Tax Issues – Page 7 – The Wrongologist

The Republican “Free Stuff” Meme

At the last Republican presidential debate, Chris Christie (R-NJ) characterized the Democratic candidates’ debate as:

A parade of, ‘I’ll give you this for free; I’ll give you that for free’.

Senator Marco Rubio said: (brackets by the Wrongologist)

It [the first Democratic debate] was basically a…debate about who was going to give away the most free stuff: Free college education, free college education for people illegally in this country, free health care, free everything.

Jeb Bush says that black voters should back him, since his:

…message is one of hope and aspiration, not one of division and get in line and we’ll take care of you with free stuff…

For the record, Medicare, Medicaid, Social Security, and unemployment have dedicated tax revenue streams. If we back out those funded benefits, all other elements of the so-called social safety net “free stuff” adds up to ~$405 billion, a fraction of the $1.2 trillion in “unfunded” Federal entitlements, and most of the rest goes to top income earners.

So, what do Republicans mean when they say “Free Stuff”? From Jared Bernstein:

There are at least three definitions of “free stuff.” The broadest would simply include all government benefits. A narrower version might apply only when people receive more in benefits than they pay in taxes. A third might refer to any net gain relative to the status quo.

Under any of these definitions, the Republican claims are misleading: they attack help for people who need it, while implicitly condoning tax subsidies for the wealthy. What the Republicans want us to focus on are public education, Medicaid, and direct cash assistance to the poor, but the government provides other subsidies, some of which the GOP seems perfectly happy to keep in place.

For example, Rubio and Bush want to cut capital gains taxes below the current level (Rubio would completely abolish them). But today’s reduced cap gains rate already provides a significant benefit to people who invest in assets (i.e., the wealthy). Then there are things like regressive housing tax breaks, about 70% of which go to those in the top 20%. In addition, 68% of the tax benefits for retirement savings and 64% of subsidies for individual retirement accounts (IRAs) accrue to the top 20%.

Can it be that government benefits for poor people are “free stuff”, while benefits for the wealthy are not?

Maybe Christie, Rubio, and Bush subscribe to the second definition described above: It’s “free stuff” if you receive more in benefits than you pay in taxes, but not if you pay more in taxes than you receive in benefits.

The third way to think about “free stuff” mirrors the most accepted concept of “free”. Bernstein asks:

Suppose, for example, that you opened your email today to find an unexpected $100 Amazon gift card. No matter how much money you had spent or planned to spend at Amazon, you would call this “free” money. Or imagine that you go out to dinner at a restaurant and a waiter decides to “comp” your dessert. Regardless of the overall price of your meal, you would likely consider that dessert item to be “free.”

Under this definition, “free stuff” from the government would be new benefits or reduced taxes relative to one’s current situation. Since the Christie, Rubio, and Bush tax plans all contain massive tax cuts, they would give away huge amounts of foregone tax revenue as “free stuff,” and unlike the “free stuff” proposed by the Democratic candidates – the GOP “free stuff” would go to their very wealthy patrons.

From the carried interest loophole, to drug patent law, to defense industry markups, to sweetheart deals for the oil industry, the total “free stuff” for the 1% dwarfs that available to the rest of us. Yet, the nattering nabobs of trickledown continue to target removing the scraps doled out to the 99%.

Social stability is the reason the rich should not begrudge the support given to those that are less fortunate in our society. The rich have the most to lose should the vast majority decide they have suffered enough, and we see an “off with their heads” moment.

Extra money in the hands of the 1% or the .01% just creates bidding wars for penthouse apartments that the 2% can no longer afford.

Monday Wake Up Call – June 29, 2015

Mylan, a generic drug maker based outside Pittsburgh, abandoned its status as a US corporation, gaining tax advantages by moving its headquarters to the Netherlands. The move reduced the taxes the company pays on profits from sales of drugs overseas, but Mylan continues to maintain most of its operations in Pennsylvania.

Mylan was viewed by some in Congress and the Obama administration as a symbol of corporate greed when they undertook a corporate inversion that placed profits above any commitment to its home country.

But now, Mylan is demanding that the US Federal Trade Commission (FTC) protect it from a hostile takeover bid by an Israeli company, Teva Pharmaceuticals. Mylan asked the FTC to examine Teva’s purchase of Mylan stock for possible violation of the requirement that large purchases of stock of US firms must be reviewed by antitrust authorities, because Mylan is still listed on the NYSE. The company claims that its principal office remains in Pennsylvania, which makes it a “US issuer” of stock for federal anti-trust purposes.

