Taxes

Why do tax jihadists insist on repeating this stupid analogy over and over? If somebody ever shows me that everybody consumes resources equally, I might not stab the next person in the eye.


Here is commentary on another silly tax tale.

Housing

Well this is something I looked at in the past but I hadn't recently. I noticed a lot of condos and housing for rent myself and this number backs it up. Maybe we will see a correction this spring in the market. That would be nice.

Recession

Well, Retail sales seem at best poor.

http://blogs.wsj.com/holidaysales/2006/11/26/visa-sees-wekness-in-department-stores-apparel/

http://blogs.wsj.com/holidaysales/2006/11/26/discounts-could-spell-trouble/

Housing has been in the crapper for a while now. I haven't seen any evidence that business investment has done anything. And considering that last quarter GDP was probably closer to 1% than 2% (we will find out more in 3 days).

I also have a personal economic indicator that just recently flipped. It hit before in 1987,1990,2001. It isn't a real one but something that seems to happen at or near an economic peak.

I think recession is pretty much a given at this point.

Economic diary 10/09/06

Relevant Link

Given the sheer size of this update, I think it will be revised downward significantly. Assuming for a second this number is correct, I think it bodes ill for the economy going forward. Productivity and wages would have to be revised downward significantly. The economy wasn't really stronger. Economic strength is not merely equal to the number of people employed but also what those people are paid. If we were all slaves (and thus working), that does not mean the economy would be great.

A revision downward to something like ~500K mutes the impact of this number. Large adjustment, yes but it merely means the economy was on the better side of ok though productivity takes a hit.. Makes the soft landing scenario more likely though still not likely in my opinion.

I wonder if Katrina is still messing with the numbers. If it isn't that, is this a permanent change in the job market? Are these statistics accurate?

The question is... Are we flying blind?

Pretty Charts

Related to my comments about the markets making tops, here is some pretty charts to look at.

http://tradertim.blogspot.com/2006/09/case-for-double-top.html

Economic diary 9/15/06

This will be an ongoing series of posts (assuming laziness doesn't take over) that will probably be boring to most of you. I want to document my thoughts about what I am observing for future reference. It is quite easy to let thoughts that were somewhat fleeting but correct in the past to become your "opinion at the time". Consider this a way to see how correct I actually am.

Macro:

1. Inflation- I think inflation will be contained in its growth going forward somewhat. A lot of it has already been baked in and the numbers will only slowly reflect it. I do think a lot of the inflation we have seen has been of the demand pull type. If the global economy slows, one would expect inflation to ease downward. Some are even arguing that we are in a deflation trap with easy money and all that (think Japan 1989). That may be the case though it is hard to say. I think any deflationary forces will be muted because of the long term policies I believe will be used (see more below).
   



2. Commodities/Oil- the entire segment has been in a steady downdraft in recent weeks. Oil has dropped but so has everything else. The Gold bug types will say this is a signal that the market doesn't anticipate inflation (see deflation trap). The problem is that if inflation is demand pull, it isn't deflation we are seeing but a global slowdown. The current Oil futures correction has occurred simultaneously with excess supply. I have long thought that Oil was merely responding to increased demand (due to China and India joining everybody else) with some currency effects thrown in.
   


3. Dollar- the dollar has basically treaded water for some time. So what gives? I think it is basically a case of least ugly. Our rates are decent so it is keeping investment flows strong.



4. Housing- Simply put, it is going to get ugly. Though not bubble collapsing ugly.
   

Given all this, what happens? I think we are in a situation where we will have a recession lead by housing (who lead us out of the last one). Inflation will tame somewhat because of reduced demand. Commodities and Oil will stabilize at a lower level. But the choice The Fed has is try to reinflate by dumping even more money and killing the dollar but possibly stopping housing from going downhill too fast OR hang on and hope that deflation doesn't take hold and housing somehow just merely slumps and the economy grows fast enough to prop everything up and give things time to heal (i.e. malaise scenario).

My bet? The Fed tries to straddle the two. They will toss the dollar overboard fairly quickly and without remorse. But they dont want to try to reinflate any asset/credit bubbles - I think they are smart enough to realize they can't play the same game as in 2001. So the best case scenario is a bearable malaise - the softest of soft landings. Maybe a quarter of negative GDP but a long period of no growth. If that sounds familar, it should. It is called 2001-2003. Can we repeat that? I don't think so. What replaces the growth supplied by housing in the previous period? The consumer can not do it. Debt levels are too high for that much heavy lifting. CapEx is floated around a lot as well. It may come to pass but some recent signs are towards less business investment not more.

