Tax Issues – Page 7 – The Wrongologist

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.

Why We Are Driving Less

The Driving Boom, a six decade-long period of increases in per-capita miles driven in the US appears to be over. There are still millions driving, which means there are millions taking part in the Geico vs Progressive battle for the best insurance prices, but the number of drivers is not rising like it used to. From the Frontier Group:

Americans drive fewer total miles today than we did nine years ago, and fewer per person than we did at the end of Bill Clinton’s first term. The unique combination of conditions that fueled the Driving Boom — from cheap gas prices to the rapid expansion of the workforce during the Baby Boom generation — no longer exists.

If you drive a truck then you may want to purchase an ELD Device online to make driving more safe, one of the electronic logs is a great investment.
The Federal Highway Administration (FHA) reported in July on data from May, 2014, showing that travel on all roads and streets changed by 0.9% (2.4 billion vehicle miles) for May 2014 as compared with May 2013.

Here is an annotated graph of the FHA data from DShort:

The only other time in history that we’ve seen a similarly long time between the peak and trough was following the 1982 recession, when it took 39 months for total vehicle miles traveled to recover to its previous peak. It’s now been more than twice that long since the all-time high in vehicle miles driven, and unlike the 1980s, we don’t have a gas-tax hike to blame for it.

The research firm Behind the Numbers argues that we’re entering a new era in which Americans simply prefer to drive less. They report that it is unlikely that miles driven will eventually return to its prior trend. Among the reasons they say a sharp reversal is unlikely:

• Boomers are getting older and driving less.
• Millennials are less interested in driving, and are now the largest generation in the US.
• The trend toward living near the urban core reduces the need for driving.
• Higher gas prices discourage driving.
• Mass transportation is winning over more consumers.

As a result, Behind the Numbers thinks that tire and auto companies won’t do well in the future, since their sales are directly related to American driving. While it’s true that Baby Boomers are aging and will continue to drive less throughout their lives, the rest of their argument warrants rebuttal.

Let’s look at the relationship of miles driven to the Labor Force Participation Rate. The participation rate is the number of people over the age of 16, who are either employed or are actively looking for work. The Bureau of Labor Statistics (BLS) has been tracking this since 1948. Here is the relationship:

Note that the left axis is the Labor Force Participation rate expressed as a % of our total population, while the Vehicle Miles Traveled is measured on the right axis, expressed in billions of miles. It is clear that once the Great Recession started, and a smaller percentage of the population had a job or were looking for work, the miles driven stopped growing and began to decline. Conversely, when the participation rate was growing briskly, America’s miles driven grew dramatically.

The long-term growth in the employment participation rate has been discussed by many, including the Wrongologist:

During the 1970s and 1980s, the labor force grew vigorously as women’s labor force participation rates surged and the baby-boom generation entered the labor market…The labor force participation rate hit an all-time peak in early 2000 of 67.3%…And labor force participation has since dropped to 63%.

So, when the number of people working declined starting in 2007, miles driven declined. THAT may explain what is happening more clearly than “Millennials don’t like cars”, or “Mass transportation is more popular” or “Online shopping equals fewer trips”, although those may also be contributing factors. For those that are still driving on the roads, it’s worth investing in a dash cam from somewhere like BlackBoxMyCar so if an accident were to ever happen, you would have video footage to protect yourself.

Fewer miles driven means lower revenues from gas taxes. Less revenue from gas taxes means less to spend on road and bridge repair. Less spending on roads and bridges leads us toward becoming a second-world economy.

This is just one of the truly poor outcomes caused by our inability to deal constructively with the economic fallout of the Great Recession.

What can we do to reverse our national losing streak?

We do not have what it takes to leave the dysfunction of our politics behind. We have a self-reinforcing system based on our politicians scuffling for money from corporations and therefore, performing as trained monkeys for their lobbyists.

You must get out and vote. You must work to drive turnout in November. We, the people, have to get back in the game, or our losing streak will continue.

