots of folks have bought into the myth that raising $1 in taxes brings in $1 in revenue and that raising taxes on the rich will allow the government to pay down the deficit.  People buy into this flawed [static analysis] naiveté because politicians that believe in big government, and benefit from it, make campaign speeches about it.”  So writes Vaughn Cordle of AirlineForecasts, LLC.  Vaughn is an airline analyst who frequently appears on CNBC and other TV business media, including in The Wall Street Journal.  (Full disclosure, Vaughn is a member of The Aviation Group.)  His recent newsletter to his clients, How Big Government Spending Impacts The Economy and Airlines explains why the current Administration is using bad math and gives an example explaining how the Administration’s tax policy will affect Delta Airlines – their bottom line and their ability to create jobs.

Vaughn occasionally strays from airline analysis but sticks with aviation.  A few years ago he predicted the failures of the very light jet charter companies like Day Jet, and even the Eclipse, the aircraft upon which these failed companies’ business models were built.  He went toe to toe with Bob Crandall, the celebrated retired CEO of American Airlines, debating the dubious outcome of his proposed very light jet air taxi startup Pogo.  Bob had teamed up for this venture with Don Burr.  Remember People Express?

In his newsletter he points out that. “As a group, progressives and liberals are great when it comes to helping the poor and working to improve the public safety net, but they don't do math very well and apparently don't consider [or understand] dynamic analysis, which takes into account how the economy is likely to respond to changes in tax policy.”  He says the current White House's budget proposals would:
•     Reduce the rate of economic growth
•     Result in lower employment
•     Reduce personal savings
•     Reduce disposable income
•     Reduce consumer spending
•     Result in higher interest rates

He points out that “Bush came into office in 2001, the year of 9/11.  Federal receipts, outlays and surpluses or deficits are a function of the economy.  So, it's best to view these variables as a percentage of GDP.”  

Average federal receipts / average outlays / deficits as a % of GDP:
Bush years [2001-2008]: 17.6% / 19.6% / -2%   
Obama years [2009-2012]: 16.1% / 24.6% / -8.5%

As for Delta Airlines, Vaughn says, “If Obama's tax policies are allowed, it would reduce Delta's top line revenue around 1%, operating earnings 12%, but bottom line "net" earnings around 20%. This would result in a lower market value of equity, a higher cost of capital and a big hit to shareholder returns for all of those retirees, shareholder employees and other average Americans that hold stock in airlines.  Effectively, Delta would have less capital to spend and hire new employees because it will be less profitable. This is the same for all other businesses, small and large, that will be negatively impacted by a foolish tax policy designed to support a size of government that the economy simply cannot afford.”

Before he buried his head in numbers, Vaughn could be found in the left pilot seat of a major airline flying international routes.