What You Need to Know About The Federal “CARES Act” Bailout Plan

A few weeks ago, the U.S. Federal government passed an 880-page bill, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, that will distribute over $2 trillion in cash aimed to bailout a virus ravaged nation. And there seem to be more bills coming. The purpose of my note is to help unpack this bill and give you more data as a citizen, entrepreneur, investor, and board member. You may not receive nor elect to take any of the money being made available. However, you and I are paying for it regardless, at least most of us. Do you find this to be good or poor “governance”?

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.–That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed,  -That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.” The Declaration of Independence

The beauty of this nation is that the Declaration of Independence set out a vision that all of us have unalienable (yes, the original spelling which means “cannot be forfeited”) rights to life, liberty, and the pursuit of happiness. The constitution, our supreme law of the land, puts this vision into law. Many of us believe that the American Revolution exalted the individual. It was not just about pursuing life, liberty, and property (please review the Due Process Clause as seen in the 5th and 14th amendments of the U.S. Constitution) but rather having your voice heard: “no taxation without representation.” And representation is critical to happiness as believed by the framers of the constitution. We have lost this voice in our current political climate. Unlike other countries, our government cannot keep us as citizens nor business owners from pursuing this happiness. In fact, we never gave any of our governments this power. Instead of citizens being able to debate and discuss the government’s reaction to this virus, citizens are being forced to stay home.

I have spoken to many of you that do not agree with this “freedom” nor believe we actually have these unalienable rights. The good news is that you have the freedom to disagree with me (as given to you in the constitution), the freedom to stay in your home (as given to you in the constitution), and the freedom to keep your business closed (as given to you in the constitution). If you follow your own freedom, you can stay safe. Especially with our strong property rights laws, you can also keep society from infecting you since your property is your castle, and you can defend it. We live in the land of the free, and with it brings great personal responsibility.

What concerns me is that while small businesses are the lifeblood of our economy, many do not understand nor have empathy. As seen in this tweet below from a small business person in my hometown…

Where Does the $2T of Cash Come From?

You and me. The federal government works on behalf of the governed (see Declaration of Independence). In the fiscal year 2019 (FY 2019 covers October 1, 2018, through September 30, 2019, our latest year of actuals to give a sense of where revenue is generated), the U.S. federal raised $3.438 trillion from you and me. It is expected that the federal government will raise $3.863 trillion for this coming fiscal year 2021, Oct 1, 2020 – Sept 30, 2021.  The FY19 U.S. federal government revenue, $3.428 trillion, was broken down as follows.

• Income Taxes (51%): Income Taxes are the primary source of revenue for our federal government. And interestingly enough, not all of us pay income taxes. Since there is a progressive income tax (the more you make, the higher % tax you pay), the top 1% of income earners pay over 25% of all income taxes. The top 20% of income earners pay 69% of all income taxes. Almost half (~44%) of U.S. citizens, 76.4 million, do not pay income taxes at all.

Income Tax Bracket	% of Population	Population	% of Income Tax	Tax per Person	Taxes Paid
Top 1%	1.00%	3,294,500	25%	$133,054	$438,345,000,000
Top 20%	20.00%	65,890,000	69%	$18,361	$1,209,832,200,000
Everyone Else	36.00%	118,602,000	6%	$887	$105,202,800,000
Do Not Pay	44.00%	144,958,000	0%	$0	$0
Total	100.00%	332,744,500	100%	$5,269	$1,753,380,000,000

I know this is a tough subject but needs to be asked. The CARES Act will be paying ~175,000,000 Americans. This is basically a HUGE distribution of wealth from those that pay income taxes to those that do not. Is this a violation of Due Process as outlined in the constitution? You may or may not support this, but is it really legal?

Not only do most of us pay our income taxes through our employer (which is why most Americans are unaware of the magnitude), we also pay payroll taxes.

