Tuesday, August 16, 2022

Three-card monte and the family making $400,000 per year

Three-card monte is a confidence game in which victims are tricked into betting on the assumption that they can find the money card (often the Queen of Hearts) among three face-down playing cards. After the victim places their bet, the con artist shows that the money card is one of those three, turns all the cards over, and shuffles them around. The victim tries to focus their attention on the money card, not realizing that through a sleight of hand, the con artist moved the money card, and the victim cannot win.

Once again, Democrats and Republicans are arguing about taxes. The current argument is whether the Inflation Reduction Act’s apportionment for the IRS to add 87,000 agents will result in higher audit rates for “working-class families.” The GOP wants to characterize families making up to $400,000 as working class.

 Let’s leave the issue of what constitutes a working-class family to the side and look at the games the GOP plays with this definition. Idaho’s senior Senator, Mike Crapo (R), offered an amendment to the Democrat’s Inflation Reduction Act. In his press release, he says the amendment “would prevent the IRS from using its massive, $80 billion cash infusion on enforcement actions designed to squeeze more revenue out of American taxpayers who earn less than $400,000 per year.” The amendment failed, and now the GOP is saying that this proves that Democrats are lying when they say they don’t want to raise your taxes.

 Sen Crapo’s amendment is less than 40 words. It reads –

 “At the end of section 10301, add the following: (c) LIMITATIONS RELATED TO THE INTERNAL REVENUE SERVICE. – None of the funds appropriated under subsection (a)(1) may be used to audit the taxpayers with taxable incomes below $400,000.”

It seems pretty straightforward. If Democrats really don’t want the IRS auditing working-class families, why aren’t they willing to put it in writing? But like all things involving the law, words matter. In this case, one word matters. That word is “taxable” in the phrase “taxable incomes below $400,000.”

Anyone who’s ever filed a tax return knows you don’t pay taxes on what you earn. Rather, you adjust your gross income by deductions and credits to obtain your taxable income. It’s common for very high net worth individuals to have zero taxable income, even though they’ve earned a lot of money in a given year.  

Take Donald Trump, for example. In 2020, copies of his 2017 tax returns were published by The NY Times. They show that in 2017, Trump earned $373,629 in wages, $6,758,494 in taxable interest, $21,984 in ordinary dividends, $7,562,038 in capital gains, and $84,351 in pension payments for a total of $14,800,496 in gross income.

 Against this amount, Trump claimed $15,313,785 in business losses and $12,306,111 in loss carry forwards from prior years for a total of $27,619,896 in losses. This made his 2017 taxable income a negative $12,819,400. Even if we assume that Donald Trump filed a completely honest and proper tax return, under Sen Crapo’s $400,000 taxable income threshold, Donald would be a working-class family man protected from an audit.

In 1987, the IRS first required taxpayers to provide the social security number of any dependents they claimed. Before that, a taxpayer simply wrote a dependent's name on the form. Starting in 1987, the SSN would be matched against the social security database to ensure that fictitious social security numbers weren’t used and/or that the same number wasn’t used twice. The number of dependents fell by 7 million between 1986 and 1987. Did 7 million people suddenly disappear? Of course not. Taxpayers were cheating on their taxes.

Having started my career at Arthur Andersen’s International Tax Consulting Group, I know a little bit about taxes and how to minimize taxable income. An entire industry exists solely to reduce someone’s taxable income. Read the Wikipedia entries for BLIPS, SOS shelters, or Son of BOSS. All those are names for just one group of structures widely marketed by tax professionals to reduce taxable income. All these structures were eventually ruled illegal by the IRS. But the only way the IRS discovers that someone is using these structures is to audit them.

So when Mike Crapo and his colleagues tell you they want to protect working families, don’t fall for the con. Through his amendment, the GOP wanted to ensure that the richest of the rich, those individuals that can afford $1,000/hour plus attorneys and accountants to save them money by stretching what was permissible under the Internal Revenue Code, never get audited.

