A Look at U.S. Taxes and Hauser's Law

The implicit dynamic here is that when taxes exceed 20% of GDP, participants modify their behavior to lower their taxes

Frequent contributor Jim S. recently submitted a collection of charts on U.S. corporate taxes and Hauser's law, which contends that Federal tax revenues rarely rise above 20% of GDP, regardless of where nominal tax rates are set.

Hauser's observation is more a socio-political trend than a law per se, but the point is that total tax revenues are remarkably stable despite changes to the mix of revenue sources and tax rates.

Clearly, Hauser's observation applies only to U.S. Federal taxes, as many European nations collect total tax revenues around 40% of GDP. Furthermore, total taxes (including state and property taxes) exceed 40% of household income in many U.S. locales.

The subject of taxes arouses all sorts of emotions and critiques, and one reason it is difficult to compare apples to apples in national tax revenues is that nation-states have extraordinarily different (and often convoluted) tax structures.

France, for instance, has a television tax. Japan sends tax collectors door to door to wheedle the national NHK network tax from households. Here in the U.S., a large percentage of total taxes paid by households in some states is in the form of property taxes. Using myself as an example, Federal tax paid in 2011 was $15,000, California state income tax was about $3,000, and local property taxes were almost $13,000.

California sales tax (which varies due to county tax add-ons) is 8.75%, but it does not apply to food or services such as dentistry. Hawaii's sales tax (for the majority of residents) is 4.5% but it applies to virtually everything and so it represents a very significant percentage of total taxes paid by households.

As a result, it makes no sense to isolate Federal tax and make all sorts of broad assumptions from that basis when in places such as California, Hawaii, Illinois, New York, etc., state and local taxes might easily exceed total Federal taxes paid.

What the central government provides varies as widely as tax revenues. If you paid a 40% tax rate in Denmark, for example, what you get in the way of entitlements is quite a bit different from what you get in the U.S.

In the U.S., the government will guarantee student loans that give you semi-permanent status as a debt-serf. (Some Federal grants are also distributed that do not have to be paid back, but these rarely cover all college costs.) In Denmark, tuition and other major expenses are paid in full by the government, and qualified students receive a stipend to live on while attending university.

In the U.S., you must be over 65 years of age or qualify as a low-income household to receive government-paid healthcare services. Everyone else pays insane sums for private healthcare insurance, or their employer pays insane sums for private insurance. In Denmark, everyone gets basic healthcare coverage paid by the government.

We pay $13,000 annually for bare-bones healthcare coverage for two adults. If we want to compare apples to apples in the tax rates for the U.S. and Denmark, shouldn't we add what households pay for healthcare insurance to the U.S. total? If we add up all the many layers of taxes our household pays, including healthcare insurance, dental bills, etc. that would be covered by taxes in Denmark, our total equivalent taxes paid is $15,000 (Federal), $3,000 (state income taxes), $13,000 property taxes, $4,000 sales taxes/junk fees and $15,000 in healthcare insurance (and related costs that would be paid by taxes in Denmark): $50,000 which is roughly 50% of our income.

The Real-World Middle Class Tax Rate: 75% (July 5, 2012)

Some people object that Social Security taxes shouldn't be included in Federal tax revenues because they are are not income taxes. Fine, but then you have to remove all the equivalent tax revenues collected in other nations when you compare tax rates. It all boils down to two simple concepts:

1. The only tax total that matters is the total of all taxes paid to all layers of government.

2. You get what you pay for. If one nation pays higher taxes to fund a national healthcare plan, then that nation's tax rate cannot be compared to one where the government only pays healthcare costs for a small percentage of its residents.

So please don't talk about "low-tax America": taxpayers in the U.S. should get T-shirts that read "I paid taxes in the U.S. and all I got was this lousy Empire."

Into this mess comes the emotional hot-button of corporate taxes. Let's look at some charts to establish some context:

Here's a chart that inflames almost everyone: corporate profits are rising while corporate taxes are declining: Arrgghh!

As corporate taxes are declined, individual income taxes paid rose. Double-arrgghh! Once your blood pressure drops to normal, note that both individual and corporate tax revenues have meandered within a fairly narrow range for the past 30+ years.

While the GDP has expanded, corporate taxes paid have remained flat-lined.

Meanwhile, the nominal U.S. corporate tax rate remains one of the highest in the world.

Despite the supposedly different nominal corporate tax rates of various nations, corporate tax revenue as a percentage of GDP is about the same for Canada, the U.S., France and Japan. The lowest corporate tax revenue as a percentage of GDP is export powerhouse Germany.

States such as the U.K., Sweden, Korea and Denmark have corporate tax revenues that are only modestly above those of the U.S. when measured as a percentage of GDP.

Clearly, nominal rates have little to do with the actual tax collected. They also have little to do with the total taxes paid by global corporations. For example, "Exxon Mobil conducts the majority of its business outside the U.S. and paid $28.8 billion in taxes to foreign governments, but only owed and paid $1.5 billion to the U.S. government." (source: Top Companies Paid 9% U.S. Tax Rate)

10 Most Profitable U.S. Corporations Paid Average Tax Rate Of Just 9 Percent Last Year.

It is not realistic to compare corporate tax rates in a unipolar world (circa 1950) when the U.S. economy represented roughly half of global GDP to today's global economy.Those who enthusiastically demand a return to high corporate tax rates forget that U.S. global corporations are not bound to the nation-state of the U.S.A. Push them into an anti-competitive tax situation and they will transfer their operations elsewhere.

