Archive for December 4th, 2012
Efforts to collect more taxes fail because people adjust their behavior accordingly.
Amidst all the “fiscal cliff” talk of raising tax rates, few dare to ask: have tax revenues topped out?
How could tax revenues decline as rates go up? Easy: people modify their behavior in response to whatever incentives and disincentives are present.
Make mortgage interest deductible and people will rack up huge mortgages. Reduce the yield on savings to near-zero (thank you, Federal Reserve) and people will save less.
Raise tax rates and people will lower their income or move to low-tax locales.As the saying has it, “Money goes where it is treated well.”
Supporters of higher rates tout studies that find upper-income taxpayers shrug off higher rates, staying put in high-tax states: Do High Taxes Chase Out The Rich? andSuperrich stay put in high-tax states like California.
On the other side of the ledger is this study from Britain: Two-thirds of millionaires left Britain to avoid 50% tax rate.
Which view is correct? Both, as a result of different dynamics. There are at least four separate dynamics in play.
1. The professional class is often “captured” and cannot move. For tax purposes, households with incomes of $500,000 and up are considered wealthy, i.e. above middle class incomes. Many of these people are self-employed or professional such as doctors and attorneys.
In theory, they could move to lower-tax states or nations, but their practice or enterprise is often local–pulling up stakes would mean sacrificing their high income which is the result of years or decades of networking and building local social capital.
Many of these high-earners are also trapped by their demographics: their kids are relying on their high incomes to pay their college costs, and aging parents may rely on their proximity and income.
Moving away is simply not an option for these high earners. So it’s not that these professionals approve of higher taxes, they just don’t have any practical alternative.
2. What self-employed high earners can do is lower their earnings. If the threshold is $250,000 each, then they will lower their taxable income to $245,000. Those with S corporations, limited liability corporations, etc. have legal ways to lower their taxable income while retaining the benefits of their entity’s income.
For example, maybe the corporation will buy a live/work loft as an office, eliminating the owner’s personal mortgage. The corporation effectively pays the mortgage, meaning their earned income can drop significantly.
Others will choose to work less. Why work so hard just to pay more taxes? Refuse work, cut your hours, enjoy life more.
3. The super-wealthy have the means to transfer income and wealth to lower-tax nations and pursue legal loopholes in the U.S. tax code. Those households making a mere $500,000 rarely have the financial wealth or firepower to justify the costs of hiring big-bucks tax attorneys and moving their assets and operations overseas.
This is the primary difference between high earners and the truly wealthy: the merely well-paid have fewer incentives to establish a legal enterprise overseas and deal with the complexities of the U.S. tax code, which considers all income from all sources to be taxable U.S. income.
For example, a wealthy U.S. citizen may earn $10 million a year, but by buying a villa and establishing a corporation in a low-tax nation, they can legally lower their tax rate on income earned or declared in the low-tax nation. By expensing all sorts of things against their U.S. income, they can effectively pay the U.S. rate on a small portion of their earnings while sheltering 90% overseas in perfectly legitimate ways.
Shifting assets and income streams to shelter income is de rigeur. The wealthy have more opportunities to do so, and so it is unsurprising that they would take those opportunities.
The wealthy and corporations are used to juggling tax code complexities and international assets/declared income; they have to do this to maximize shareholder value. Jacking up rates basically impacts the “captured” professionals and small business owners who have large earned incomes.
At some point many of these people will decide to sell out, retire, or drastically trim their enterprise to avoid working hard just to pay more taxes.
4. These basic avoidance strategies–earning less money and moving income and assets to lower-tax nations–are already common and relatively easy for those with control of their incomes and assets. Tax avoidance is universal, which is why tax increases always raise less money than linear projections anticipate.
If the sales tax or VAT goes up, people buy less retail and buy more on the cash-black market. The wealthy are simply doing the same thing on a larger scale.
Those with an interest in technical analysis may discern a topping pattern in this chart of tax receipts. It looks like the resurgent tax receipts of the QE/stimulus era will top out and roll over as the global recession deepens in 2013, forming a lower high.
We can anticipate a stairstep down pattern as tax receipts decline, new tax increases bump up revenues for a brief time and then people respond with more tax avoidance and tax revenues will resume their decline.