The GOP is using the $400,000 figure like the Queen of Hearts and wants you to focus all your attention on that. Then maybe you won’t realize that you’re the mark and you’ve been swindled because you’ll be paying taxes while the richest of the rich don’t.

If the GOP really wanted to help “regular” taxpayers, they would have changed “taxable” to “gross” income. That way, real working families wouldn’t be subject to increased audits, but the rich like Sen. Mitt Romney and Donald Trump would.  Mike Crapo is a Harvard-educated lawyer. He understands the significance of the change. He’s not stupid; he just assumes you are

Friday, July 29, 2022

The Measure by Which You Measure…

 For as you judge, so will you be judged, and the measure with which you measure will be measured out to you. 

- Matthew 7:2


In response to my post yesterday about GDP, someone asked if I thought it was appropriate to credit Biden for the 2021 GDP growth rate of 5.7% because that was achieved based on policies and legislation established before he took office. I believe it’s a fair question and will address it in this post.


First, I think every President gets too much credit when things go right in the economy and gets too much blame when things go poorly. That’s just the nature of the politics. Second, I agree that it is often difficult to precisely measure the impact of any single action, Presidential or otherwise is on the aggregate economy, particularly when it is evaluated by just one figure like aggregate GDP. GDP is just one figure in the overall economy and can be improperly interpreted if not analyzed in the context of the overall picture.


That being said, I think an honest discussion of the issue requires an equal measuring stick. As the person acknowledged in his original message to me, Trump took credit for the economy from the moment he took office. I’d point out that he often took credit for economic performance from before he took office (citing stock market performance from the date of his election in early November 2016 rather than his inauguration in mid-January 2017) to highlight how great the economy was (I don’t think the economy and the stock market are the same thing the way he does). Of course he inherited a fantastic economy. But history also shows us that the rate of economic growth slowed during his presidency (even before Covid). So I guess the answer depends on the perspective. 


Democrats love to point out that Bill Clinton had four years of balanced budgets (actually he even had small surpluses). But what they don’t like to mention is that the balancing was a direct result of the revenue generated when George H.W. Bush’s broke his “read my lips, no new taxes” 1988 RNC convention pledge. Bush Sr raised taxes in the Omnibus Budget Reconciliation Act of 1990 and that ended up costing him the 1992 general election when he was first attacked in the primaries and then had his electoral base splintered with Perot in the mix. Even Bill Clinton used Bush‘s broken pledge to call into question his integrity.


Likewise, Obama both gets blamed (by Republicans) and gets credit (by Democrats) for TARP and the bank bailouts which were part of the Economic Stabilization Act of 2008 signed by George W. Bush in October 2008 but not fully implemented until after he left office. That blame directly led to the rise of the Tea Party in the 2010 election. At the same time, Democrats hold out the bailout as a massive accomplishment and an illustration of how the Obama administration saved the global banking system when the heavy lifting was in fact done by the Bush administration and the 110th Congress.


But let’s imagine that Obama didn’t implement TARP as enacted by Congress. A tremendous amount of governing gets done by executive branch action both by regulation and by determining who leads an agency and therefore the policies it adopts. If that happened and the 2008 financial crisis worsened instead of improved, would that be Bush or Obama’s fault? 


So does Biden deserve credit for every bit of the 5.7% economic growth? Personally, I don’t think so. But if the MAGA crowd is going to point to Trump and say, “look at what a great job he did on the economy” and take credit for everything from January 20, 2017, then that’s the same measure I’ll use when speaking about Biden.


Given that Trump’s 1.6% economic growth was the worse since records began and we know that growth was slowing, I’m perfectly fine saying that Trump’s performance should be measured using 2008-2022 figures. But the equal measuring stick then means that Trump then bears the responsibility for the inflation figures for that same time frame. 


We can’t use one measuring stick for Republican Administrations and another for evaluating Democrats. 



D(ebt) is what converts the GOP in to GDP

Social media is abuzz with stories of how today’s GDP report proves we are now in a recession. And while an “official” recession is technically determined by a panel of economists (something that usually happens well after the recession has ended), the common understanding of a recession is two consecutive quarters of negative economic growth – which is exactly what we’ve just experienced.