• Payroll Taxes (35%): As an entrepreneur, these are the taxes you pay when you hire employees. The two main federal payroll taxes levied on wages are known as the Federal Insurance Contributions Act (FICA) taxes. Employees and employers both pay FICA taxes: employees usually have them withheld from their paychecks, while employers pay them in addition to any other taxes they owe. The 2 FICA taxes include:
  • Social Security Tax: This is levied at 12.4%, which is split evenly between employers and employees and capped at $132,900 (in 2019). These taxes go towards our social security system.
  • Medicare Tax: This 2.9% tax on wages is split evenly between employees and employers. Unlike the Social Security tax, there is no wage cap. If you earn over $200,000 (or $250,000 if you file as a married couple), there is an additional 0.9% tax, for a total of 3.8 percent on income. Revenues from the Medicare tax support the hospital insurance portion of Medicare. There is a 3.8% tax on investment income for high-income taxpayers as well, but it isn’t withheld through the payroll tax or reserved for the Medicare Hospital Insurance trust fund.
  • Self-Employment Tax: if you work for yourself, you pay an equivalent tax to FICA known as Self Employment Contribution Act (SECA) tax. This has been an ongoing fight amongst the IRS, employers, and workers, especially with the gig economy that has impacted Uber, AirBnB, and even energy’s darling, Rigup. It is so much easier to hire contractors since they have the burden to report and pay their own payroll taxes and thus one of the leading benefits of the gig economy.
  • Federal Unemployment Tax Act (FUTA) Tax: Employers pay 0.6% percent on the first $7,000 of a worker’s wages. Employers are responsible for paying up to $42 per worker per year. This tax pays for the administration of state unemployment insurance programs.

• Excise, Estate, & Other Taxes (8%): Excise taxes are indirect levies upon transactions of particular goods or activities, such as gasoline, alcohol, or gambling. Estates over a certain threshold must pay federal taxes. This year, 2020, taxes are due for any estate valued over $11.58M. Individuals who give large gifts of property (including money) to other individuals may also be subject to a gift tax. The current threshold is $15,000, which is probably why your grandparents keep giving you cash donations under $15k.

• Corporate Income Taxes (6%): Currently, corporations must pay 21% tax on their earnings. The Tax Cuts and Job Act of 2017 changed the corporate tax rate to a flat 21% from 35% when it went live on Jan 1, 2018. Corporate taxes only generate 6% of the federal government’s revenue; however, this has been a political mess due to the double taxation problem.

[Double taxation: One of the largest complaints (one of the few issues that startups need not worry) about the U.S. federal tax system is called double taxation. Double taxation primarily refers to corporations that pay their 21% federal tax on their earnings AND shareholders who are also taxed again on the dividends they receive from those earnings. Dividends are taxed at the shareholder’s personal tax rate. There are two other definitions of double taxation that I find interesting: (1) if you are an owner and an employee of a corporation, you pay a personal income tax on the salary you receive AND get taxed on the dividends you receive as a shareholder. (2) The United States is one of only two countries in the world that has citizenship-based taxation (the other is Eritrea). As a U.S. citizen, you must file a tax return, no matter where you live, and often pay U.S. taxes on top of the tax you already pay in your country of residence — so-called double taxation.]

The U.S. Government Spends A LOT More Than It Makes

The current U.S. government planned spending is $4.829 trillion. That’s the federal budget for the fiscal year 2021 covering Oct. 1, 2020, to Sept. 30, 2021. The government forecasts that it will collect $3.863 trillion (most likely lower after C19), leaving a budget deficit of almost $1.0 trillion.

This projected $1.0 trillion does not include the $2.0 trillion from the CARES Act and whatever else is in the pipeline now that C19 has unleashed the dragon. It is unclear to me which budget cycle (FY20 or FY21) the CARES Act is being attributed and how much it will ADD to the debt. Each year, the annual U.S. government budget deficit adds to the U.S. debt. To raise funds to cover the deficit, the government “borrows money” by issuing securities such as Treasury notes, which are purchased by many investors. At the time of writing this note, the U.S. national debt is $23.3 trillion.

