Truth, Justice, and the American way. TRUTH: Helping to correct people's misconceptions about history, science, and the state of the world. JUSTICE: Meant in the biblical sense. Fair treatment of other people, rational laws, and assisting the disadvantaged. THE AMERICAN WAY: A classless society where everybody has an opportunity to meet their potential and for economic advancement, regardless of race, ancestry, religion, gender, or sexual orientation.

Friday, December 14, 2012

US Tax Reform for 2014 and later

Problems with the current tax laws

The current federal income tax laws are several thousand pages. The court cases that interpret how the law applied requires a small library. Minor changes (such as changing the level of tax brackets) will not significantly improve the nation's problems.

We reached this unreasonable situation, because most of the tax laws members of congress vote based on the interests of donors, rather than the interests of contributors (indirect bribery). The candidates for the 2012 US presidential election spent more the $2,000,000,000 (two billion US dollars). Some representatives and senators spend millions of dollars getting elected. The rich expect consideration for their spending.

The current tax laws collect less from the wealthy than from the middle class.

Current laws give large businesses an unfair advantage over new or small businesses. Besides special loopholes, Social Security premiums place an unfair burden on small businesses. People starting a new business pay %25 of their net income as Social Security premiums. Since new businesses are the heart of

The United states has a growing disparity of both wealth and income between the wealthy and the middle class (a 20% increase in disparity over the past decade, according to the widely accepted GINI measure).

Most important reforms

The reforms I am recommending originate from wealthy, conservative people (such as Malcom Forbes).

The most important reason for the increase in wealth of the wealthiest is that inheritance taxes have been largely eliminated. Gifts, trusts, and inheritance should be taxed as income. The giver would be taxed upon receipt of the income and the recipient would be taxed upon receipt (or withdrawal from a trust) of the funds. Gifts and inheritance between spouses should not be considered income. This is better than having a separate book controlling inheritance tax.

One of the goals of a progressive tax system is to minimize taxes on those living below the poverty level. Sales and property taxes are inherently unfair to the poor. Exemptions on income tax should be adjusted to about the poverty level. Charging a flat tax rate after exemptions and deductions should be a fair income tax.

Capital gains means money obtained from investments held for a minimum time (unearned income). Currently only 50% of capital gains are included in taxable income. Money invested in starting a business is not capital gains (another way the tax system discourages creation of jobs). The capital gains exemption should be phased out over a four year period.

The US must increase the "Safety net" to meet the standards of the rest of the civilized world (or even just the industrialized world). This can be funded without a federal tax increase by removing the cap on FICA (Social Security) premiums. Currently, 25% of net income up to $103,000 is is taxed, but income above the cap is exempt from FICA tax. Half of FICA tax is paid by the employer and half is paid by the earner. Removing the cap will provide enough money to fund Social Security, health care (including dental and other needs), and increased unemployment coverage. Removing the employer's portion of the FICA premiums will make it easier to operate businesses.

Businesses should be taxed based on the change in "book value" of the business, plus dividends, and the pay to the highest level of management ("C level"). Payment in stock options should not be permitted.

Other changes 

Tax deductions other than the funds to pay for emergencies (disasters), direct employee costs, and charitable gifts should be phased out over the next ten years.

The homeowner interest tax deduction should be immediately eliminated. Rent, mortgage payments, and insurance premiums to protect health or possessions should be tax exempt for the primary dwelling and any unoccupied dwelling awaiting sale.

Any business incentives should be explicit contracts and divorced from the tax system.

Import duties must be protectionist. The wholesale price (including duties) of an item manufactured outside the US should not be below the wholesale price of the item manufactured (to the same standards) within the US (adjusting for the cost of raw materials). The same is true for services obtained from outside the US (including software and other non-physical products). 