Various studies have found that Federal tax revenues top out just above 20% of total household income, regardless of the era or nominal tax rates. Recall that in many high-tax economies, up to 50% of the economic activity occurs in the informal/black market.
When tax rates are high, people move their consumption and enterprise into the cash informal economy and only pay taxes on half their total income. This is one way that people limit the amount of taxes they pay to around 20%, regardless of the nominal tax rate.
Efforts to collect more taxes fail because people adjust their behavior accordingly. Linear projections of rising tax revenues always fail to account for this easily predictable behavioral response.
Charles Hugh Smith – Of Two Minds
(Reuters) – Darden Restaurants Inc (DRI.N) warned on Tuesday that earnings for the latest quarter would miss expectations after unsuccessful promotions led to a decline in sales at its Olive Garden, Red Lobster and LongHorn Steakhouse chains.
Promotions my ass.
The simple reality is that the devaluation of purchasing power is biting the consumer and the more QE The Fed does to cover deficit spending, and thus the more deficit spending The Government does, the worse this problem is going to get.
You can cover it up for a while with more borrowing, such as in Student Loans. But eventually that “goosing” of the economy runs out, as acceptance of credit tops, and when that happens the trend re-asserts itself and the driver of it, which is the government’s deficit spending, comes back to the fore.
Bubble TV is trying to play this off as “fiscal cliff” concerns. Nonsense.
The trend was evident more than six months ago in the macro-level data and I’ve been talking about it since. There is no evading the impact of what the government has done with its handmaiden The Fed.
Remember that we were told that “Christmas would be strong” and other similar lines of crap. Well, if sales are going to be strong,why the profit warnings?
I don’t know about you, but I’m already sick of the so-called “Fiscal Cliff” battle in Congress. That’s the mandatory concoction of tax increases and spending cuts that kick in January 1st if Republicans and Democrats can’t reach a compromise. Comedian Jon Stewart gave his perspective recently on The Daily Show. He makes it very clear who is to blame for all this.
While I’m flattered the Speaker would call something “the Bowles plan,” the approach outlined in the letter Speaker Boehner sent to the President does not represent the Simpson-Bowles plan, nor is it the Bowles plan. In my testimony before the Joint Select Committee on Deficit Reduction, I simply took the mid-point of the public offers put forward during the negotiations to demonstrate where I thought a deal could be reached at that time.
Heh heh heh….
Boehner thinks he can just grab someone’s name and use it without asking them first.
By the way, for those who think that folks like Rand Paul have a good idea in their proposals, well, no. Rand, like so many others, fails to understand that in a fiat monetary system money and credit are fungible and therefore in the classic monetary equality (GDP = MV) “M” is not money, it is money and credit.
The reason that we have not seen massive inflation is not, as Rand insists, that we have “exported” our inflation (e.g. to China.) Most of that “exporting” happened in the 1990s and 2000s, not in the last four years. The infuriating part of reading crap like Rand has published over and over again is that ideology has blinded him, along with others such as his father, to the facts even when the facts are right under their nose!
This chart, which you have all seen countless times, is the summary picture of all aspects of our monetary system, because all money is debt in a fiat, debt-backed monetary environment.
The acts of Congress and The Fed have done exactly one thing — they have replaced the credit in “Financial Instruments.”
If you look at GDP in unit-invariant terms (that is, getting “dollars” out of the definition) you would find that of course it has grown materially since 1980, as population has gone up as well in the United States. But population has not gone up by a factor of 10, nor has gross output. The difference is monetary inflation, and much of it (that “green bar”) has been hidden as that part of the chart does not circulate.
In short that is the “skim” that the money-changers steal from society. They provide nothing in exchange for it.
In 1980 this was $531 billion out of a total of $4.39 trillion, or 12%.
In the 4th quarter of 2008, just before the market turned, it reached $17.1 trillion, or thirty-two times larger, and represented thirty-two percent of the total, or roughly three times as much.
What the Federal Government has done is protect these firms from the consequence of attempting to skim a full third of the economy off for themselves — an utterly outrageous and unsustainable attempt that should have resulted in their mass bankruptcy. As that credit went from $17.12 trillion to $13.86 trillion, a decrease of $3.26 trillion, Federal Credit increased from $6.36 trillion to $11.11 trillion, a $4.75 trillion increase.