• Who owns the Debt: China and Japan each own over $1.0 trillion of the U.S. debt. Europe + the UK combined also own over $1.0 trillion. This is one of the reasons why there is so much financial interdependency amongst the largest economies in the world. What is lesser known is that our own federal government, the federal reserve (“The Fed”), owns ~ 10% ($2.63 trillion as of Q4, 2019) of the debt. [Founders: when we invest in startups, there are protective provisions preventing you from borrowing money, issuing stock, or buying back its own stock.] The Fed purchases debt (Treasurys) from its member banks effectively printing money, pushing liquidity into the market, and pushing interest rates down.

• How does this compare to other countries: I am wondering what this new unprecedented debt will do to the U.S. economy and our political system (more government control and the impact on how people will vote). How much does the government borrow compared to others? The U.S. total federal debt to equity as of Q3 2019 was ~84%. Instead of corporations that track gearing/debt to equity ratios, most countries track total public debt as a percentage of gross domestic product. It is difficult to compare a country to a corporation; however, as an investor, I have to wonder. For the U.S., the total federal debt to GDP as of Q3, 2019, was ~105%. However, since we are using GDP as our denominator, why shouldn’t we use all debt of a nation (consumer, business, and government) as a numerator. In the U.S. (leaving out state and local debt…too much work), total consumer debt = ~$14.0 trillion + total corporate debt = ~$15.5 trillion + federal government debt = $23.3 trillion = Total U.S. debt = $52.2 trillion; however, a few other sources shows total U.S. debt at $69.0 trillion (why is it so hard to have transparency here?). Regardless, the total debt to GDP ranges anywhere from 240% – 300%. The last information I can find on China is from 2018, with its government debt to GDP at ~50%. In early 2019 (assuming my sources are accurate), China’s total debt burden to GDP was 304%! This is going to have a problematic impact on both the U.S. and China now that the economy will most likely not bounce back, making it difficult for both countries to service the debt. While I am not an expert on Modern Monetary Theory, I am curious to watch whether Japan is going to be a leading indicator of whether this excessive debt spend will pay off over the long-run.

• How does this debt compare to Corporations: My original point was to compare our federal government’s debt ratio to business. At the end of FY 2019, Shell reported its debt to equity ratio at 51.71. ExxonMobil’s was 27.53. Tesla is at 222 (they have a lot of debt). Oxy is 116.88 (and this is prior to C19 and Carl Icahn). What is a good vs. bad debt to equity ratio depends on the industry, economy, and situation; however, when it gets too large, that entity whether a corporation or government can run into being unable to pay its bills… and this leads to insolvency, driving countries and businesses into recession/depression or out of business altogether.

Where is the $2T of cash going from the CARES Act?

You can read it yourself or see my “Kirk’s notes” below on where the CARES Act will allocate $2 trillion. There is too much to cover (it is 880 pages after all); however, I am calling out the important and the interesting:

The Federal Government Gets a Pay Raise while America gets a Pay CUT

First of all, the CARES Act gives key federal government agencies a $2.6B PAY RAISE for just salaries alone. I only added up those departments that specifically were given additional salaries. There are other increases in budget throughout the bill that I did not disclose.

Congress is taking $25M of the CARES Act to pay itself MORE than is already allocated in the current budget. I am currently watching friends, entrepreneurs, small businesses, and many others suffer through this economic devastation.

Many startups are reducing their salaries or going out of business altogether. The CARES Act even has provisions to reduce executive compensation for larger businesses. Does this make sense to you? For the people, by the people?