But what do all these words means?


The most common method of calculating GDP is the “expenditure approach.” This adds the total amount spent by private consumers for goods and services, the total amount spent by governments (both federal and local), the total amount of investments made (in equipment, inventories and housing), and the net exports in a given period of time (typically a quarter or a year). 


You might want to note two things: (1) the more the government spends, the higher the GDP and (2) government debt doesn’t show up anywhere in the formula. Therefore, GDP increases as long as the government is spending money, even if it is money it doesn’t have. 


One of the common cries of Republicans is that we have to bring the size of government back under control. Currently, direct government expenditures make up about 17.3% of our GDP.


Joe Biden has now been President for five full economic quarters. Government expenditures have fallen each of those quarters (from 2021Q2 through 2022Q2). In contrast, government expenditures rose each year during Trump’s presidency and the federal debt ballooned. Trump added more debt in 4 years than any other President in our history.


So when a Republican points out how “great” the economy was under Trump, remind them that GDP growth during his term was an annualized 1.6% (the lowest of any President since Herbert Hoover [think 1929 and the Great Depression]), and that a large portion of that was generated by a federal government spending money it didn’t have. The Trump administration grew the size of government and left us the bill. In contrast, the GDP grew 5.7% in Biden’s first year. 


Now don’t get me wrong, the economy has slowed and the GDP report shows decrease in goods and investments. But if the Biden Administration had continued the fiscally irresponsible, grow the federal government through ever increasing deficits policies that Trump advocated, Joe wouldn’t have ended up with two consecutive quarters of GDP contraction.


[Oh, and before anyone screams “but inflation.” All my data is based on real (not nominal) dollars using the 2012 base used by the Bureau of Economic Analysis, the agency that issued this morning’s GDP report.]





Friday, August 31, 2018

Jeff Bezos and PT Barnum think alike

PT Barnum was right; there is a sucker born every minute.

Amazon recently announced a program that promises massive profits to startup local package delivery companies. It represents that entrepreneurs who participate in its program can earn $300,000 in profit per year. That's certainly an attractive proposition. Their site represents that this is achievable with only a $10,000 investment and an additional $30,000 in liquid assets. That's a heck of a potential return*

Now the math. Let's assume that Amazon is completely honest and you'll make $300,000 in profit each year with 40 vans (but if you dig a little deeper, that $300,000 headline number become $75,000 to $300,000). But let's stick with the best case scenario of $300,000. 

That works out to $7,500/year/van or $21 per day per van... and you take all the risk, you use your capital, and you are liable on the debt. You work 365 days a year, and you can be sure that they expect close to 6 sigma performance.

Amazon doesn't say anything about what happens when driverless vans come around. My guess is that you'll be dropped like a Trump staffer who has managed to piss off Ivanka and be stuck with useless vans and the need to unwind this whole operation. You think this is crazy? Well, Amazon is buying a fleet of aircraft so that it can move business away from FedEx and UPS.

Before rushing into an opportunity that seems too good to be true, think about the risks involved. Economics 101 teaches us that an efficient market will not in the long-run allow someone to earn an above average return without taking an above average amount of risk. Only suckers think otherwise.

*The NPV of an investment requiring $10,000 up front and generating a 20-year stream of profits of $300,000/year increasing 2% annually for inflation and discounted at an 8% discount rate is more than $3.2M.