Even worse in terms of fairness, high corporate tax rates punish those companies that do not have the elaborate tax avoidance scams of global companies. Some U.S. companies pay close to the nominal rate while the average pay roughly one-fourth of the official rate. Ours is a blatantly unfair system where corporate capture of the political machinery offers a well-greased back-door method of lowering taxes for those able to buy political influence.

A much better tax collection strategy, and a much fairer one, is a flat corporate tax of 8% that aligns the U.S. nominal rate with the rate actually collected. Actual tax revenues collected would be about the same or perhaps even rise as gaming the system is no longer rewarded, and all the wasted motion of tax avoidance would go by the wayside.

Non-U.S. corporations doing business in the U.S. should pay the same 8%. Currently, many non-U.S. corporations selling billions of dollars of goods and services here pay negligible Federal corporate tax.

The point that many miss is the mix of taxes is a social/cultural decision. In general, corporate taxes are low in Germany and individual taxes are high, while in France business taxes are high and individual tax rates are (relative to its EU peers) generally low. The total tax revenue collected as a percentage of GDP ends up being about the same.

What this suggests is some tradeoffs are necessary. Better to have flat rates that are actually collected than byzantine tax codes and high nominal tax rates that incentivize gaming the system and result in unfairly disparate real tax rates.

Despite changing the nominal rates on corporate taxes, payroll taxes and individual income taxes, total Federal tax revenues have remained close to 20% of GDP for decades.

Federal tax revenues swing between 15% and 20% of GDP. In a $15 trillion economy, that 5% is a significant chunk of cash: $750 billion.

The implicit dynamic here is that when taxes exceed 20% of GDP, participants modify their behavior to lower their taxes. Corporations will shift operations overseas. Those in the higher tax brackets will lobby the political class for lower tax rates. Some high-wage earners will simply work less, reducing their income to lower tax brackets. Small business owners will decrease their compensation, cut back their workload, or simply bail out. Others will leave the high-tax market and slip into the cash/informal economy where the tax rate is zero.

In a $15 trillion economy, this suggests the maximum Federal tax revenue that can realistically be collected is around $3 trillion. Currently, Federal tax revenues are around $2.5 trillion, and Federal spending is about $3.8 trillion.

That leaves a $1.3 trillion deficit that is filled with borrowed money.

Taxes are zero-sum to the taxpayer: collect another $500 billion in Federal taxes and that's $500 billion taxpayers don't have to spend, save or invest in the economy. So policy-makers fear raising taxes will trigger a recession, yet running deficits that are 35% of Federal expenditures is not sustainable.

Tradeoffs will have to be made. That is the essence of adulthood. Too bad we've become a nation of spoiled adolescents.

Spoiled Teenager Syndrome (January 3, 2013)
Is masking risk, cost and consequence a strategy that leads to success? No; it is a pathway to catastrophic failure.


Roundtable discussion with CHS, Gordon T. Long and Bill Laggner: China, Japan & Central Banking (25 Minutes, 34 Slides)

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Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

Kindle edition: $9.95       print edition: $24 on Amazon.com
To receive a 20% discount on the print edition: $19.20 (retail $24), follow the link, open a Createspace account and enter discount code SJRGPLAB. (This is the only way I can offer a discount.)

Thank you, J.M. S. ($100), for yet another outrageously generous contribution to this site -- I am greatly honored by your steadfast support and readership.

Thank you, Ann B. ($20), for your exceedingly generous contribution to this site --I am greatly honored by your support and readership.

Read more...

The Hollowing Out of Private-Sector Employment

The financial and political Aristocracy will continue to do more of what's failed because they have no alternative model that leaves their power and wealth intact.

Frequent contributor B.C. has provided five charts that reflect the hollowing out of the private-sector employment. This has profound implications for education, taxes, housing and inequality.

Many people point to offshoring/global wage arbitrage as the key driver of stagnant wages and employment in the U.S., and this is certainly a factor. But we would be remiss not to note the other equally important drivers:

1. A system in which inefficient quasi-monopolies/cartels (defense, healthcare, education) are protected by a debt-based, expansionist Central State.

2. The exhaustion of the consumption/debt-based economic model.

What no one dares admit is that the U.S. economy is burdened by overcapacity(too many malls, restaurants, MRI machines, etc.) and too much debt, much of which was taken on to fund mal-investments (McMansions in the middle of nowhere, duplicate medical tests, costly weapons systems the Pentagon doesn't even want, etc.)

Consider this thought experiment. Suppose the offshoring of jobs was suddenly banned; only U.S. workers could be hired (setting aside that this is impossible in an economy where 50%-60% of U.S. corporate sales, profits and labor are non-U.S.; how are corporations supposed to compete in markets that generate 60% of their sales/profits if they can't hire local workers?)