The irony of this is not lost in Washington. Rep. Chris Van Hollen (D-MD), the senior Democrat on the House Budget Committee said:

Mylan is trying to have its cake and eat it too…It is an intolerable abuse of a loophole when US corporations pretend they are based overseas in order to get out of paying their fair share and duck their responsibilities to the United States. It’s just plain hypocrisy when one of those same inverted companies claims that it is actually a US company because it needs the special protections US law gives to American companies.

Mylan may have a case. Its plea for help from the US government could pass legal muster but, the optics of a company that abandoned its US citizenship in order to pay less in federal taxes, and then seeking the protection of a federal agency is problematic.

Compounding the farce, Mylan is attempting its own hostile takeover of Perrigo, in order to stave off Teva.

Mylan’s unabashed lack of shame is impressive. Maybe the FTC’s decision-making on this case should take quite a while.

So, wake up Congress, and deal conclusively with corporate inversions! Our wake-up calls for the next few weeks will be songs about summer. We start with the Lovin’ Spoonful’s only #1 hit, “Summer in the City”:

For those who read the Wrongologist in email, you can view the video here.

Monday’s Hot Links:

The return trip often seems shorter than the initial trip, even though the distance traveled and the actual time spent traveling are identical. This is called the “return trip effect”. Two studies say it is real, but you already knew that.

Trucker jobs will be the first casualty of driving robots. Trucker salaries average $40,000/year. Most truck accidents are due to user error: Driving too fast, driving while tired, or driving while intoxicated. Robots don’t drink, don’t get tired, and won’t drive unsafely in order to get to a destination faster. Drivers will still be needed for inner-city driving (at least initially), but most long-haul operations will quickly vanish as soon as licensing is complete in most states.

Three years ago, Saudi Arabia announced a goal of building, by 2032, 41 gigawatts of solar capacity by 2032, slightly more than Germany has today. The Saudis burn about a quarter of the oil they produce—and their domestic consumption has been rising at 7% a year, nearly three times the rate of population growth. According to a British think tank, if this trend continues, domestic consumption could eat into Saudi oil exports by 2021 and make the kingdom a net oil importer by 2038.

Privail Diagnostics, has developed a simple, portable blood test that can detect the HIV virus (not antibodies) for the first time. That means an earlier diagnosis, and reduced infection rates. Privail’s at-home testing device is like a diabetes test, needing only one drop of blood. It shows the results in a color bar, like an at-home pregnancy test or digital output, like a diabetes meter. Invest at your own risk.

Hackers have apparently cracked the computer systems responsible for issuing flight plans to pilots of every airline. The apparent weak link? The flight plan-delivery protocol used by every airline. Ground computers calculate the appropriate flight plan for planes, and someone on ground approves the plan before distributing it to pilots. Pilots receive plans before taking off, as well as enroute, when a change occurs during a flight. Plans are uploaded to planes via a datalink. Once a hacker figures out those protocols, it is possible to issue a bogus flight plan. But, the industry says, not to worry.

Your thought for the week: Giving money to poor people is socialism, or even communism…..giving money to AIG or Goldman Sachs is capitalism, and that’s what made this nation grrrreat!!!

Sunday Cartoon Blogging – June 14, 2015

Let’s talk taxes. Specifically, let’s focus on a Republican governor, Jindal of Louisiana. Louisiana faced a massive shortfall ($1.6 billion) due to the fact they are governed by Bobby Jindal and a bunch of Republicans who can’t admit that they are raising taxes because otherwise, Grover Norquist will get angry at them. From the NYT:

With less than two hours left in the 2015 session, Louisiana legislators agreed Thursday on a solution to the worst budget shortfall in decades, approving a funding arrangement that drew bipartisan criticism

The legislators had looked at raising taxes, but Jindal said that he would veto anything that violated his pledge to Norquist. The big losers if no deal was reached would have been public education and health care.

So, the governor consulted with Americans for Tax Reform, the Washington anti-tax advocacy group led by Norquist, and came up with a complicated plan that was an accounting fiction, in order to solve the budget crisis.

• The plan obligated $350 million of the revenue raised during the session to higher education, thus preventing cuts
• That was augmented by an “assessment” of $1,600 per student on the state’s public college students
• Nobody would actually pay the assessment because students would also be granted a tax credit against that assessment
• The student’s tax credit, in turn, would be transferred to the state Board of Regents, the body that runs higher education

The board would then use the credit to draw money from the Department of Revenue. It’s confusing, and not just to the accounting-challenged. But, under the plan, no one’s tax burden went up or down, which allowed the Louisiana Legislature to raise the cigarette tax by 50 cents a pack, increase costs for businesses by reducing a variety of tax credits and raise fees on car buyers and other Louisianians.

Lawmakers have called the provision everything from “money laundering” to “stupid,” and that was just the Republicans. Robert Travis Scott, president of the nonpartisan Public Affairs Research Council of Louisiana said:

There is no way you can explain that it’s an offset…This is a vehicle that allows Governor Jindal to raise taxes, period.