Take Responsibility for Disaster Preparedness

It's no secret that I think Donald Trump is an embarrassment as a President and as a human being. That being said, all this talk about the death toll in Puerto Rico is unfair to throw on him.
Local Puerto Rican government officials failed the people of Puerto Rico. They clearly did not do enough over the decades to prepare the Puerto Rican infrastructure to deal with a hurricane that was certain to come one day. A Cat 4 or 5 storm in the Caribbean is not a black swan event - it's completely foreseeable. Instead, they wasted billions through countless crony projects, subsidies to win votes and corruption. And all these officials were elected and re-elected by the people of Puerto Rico themselves.
So while we should expect DJT to show some compassion, the 3,000 person death toll is not his fault. At most, only the deaths that could have been prevented in the period following 5 to 7 days after the storm should be his responsibility because that demonstrates a failure in our response. I've yet to see a break down of when these 3,000 deaths occurred or what they were attributable to. But the President of the United States cannot be responsible for someone choosing to live in a structure that is built to sub-par building codes because local officials were incompetent or corrput or in a flood zone.
Since Katrina, FEMA has clearly stated that every American should be prepared to survive on their own for at least 3 days after a natural disaster without assistance. That's true whether they are in Florida, NY or California, but it's particularly true when you are in a remote location like Alaska, Hawaii, Puerto Rico, Guam or anywhere else that a logistics infrastructure can't use roads or rail. I don't believe it's unreasonable for people in remote regions to expect to be on their own for up to a week until aid can be mobilized to these areas.
Look at the difficulties residents of NYC faced after Superstorm Sandy. They are in one of the world's greatest cities but very few of them had even a day or two's supplies to deal with power outages and flooding.
Sooner or later we are all likely to experience some natural disaster be that hurricane, flood, tornado, earthquake, blizzard or volcano. If you don't prepare in advance, you'll end up being one of those thousands who have to wait in line for basic necessities and you'll have nobody to blame but yourself. People need to take responsibility for themselves and stop expecting the government to be their nanny.

Thursday, August 30, 2018

A historic opportunity to protect the GOP

There's actually a historic opportunity here for both Senators McConnell and Schumer. They should sit down and propose a Constitutional Amendment enshrining the filibuster for Supreme Court appointments. It has to be an amendment because changing the rules of the Senate are not binding on future Congresses (or even this same Congress). Harry Reid created this mess when he double-crossed Bill Frist and did away with the filibuster rule for Article I judges after telling Frist not to do the same when he was in the majority.
It would be in the interest of both parties (because one day, the GOP will again be in the minority) and the country as a whole to ensure that the rights of the minority are protected particularly when it comes to something as irrevocable as a lifetime appointment to the Supreme Court. They could both look like statesmen and change their legacies from petty politicians to real leaders.

Supreme Court History: It wasn't always like this.

Just how divided has our Congress become? Antonin Scalia (the poster child of conservative Supreme Court Justices) was confirmed by a vote of 98-0 in a Senate that was split 53-47 between Republicans and Democrats. Ruth Bader Ginsburg (the poster child of liberal Supreme Court Justices) was confirmed 96-3 in a Senate that was split 53-47 between Democrats and Republicans.
When did our Congress become a force to divide us instead of an institution that rose above politics to do what was best for our nation? When people want to work together they can.

Who needs the KGB when you have the National Enquirer?

Can we just stop for a moment and consider what we found out last week? An organization literally has a vault full of information consisting of embarrassing and possibly illegal conduct by the person who occupies the office of the President of the United States. 
In the intelligence community, this is called “Kompromat” and it is accumulated and stored by foreign intelligence service to blackmail people into doing certain things (like spying on their country). 
So that leads me to several questions:
• was the US counterintelligence community aware that the person who holds the highest degree of clearance in the country was subject to kompromat?
• if David Pecker and Trump were friends, why was Pecker retaining this information instead of destroying it? It makes no sense to keep something unless you intend to use it in the future. How did Mr. Pecker intend to use this?
• How secure is the vault at American Media? Is it possible that foreign intelligence services may have gained knowledge of the kompromat or access to it? Is the material in paper or electronic form? Is there an inventory of it such that it can be determined whether it is all still there?
• Who else knows about it? Presumably David Pecker did not handle every aspect of the story; the investigation, collection of information, summarizing it, negotiating the deals to pay off the sources and then securing all that data in the vault? So isn’t each of those people also subject to being compromise by foreign security agencies in order to gain access to what they know?
• shouldn’t a US counterintelligence team be given full access to the information to determine what exposures exist and what safeguards need to be taken to prevent the kompromat’s use?
• who else within the administration and Trump family does American Media have kompromat on? Should their security clearances be reviewed? Were they aware of the existence of this material? Did they disclose it as required on their security clearance forms (my understanding is that providing false, incomplete or misleading information on an SF-86 is a federal felony).
This is potentially a very dangerous situation and Trump’s chief of staff General Kelly knows this. Has he addressed this with the President? Has the President disclosed all he knows? Enquiring minds want to know.