Does a ban on offshoring suddenly make it profitable to hire more employees in the U.S.? No, it doesn't. Healthcare costs are still double those of our global competitors America's Hidden 8% VAT: Sickcare (May 10, 2012), and stagnant wages and high debt levels leave few opportunities for big profits.

Instead of developing new products and services, corporations either slash labor costs or belly up to the State trough of favored cartels: defense, healthcare and education. It is no mystery why these three State-protected sectors have seen costs skyrocket in a low-inflation, low-growth economy: college tuition has leaped by 1,100% above inflation and healthcare has risen 600% above the CPI (consumer price index).

Once the State enforces quasi-monopolies and cartels, inefficiencies rise because the feedback from reality (i.e. price) has been severed. This is how you get an economy where a biopsy costs $70,000, new fighter aircraft cost $200+ million each (six times the previous top-of-the-line fighter) and a conventional (i.e. non-Ivy League) college education costs $120,000 - $200,000.

Banning offshoring would simply create even more incentive to replace human labor with machines and software. As many observers have noted, robots are even replacing human labor in low-cost China because robots are cheaper and more productive than human labor, no matter how poorly paid.

Student Debt Has Tripled in Eight Years

Thinking About the Future – Technology & Crisis

Nations Must Prepare For Robots Destroying The Low-Skill Job Market

In other words, the erosion of private-sector employment has structural causes that are the consequence of the debt-burdened, crony-capitalist domestic economy and technological innovations.

Here are the charts B.C. sent along that illustrate the hollowing out of private-sector employment.(Chart notes are mine.)

Private full-time employment as a share of total employment: new low, and four years of unprecedented fiscal/monetary stimulus has pushed it back up to merely recessionary levels:

Private full-time employment minus health services jobs as a share of total employment: remove the State-protected sickcare cartel and the picture is even worse.

Private full-time employment minus health services jobs as a share of the total labor force: subtract government and healthcare jobs and roughly half the labor force has a private-sector job.

Part-time employment as a share of total employment: roughly 1 in 5 jobs is part-time, and does not pay enough to support a household, even a one-person household.

Part-time employment as a share of the total labor force: much of the vaunted increase in employment of the past four years is part-time jobs that cannot support mortgages, consumer debt, healthcare costs, auto loans, or even rent.

B.C. included this link and commentary:

53% of Recent College Grads Are Jobless or Underemployed (The Atlantic)

Less government and health services employment, only about half of the labor force is employed full-time. This is precisely why half of college grads are unemployed or underemployed, i.e., part-time work at low pay. Statistically, if they are not employed in government or health care, they have no more than a 50% probability of obtaining ANY full-time private employment. 

At ~18% of the labor force employed part-time, those 50% grads who do not obtain full-time private employment outside health care must compete for the 1 of 5 jobs in the labor force that are part-time, implying that no more than 59-60% of college grads will obtain ANY employment under current labor market conditions, leaving ~40% of grads with no prospects for earning purchasing power. 

Is it a surprise why student loan delinquencies have begun to soar? How will the housing market grow with as many as 40-50% of high school and college grads unemployed, underemployed, or unemployable? 

From my experience, perhaps as few as 10% of the population know the information above. Most in the top 10% don't know because they are largely unaffected and thus don't care and will not be persuaded that they should care until they have to (i.e. when their children experience the aforementioned conditions). 

The vast majority of the bottom 90% don't know because they spend their waking hours trying to survive and can't do anything about it were they to know. Those who do know tend to be well-positioned economists, politicians, and similar types who have no financial or professional incentives to share the information because no one in the top 1-10% cares to know or do anything about it. 

How do you maintain a mass-consumer, debt-based economy with only half of the labor force with full-time private employment outside of health care, accelerating automation of labor and loss of incomes and purchasing power, 40% of the youth with little or no purchasing power, and 90% of the population relying in old age on transfer payments from the wages of younger wage earners and their struggling employers? You can't. 

So the mass-consumer economy and welfare-state for the bottom 90%, elderly, underemployed, disabled, young, and poor is not sustainable. Now what?

Thank you, B.C.

I would like to add a few points:

1. Healthcare, defense and education are all bubbles that are about to burst as debt-based government spending must slow, and this means the "you have a guaranteed job in this sector" mindset that has been true for the past 50 years will change.

Rather than obtain a guaranteed full-time job, those entering these fields (other than M.D.s, in which a critical shortage looms large) will be competing with vast hordes of other job seekers who also believed these were "safe" careers. The same can be said of law, as the era of "Big Law" is over as large law firms shed attorneys and reduce compensation. BigLaw Growth is Dead: Here's What's Next.

2. Sickcare acts as a systemic tax, as does the cartel defense industry. Politicians love defense and healthcare spending because they believe it "creates jobs." But since these are largely unproductive mal-investments, for reasons I have highlighted here many times, State spending on these sectors is extraordinarily ineffective at creating not just jobs but productive investments of labor and capital.

To take but one example of thousands: western Pennsylvania has about as many MRI machines than the entire nation of Canada. Those who own the machines funnel thousands of people into their labs to take unnecessary or duplicative MRI tests as a profit-mill. Since the State (Medicaid and Medicare) and insurance will pay for any and all tests deemed "necessary" in a system that revolves around defensive medicine, i.e. doing whatever it takes to avoid future lawsuits, this waste makes perfect sense in terms of generating profits.