The Irony Burns at Burning Man

If you have never been to Burning Man, your perception is likely of a white-hot desert filled with 50,000 stoned, half-naked hippies doing sun salutations while techno music thumps through the air and a big wooden statue of a man gets torched on the penultimate night. From the New York Times:

….let’s go over the rules of Burning Man: You bring your own place to sleep (often a tent), food to eat (often ramen noodles) and the strangest clothing possible for the week (often not much). There is no Internet or cell reception. While drugs are technically illegal, they are easier to find than candy on Halloween. And as for money, with the exception of coffee and ice, you cannot buy anything at the festival. Selling things to people is also a strict no-no. Instead, Burners (as they are called) simply give things away. What’s yours is mine. And that often means everything from a meal to saliva.

That is what it was like 10 years ago. Not anymore. As the desert week of art, sunburns and egalitarianism has grown, it sold out all available tickets. Scalpers ran up ticket prices, and the demographics began to shift upwards. People went from spending the night in tents, to renting RVs, to building actual structures. More from the NYT:

We used to have RVs and precooked meals, said a man who attends Burning Man with a group of Silicon Valley entrepreneurs…Now, we have the craziest chefs in the world and people who build yurts for us that have beds and air-conditioning…Yes, air-conditioning in the middle of the desert!

The NYT reported that his camp includes about 100 people from the Valley and Hollywood start-ups, as well as several venture capital firms. And while dues for most non-tech camps run about $300 a person, he said his camp’s fees this year were $25,000 a person. A few people, mostly female models flown in from New York, get to go free, but when all is told, the weekend accommodations will cost the party goers over $2 million.

So, starting today, San Francisco will resemble a ghost-town, with empty Google buses and Starbucks gone quiet as the city’s tech community descends on the Nevada desert. And this year, there is a Burning Man Traffic Mitigation Plan. All vehicles entering Black Rock City will need a $40 vehicle pass, and only 35,000 such passes are available.

Imagine: The wealthy icons of Tech partying with hipster representatives of the 99% who buy their products. Guess that means we can hate the multinationals who are working inversion deals to pay fewer taxes, but shame on you for hating Apple, Google and Microsoft. They go to the desert with the rest of us.

Now, gentrification is inevitable in any city. This is just another gentrification of large, public events. Think about South By Southwest (SXSW), the film, interactive, and music festival and associated conferences that take place early each year in March in Austin, Texas. First held in 1987, now it has corporate sponsors. Same with Coachella, the music festival that began in 1993 at one of the Wrongologist’s favorite places, the Empire Polo Club in Indio, California. (We go in January for an annual dog show, not for polo or the music festival in March).

These radical, egalitarian things morph into an amusement for the 1% just like the Hamptons, Jackson Hole, Ibiza or private islands. Its radical spending, and radical conspicuous consumption instead of the ideal of Burning Man, which is self-expression. Now, the ticket revenue is $20.4 million, ($300 x 68,000 tickets). There are no vendors allowed to set up inside the event but there are plenty of rich dudes on the inside ready to monetize and network.

In the words of Cyndi Lauper, “Money changes everything!” You know that’s true for Burning Man, since a featured guest speaker this week is Grover Nordquist, noted tax hater. It is doubtful that he would have attended this in earlier years, when it was a collection of just the naked 99%. Jon Stewart commented on Grover’s visit:

#TDSBreakingNews Grover Norquist is going to Burning Man. Thinking anti-tax message will resonate better if delivered in a neon thong.

— The Daily Show (@TheDailyShow) July 30, 2014

Burning Man is organized around 10 Principles. Here is number 3: (emphasis by the Wrongologist)

In order to preserve the spirit of gifting, our community seeks to create social environments that are unmediated by commercial sponsorships, transactions, or advertising. We stand ready to protect our culture from such exploitation. We resist the substitution of consumption for participatory experience.

Can you imagine what they could have done to Woodstock had it become an annual event?

This year, how about a huge moving sculpture of Burning Man jumping the shark?

What’s Erbil Got to do With It?

David Brooks:

We are now living in what we might as well admit is the Age of Iraq. The last four presidents have found themselves drawn into that nation because it epitomizes the core problem at the center of so many crises: the interaction between failing secular governance and radical Islam.

While Lawrence of Arabia said “on to Aqaba”, President Obama says, “on to Erbil”.

From the 2-time Pulitzer Prize-winning Steve Coll, writing in The New Yorker:

To the defense of Erbil: this was the main cause that drew President Obama back to combat in Iraq last week, two and a half years after he fulfilled a campaign pledge and pulled the last troops out.

The Wrongologist

Geopolitics, Power and Political Economy

Category: Tax Issues