69% of the new Federal Debt to for the sole and exclusive purpose of propping up those firms. It did not go to help the people in any way — not even by transfer payment! It simply filled in the hole in bank balance sheets.
But that credit is still unsustainable. It represents $13.86 trillion today out of $55.18 trillion. That is, a full 25% of the economic lifeblood of the economy is still being siphoned off by these jackals and people like Rand Paul either don’t understand it (in which case they’re incompetent to hold their office) or are too damned corrupt to speak of it (in which case it’s worse.)
There is some price for intermediation in the market, of course. The low 10% range seems reasonable to me. If you go back to the 1950s, however, you’ll find that the financial industry took just a couple of percent of the total economic activity!
The problem with what The Fed and Government have done is that they transferred responsibility for the financial credit to the public at large. That’s theft folks.
And it is exactly what Boehner, Reid, Pelosi, McConnell, Obama and even Rand Paul along with the mainstream media are advocating.
History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and its issuance. - James Madison
… The modern theory of the perpetuation of debt has drenched the earth with blood, and crushed its inhabitants under burdens ever accumulating. -Thomas Jefferson
Just because the biosphere is going to be toast at some point within the next 100 years doesn’t mean we can’t have some serious fun now. There’s certainly no dearth of hilarious news to go around. When I was called for jury duty last year, I told the lawyers and court officials that I was a writer. They asked me whether I wrote fiction. No, I said, I never write fiction and rarely read it. I told them Real Life is always better than fiction. Having seen a lot of things, they could only agree.
What you’re about to read is not fiction. This is really happening. We don’t make this stuff up. I’ll quote fromBloomberg’s Treasury Scarcity to Grow as Fed Buys 90% of New Bonds.
Even as U.S government debt swells to more than $16 trillion, Treasuries and other dollar fixed- income securities will be in short supply next year as the Federal Reserve soaks up almost all the net new bonds.
The government will reduce net sales by $250 billion from the $1.2 trillion of bills, notes and bonds issued in fiscal 2012 ended Sept. 30, a survey of 18 primary dealers found. At the same time, the Fed, in its efforts to boost growth, will add about $45 billion of Treasuries a month to the $40 billion in mortgage debt it’s purchasing, effectively absorbing about 90 percent of net new dollar-denominated fixed-income assets [T-bills] according to JPMorgan Chase & Co…
The Fed has pumped money into the financial system by purchasing more than $2.3 trillion of Treasuries and mortgage- related securities in three rounds of policy called quantitative easing. The latest program announced Sept. 13 involves buying $40 billion a month in mortgage securities, and has no end date or fixed total amount.
A “number” of Fed officials said the central bank may need to expand its purchases next year, according to the minutes of the Federal Open Market Committee’s Oct. 23-24 meeting. Bond traders predict policy makers will announce at their Dec. 11-12 meeting that they will make new Treasury purchases next year of about $42.9 billion a month, according to the average estimate of primary dealers surveyed by Bloomberg News.
Surely there is a level of absurdity at which serious commentary is no longer required. Not only have we reached that level, but I believe we have moved well beyond it. The Federal Government borrows money. To cover that new debt, the Central Bank prints up some crisp new bills in large denominations and purchases the debt. What could be easier? And to make the deal even sweeter, so-called primary dealers (financial institutions, aka. the big banks) make a boatload of money acting as middlemen in those purchases. How sweet it is!
But there must be—harrumph! harrumph!— some Very Serious Purpose behind this transparent scam. And indeed there is. In fact, there are several Very Serious Purposes.
Even after U.S. public borrowings outstanding grew from less than $9 trillion in 2007 as the U.S. raised cash to pay for spending programs designed to pull the economy out of the worst financial crisis since the Great Depression, rising demand coupled with a drop in net supply means bonds will be scarce.
“The shrinking amount of bonds in the market is lowering rates and not just benefiting the Treasury, but providing lower rates for private-sector decision-makers as well,” Zach Pandl, a senior interest-rate strategist in Minneapolic at Columbia Management Investment Advisers LLC, which oversees $340 billion, said in a Nov. 30 telephone interview.