Sickcare Will Bankrupt the Nation--And Soon (March 21, 2011)

According to local media reports, Western Pennsylvania has about 140 MRI machines, while the 32 million residents of Canada share 151 MRI machines. And the machines are getting a lot of use: the number of CT and MRI scans (scans other than old-fashioned X rays) tripled from 85 to 234 per thousand insured people since 1999. While proponents are quick to note that scans are cheaper than the alternative diagnostic procedures, one firm's research found that a doctor who owns his own machine is four times as likely to order a scan as a doctor who doesn't.

Add in massive amounts of fraud (billing Medicare for tests that were not even given) and 40% of the system costs wasted on paper-shuffling, and you have a system that is literally crippling the entire U.S. economy with its high costs, fraud and waste.

3. Where does the leadership of our multiple layers of government think future tax increases will come from when private sector employment is eroding and half of all college graduates are unemployed or earning low pay in part-time jobs? The wage-base for higher taxes to pay for ballooning entitlements is eroding, too.

4. We suffer from a systemic failure of imagination. The financial and political Aristocracy that rules the neofeudal, financialized economy have no other model other than debt-based misallocation of capital and endless growth of debt-based consumption. That this model is broken and cannot possibly get us where we need to go does not matter; they will continue to do more of what's failed because they have no alternative model that leaves their power and wealth intact.

America Is Just Going Through the Motions (November 19, 2010)

We Have No Other Choice (March 15, 2012)

What If We're Beyond Mere Policy Tweaks? (February 6, 2012)

The Junkie in the Pool and False Idols: Faith in Wall Street and The Fed Has Eroded(August 10, 2011)

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Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

Kindle edition: $9.95       print edition: $24 on Amazon.com
To receive a 20% discount on the print edition: $19.20 (retail $24), follow the link, open a Createspace account and enter discount code SJRGPLAB. (This is the only way I can offer a discount.)

Thank you, Lynn M. ($75), for yet another magnificently generous contribution to this site -- I am greatly honored by your steadfast support and readership.

Thank you, Ann K. S. ($25), for your wondrously generous contribution to this site --I am greatly honored by your support and readership.

Read more...

Understanding Failed Policies: Wealth Effect, Wage Effect, Poverty Effect

Central banks' attempts to boost borrowing, consumption and wages by inflating asset bubbles leads to the poverty effect, not the wealth effect.

Central bankers have been counting on "the wealth effect" to lift their economies out of the post-2009 global meltdown slump. The wealth effect concept is simple: flooding the economy with credit and zero-interest money boosts the value of assets such as housing, stocks and bonds. Those owning the assets feel wealthier, and thus more inclined to borrow and spend more money. This new spending creates more demand which then leads employers to hire more employees.

Unfortunately for the bottom 90% who don't own enough stocks to feel any wealth effect, the central bankers got it wrong: wages don't rise as a result of the wealth effect, they rise from an increased production of goods and services. Despite unprecedented money-printing, zero interest rates and vast credit expansion, real wages have declined.

Apologists will claim that it would even be worse without central banks attempting to inflate asset bubbles in search of the wealth effect, but the wage/M2 money supply correlation suggest chasing the wealth effect has been a policy failure.

The unintended consequence of inflating asset bubbles to drive an illusory wealth effect is that speculative bubbles inevitably pop, creating a pervasive poverty effect. The asset bubble creates phantom collateral that households borrow against. When the bubble pops, they're left with the debt and debt payments ("the poverty effect") while the ephemeral "wealth" has vanished.

Frequent contributor B.C. has offered some charts correlating wages, M2 money supply and production. His commentary elucidates the difference between inflation that includes wages (wages rise along with prices) and inflation that erodes purchasing power (wages stagnate while prices and assets rise).

(The chart notes are mine.)

Here is B.C.'s commentary:

I tend to think of "inflation" as the effect on the purchasing power of wages from the differential rate of change of money supply (and by extension bank lending and GDP) to wages (relied upon virtually exclusively by 90% of households, including those receiving transfers from taxes on wages) with regard to production.In other words, if wages are rising along with production and prices, price inflation is largely a reflection of population, value-added output and consumption, and commensurate returns to labor from growth of money and production, i.e. an optimal growth condition. 

However, if growth of money (M2) and bank lending (and GDP, which rises as a result of gov't deficit spending), exceeds growth of wages and production, money inflation tends to result in price inflation that erodes the purchasing power of wages and private production. This reflects economic conditions that are sub-optimal or recessionary. 

To the extent that there is a so-called "wealth effect," the flow effect is likely in the opposite direction as is commonly assumed; that is, rising production and wages to money supply affect an increase in asset prices; therefore, it should be referred to as the "wage effect" on growth of economic activity and asset prices, rather than the converse. 

Thus, the S&P 500 dropping back to the level of the mid-'90s (when the bubble commenced) would reflect the "wage effect" and actual sub-par economic conditions rather than the dubious "wealth effect" assumed from rising asset prices.
Of course, in the hyper-financialized US economy and global imperial trade regime, this is heresy.