The fact that Norquist helped Republicans in Louisiana figure out a way around HIS OWN PLEDGE tells you that this “no new taxes” nonsense has become simply theater. Now Jindal can run for president with Norquist’s blessing. Isn’t that nice?

On to cartoons. The big news of the week included the Trade Fast Track fail, sending more troops to Iraq, and a new Jurassic Park movie.

Fast Track is side tracked:

The same old Iraq strategy reappeared:

With predictable results:

New Jurassic movie brought out new GOP creatures:

Like Jurassic movies, STEM in Congress creates BIG problems:

End Government Subsidies of Private Equity

We have written about taxpayer-funded corporate subsidies this week. Let’s talk about the Private Equity (PE) industry, where profit margins are pretty high. By PE we mean investing in assets that include equity securities and debt of operating companies that are not at the time of the investment, publicly traded. Having a number of streams of income coming from a variety of investments or income generating assets is one of the best ways to build wealth. You see, hPE is a re-branding of leveraged buyouts (LBOs) which were the way Wall Streeters built wealth in the 1980s.

In the past 35 years, we have seen a finance-led revolution that has generated fantastic wealth for PE managers. PE has in large part, helped create the growing chasm between America’s most wealthy and everyone else. This is shown in the disproportionate numbers of private equity and hedge fund principals in the top .1% of American wealth. That wealth doesn’t only come from just making a killing when the target company goes public or is acquired, it also comes from favorable tax treatments for the PE company principals and investors.

Although the PE industry is often held up as an exemplar of free-market capitalism, it is surprisingly dependent on government subsidies for its profits. In a typical deal, a PE firm buys a company, using some of its own money and some borrowed money. It then tries to improve the performance of the acquired company, with an eye toward cashing out by selling it, or taking it public.

The key to this strategy is debt: the PE firms borrow to invest since, just as with your mortgage, the less money you put down, the bigger the potential return on investment. But debt also increases the risk that companies will go bust, so early on, the amount of debt PE firms employed was conservative.

That has changed in the last 10 years. After using debt to buy them, many PE funds now have their portfolio companies borrow even more. They then use that money to pay themselves “special dividends.” This allows them to recoup their initial investment while keeping the same ownership stake.

Before 2000, big special dividends were not common. But between 2003 and 2007, PE funds took more than $70 billion out of their companies. These dividends created no economic value-they just redistributed money from the company to the private-equity investors.

As an example, in 2004, Wasserstein & Company bought the mail-order fruit retailer Harry & David. The following year, Wasserstein and other investors took out more than $100 million in dividends, paid for with borrowed money. In 2011, Harry and David defaulted on its debt and dumped its pension obligations on the US government. And when an investment goes bankrupt, there are more fees, and maybe more tax write-offs for the PE partners.

Taxpayers are left on the hook. Interest payments on that debt are tax-deductible, and when pensions are dumped, a federal agency, the Pension Benefit Guaranty Corporation (PBGC) picks up the company’s pension liability. That means taxpayers are on the hook for those unfunded pensions.

And the money that PE dealmakers earn is taxed at a much lower rate than normal income, thanks to the US tax code’s carried interest loophole, which permits that income to be taxed at capital gains rates.

Most do not know that the single largest source of investment capital in PE funds is government pension funds. According to Preqin, a database company that tracks investment in PE, approximately 30% of capital in US PE funds is contributed by government pension funds. Government pension funds are usually called “public” pension funds, administered by government employees and governed by officials who are directly elected by the public or appointed by elected officials.

A key point about the power and reach of PE. They have more than $3.5 trillion under management. Assuming normal leverage (30% equity) that gives them $11.7 trillion in buying power. That’s about 40% of the value of publicly-traded firms in the US. Think about the political clout they have by investing government pension money. Not only do PE firms own a huge portion of America’s productive businesses, unlike the diffuse ownership of public companies, they control them outright.

So, PE is a government-sponsored enterprise, both via tax subsidy and via funding. We taxpayers are helping them to fabulous paydays, thanks to our Congress Critters.

If PE firms are as good at remaking companies as they claim, they shouldn’t need tax loopholes to make their money. If we capped the deductibility of corporate debt, and closed the carried-interest loophole, it would not prevent PE firms from buying companies or improving corporate performance.

But it would add to our tax revenues, and that might keep a bridge or two from falling into a river during rush hour somewhere in America.

“The American Dream: You have to be asleep to believe it.” -George Carlin

Maximizing Shareholder Value

The Guardian highlights a report by the International Monetary Fund (IMF) about the level of global subsidies paid by governments to the fossil fuel industry:

Fossil fuel companies are benefiting from global subsidies of $5.3tn (£3.4tn) a year, equivalent to $10m a minute every day, according to a startling new estimate by the International Monetary Fund.