Small Businesses ($377B)

This applies to companies with fewer than 500 employees (most of the companies in the U.S.). The main features for small businesses are emergency grants and a forgivable loan program. There are also changes to rules for expenses and deductions meant to make it easier for companies to keep employees on the payroll and stay open in the near-term. The three primary features of this bill include:

• Emergency Grants: The bill provides $10B  for grants to provide emergency funds for small businesses to cover immediate operating costs.
• Forgivable Loans: There is $349B allocated for the Small Business Administration to provide loans of up to $10 million per business. Any portion of that loan used to maintain payroll, keep workers on the books, or pay for rent, mortgage, and existing debt could be forgiven, provided workers stay employed through the end of June.
• Relief for Existing Loans: There is $17B to cover six months of payments for small businesses already using SBA loans.

CLICK HERE FOR SPECIAL SECTION ON HOW TO GET AN SBA LOAN IF A VENTURE BACKED STARTUP

Individuals ($560B)

There are many details, especially on the unemployment side, on how to take advantage of these provisions. The easiest way is to go to your state’s unemployment website.

• $300B (Cash Disbursements): Most individuals earning less than $75,000 should receive a cash payment of $1,200 (page 144). Married couples will get $1200 each plus $500 per child. For individuals that make over $99,000 (or couples over $198,000), you will receive nothing. And like it. Since the government already has your bank account information (the truest definition of Big Brother), it should arrive via direct deposit.
• $260B (Unemployment Bonuses): this dollar amount can change based on the actual number of people filing for unemployment. This provision adds $600 per week (page 99) from our federal government on top of the base amount provided to workers from your individual state program and will last for four months.

Since we are all working from home, your business has been able to shift operational costs (specifically electricity + internet + coffee) onto you. Your overall electricity bill will most likely stay flat. There are three things happening at the same time to drive this:

• In Texas, your electricity delivery charges have gone down: Simultaneously but unrelated to the C19 issue, The Texas Public Utility Commission (“PUC”) approves new delivery charges for your electricity (shown on your bill as TDSPs – Transmission + Distribution Service Provider) every March 1 (usually down) and September 1 (usually up). On March 1, the PUC lowered these charges across the state. While not much (in CenterPoint, which services the city of Houston, the charge went down by 0.5553¢/kWh). The TDSP charge is a significant line item on our electricity bill. For me, this charge is usually 40% of my bill.
• Your consumption of electricity at home is going up: Since most of us are charged on a usage basis, the more we use, the more we pay. Now that we are all at home, our TV’s, laptops, iPhones, Xbox’s, are cranking and charging simultaneously. And since the weather is also getting warmer, in Texas, we use more air conditioning.
• Electricity is Cheaper during C19: Unless locked into an existing plan (in which I suspect applies to most), electricity demand has gone done due to Commercial and Industrial businesses using a lot less power. In other words, demand overall for electricity has dropped. At the same time, natural gas prices have plummeted over the past year. Since natural gas is a key fuel used in our electricity generation, the price to produce electricity has also dropped.

Can’t pay your electricity bill? Have no fear. “The Texas Public Utility Commission approved an order Thursday that would ban disconnections of water and power service for Texans financially impacted by COVID-19 and put them on deferred payment plans.” For those of you that live elsewhere, check your local news.

Large & Medium-Sized Corporations, States, and Municipalities ($500B)

The Secretary of the Treasury is “authorized to make loans, loan guarantees, and other investments in support of eligible businesses, States, and municipalities that do not, in the aggregate, exceed $500,000,000,000 and provide the subsidy amounts necessary for such loans, loan guarantees, and other investments in accordance with the provisions of the Federal Credit Reform Act of 1990.” $58B (11.6%) of this part of the bill is aimed towards keeping the airlines open. The rest of it is reserved for the Board of Governors of the Federal Reserve System to make short-term loans (up to five years) to these entities that need help. Here are a few interesting hooks that you should be aware of:

• No Stock Buy Backs, No Paying Dividends: After paying off the loan, the company cannot re-purchase its own stock for an additional 12 months following. The company also cannot pay dividends for an additional 12 months following repayment of the loan. For the U.S. based oil & gas companies, this is going to be a big problem. Take the money, and you survive; however, your investors may dump the stock as a result due to its lack of paying dividends. However, the Secretary of the Treasury may waive (page 519) the dividends clause (will this lead to playing favorites?).
• No Headcount Reduction: “until September 30, 2020, the eligible business shall maintain its employment levels as of March 24, 2020, to the extent practicable, and in any case shall not reduce its employment levels by more than 10 percent from the levels on such date,” For the oil & gas industry, how is this going to work?
• Uncle Sam wants Financial Protection (Warrant and/or Equity): the Secretary at his discretion when offering a loan will also ask for a warrant or equity interest or a senior debt instrument. Whoa…do you want the U.S. government to be an equity holder in your company?
• Executive Compensation is Limited: Hey, since Congress makes the rules, they can get a pay raise. However, if you are going to take money from this bill, you will need to take it in the chin. If an office or employee of these corporations has a total compensation (salary + bonuses + stock + other financial benefits) of $425,000 or more in 2019, they will not be allowed to have an increase in total compensation as long as the corporation has an outstanding loan from the CARES Act, plus 12 additional months (at a maximum, this could be six years). If an officer or employee is terminated, severance pay cannot exceed 2X their total compensation. However, for the officers and employees that exceed $3M in total compensation, they will be allowed to make $3M plus up to 50% of the excess over $3M. This is going to make it interesting since it puts many potential companies in a lose/lose position.
• Administration Nightmare: Ask yourself how the Secretary of the Treasury is going to manage all of these investments since this is not his day job? The government will have to grow (up to $100M is reserved for this) to manage these investments.

State & Local Gov’ts ($339.8B)

Outside of the discretionary spending that falls under the $500B above, this $339.B is divided up to put $274 billion toward specific COVID-19 response efforts, including $150 billion in direct aid for those state and local governments running out of cash because of a high number of cases. This provision also includes $5B for Community Development Block Grants, $13 billion for K-12 schools, $14 billion for higher education, and $5.3 billion for programs for children and families, including immediate assistance to child care centers.

There are many other places this bill will give money, including public health, education, child nutrition, food stamps, food banks, student loan relief, and a lot more… Unfortunately, I lost interest and focus on this note.

What Else Is in the Bill That You Are Paying for But May Have You Scratching Your Head?

As a steward of the governed’s resources, I went through most of the 880 pages and wondered if you as the investor would approve the following:

• $350M for the Department of State Migration & Refugee Assistance (page 817) — The Migration and Refugee Assistance Act was passed in 1962 to deal with refugees, conflict victims, and persons at risk around the world. This act was used by President Clinton in 2001 to deal with the crises in the Balkans and Nepal, as well as by President Obama in 2009 to help Palestinian refugees. During this time of domestic need, I am unclear why we need to be sending money to others.
• $75M for the National Endowment for the Humanities (page 724) — I give up. I have no idea what this is for except to funnel money to “special projects.”
• $75M for PBS (page 770) — When you are part of the government, it must be good. This is on top of PBS’s existing funding. If you are in public broadcasting, you are getting a raise… Necessary?
• $60M for NASA (page 628) — Again, how does the Coronavirus impact NASA more than anyone else since this is on top of their existing budgets?
• $25M for the Kennedy Center for the Performing Arts (page 722) — Since it is in Washington D.C., they deserve it over The Hobby Center and/or Wortham Center. D.C., after all, is the center of the pork.
• $25M for Salaries and Expenses for House of Representatives (page 781) – It’s hard to be a congressperson. They are working from home, too, and thus need a raise.
• $13M for Howard University (page 768) + $7M for Gallaudet University (page 767) — hey! Both universities are based in D.C., private (wait a minute), and federally chartered. The federal government takes care of its own. However, why didn’t the other congressionally chartered universities, American University, Georgetown University, George Washington University, and the Institute of American Indian Arts (IAIA) get any of kickbacks?

This is only the tip of the iceberg to this bill (that will be with us for generations to come), as well as what is brewing in Washington, D.C., at this moment for more spending. We need to be aware and be good citizens that continue to exercise our rights.