What John McCain can teach Catholics

Two big news events this weekend triggered news alerts on my phone Saturday night. One was the death of Senator John McCain and the other was the accusation by Archbishop ViganĂ². 
As a Catholic, these claims were another punch to the stomach. Each revelation brings feelings of disgust, shock, repugnance, anger, sorrow, and embarrassment. Truth be told it was a heck of a struggle just to go to mass this weekend.
Which brings me to Senator McCain. As a POW he was beaten regularly, denied medical care, had his arms broken and later re-broken, held in solitary confinement for years, had his teeth knocked out and was close to death several times. I’m sure he had doubts pop into his head hundreds of times over those years. He must have felt disgusted, shock, anger, sorrow, and embarrassment at a level I can literally not imagine. Yet when being debriefed by the Navy about his experiences in captivity he said that he made it through by having “Faith in country, [the] United States Navy, family, and God.”
This morning, the news had all sorts of stories on the life of Senator McCain. One of those told of how upon returning to the states after his release he attended the National War College. By the time he graduated, the concluded that “Mistakes by American political and military leaders had doomed the war effort.” 
How devastating must it have been to have spent 5 years in that hell hole for what you now believe was an effort led by bad leadership? And then it occurred to me. John McCain’s love of country was not diminished by the grave errors its leaders made, even though he paid a tremendous personal price for those errors. In fact, he dedicated the rest of his life to try to make the country better.
The evils that have enveloped our church are horrible. Many of us feel beaten, not by an enemy who holds us in captivity but rather an enemy from within our church who has tolerated way too much of this for way too long. But we will not fix this by turning away from the church. We must fight to fix it. And like Lt. Commander McCain, we need to retain our faith in God because it’s the only way we will make it through this.

The Conservative Hypocrisy on Free Speech

Donald Trump and people who claim to be conservatives are all up in arms about the purported censoring of their speech by social media platforms. 
The hypocrisy from the right is again stunning. In the Hobby Lobby case, the right advocates that forcing Hobby Lobby to provide certain types of birth control to its employees is an impermissible infringement on its first amendment rights - because it creates the appearance that they condone it and therefore forces them to speak or act in a manner inconsistent with their beliefs. 
Likewise, in the Colorado baker case, the right argues that you can't force a commercial actor to do something that they are against on religious or political grounds. Now, these same people want to ignore those very arguments and insist that all points of view must be afforded equal protection by private businesses. 
Though there is no evidence that they are censoring speech, I'd ask why should Hobby Lobby and the Masterpiece Cakeshop be protected from being forced to speak or act in a manner that they disagree with, but Google, Facebook, and Twitter not be given the same rights?
The fact that the President of the United States invoked the first amendment when discussing this matter and conservative are parroting it, shows the ignorance of all them. The first amendment restricts the government, not a private business, from restricting speech. I cannot believe why conservatives are not up in arms that the President, speaking from the White House, threaten to use the police powers of the state against a private enterprise when he perceived that it is not permitting his point of view to be spread. How would his actions be any different than when a third world dictator threatens to seize a television station or newspaper? 
When it comes to the second amendment, conservatives tell us that we should support the Constitution in its entirety, not pick and choose what provisions and amendments are important. I wholeheartedly agree. But this also means that other people have all the same rights you do, whether or not you agree with them.
The fact that the GOP is going along with this is just one more piece of evidence that the party is conservative in name only. It has no problem with big government, as long as that government is doing what they want it to do.