That’s $5.3 trillion per year. The subsidy estimated for 2015 is greater than the total annual health spending of all the world’s governments. The subsidy is created by polluters not paying the many costs imposed on countries by the burning of coal, oil and gas. These include the harm caused by air pollution.

The IMF said that ending subsidies for fossil fuels would cut global carbon emissions by 20%. They argue that ending the subsidies would also slash the number of premature deaths from outdoor air pollution by 50%, or about 1.6 million lives a year.

It is difficult to get behind the IMF headline to the methodology that leads to their findings. They are basically estimating how much damage global warming is doing and listing that as a government subsidy. The benefits that fossil fuels have delivered to mankind are massive. The pro-fossil fuel argument is that if you could put a price on these things, it would outweigh the $5.3 trillion figure by many thousands of times.

That is true, but the argument misses the point. We need fossil fuels. We use fossil fuels. The issue is why are the costs socialized, while the profits are privatized?

This again highlights the moral and intellectual bankruptcy of the “Maximize Shareholder Value” movement in corporate governance. The 1970-era Clean Air and Water Acts and the 1980-era Superfund, TSCA, and RCRA Acts were among the first attempts to shift the costs of the socialized pollution costs back onto the corporate and municipality originators. Ironically, given today’s political environment, all of the major environmental acts (except the 1980 Superfund) were signed into law by Republican presidents Nixon and Reagan.

In the IMF report, China provided $2.3 trillion of the subsidies. The US was 2nd with $700 billion.

China will be focusing on reducing their pollution and other impacts as their society gets wealthier. Once people’s basic needs are met, they will be looking to improve their lot, and breathing in poisonous smog and living next to putrid water will not be high on their list of desires. As an example, it only took 25 years after the end of WW II for Americans to insist on an improved environment.

And all of the above ignores the costs of wars to keep the fossil fuel supply lines open, as well as the regular costs of our defense and intelligence establishments, and the destruction of democracy as necessary collateral damage.

All that for something we burn. Along with our tax dollars, that is.

Cartoon of the Day: The real truth about DC’s Think Tanks:
Links:

Hillary Clinton on Trade Agreement: “I have been for trade agreements, I have been against trade agreements.” Anybody want syrup with those waffles?

Is Japan becoming extinct? The Japan Times wonders what the projected drop in the country’s population says about its future. They cite a report, “Local Extinctions”, which says that that 896 cities, towns and villages throughout Japan are facing extinction by 2040. Factoid: In 2013, 8.2 million of the more than 60 million homes nationwide were empty, and 40% percent of the 8.2 million empty homes were not being offered for sale or rent.

Here’s how much of your life the United States has been at war. The link shows a ginormous chart of how many years of your life were in wartime. For the Wrongologist, it is 43.8% of his life.

Millions of tiny spiders rained from the sky in Australia. Residents of Goulburn, Australia woke one day this month to find their town shrouded in silken webs, while millions of tiny spiders rained down from above. Apparently this is called “Spider rain.” It happens when large groups of arachnids migrate all at once, using a technique called “ballooning.” Creepy much?

After decades of maintaining a minimal nuclear force, China is re-engineering its long-range ballistic missiles to carry multiple warheads, or MIRVs. China has had the technology for decades, but the decision to put three or more warheads atop a single missile is recent. So far, China has declined to engage in talks with the US about their decision to deploy MIRVs. If America treats China like an enemy, then China WILL BE our enemy. Maybe that’s what the Pentagon and CIA want. They need something to justify their big budgets, and their secret slush funds.

See you on Sunday.

Tax Day and the Estate Tax

Today is tax day, and most good American doobies will have filed their taxes by midnight tonight. It takes the temperament of an accountant who’s passed the relevant CPA exam parts to self-prepare your taxes, and Wrongo has that temperament for less than 2 hours a day, so doing the Wrong family taxes never gets easier.

You might like “Tax Rap” by Go Remy. It was a submission to a Turbo Tax contest. While it didn’t win, it is very funny:

For those who read The Wrongologist in email, you can find the song on YouTube here.

On Tax Day, we have to talk about the Estate Tax, or as the Republicans call it, the “Death Tax”. Why? Because House Republicans are going to repeal the Estate Tax this week. In their ham-handed way, they will link the two events to show Americans that Republicans are lowering taxes for the people.

But as Bloomberg points out, the Estate Tax is now paid by only 0.2% of US estates. That translates into about 5,500 households a year. The Hill reports that the Congressional Budget Office (CBO) estimates that repeal of the Estate Tax would add $269 billion to the federal deficit from here to 2025.