Thank you, B.C. In other words, a sustainable wealth effect results from the wage effect, as rising production of goods and services organically boosts wages. The Federal Reserve and other central banks have it backwards: inflating asset bubbles does not increase wages or create a sustainable wealth effect; increasing production of goods and services bolsters wages which then leads to a sustainable wealth effect.

Inflating serial bubbles as a means of boosting more borrowing and consumption only leads to the poverty effect: an erosion of wages' purchasing power and the inevitable deflation of asset bubbles that leaves unpayable debt once the phantom collateral evaporates.

The Fed has been able to maintain price stability but not wage/purchasing power stability. That dooms its entire intervention project.

Simply put, central banks' attempts to boost borrowing, consumption and wages by inflating asset bubbles leads to the poverty effect, not the wealth effect.

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Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

Kindle edition: $9.95       print edition: $24 on Amazon.com
To receive a 20% discount on the print edition: $19.20 (retail $24), follow the link, open a Createspace account and enter discount code SJRGPLAB. (This is the only way I can offer a discount.)

Thank you, Helen S.C. ($10), for yet another magnificently generous contribution to this site -- I am greatly honored by your steadfast support and readership.

Thank you, Bud W. ($50), for your stupendously generous contribution to this site --I am greatly honored by your support and readership.

Read more...

Part 41: "I should have known there was a man in your life—look at your cute little green dress." (serialized fiction)

Here is this week's chapter of my serialized comic novel "Four Bidding For Love."(Those who find absurdist humor and adult situations offensive, please read no further.)

     No one has made me an honest dinner since, I don't know, my first year with Viggy, she mused. In my last romantic obsession, it was me constantly monitoring his happiness—and what an unrewarding anxiety that was—not him wondering about my happiness.
     The difference was so striking that Alexia wondered if she'd ever been with a man who was actually solicitous of her in the manner of R.T. , and her analytic side coolly sorted through her memories and drew this conclusion: no one had been as solicitous as R.T. , even this early in a romance. The men she'd been drawn to all seemed to detect her fear of not measuring up, and each had effortlessly exploited her insecurities—not in malice but as if nature had deemed it so. It was shameful to admit, but she'd sensed Viggy's affair before he'd confessed it, and yet she'd demanded nothing of him.
     To say Alexia was wary of placing too many expectations on such a tentative romance would be an understatement, for she quickly established a practical litmus test in her mind: if I would miss having R.T. around, then I'll keep him around. I am not in love with him, or even mildly touched with the fever I felt for Mr. Doom, a.k.a. He Who Dumped Me. R.T. is amusing, and kind, and a pleasant interlude from loneliness, that's all.
     A sharply dressed young fop waiting for the 41 Union bus eyed her appreciatively as she passed, and Alexia caught herself wondering why she'd picked the tight-fitting green dress to wear that morning. It had hung untouched in her closet for many months, and Alexia confessed the reason for her decision to set aside her first choice, a demur blue skirt and long-sleeved blouse: the hope that R.T. would respond like the young man awaiting the bus.
     Her determination not to allow any romantic hope to flicker to life lasted two blocks, at which point she entered "Well Heeled Etc." After waiting for Katy to ring up a customer's purchase, Alexia unloaded her tale of Ruby's death and unexpected intimacy with her uninvited guest on her friend with the alacrity of a warehouseman emptying his last forklift Friday afternoon at 3:59 p.m.
     "There's a man living in my house," she announced, and Katy's large gamine eyes expanded into brown saucers as Alexia elaborated that he'd clairvoyantly made her dinner, listened to her most sympathetically on one of the worst days of her life, and then brought her coffee the next morning.
     "Sweet Loretta, slow down," Katy exclaimed, and then lowered her voice. "I should have known there was a man in your life—look at your cute little green dress."
     "It isn't true love,” Alexia disclaimed. “My last little episode inoculated me against that disease. It's just interesting how this happened."
     "Just coffee in bed, and you running in here in a tight little dress to breathlessly tell me all about it."
     "I am not breathless."
     "No, but you do have a certain rosy glow about you." Katy's clouded expression cleared and she exclaimed, "Oh, I get it. This guy is nobody you want to show off, but he's nice."
     "You're right, he is nothing to look at," Alexia retorted coldly. "Not like your Prince Charming. And he isn't an investment guru, either. He is just a mere mortal who was burned out of his home and who made me dinner. Does your wonderful husband make you dinner?"
     "No," Katy replied, "We usually go out, but he does make ranchos huevos for me on Sunday morning."
     "And I'm sure they're perfect," Alexia remarked acidly, and Katy issued a huge sigh. "This isn't a competition," she said, but to Alexia that sounded like denying rain was wet.
     "I thought you'd be happy for me," Alexia said accusingly. "It's just a little romance." Katy grasped the depth of the wound she'd so cavalierly sliced in her taller, exquisitely vulnerable friend and she blurted, "I am, I am."
     "It's just a little romance," Alexia repeated. "Not a cruise ship heading for Wedding Island."
     Katy brightened and then whispered, "You never know. You may get blown off course and end up there."
     "Not with this guy," Alexia reassured her, and then both turned as the door bell tinkled merrily and two leggy young women in stylish Panama hats entered the boutique in a faint cloud of expensive perfume.
     As she two women began browsing her rows of footwear, Alexia mustered an entrepreneur's welcoming grin and thought, I've already been to Wedding Island on the Shotgun Marriage Tour, and once was enough.
     Even as Alexia's thoughts expressed a cynical resolve born of disappointment, changes unfolding inside her were offering a deeply ironic betrayal of her world-weary pronouncement.