I think we will have a hard landing. Fed will toss the dollar in an attempt not to crash. Housing will take a 10-20% correction and stay level after (for years) that due to the Fed's action. Similarly, we won't have huge negative GDP but it will be stretched out over the course of years (i.e. instead of a yr of -4% GDP, a decade of -.2% GDP). Again, the Japan scenario looms large. The question is do we experience deflation like they did? I think no. Our debt is too high, our culture too different, banking system much more ruthless. By the numbers, it will seem better but on the personal level, it will be far worse. The Japanese system caused pain but due to its long time frame many suffered long but not so harshly. Our system is far worse. A good fraction will suffer harshly ( see Bankrupcy reform bill).

Stock Market:

The Dow is about 100 points from meeting the last top. If it fails to break through, it looks like a really clean double top. The Nasdaq is about 120 points from a top. The last top was tested several times. Definitely a harder ceiling than the Dow. The SP500 has reached the level of the last top. So what happens from here? I think we get a short term rally. The Sp500 might even break its top. I think that is mainly because the street will read the inflation and commodity numbers and think that inflation is under control, the fed won't boost rates, and we will have a soft landing. I think the first two aren't horrible reads but the last one is totally off. So the market will rally before they realize how bad things are getting and will begin a leg down. I think of the scenarios you put up (bearable malaise, malaise, reinflation of the credit bubble), only a reinflation is positive for the market at all. But the reinflation can't last forever. I just see as best case that the long overdue correction will merely be delayed. Still think there is a good chance of a 15%+ drop before the end of the year- on the low side.

Tax Inquiry Is Moving Past KPMG

Tax Inquiry Is Moving Past KPMG - New York Times: "Ever since the accounting firm KPMG reached a $456 million settlement of a federal investigation into abusive tax shelters nearly three weeks ago, the question has been who may be next."

Looks like I was wrong. Maybe. I will hold judgement until they actually do something else.

Bitch bitch bitch

MSN Money - When you -- and the IRS -- flip a condo: "Now, from your $100,000 gain, you've only cleared $44,700. "

Why is it that when people have to complain about taxes, they don't use any reasonable numbers? This idiot assumes a 35% tax rate. That means he is assuming the subject is making $319,101 or more a year. How reasonable is this assumption? Not very even among his readers. People making that much a year generally won't bother reading a free column for financial advice.

And idiot you even point out how this can be avoided anyway. Hold on the property for a year! Oh what is that? You need to flip it quickly because the market could fall or a balloon payment is due? Well, that is why this is an investment, it involves risk. If you don't want to take risks, then go find some bank CDs, flipping isn't for you.

And to top it off he is complaining that if you buy and sell multiple properties the IRS will consider it a business. Well guess what? If you are buying and selling this often, you are in the trade. Why should you get favorable tax treatment because you consider it a side thing for you? What if do more business than someone who this is their main job? He mentions self employment taxes of 15.3%. That would drop down to about 2% (the medicare part of it) after you sold the first house. And you wouldn't get hit with it in the first place unless you sold more than one (probably significantily more than one). So the numbers he presents is the absolute worst case scenario when combined into 1 transaction. If this was the only source of income (which negates the bitching of self-employment in the first place), the flipper has to make 4 sales at least for it to come true. And all three other sales would have a far lesser hit than the one he shows.

Finally, no where in this column is their any perspective that he is talking about 35 grand for 2 weeks a work, producing nothing, building nothing, not adding any extra value to anything. The flipper is just a leech. It sucks up wealth from the economy while not producing anything. That is why too much speculation is very bad. It is unsustainable. You want to bitch about making only 17 grand a week, go right ahead. You want to bitch about paying the same taxes as if you had a salaried job making the same amount but you work for much less time, go right ahead. It doesn't make you anything more than an idiot.

KPMG Strikes Deal Over Tax Shelters

Washington Post:

"KPMG LLP will pay about $450 million and open up its operations to independent review as part of a deal with federal prosecutors to avoid a criminal indictment that could have sent the nation's fourth-largest accounting firm into a death spiral, according to sources familiar with the pact."

Im glad to see this. I would hope this would be the first of many but I know it won't be (article says as much). Corporations are going to push too far someday.

Another supply side/libertarian myth dies

They will always tell you the welfare state drags down economies. Safety Nets hurt the ones they are designed to help. We can not have Single Payer health care in this country as it would destroy us. We do better than everyone else because our regulations are lax.

Foreign Affairs - Mind the Gap - Robert C. Pozen: "Gross domestic product has grown at an average rate of 3.3 percent a year in the United States over the last decade, compared to 2.1 percent a year in the EU15. Per capita GDP growth, however, has been very similar: 1.8 percent a year in the United States, 1.7 percent in the EU15. The main factor driving higher U.S. economic growth is not greater productivity gains; it is a more rapidly expanding population."