The Republican logic for repeal is that the tax unfairly steals the family jewels from ordinary hard-working Americans, but the current estate tax doesn’t kick in unless an individual has assets totaling more than $5.43 million. For married couples, the threshold for avoiding the tax is $10.86 million.

Not chump change.

Under the Republican plan, estates would pay no taxes. Furthermore, families would be able to pass assets across generations and avoid paying capital gains taxes on both real gains and so-called phantom income attributed to inflation, a loophole called “stepped up basis” in the tax code. Subsequent heirs could continue this strategy so that the gain is effectively never taxed.

Here are a few quotes from Republican supporters of Estate Tax repeal:

Rep. Paul Ryan (R-Wis.):

This tax doesn’t just hit the big guy, it hits the little guy — like the small business and the family farm.

Rep. Kevin Brady (R-TX) made the “double taxation” argument:

The death tax is the wrong tax at the wrong time, and it hurts the wrong people…They are double and triple taxed.

Sen. John Thune (R-SD):

The death tax imposes a tax rate as high as 40 % on family farms, ranches and small businesses, which hurts economic growth by discouraging savings and development.

But, the nonpartisan Tax Policy Center estimates that only 120 farms and small business, where at least half the assets are in farm or business assets, had to pay the estate tax in 2013. And double-taxation shouldn’t be so hard for Republicans to understand. No one claims that when a worker gets paid a wage, and pays a tax on that income, and who later spends some of that after-tax income paying someone to mow their lawn, that it is double-taxation for the lawn guy to pay income tax. This is really simple: Money moves from entity, to entity, to entity, and each time, tax applies.

So, the facts don’t support the case against the estate tax, but this does not matter to Republicans.

It has become an ideological issue, even if the data show that that relatively few small farms or businesses appear to be affected. Even if it’s only a handful, that’s apparently too many for Republicans.

The truth is that repealing the Estate Tax would mainly benefit the very wealthiest Americans. In 2016, the wealthiest 1,300 or so estates (those worth $20 million or more) would receive 73% of the benefit, with each receiving a tax windfall averaging roughly $10 million, according to the Joint Committee on Taxation’s analysis of the repeal proposal approved by the Ways and Means Committee.

This is a special kind of welfare. It is welfare for the rich. This will give multimillionaires, who are the only people we are talking about, an additional 40% of wealth transfer upon the death of a parent. This undresses Republicans as planning to create a permanent aristocracy based on inherited wealth.

And Republicans say they will address income inequality if only America votes for them in 2016?

The GOP proves again that they are not what they claim. They claim to be for balancing the budget and decreasing the deficit, but leap at the chance to lavish more $ billions on the rich, while increasing the deficit.

The facts mean nothing to President Nordquist, or to our right-wing friends when discussing taxes.

Happy Tax Day!

Monday Wake-Up Call – February 16, 2015

“The illiterate of the 21st century will not be those who cannot read and write, but those who cannot learn, unlearn, and relearn” − Alvin Toffler

Today’s wake-up call is for Americans who can’t unlearn that trickle-down doesn’t work, and that voting in politicians who espouse it will prolong the nation’s agony. Do people know that the new GOP House began passing a series of deficit-hiking tax cuts that will primarily help the rich at the expense of everybody else?

Rep. Paul Ryan (R-Wis.), chairman of the Ways and Means Committee (which writes tax legislation), wants to make some previous tax breaks permanent. From HuffPo:

The House voted 272 to 142 to make permanent a number of temporary provisions that are aimed at helping businesses earning up to $2 million. The main cut, which would add $77 billion to deficits over 10 years, allows businesses to immediately write off new equipment purchases up to $500,000. Temporary versions of the measure have been passed about a dozen times before, generally as economic stimulus measures.

The GOP then passed a second tax cut, aimed at giving bigger tax breaks for charitable giving. Ryan wants even more tax cuts that would add another $300 billion to the deficit. Those may reach the House floor later this month.

Here’s the Republican strategy: Slice the elephant and eat it a bite at a time. Pass small pieces of tax legislation while ignoring the deficit impact, then when their corporate and wealthy individual patrons are taken care of, remind everyone that the deficit is the biggest, baddest enemy the economy has. Then propose budget cuts that hit the working poor and the middle class. Ryan’s current strategy can be seen here: (emphasis by the Wrongologist)

If you dare try to make these things that we all agree on that need to stay in the tax code permanent, it’s ‘You’re not paying for it; it’s a budget buster; you’re being irresponsible; you’re jeopardizing tax reform.’ Process, process, process…Here’s the problem. What we’re trying to do here, we’re trying to grow the economy. We’re trying to get people back to work.

That meme will end soon. It will be replaced with: “growth is being stifled by the deficit”.