Next: Kylie: a wild poppy turning its iridescent orange blossom gaily to the sun (Chapter 12)

To read the previous chapters, visit the "Four Bidding For Love" home page. 

Read more...

Capital Controls, $5,000/oz Gold and Self-Directed Retirement Accounts

A wide-ranging conversation on capital controls, gold and self-directed retirement accounts.

Recent news stories about Federal plans to "help" manage private retirement accounts renewed my interest in the topic of capital controls. One example of capital control is to limit the amount of money that can be transferred out of the country. Another is limiting the amount of cash that can be withdrawn from accounts.

The article linked above suggested a third example, in which the government mandates private capital must be invested in government bonds. The way this might work is this: an agency of the Federal government might announce that to "protect" households' $19 trillion in retirement funds from the vagaries of the market, 50% of all retirement accounts must be invested in "safe" Treasury bonds.

Though presented as "helping" households, the real purpose of the power grab would be to enable the Federal government to borrow the nation's retirement accounts at near-zero rates of return.
As things fall apart, Central States pursue all sorts of politically expedient measures to protect the State's power and the wealth of the political and financial Elites. Precedent won't matter; survival of the State and its Elites will trump every other consideration.

To explore alternatives to conventional retirement accounts (IRAs and employer-funded 401Ks), I asked Michael Reps to join me in an email conversation on capital controls, gold and self-directed retirement accounts. Michael and I have a long history of correspondence, and his great respect for the oftwominds.com audience led him to advertise his Expat Your Wallet service here.

I personally have what is known as a solo or self-directed 401k trust, an individually managed retirement account designed for sole proprietors. I am no tax expert, but self-directed 401ks have larger tax-deferred contribution limits than IRAs and at least some of them allow the owners to invest in real estate and other tangible assets, in stark contrast to IRAs and employer-managed 401Ks.

Very few people seem to have heard of self-directed retirement options, and so this conversation is an attempt to explore some of the issues related to capital controls and self-directed retirement accounts.

Please note that these accounts may not be for everyone, and not everyone may qualify to establish such an account. The following is not advice or a recommendation, it is an informal, broad-ranging discussion on a variety of topics. Please read the HUGE GIANT BIG FAT DISCLAIMER before reading on.


Here are Michael's Introductory comments:

Many if not most gold analysts will discuss at length and great detail the catalysts or conditions that could lead to gold's further bull run. These reasons are too detailed and varied to go over here. The purpose of this Q&A is not to refute their claims but rather to acknowledge them and to ask one question: What would America look like with gold at $5000 an ounce?

Does it mean that the gold bugs win and the rest of the population loses? Can you walk into an appliance store an buy a refrigerator, dishwasher and washer/dryer with a few ounces of the ancient barbaric relic? Does it represent the onset of hyperinflation where buying power is diminishing? Or does it mean that speculators have caught wind of the next best momentum investment? In other words, is the rise in the price of gold "Value Driven", "Event Driven" or "Price Action Driven"?

Instead of attempting to forecast how gold "should" rise in value and price, would it not be better to consider the world we live in based on "Why" gold has risen?

Consider what these three economic events could do to your retirement: rising interest rates, a falling US Dollar or major bank failures. All three can send gold to parabolic levels and wreak havoc on your nest egg. They represent either a loss of spending power, a loss of borrowing power, or an outright loss of capital.

Current thinking dictates that one is to grow, grow, grow savings until they retire and then spend, spend, spend, down a life's worth of savings, overlooking the fact that at the time of retirement the account statement may read 6 figures in nominal value but have only 5 figures of buying power. Many will consider gold and silver as a hedge against such an event and I wouldn't argue. The ability to freeze in place stores of value that cannot be degraded by reckless monetary policy may be the only hope for Boomers.

All this raises an interesting question: what would America look like at $5000 an ounce gold?

CHS
Just to be clear: do you think gold could go to $5000 an ounce over a relatively short period of time?

MR
The Dow rose from 875 in 1981 to 14,000 just over three decades later. I can't see why gold could not do the same. I wouldn't rule out $10,000 either.

CHS
Why would anything be different with gold appreciating to these levels when the Dow stocks rose from 875 to 14,000 in the past? The world didn't come to an end and the wealth generated has had many positive affects on the economy.

MR
Correct, that is why I think it is important to consider the reasons behind its rise and what they mean for the overall society we live in. I believe if it is just a speculative bubble (Price Action Driven) then it's a clear "buyer beware" situation. However, if there is an major awakening from the public that gold is money, more so than greenbacks, then I suspect we will be living in much more challenging times.

