Will Three Model S Fires make Tesla join the Long Line of Green Car Company Failures?

Posted by PITHOCRATES - November 10th, 2013

Week in Review

Tesla has had three car fires with their Model S in six weeks.  Causing their stock price to slide after surging earlier in the year.  Forbes wrote about those better days in a May article that is making the rounds again.  Explaining why Tesla was escaping the fate of so many other green car companies (see The Real Reason Tesla Is Still Alive (And Other Green Car Companies Aren’t) by Joann Muller posted 5/11/2013 on Forbes).

Add VPG to the growing list of recent green car failures: Bright Automotive (electric delivery vans) , Carbon Motors (clean diesel-powered police cars), Aptera Motors (three-wheeled electric cars), Coda Automotive (inexpensive electric sedans) and, arguably the most infamous, Fisker Automotive (plug-in hybrid sports cars).

All had applied for financing under a $25 billion U.S. Energy Department loan program to promote development of cleaner cars, but only Fisker and VPG managed to draw the lucky tickets. Fisker was awarded $529 million (but received only $193 million before the DOE cut them off because of missed milestones) and VPG received $50 million. But now, they’re all dead, or almost dead. (One exception: tiny Wheego Electric of Atlanta, an EV start-up that started out making glorified golf carts and now sells a handful of bubble-shaped two-seaters with a top speed of 65 mph. The company is talking about introducing a $44,000 electric SUV next, but I wouldn’t hold my breath.)

That leaves only Tesla Motors TSLA -1.27%, maker of the plug-in Tesla roadster and the new Model S sedan, still standing. Which begs the question: why has Tesla made it when so many others have not..?

Experience, for one thing. While most of the other green car start-ups were founded by traditional car guys with a dream but little experience running a company, Tesla founder Elon Musk, with degrees in physics and business, had already built and sold one successful company, PayPal, (to eBay in 2002 for $1.5 billion) and also runs SpaceX, a maker of rockets and spacecraft. He had the stomach to push through difficult times, and the chutzpah to twist the arms of reluctant investors…

Tesla has been clever in other ways, too. It sells credits it receives from the state of California for producing zero emissions vehicles to other automakers that aren’t so clean. At up to $35,000 per vehicle, it’s a windfall that has helped keep the company alive, according to Gartner analyst Thilo Koslowski. “At the end of the day, other carmakers are subsidizing Tesla,” Koslowski told the Los Angeles Times.

While true until now, Tesla says those credits will decline as sales spread beyond California and into Europe.  In the first quarter, Tesla said credits sold to other automakers amounted to approximately $68 million or 12% of its revenues.

So the long list of green car company failures tells us there is no market for these cars.  Making it a poor economic model.  Companies that have depended on selling cars to succeed have failed.  But if you’re creative and can think of other sources of cash you can keep a green car company in business even without selling cars.  But tax credits and government loans still weren’t enough to fund Tesla.

Musk, luckily, is a billionaire. He pocketed roughly $180 million as a cofounder of PayPal, and helped get Tesla off the ground in 2004 with an initial investment of $6.3 million. He put in another $20 million in 2007, and then in fall of 2008, with the company on the verge of collapse as the economy seized to a halt, Musk was virtually broke. He spent his last $20 million trying to keep the company afloat, while living off personal loans from friends.

The $465 million government loan helped, as did Tesla’s initial public offering in 2010, which raised $226 million.

Today, Musk is worth almost $3.8 billion — $1 billion more than Forbes estimated less than three months ago. Tesla stock has surged 40 percent this week alone, following the positive earnings report and the Consumer Reports review…

Musk could well make it happen because unlike those other green car companies, he has things you can’t get from the government: huge skin in the game, passion and talent.

This is why Tesla is still in business while those other green car companies are not.  Passion.  Something that is hard to truly appreciate unless you’re an entrepreneur.  And lots and lots of money.  While other companies ran out Musk was still able to go on by putting his money where his passion is.  Makes you want to cheer him on to success.  Even if you don’t believe the electric car is a valid economic model.  You love gasoline.  And you love the internal combustion engine.