The NYT’s Upshot notes that a number of Republican governors are proposing tax increases — and in every case, the tax hike would fall most heavily on those with lower incomes, while they propose simultaneous tax cuts for business and/or the wealthy. Krugman analyzes it thusly:

If you look for an overarching theme for overall conservative policy these past four decades…It has been about making the tax-and-transfer system harsher on the poor and easier on the rich. In short, class warfare.

Class warfare. These folks keep bottling snake oil and voters keep buying it. Lowering income taxes on the wealthy doesn’t create jobs. Why would it? The focus of the GOP on cutting income taxes is solely intended to protect the rich.

Wrongo has run businesses for 35+ years and never saw taxes as an impediment. Taxes are paid out of profits, not revenue, and paying taxes means you are running a profitable business. Cutting taxes for small business can be a disincentive: Why should the owners expand the business when their net is greater, and they didn’t have to increase sales? For large corporations, tax cuts mean that people in the C-suite get richer. Nothing. Filters. Down.

Here is your Monday tune to fight the Plutocracy. “Rich Man’s War” by Steve Earle, from his 2004 album, “The Revolution Starts Now”:

And some Monday hot links:

The Westminster Dog Show starts today. Wrongo and Ms. Oh So Right are attending.

Researchers are using drones and satellites to spot lost civilizations. Remote sensing technology is revealing traces of past civilizations that have been hiding in plain sight.

Lobbyists move though the revolving door back to House and Senate committees. There is a profound change taking place among Capitol Hill staff, as many GOP lawmakers are handing the keys to K Street corporate lobbyists. Public Citizen’s Paul Holman notes that Speaker John Boehner, has “encouraged new members to employ lobbyists on their personal and committee staff.”

More than 4,000 Fort Carson soldiers are heading to Kuwait, where they will become one of America’s largest ground forces in the troubled region. Did you know that the Army has kept a brigade in Kuwait since the end of the Iraq war in 2011?

Majority of public school students are now considered low-income. Another success brought to you by trickle-down economics.

Unaffordable rents here to stay say experts. They aren’t likely to ease up for at least two years, according to the latest Zillow Home Price Expectations Survey

Monday Wake Up Call – February 2, 2015

Waaay too many Mexican appetizers last night, not to mention margaritas and beer. Anyway, another national football excess is in the record books, congrats to Tom Brady and the Patriots.

Get your day started with this hilarious meditation on football vs. baseball by the great George Carlin:

https://www.youtube.com/watch?x-yt-ts=1422579428&v=qmXacL0Uny0&x-yt-cl=85114404

Monday’s hot links:
There’s no such thing as Nacho cheese. On the day after the Super Bowl, when so much nacho cheese was consumed, this shows how little can be taken for granted. Inquiring minds are wondering—do people expect nacho cheese to be a particular flavor? Or color? Or texture? Or is it just any cheese that happens to be on nacho chips? Here’s the truth: There are no standards for nacho cheese, it is just whatever we believe it to be. Does this bring up deeper, non-cheese-related existential questions?

Yosemite Park reported the first confirmed sighting of a rare Sierra Nevada red fox (Vulpes vulpes necator) in nearly 100 years. Park wildlife biologists documented a sighting of the fox on two separate instances (December 13, 2014 and January 4, 2015) within the park boundary. The Sierra Nevada red fox of California is one of the rarest mammals in North America. Estimates say there are fewer than 50 in the US. Check it out:

Mississippi has the highest vaccination rate for school-age children. It’s not even close. Last year, 99.7% of the state’s kindergartners were fully vaccinated. In California, epicenter of the Disney measles outbreak, almost 8% of kindergartners (41,000 children) were not immunized against mumps, measles and rubella. In Oregon, it was 6.8%. In Pennsylvania, it was nearly 15%! The secret of Mississippi’s success stems from a strict mandatory vaccination law that lacks the loopholes found in almost every state.

Leaving Afghanistan has become one of the most difficult operations the US military has ever undertaken. A Colonel in charge of packing up Afghanistan last year called it “a logistics Super Bowl.” Here is Lt. Gen. Raymond Mason, who headed Army logistics until he retired last year:

Certainly in our lifetime, it’s one of the biggest, if not the biggest operation in terms of complexity, size, and cost.

The dirty little secret is that our military knows how to get people, weapons and supplies into a war zone, but has little experience getting them back out. This may cost the taxpayers more than $2 billion before it is done.

China has sent drones to Nigeria. As the Boko Haram insurgency enters its 7th year, China is busy building a better relationship by selling drones, MRAP vehicles and smart bombs to Nigeria, (most of which the US has been unwilling to provide to Nigeria due to human rights concerns). China wants to become a first tier exporter of military equipment, and is looking to lock up Nigeria as a supplier of oil. On January 25, 2015, a photo appeared online showing a Chinese CH-3 UCAV drone which crashed in Nigeria’s Borno Province. Borno is the area where much of the Boko Haram violence occurred in 2014.