“The Fed is not creating this scarcity to help out the Treasury, it’s primarily to get the economy going.”
[Bond] buyers range from central banks to financial institutions stocking up on high-quality assets to meet the Dodd-Frank financial-overhaul law and global regulations set by the Bank for International Settlements.
They’re helping the Fed and the Obama administration keep borrowing costs at all-time lows for everyone from consumers to Walt Disney Co…
U.S. 10-year yields fell seven basis points, or 0.07 percentage point, last week to 1.62 percent in New York, according to Bloomberg Bond Trader prices. The benchmark 1.625 percent note maturing in November 2022 rose 22/32, or $6.88 per $1,000 face amount, to 100 3/32.
Programs to pay for the bailout of the financial system, an extension of unemployment benefits and to bolster housing helped cause the size of the U.S. taxable debt market to swell 27 percent since 2007 to$31.3 trillion, according to Nomura Holdings Inc. The figures exclude money-market securities such as commercial paper…
Although I put it in the red font, I want to make sure you get the joke. The total size of the U.S. taxable debt market, excluding money-market securities is
And in case you missed it, Walt Disney, which has lost money for 18 consecutive quarters, is doing its bit in America’s Heroic War on Solvency.
Walt Disney sold a record amount of debt last week at the lowest interest cost it’s ever paid. The company issued $3 billion of bonds on Nov. 27 in a four-part offering with coupons ranging from 0.45 percent on three-year debt to 3.7 percent for 30-year securities.
The issue was the biggest in the 89-year history of the Burbank, California-based company.
Anything else I might say would be superflous. Real life is always better than fiction.
Well, OK. There are rare exceptions. I’ll let Jim Abrahams and the Zucker brothers take it from here.
By the way, is there anyone on board who knows how to fly a plane?
Dave Cohen – Decline of Empire
U.S. regulators probing potential fraud by China-based companies increased pressure on their auditors by formally accusing affiliates of Big Four firms of withholding documents from investigators.
Deloitte Touche Tohmatsu CPA Ltd., Ernst & Young Hua Ming LLP, KPMG Huazhen and PricewaterhouseCoopers Zhong Tian CPAs Ltd. have refused to cooperate with accounting investigations into nine companies whose securities are publicly traded in the U.S., the Securities and Exchange Commission said in anadministrative order yesterday. BDO China Dahua Co. was also named by the SEC in the action.
Refused to cooperate eh?
Sounds like two or more people conspiring to obstruct in a corrupt manner? Why I think we have a name for that, right?
“I don’t think there’s a resolution in sight,” Gillis, also an adviser to the U.S. Public Company Accounting Oversight Board, said from Beijing. “China is hypersensitive to the idea of foreigners operating within its borders and enforcing foreign law. The next step is likely to be the PCAOB trying to deregister accounting firms it can’t inspect. It’s eventually all leading to the de-listing of Chinese firms in the U.S.”
Good. The vast majority of these firms are frauds in some form or fashion anyway. Sino-Forest is just one example.
The cockroaches are circling however, and do not intend to die without being stepped on:
“Simply swinging the hammer of enforcement, while effective at garnering headlines, will likely not be enough to achieve the SEC’s goal,” McGovern, a former SEC enforcement attorney, said. “As capital flows from the U.S. to China at an increasing rate the pressure will grow on the SEC to find a way to forge compromise. The path to compromise may mean that the SEC has to recognize China’s sovereign interest in protecting certain industries or companies.”
Blow it out your butt McGovern.
What some other nation allows is up to them. If you take your money overseas and lose it because the firm in question (or exchange!) doesn’t meet US standards, that’s your problem.
But if you want to business here in the United States, including listing your stock here on our exchanges, then you follow our rules!
This is the same argument I’ve made for years on banks. Foreign banks break our laws all the time and our “regulators” look the other way. They argue that our money-launder laws “shouldn’t” apply to their operations, but the fact of the matter is that as a sovereign nation we have the right to demand of any company that it comply with our laws as a condition of operation in our nation.
This is no different, and de-certifying the affiliates is the right thing for the US Government to do.