Thursday, October 18, 2012

Investment and Jobs


Most people incorrectly believe that by investing in stocks they are creating jobs.
  • Buying stock does not create jobs.
  • Companies holding on to cash costs jobs
  • Mergers and acquisitions cost jobs and lead to inflation.
  • Vulture capitalism costs many jobs.
  • Outsourcing to other countries costs workers 3 times what one would expect
  • Federal bailouts and infrastructure investment help the economy more than tax cuts 
Look for ideas about tax reform soon

Buying Stock Does Not Create Jobs

Most people think that by investing in the Stock Market, they are investing in companies. Actually, if you buy a share of stock, you are usually buying a piece of a company and gambling that the share price will go up. The company does not directly benefit from changes in the share price, so you are not actually investing in the company, but buying part of the company from somebody else.

When a stock offers dividends (a periodic bonus) the share price is usually steadier and the shareholder tends to make more money. This is how a company gives shareholders a portion of the profits (because the shareholder owns part of the company).

While the share price tends to vary with the company's success, a lot of price changes are based on  guesses about the future and lead to wild stock price swings. There are ways to improve these guesses using computer models, but they are still just guesses and should usually be left to professionals (usually mutual fund managers).

The advantage of buying shares on a stock market is that you become a limited liability partner in the company (corporation). This means that if the company loses money, the creditors cannot ask you to pay the company's bills (you can lose your investment, but not more).

Actual Investment in a Company Creates Jobs

The easiest way actually invest in the expansion of a company is to lend the company money (buy bonds sold by the company). Lending the company money allows the company to expand or buy new equipment. Expansion means that the company has to hire more people. Upgrading old equipment sometimes allows more efficiency with fewer employees (the company lays people off), but new equipment usually means an expansion in business and a net gain in jobs. When a bond expires, the value is fixed (assuming the company is not bankrupt). Before that date, the value depends on how well the company is doing and general interest rates.

A second way to invest in a company is to buy shares directly from the company. The opportunities for this are limited. An initial stock offering or an offering of additional shares in the company provides stock that the company sells through specialized investment houses (arbitragers). Purchase of  these shares is investment in the company.

The best way to create jobs is to invest in new companies. This involves either creating a new company, investing in a new company, or buying stock in a venture capital fund.

Companies Holding Cash Costs Jobs

When a company sells stock or gets a loan, not all of the money is spent immediately. The money that is saved for the future should be put to work by investing in other companies. Some can be used to buy stock in other companies (or put in the bank), but most of the money should be in actual investments.

Mergers and Acquisitions Cost Jobs and Lead to Inflation

Sometimes a company will buy another company in order to gain valuable resources (such as skilled workers, patents, or contracts. Most company presidents want to streamline the combined company:
  • Use the same forms and software throughout the company (requires retraining or layoffs)
  • Merge duplicate offices or divisions (requires layoffs and/or relocation of employees)
  • Eliminate parts of the combined company that are not part of the central role of the company (spin-offs or layoffs).
Mergers and acquisitions usually cause inflation, because there is a loss of competition.

Vulture Capitalism Costs Many Jobs

Vulture Capitalism is the opposite of Venture Capitalism. Venture capitalism is investment in new businesses (high risk, but very high potential reward). Vulture capitalism is squeezing all of the money out of a company and then closing the company.

A vulture capitalist buys a company that is either distressed or has a low stock price. Then, resources (divisions, equipment, contracts, trademarks, patents, and so on) are sold off until all that is left is the name. In the mean time, most of the employees are laid off and pension funds are raided. Finally, the name is sold.

Often spinning off resources results in requiring workers to relocate and reducing worker pay.

An example is the purchase of AT&T by Southwestern Bell, which followed the above plan (except) that the combined company was renamed AT&T (fraudulently taking advantage of the public trust built under the AT&T name in earlier years).

Outsourcing a Job to Another State or a Foreign Country Costs Many Jobs

As a rule of thumb, every dollar of new employment brought into a local economy adds $3 to the local economy (through purchases and services used by the new person, and purchases and services paid for by existing people serving the new person, and so on). Assuming round numbers, this means that every new person hired adds between $100,000 and $150,000 to the annual local economy (depending on the base income assumed). Laying off a person costs between $75,000 and $100,000 from the annual local economy (unemployment insurance reduces the cost of a layoff). However, the lost taxes bring the overall loss up to the $100,000 to $150,000 range.