We work significantily more hours and women are less likely to work outside the home in Europe. So with some changes, they should pass us. Europe's long term economic problems is not one of a welfare state dragging them down but of low birth rates and xenophobia.

Further musings on Class

I left off stating that the rich have a complete different worldview. I think the following shows this.

Ramesh Ponnuru on Tax Cuts on National Review Online: When surveys show that a fifth of the American public thinks it's in the top one percent of the income distribution, and another fifth thinks it's going to be there soon, conservatives generally applaud the public's confidence and optimism.

There are 2 findings there. One is an expectation that a person will do better than they currently are and I agree that can be applauded (though one may be worried about unrealistic expectations).

The second finding is the one that Ponnuru ignores and, to me, the more significant one. We have 20% of the country thinking they are in the top 1%. There is no other word for this than ignorance. This is not optimism. They don't believe something may be true about the future. They believe sometime that is demonstratively false is true currently. Why should this be applauded in any way, shape, or form? Simply put, if you can make people not understand the differences in class, then they will see one group's interests as their own even if it is completely opposite of their own. People think they are rich or nearly so when the truth is that they have no concept of what it is like to be rich.

The inequality of Capitalism largely exists on ignorance. Perfect knowledge automatically leads to transactions that are equitable. I think this is true in a free market as well as politics. People don't support policy like an estate tax because a lot of them believe it will affect them or will hurt the people it does affect. Of course, the problem with repealing the estate tax is it will affect those people in another way they do not know about (elimination of the stepped up cost basis).

My point is the rich seem to have a trait in common. They think they will always "win". And as I said before, a lot of them see themselves as better. So, to them, it is a good thing that the masses are ignorant. It just reinforces that belief because they are not ignorant. They are rich because they are not ignorant. They are not ignorant because they are better. They are better because they are rich.

I am not anti-rich though it may sound like it. I am anti-exploitation. And that is what I see.

Issues of Class

Pandagon: Class and marriage: "I cannot tell you how many times I had the jaw-dropping realization that friends of mine don't get that I have no safety net, nothing to cushion me that allows me to examine a creative career full-time. "

Maggie would love to have a summer internship with a human rights group, but she needs paid work and when she graduates, with more than $100,000 of debt, she will need a law firm job, not one with a nonprofit. So when Isaac one day teased her as being a sellout, she reminded him that it was a lot easier to live your ideals when you did not need to make money to pay for them.

I was born into a working/middle class family (hard to tell the line exactly). I have eaten government cheese. We were never on welfare. As we got older, it definitely got better. We lived closer to the edge when I was young than I probably even realize today. Even relatively recently, when by almost any measure we would be considered middle class, things were scary on occasion. My dad nearly died my senior year in high school. I was thisclose to not going to college at all. I would have went and got a job and that was that. There wouldn't have been a choice.

I went to college with a diverse group of people. There was the rich subset. And the richer subset. I obviously was in neither. And they had a couple different outlook on life than I could possible imagine. They had a lot of ideas about the way things were which I considered silly then and think is a sign of mental retardation now. Most had no clue what it meant to be limited by financial constraints. Many thought there were plainly better than other people. I will note not all. One of my best friends was extremely wealthy but you never knew it. So I won't say that class is deterministic but it is nearly so.

Rights

There has been a debate recently in the blogsphere about Universal Health Care. Now, normally besides all the ideological bullshit you get a bunch of numbers proving this or that. However, there was an interesting twist in this debate. It got sidetracked into the concept of rights and whether Health Care is a right.

Well, as anybody who knows my thoughts on the subject, I think single payer would be a great idea but doubt it would happen anytime soon. My argument is almost always made based on economic grounds. But what about rights? Is it one? I think the short answer is yes.

McQ's issue seems to be that his right is being infringed because they are taking his money. Now, he comes from a fundamentally different perspective on the subject than me.

My view of government is that it is a system where there is a sacrifice of individual benefit for a common benefit. Or at the very least a disregard towards personal benefit. Capitalism is an example of this tradeoff. We don't care about each individual outcome as much as we care about the aggregate outcome. We, as a society, accept the possibility of impoverishment in exchange for greater growth overall and better potential for everyone. Now, we do use some of our wealth to mute some of the effect on the bottom but the fact is we do not take away Bill Gate's fortune to equalize everybody.

In this context, I view "Rights" as merely benefits of the system that pass a cost-benefit analysis (Yes, I know how cold and mathematical) . Does the proposed right cause a net positive or a net negative?