A January 2011 Moody's report noted that the ratio of national debt to national tax revenue in the United States is the worst of all the AAA-rated countries in the world. The U.S. fiscal condition has deteriorated to the point where its debt to revenue ratio is nearly three times higher than the AAA median, and more than twice that of Germany, the U.K., the Netherlands, Switzerland and Canada.

Even the German Bundesbank is getting wobbly, as they request the return of their 300 tons of gold held at the NY Federal Reserve Bank, which came just three months after the Federal Reserve refused to submit to an audit of its holdings on Germany's behalf. The end result is that faith is running thin regarding the safety of US domiciled assets. Now we hear of the Netherlands, and others making overtures about the safety of their assets. We should take a clue from this.

CHS
Let’s say gold declines to $1,000 an ounce. Does that change anything we’re discussing?

MR
This is a good question, and again it gets back to the reasons for the "deflation" or depreciation in gold's price. It could still maintain enormous value relative to other goods and services, or it could be deemed an albatross that is so highly regulated and taxed that it loses appeal. Its price could even be the result of government mandated "price controls" which again represents a picture of a much different America than the one at present. It really depends on "Why" it has declined in price.

A legitimate free market should always price things based on real supply and real demand and my contention is that there will always be a market somewhere that will recognize gold's real value. This goes for many other stores of value as well, but precious metals do have a very universal appeal. This may be one reason why there are services out there that help people store precious metals offshore.

CHS
In the broader context, what do you see as the primary challenges we will face?

MR
I think the first thing to go is "Trust"; trust in the existing fiat structure, in fractional reserve banking, in how to value your work, your compensation, your long term plans. When trust is broken, all bets are off and the government will have free rein to impose even greater controlling measures in order to shore up the economy. These measures of control will likely manifest themselves in a myriad of changes to include "price controls", "capital controls", "trade wars", "currency wars" and possibly civil unrest.

CHS
In previous essays, you discussed opening up a foreign bank account to diversify sovereign and currency risk. In terms of holding funds outside of the existing system, what options are out there?

MR
It seems that investing "outside" of the existing system has its merits. We have had some good success with this simple act of opening up a foreign bank account and since the start of that service some people have capitalised on the rising New Zealand Dollar as well as higher bond yields. What has also emerged from this has been a good deal of interest in getting an overseas incorporation. This incorporation has helped to establish business and trade accounts outside of the US and in compliance with US Tax laws.

It is when I started going down this path that I discovered something quite interesting that I think your readers may benefit from, and that is to not only self-direct their retirement accounts but to self-direct them overseas where they have a new set of opportunities not readily available at home.

CHS
In an era of such low yields, many investors are seeking some form of return or absent that, at least a store of value.

MR
This is my point. Especially when you are close to retirement you just dont want to take too many chances, so greater fixed income exposure usually becomes the default choice of most aging boomers. Your readers are well aware of the overall issues facing investments in this zero interest rate climate. It may be a good idea to consider a strategy that opens them up to a whole world of investment opportunities. And by whole world, I mean just about anywhere on the planet.

CHS
Do individuals have to pay any penalties or take early distributions in these self-directed accounts?

MR
No and No. There are no penalties for a self-directed retirement account that invests overseas and no distributions need to be taken.

For the increased number of boomers who are leaving the work force and considering an affordable retirement, living in another country may be their best option, at least for now, while the US Dollar is strong on a relative basis. Countless Americans don't just flock to the warm sands of Florida to escape cold winters and New York State's income tax, they retreat to Central and South America, the South Pacific, and other regions around the world where the cost of living may be more in line with their actual budget.

So ask yourself, "In US Dollar terms, do you believe you will be able to buy more or buy less in another country 10 years from now with your US Dollars?" For some answers to this it may be helpful to understand how the US Government views your individual retirement account or 401k in the first place.

In 1984, the Treasury Department proposed to eliminate Section 401(k) from the Internal Revenue Code. Although this proposal was never implemented, the Tax Reform Act of 1986 (TRA ’86) substantially tightened the rules governing 401(k) plans. Congress changed the rules because it thought that these plans did not provide adequately for rank-and-file employees and that these plans should be secondary, not primary, retirement plans. Source **

Retirement plans were intended to be a supplement, not a replacement for the role of the Social Security Administration. As a supplement, I believe if it came down to a choice between saving Social Security at the expense of individual retirement plans I'll side with the government winning this one. It is not a stretch to imagine a significant percentage of the $19 trillion in retirement savings pledged as a "fix it" for a "Social Security Crisis."

This is where self-directing your retirement plan into tangible assets such as real estate, agriculture, heavy equipment, or even a solid business, starts to shine. And don't think for a moment that these assets have to reside in the US. They don't.

Enter Treasury Regulation Sub-chapter A Sec.1.408-2 (b) This is simply the regulation that states that an individual retirement account must be a trust created or organized in the United States and that such trust must be maintained at all times as a domestic trust of the United States. It is not difficult to see that many will view this rule as also confining the assets invested in the retirement plan to inside the United States or US based financial institutions.

However, this is not so. Millions of Americans hold ownership stakes in foreign companies from BP to Sony inside their IRAs and while they may be traded as depository receipts or within international mutual funds, they are still foreign in origin.