Will those three fires in 6 weeks be too great an obstacle for Musk to overcome?  Will the passion and cash last?  Time will tell. 

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Double Entry Bookkeeping, Trial Balance, Financial Statements, Financial Ratios, Italian City-States and Capitalism

Posted by PITHOCRATES - January 8th, 2013

History 101

The Government Finances are a Train Wreck because they have the Power to Tax and to Print Money

President Obama averaged a deficit of $1.3 trillion for each of his first 4 years in office.  Bringing the national debt up to $16.4 trillion at the end of 2012.  And there will be another drop-down, drag-out fight to raise the debt limit in a couple of months.  Why does the government spend this kind of money?  Because they can.  And because they can they can buy a lot of votes by giving stuff away.  Stuff paid for with all of that spending.

When the government implemented Social Security and Medicare there was still an expanding birthrate.  More people were entering the workforce than were leaving it.  Providing an ever expanding tax base.  And a rising level of tax revenue.  Without ever having to increase tax rates.  And the smart government planners thought the good times would just keep rolling.  But they didn’t.  Thanks to birth control and abortion.  Which reversed the equation.  The population growth rate slowed down.  Fewer people entered the workforce than left it.  Resulting in a declining tax base.  And falling tax revenue.  Pushing Social Security and Medicare to the brink of bankruptcy.

The government finances are a train wreck.  And they keep digging their hole deeper.  Because they can.  For they have the power to tax.  And to print money.  Something private businesses can’t do.  Which is why few corporations’ finances are train wrecks.  Except those with unionized workforces with defined-benefit pension plans.  Something long discontinued by most in the private sector.  As it’s a failed economic model.  Just like Social Security.  And Medicare.  Over time more people move from being contributors to being beneficiaries.  Pushing defined-benefit pension plans, too, to the brink of bankruptcy.

At the End of each Accounting Period they run a Trial Balance to Verify the Total of Debits Equals the Total of Credits

The difference between private sector businesses and the federal government is that private sector businesses have to be responsible while the federal government does not.  The federal government focuses on what’s politically expedient.  While private sector businesses must focus on the bottom line.  Spending only the money they have.  Because they can’t tax or print money to fix their messes.  Like the government can.  And does.  A lot.  So they have to avoid making messes in the first place.  They can’t kick the can down the road.  Because in the private sector there is accountability.  And that accountability begins with getting their hands around their business numbers.  So they can understand what their businesses are doing.  And when it’s time to take appropriate actions.  To prevent a financial train wreck.  And it all begins with double-entry bookkeeping.

Double-entry bookkeeping includes debits and credits.  Each transaction is posted to the accounting records with at least one debit and at least one credit.  The dollar amount of debits equals the dollar amounts of credits.  If they don’t equal after recording a transaction they were posted incorrectly.  For example, when someone pays cash for something at a retail store there are two debits and two credits to post.  First we debit cash $20 and credit sales revenue $20.  Then we debit cost of goods sold $18 (the cost of the item sold) and credit inventory $18 (the cost of the item in inventory).   If posted correctly the total debits equal $38.  And the total credits equal $38.  If, for example, someone debited sales revenue instead of crediting sales revenue the total debits would equal $58 while the total credits would equal $18.  Because they don’t balance we know something was posted incorrectly.  And can go back, find the error and correct it.

A business accounts for every penny that flows through their business.  Each accounting period will have thousands of such entries.  And at the end of each accounting period they will run a trial balance to verify that the total of debits equals the total of credits.  When they do they can be pretty sure that the financial information they recorded fairly represent the financial activity of the business at the end of that accounting period.  Then they prepare the financial statements (the income statement, the balance sheet, the statement of cash flows and the statement of retained earnings and stockholders’ equity).  Businesses study these statements to assess the health of their businesses.  They calculate financial ratios to assess the liquidity, long-term debt-paying ability and profitability of the business.  As well as calculate ratios for investor analysis.  To make sure they are satisfying the owners of the company.  The stockholders.