Now, some rights are considered innate. In my analysis, I would argue that these rights have such a large net positive benefit that without them, we remove ourselves from the sphere of civilization and humanity. In that sense, they are innate to being human.

But those rights are few and far between. What is innate about a right to own a gun? I would argue that it is not innate at all. It is a right that we as a society think is positive. But if society changed in such a way that it became a net negative, the right would be curtailed or eliminated entirely. This is what we see happening in urban areas. Urban areas are fundamentally different from rural areas and, as a result, limitations have been placed on gun ownership.

In the same context, I would argue that a single payer system is a right because it represents a net positive benefit to society. A large part of this is based on economic grounds. Namely, our system is inefficient because of its structure. I won't rehash the arguments made elsewhere at great length. Needless to say, anybody arguing that our system saves us money has a large hill to climb. But further, I would argue that a single payer system has additional benefits in terms of alleviating the uncertainity of the bad health lotto. People are more productive when there is less chaos around.

I think that is enough for now. I am sure I will elaborate more later.

Links edition.

Lots and Lots and Lots of stuff going on lately. We have congress passing unconstitutional laws and the public isnt buying it. But we are learning the beauty of a living will. We see hacks declaring fake qualifications for a doctor in this case. We have SS Trustees playing with the numbers to make things look worse than they are but even in doing that make the long term numbers look better. But the press can't get their story straight.

God I hope this shit comes to a halt and soon.

They call them flippers

CNN/Money: "They call them flippers. Buy. Sell. Profit. Repeat. Investors are flipping houses to build wealth. Here's what you can learn."

They call him Flipper, Flipper, faster than lightning,
No-one you see, is smarter than he,
And we know Flipper, lives in a world full of wonder,
Buying homes over, how wrong they'll be!

If this isnt a bubble, I official give up and declare economics dead.

Greenspan

Greenspan-US economy sound, spending curbs needed - Mar. 2, 2005: "'However, tax increases of sufficient dimension to deal with our looming fiscal problems arguably pose significant risks to economic growth and the revenue base.

I hate it when people who know better act like nobody can tell they are lying. Asshole, current revenues are 16.3% of GDP. If we just rolled back the taxes cuts such that we were at 18%, which is still lower than we were at during some of the Reagan years AND lower than the level for most of Clinton's presidency, the Deficit would be roughly half and we wouldn't be having any major funding crisis. You remember the Clinton years right? Higher Tax Rates and yet we still had good growth.

'The exact magnitude of such risks is very difficult to estimate, but, in my judgment, they are sufficiently worrisome to warrant aiming, if at all possible, to close the fiscal gap primarily, if not wholly, from the outlay side,' he added."

And you know Alan, because you can do simple math, that if we cut every single cent of nondefense discretionary spending, we STILL have a deficit. Heritage knows this

President Bush’s 2005 budget request takes a first step by proposing freezes or near-freezes in most non-defense discretionary programs. However, these programs represent less than one-fifth of federal spending, and cannot provide sufficient savings to close a $500 billion deficit.

Goes to show you can NEVER trust a Randite.

Social Security part 2

Brad Delong expands on the way to reconcile the numbers (see my post below) and adds three other ways.

1. A substantial decline in the stock market in the near future to push dividend yields back up to the levels they need to be.
2. Stagnant wages and a permanent jump in the profit share to push dividend yields up to the levels they need to be.
3. A large jump in firm payouts, supported by the fact that accounting earnings are massively understated.
4. A long-run trade surplus of 6% of GDP.

3 and 4 are just plain silly. 1 is scary and 2 sounds like so much fun!

Some people expressed confusion at all this stuff (Hey Moz!). Well quick version:

Right now, SS collects more money than it sends out. The extra is put into a Trust Fund(think a bank account). Republicans think the Trust Fund will run out of money in the future. It is possible. They are suggesting that we should change the system to one in which people invest their money in the stock market. It should make up the shortfall (or so they claim). The issue is whether it is possible for SS to fail AND the private accounts to suceed. That is what the statements above discuss. It is possible but so unlikely or scary as not to be something you want to plan for.

Social Security

Well someone finally did it. Someone finally explained (to some degree) how private accounts could work and Social security fails. The scenario doesnt even seem plausible but at least it works on some mathematical level. Fewer taxes for corporations and stagnant wages for 75 years. Think MegaCorp Future. Yippee.

The interesting point is stagnant real wages would reduce future Social Security benefits. In effect, the wage index would equal CPI and therefore, it would have the effect of the cuts Bush has proposed. The question becomes is the net effect eliminating any solvency benefit the Bush cuts has and therefore, causing more problems (debt) down the road?

Someone still needs to ask why Bush is such an economic pessmist.