Outsourcing to another state causes 3 local layoffs for each person relocated or laid off by the company. Because of bad tax and quality laws, outsourcing to a foreign country costs 4 to 5 layoffs to the local, state, and US economies.

For example, outsourcing telephone customer service to India results in:
  • Loss to the local economy of at least 3 times the salary of the person laid off
  • A reduction of service quality
  • Employees being paid around half of what US employes would be paid
  • No import duties charged on the services and no taxes paid in the US (increasing import duty collections on services would greatly reduce outsourcing services to foreign countries)
Outsourcing of manufacturing to a foreign country
  • Creates a very complex import duty situation,
  • Loss to the local economy of at least 3 times the salary of the person laid off
  • A reduction of product quality (poor inspection, rampant bribery, poor environmental controls, and so on)
  • Employees being paid around half of what US employes would be paid

Federal Bailouts and Infrastructure Investment Help the Economy More Than Tax Cuts

Tax cuts for the rich are like buying stock in companies, most of the money is saved, not spent. Tax cuts for the poor make very little difference to the national or local economy, because the amount of money is small.

Tax cuts for the middle class help the economy, but the multiplier is smaller than creating new jobs. For the past 15 years, the middle class has been shrinking as people are paid lower salaries and are laid off.

Federal bailout of a US financial institution helps the US economy if it avoids layoffs. Federal bailout of a foreign financial institution hurts the US economy and increases inflation.

Federal bailout of US manufacturing firms helps the US and local economies by maintaining 3 times the jobs as the layoffs averted.

Maintenance of schools, roadways, bridges, public parks, waterways, levies, and other public "commons" has fallen behind by 15-20 years. Road widening in metropolitan areas and pavement upgrades in rural areas are 5-10 years behind. The Katrina rebuilding and the BP cleanup are still not complete.

Investment in infrastructure would help alleviate these problems, provide jobs, and would speed growth of existing and new companies.

Saturday, February 25, 2012

Illegal Alien Questions Rise Again in California

In Los Angeles county (southern California), police officials are investigating the idea of allowing illegal aliens to drive without drivers licenses.

This idea is wrong for several reasons:
  • Nobody should be allowed to drive in California without taking both a written test and a driving test. The driving test in California is strict. California drivers licenses are accepted in several other countries (when accompanied by a passport) and all of the USA.
  • The primary form of legal identification used in California is ones drivers license (one must show an original birth certificate or a passport to obtain a California drivers license). Non-drivers may obtain a similar identification card.
  • Drivers licenses are available to aliens (people who are visiting the country), provided the other requirements are satisfied. The drivers licenses of people under 21 years of age and aliens have distinct marks.
  • Part of the issue relates to vehicle registration and insurance.

There is already a way for aliens to drive in California, provided they have met the requirements, so what is the issue?

The issue is that many people live and work in California who have no legal right to be here (borders are part of the "Sovereignty" of every nation). Unless the US opens its borders to all, then it is not reasonable to allow over 12 million people to live and work here illegally (5% of the US population).

Because of the widespread immigration of those without valid visas, whole subgroups of exploited and underpaid people have developed and various industries have grown to rely on the ability to underpay workers. The recent problems in Georgia (when the state started checking work permission for farm workers and food rotted in the fields) are an example.

The ability of companies to exploit illegal laborers (undocumented workers) has reduced the price of necessities, while making it harder for legal workers to earn enough to take care of a family. The average (median) per worker income in 2010 was around $54000/year. The poverty level (substandard housing, poor food, poor medical care, and so on) is approximately half of the median income. This means that a fair minimum wage is over $12/hour. Since illegal aliens earn less than half of this, they become a drag on the the workforce and the congress has no incentive to set a reasonable minimum wage.

The US cannot deport 12 million people, but the US can afford to insist that all workers are either citizens or have work visas.

This problem is also related to the exporting of jobs to other countries, a problem that is ruining the US, Japan, and much of the EU.

About Me

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Canoga Park, California, United States
Software Engineer with Ph.D. in Computer Science. I have a deep background in the sciences and in computer-human interaction. I was a college professor for 11 years, followed by over a decade of work in industry.