The First Use of Double-Entry Bookkeeping dates back to the Italian City-States of Florence, Genoa and Venice

This is a lot of valuable information.  Courtesy of that double-entry bookkeeping.  Something that can be so mundane and mind-numbing at the data entry point.  Especially if you’re trying to figure out why your trial balance doesn’t balance.  But when it does balance.  And the financial information is fairly represented.  Business owners and managers can make informed decisions to avoid doing what our federal government does.  Including making the hard decisions that permit these businesses stay in business for a decade or more.  Even a century or more.  Thanks to merchant banking.  And the Italian city-states.

For those of you who hate bookkeeping blame the Italians.  Some of the Florentines were using it as early as the 13th century.  The Genoese were using it shortly thereafter.  Soon Florence, Genoa and Venice were using double-entry bookkeeping.  This mastering of economic data made these city-states the dominant economic powers of the Mediterranean.  Making them masters of trade.  And merchant banking.  To manage that trade.  This system of accounting even made it into textbooks in the late 1400s.  Helping to spread good business practices.  Where they were picked up by other great traders.  The Europeans.

With double-entry bookkeeping businesses were able to grow.  First with the help of government.  Mercantilism.  Then without.  Free market capitalism.  Which created the British Empire.  And gave us the Industrial Revolution.  Then the United States came into their own in the late 19th century.  And surpassed the British Empire.  Economic activity exploded in the United States.  Because they were able to get their hands around all of those financial numbers.  And thanks to free market capitalism they focused on the bottom line.  And made the necessary decisions.  No matter how painful they were.  Something that the federal government just can’t do.  Because those decisions aren’t politically expedient.

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FUNDAMENTAL TRUTH #75: “Lower income tax rates generate more tax revenue by making more rich people who pay more income taxes.” -Old Pithy

Posted by PITHOCRATES - July 19th, 2011

The top 1% of Earners pay close to 40% of all Federal Income Taxes

Poor people pay little income taxes.  Rich people pay a lot of income taxes.  Everyone else pays somewhere in between.  The tool to make this happen is the progressive tax system.  Government designed it so that people with more income pay more taxes.   Via progressive tax brackets.  And the current (2010-2011) brackets (for head of household) are:

  • 10% on first $12,150
  • 15% on income from $12,150 – $46,250
  • 25% on income from $46,250 – $119,400
  • 28% on income from $119,400 – $193,350
  • 33% on income from $193,350 – $379,150
  • 35% on income over $379,150

If you earn $8,000 you owe $800.  Simple.  If you earn $83,600 you owe $15,668.  If you earn $450,000 you owe $131,435.  If you earn $2,500,000 you owe $848,935.  See the pattern?  Earn more.  Pay more.  Almost as if you’re penalized for being successful.

Of course, low-income people often don’t pay any federal income taxes.  In fact, a lot of people don’t.  About half.  Thanks to tax credits, deductions and exemptions.  But when you’re a rich CEO earning a multimillion dollar salary there aren’t enough tax credits, deductions and exemptions to avoid your taxes.  That’s why the top 1% of earners pay close to 40% of all federal income taxes.  Something we should thank them for.  Instead of demonizing them.

The higher the Top Marginal Tax Rate is the more the Rich avoid paying Income Taxes

There are no Mom and Pop hardware stores anymore.  The big box home improvement stores like The Home Depot, Lowe’s and, for those of you old enough to remember, Builder’s Square put them out of business.  Because of greedy consumers like you.  And me.  Who want to get the best value while shopping.  And if we can buy something of equal quality at a lower price we do.  We work hard for our money.  We spend it carefully.  Wisely.  And we don’t pay more for something when we can get the same for less elsewhere.