Your thought for the week: We hear all the time from yahoos on the web and yahoos in Congress something like this:

Isn’t it unfair that corporate dividends are taxed twice?

The answer is no, and here’s why:

A corporation is a legal entity. If it has an “accession to wealth” (meaning, a profit in tax legalese), in our system, the corporation must pay taxes. A stockholder is also a legal entity. If a stockholder receives a dividend, he/she also has an “accession to wealth”, and thus, pays a tax.

Why is this hard to understand? No one claims that when a worker gets paid a wage, and pays a tax on that income, and later spends some of that after-tax income paying someone to mow their lawn, that it is double-taxation for the lawn guy to pay income tax.

This is really simple folks: Money moves from entity, to entity, to entity, and each time, income tax applies.

And, if someone makes the argument that the shareholder is the corporation, they don’t get what a corporation is. It’s a separate legal entity that exists to protect shareholders from the business’s liabilities. The fact that it pays taxes is a normal consequence, and the entire point of its existence.

Meds Are Too Damn High

On Sunday, 60 Minutes ran a segment about the high cost of drug therapies. They exposed the rip-off prices Big Pharma charges for certain Cancer drugs. Moreover, the clear message was that if you have a life-threatening disease, it is likely that some drug company has come up with a treatment that may extend your life, at a price. How much would you pay for another year of life? In 2012, of the 12 cancer drugs approved by the FDA, 11 cost over $100,000 per year.

Who wouldn’t pay that (if they could) in order to stay alive? 60 Minutes quoted Dr. Leonard Saltz, chief of gastrointestinal oncology at Memorial Sloan Kettering:

And remember that many of these drugs, most of them, don’t replace everything else. They get added to it. And if you figure one drug costs $120,000 and the next drug’s not going to cost less, you’re at a quarter-million dollars in drug costs just to get started.

The big lie told to the American people is that these high prices are necessary for innovation. 60 Minutes asked John Castellani, the CEO of the industry’s lobbying group, PhRMA, to explain why drug prices have to be so high:

The drug companies have to put a price on a medicine that reflects the cost of developing them, which is very expensive and takes a long period of time, and the value that it can provide.

This is, of course, BS. You never buy anything because it costs more to develop. You wouldn’t pay more for a car because GM wasted extra money in R&D without results. You buy the car because the car is safer in a collision.

The same with drugs: we should pay what they’re worth, not what it cost to develop them, particularly if you knew about your options, or were able to negotiate, like you can at the car dealership. The neoliberal meme at work is that profits motivate someone to invent. Perhaps Big Pharma just forgets about Dr. Jonas Salk, who gave his polio vaccine to the public free of charge, demonstrating the big lie spoken by the Big Pharma lobbyist.

Of course sociopathic entities, (that would be our beloved Corporations, who are people now) do not grasp altruism and empathy.

The Food and Drug Administration (FDA) approves drugs if they are shown to be “safe and effective”, but does not consider what the relative costs might be once the new medicine is marketed. From Bloomberg:

By law, Medicare must cover every cancer drug the FDA approves. (A 2003 law, moreover, mandates payment at the price the manufacturers charge, plus a 6% cushion) In most states private insurers are held to this same standard. Physician guideline-setting organizations likewise focus on whether or not a treatment is effective, and rarely factor in cost in their determinations.

The reality is that the drug companies are taking advantage of the current US law (that they lobbied for) to price their Cancer drugs.

Are these prices a rip-off? Prices for some of these drugs have increased the longer they are available, even though there is no increased research, no additional expenses in order to produce the drug. For example, Bloomberg notes that Gleevec, from Novartis, possibly the greatest cancer drug ever invented, cost $24,000 a year when it was introduced in 2001; now it costs $90,000 per year, nearly quadrupling in price. The typical new Cancer drug coming on the market a decade ago cost about $4,500 per month (in 2012 dollars); since 2010, the median price has been around $10,000. Two of the newest Cancer drugs cost more than $35,000 each per month of treatment.

A final quote from Bloomberg: (Emphasis by the Wrongologist)

While generic drugs… now make up 86% of all medicines used in the US, that hasn’t reduced total spending on prescription drugs. In 2012, Americans spent $263 billion, or 11% more than the $236 billion in 2007, according to government data.

Fifty million people went without needed prescriptions in 2012 because they couldn’t afford them. It’s high time something is done about this.

A possible solution is to change the law so that Medicare negotiates volume discounts with the pharmaceutical companies, adding a fixed markup over costs, including R&D, plus the cost to produce and market the drug, and then adding a “fair profit” say, 20%.