It’s the same for rich people.  When they shop.  And when they invest their wealth.  Or their ability.  They look at their options.  Create a new business?  Work at an established business?  If you’re highly skilled you can earn a lot of income.  Which rich people take into consideration.  But there are costs.  Payroll taxes.  Employee compensation and benefits.  Compliance and regulation costs.  And, of course, the progressive tax system.

The higher the top marginal tax rate the less incentive they have to start or run a business.  The less incentive they have to create jobs.  And the more likely they won’t start or run a business.  Instead they’ll invest their money and pay the simpler and (so far) lower capital gains tax.  And this is what happens.  The higher the top marginal tax rate is the more the rich avoid paying income taxes, leaving the middle class to pick them up.  Just like you avoided that Mom and Pop hardware store on your way to The Home Dept.  And with an abundance of government debt available, the rich can invest and live on interest.  Sitting on the sidelines.  Watching the rest of us struggle to find a job.

You don’t need Employees to live on Interest Income

So, the progressive tax system is a way to make rich people pay more.  To transfer the tax burden to them.  And it does.  To a point.  But if you try to tax them too much they’ll just drop out of the economy.  And take their jobs with them.  Which is a double whammy.  We lose some of that generous 40% of income taxes they pay.  And we lose who knows how many thousands of jobs.  And taxpayers.  Thus transferring the burden the other way.  Away from the rich.  To those less able to afford it.

The progressive tax system is supposed to make paying taxes easier on the poor.  The less you earn the less you pay, leaving you with more money for the necessities of life.  Whereas the rich can afford to pay more so they do.  But a flat tax is a progressive tax, too.  The more you earn the more you pay.  For example, going to a 15% flat tax, our sample earners above would change their taxes owed as follows:

  • $8000:  $800  →  $1,200
  • $83,600:  $15,668  →  $12,540
  • $450,000:  $131,435  →  $67,500
  • $2,500,000:  $848,935  →  $375,000

It’s still progressive.  And, yes, the rich will pay less individually.  But there will be more of them.  For this lower income tax rate changes the dynamic.  It will be more profitable to get off of the sidelines and get back into the economy.  Because a flat 15% income tax rate will beat or equal the capital gains tax.  And the profit from creating or running a business will blow away the earnings on a portfolio of treasury bonds.

Better still are the jobs.  You don’t need employees to live on interest income.  But you need them to run a business.  More jobs mean more taxpayers.  So more rich people are back in the economy earning income and paying income taxes.  And more employees are working.  That’s more payroll taxes.  And more personal income taxes.  In the end, the numbers win.  More jobs.  More GDP.  And more federal tax receipts.

Keeping People Poorer and more Dependent on Government

If the goal of government tax policy is to raise tax revenue, the logical thing to do would be to design a tax code that creates more rich people.  A lower top marginal tax rate does this.  So does a flat tax.  Such a tax policy will create incentives to earn income instead of living on capital gains from investments.  Each rich person will pay less income tax individually but there will be far more of them paying income taxes overall.  And they will create jobs.  The more jobs there are the more payroll taxes and personal income taxes there are.

History has shown that cutting tax rates has done just that.  The Mellon tax cuts of the 1920s.  The JFK tax cuts of the 1960s.  The Reagan tax cuts of the 1980s.  The Bush tax cuts of the 2000s.  So if the record shows that lower tax rates produce more tax revenue, why are we always trying to raise the top marginal tax rates?  Simple.  Politics.

Being in politics is the closest you can get to being part of an aristocracy in the United States.  Unless you’re born a Kennedy.  Whether its ego or the graft, people aspire to be in the privileged few.  Life is better there.  If you have no talent or ability.  Other than being able to tell a pretty good lie.  So you use class warfare to get the masses to support you.  And the progressive tax system.  Which keeps people poorer and more dependent on government.  Like it used to be in the old days when there was an aristocracy.

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