By multiplying the number of probable drug users, the dose frequency, term of the prescription and the length of an exclusivity period, we could determine the cost/dose required to achieve that return. Parenthetically, the government should directly fund antibiotic research and also control the price of those drugs to give the company a fair fixed profit (at a lower return than if the R&D had been paid by the companies).

The drug industry needs to think about how it can limit Cancer and other drug costs, and how to price affordably — before someone decides to do the thinking for them.

Is a New World Order Coming?

In the prologue to his 1987 book of essays, Hidden History: Exploring Our Secret Past, historian Daniel Boorstin wrote about “the Fertile Verge”, a place where something and something else, something unexplored, meet.

A verge is like a frontier region, a place where ecosystems, or ideas, mingle. Verges between land and sea, between civilization and wilderness, between state and national governments, between city and countryside – all are a part of the American experience. Boorstin said that the movement westward by colonists into the American continent was a verge between European civilization and the culture of the American Indians.

America is clearly now on the verge of something new, possibly a big change in the world order. The old rules are broken. New states may emerge out of conflict in the Africa and the Middle East. Our old allies see their future drifting away from ours. The old order is rapidly disintegrating. But is there a new order that will replace it? Will it happen only in America, or will it be a global change?

Consider the following about America:
• In August, the Wall Street Journal reported on an FBI database that contains a file on one in three adults, or 77.7 million Americans.
• Our schools aren’t succeeding,
• Our infrastructure is crumbling,
• American corporations are heading for the exits (to tax havens).
• 45 Million Americans live in poverty, and that number hasn’t changed since 2010.

We are taking on some of the trappings of a police state. And there is no reason to suppose that the FBI’s (and the NSA’s) increased sophistication in domestic spying, and data storage and retrieval will do anything but make that trend more efficient, and penalties more severe and long-lasting. That is not a prescription for maintaining a united Homeland.

Our coffers are shrinking, yet we march off to one risky war after another, with all of those billions going where, and for what? Our Republic now seems to want only compliant workers and consumers. All others need not apply.

Last bit of history; the Principate, (27 BC – 284 AD) was the first stage of the Roman Empire. The Roman Empire succeeded the Roman Republic. The Principate was characterized by a concerted effort by its Emperors to preserve the illusion of the continuance of the Roman Republic. And just like the Principate, the illusion of the American Republic is what now remains.

The order of things that underpinned our era is in crisis. Part of peoples’ concern is the sense that the old order isn’t holding, but we’re not quite yet able to see the terms of any new order, one that may be based on different states, different global powers, or on different principles.

So, what’s next for America? A nation founded explicitly on an idea of individual freedoms and representative governance, the US has always identified its success with the spread of liberty and democracy. Today, those very rights are threatened here at home.

The post-WWII bipolar world ended when the USSR collapsed under their own weight. That brought about a different world order, a uni-polar era, with the US as the sole superpower, possessing the only military strong enough to deter any other potential rival from engaging in aggressive war.

Even that order is ending. We are on the frontier of something completely new in global politics in addition to change in our domestic society. Consider what is happening around the globe:
• Our people see what’s happening in Ukraine; what’s happening in Syria, with what Assad has wrought on his own people; in Iraq, where Sunni, Shia and Kurd fail to compromise, even in the face of invasion; the war between Israel and Gaza; the challenge of ISIS.
• Libya is in civil war, Pakistan is close to one, and Afghanistan’s democracy may be on the verge of paralysis. Egypt again has a military-dominated government.
• Add to these troubles the relationship between the US and China, that bounces between pledges of cooperation and public recrimination.

In Africa and the Middle East, the 21st Century has collided with the 8th Century, and the 8th Century is armed with 21st Century weaponry, so it is winning on the ground. An entirely new paradigm for deciding our priorities is required.

What will that new paradigm be? The most important questions to ask are – what is in the best interest of our country?
• What do we seek to prevent, no matter how it happens, and if necessary, alone?
• What do we seek to achieve, even if not supported by a multilateral effort?
• What do we seek to achieve, or prevent, only if supported by an alliance?
• In what should we not engage, even if urged on by a “responsibility to protect”, or by a multilateral group or alliance?”

All of our intermediating of trouble in the world has weakened us. Continuing to do so will only hasten our eclipse as the indispensable power. Our role in the world depends on a strong economy and few structural/societal problems at home. Shouldn’t taking care of the Homeland be our primary concern?

We may feel that a new “Fertile Verge” is almost upon us, but no one knows yet what it will be, or if we will make it across to the other side.

Or, if crossing to the other side will be better for America.

The Wrongologist

Geopolitics, Power and Political Economy

Category: Tax Issues