Lost in the noise and confusion of the financial media is the important distinction between the "CUSTODIAN" of the retirement assets and the "INVESTOR" of those assets. These are two distinct and separate entities involved in your retirement plan, one dedicated to IRS Compliance while the other dedicated to investment opportunities. While you must adhere to the custodianship rules outlined in Sec. 1.408-2(b) in an IRA you can elect to be the "INVESTOR" of those assets, opening up a whole universe of choices outside of the US.

But don't expect the larger financial intermediaries to make you aware of this regulation. The more you believe that your investment choices are a privilege bestowed on you by the designated mutual fund company, the more you will avoid looking outside the NYSE or even US borders.

CHS
So by law you must use a US Based custodian who reports to the IRS, but the investments can exist outside of the US?

MR
Correct. Once you select a custodian the next thing is to select an experienced lawyer who specialises in Company Incorporation. You will have to establish a Limited Liability Company (LLC); this is where the foreign or domestic incorporation comes in. It is this company that invests your funds on behalf of you.

Think of it as starting your own Fidelity Investments but you are the only client and you are the only employee. This is the simplest way to explain it. Your company has rights and the ability to invest but there are restrictions to what your business can own.

CHS
What are those restrictions?

MR
There are restrictions such as you cannot live in any real estate you purchase, cannot buy antiques, and if you purchase a business, you cannot receive a salary from that business.
The following is a brief list of what you can invest in:

Real Estate
Most currencies
Stocks, bonds, mutual funds
Trust Deeds and Mortgage Notes
Limited Liability Corporations
Private Stock Offerings
Leases and Lease Options
Joint Ventures
U.S. Treasury Gold and Silver Coins
Gold Bullion
Heavy equipment
Private Loans/Notes
Collectibles and Life Insurance ARE PROHIBITED

And as I mentioned, if you incorporate outside of the US you then will have to pay corporate taxes in that country of incorporation. This may seem counter-productive, but paying 25% in taxes on 4% bond yields beats a tax free 1% CD yield any day, and many countries have low corporate or even no capital gains taxes.

Another thing you must be mindful of are "Prohibited Transactions." You need to be aware that any addition to the account in the form of labor must be viewed as a contribution. That is, everything, and to some degree, everyone who contributes to the accounts' existence and operation must be compensated by the plan and only the plan otherwise that contribution can be viewed as a deposit of funds for lack of a better description. Gaining compensation outside of the plan for the benefit of the plan can run you into trouble with the IRS.

For example, if you buy a rental and use a property manager, the property manager must be compensated by the plan and not by you. If the rental needs a roof, that roof must come from the plan and not outside of the plan as it would be deemed a contribution. This could also apply if you decide to put a coat of paint on the building or cut its lawn. Again, it is best to get acquainted with this program and the net is filled with people offering this service.

CHS
Since not everyone has migration to another country on their radar, what suggestions would you give to readers that are interested in learning more about self-directed retirement plans at home?

MR
My first piece of advice is to Google "Self Directed Retirement". I would also like to suggest that if one of your readers is a lawyer that specialises in incorporations and corporate law, that they contribute their insights to this discussion. US corporate law has some additional complexity via interstate commerce, but nothing monumental as far as I know.

Another thing they could do is speak with a financial/tax professional that recognizes self-directed accounts.

CHS
Can you see other benefits to incorporating in another country?

MR
An option that is gaining attention is to use the assets in your retirement account as proof of investment into another country thereby helping to qualify for residency in that country. Anyone who has considered emigrating from the US will see that many countries welcome Americans with open arms and free healthcare provided you invest and domicile your wealth locally. This could represent a very interesting form of capital flight as it is perfectly legal and at the end of the day, it is your money.

I'm currently liaising with Immigration NZ and a couple who plan to retire here and the process is very straightforward since the assets are treated as no different than a taxable account. As for other countries, it pays to get an answer direct from an official source to be certain.

In the end, if you have a long range plan for retirement that involves exposing yourself to as many options as possible, it may be best to start implementing that plan sooner rather than later.

Thank you, Michael, for a most interesting discussion.

For those interested in exploring options mentioned here, please consult a qualified financial/tax professional to learn more about your retirement account and retirement planning options.


Michael Reps resides in New Zealand and is Director of Expat Your Wallet. For more information email Mike at expat@yieldqwest.co.nz.

** Source: In its Committee report on TRA ’86, the U.S. Senate Committee on Finance (May 29, 1986) stated: “The committee is concerned that the rules relating to qualified [CODAs] under present law encourage employers to shift too large a portion of the share of the cost of retirement savings to employees. The committee is also concerned that the present-law nondiscrimination rules and permissible contribution levels permit significant contributions by highly compensated employees without comparable participation by rank-and-file employees. The committee recognizes that individual retirement savings play an important role in providing for the retirement income security of employees. The committee also believes that excessive reliance on individual retirement savings (relative to employer-provided retirement savings) can result in inadequate retirement income security for many rank and-file employees. In particular, the committee believes that qualified [CODAs] should be supplementary retirement savings arrangements for employees; such arrangements should not be the primary employer-maintained retirement plan.” See also Joint Committee on Taxation (May 4, 1987), which ascribes the same motivations to Congress as a whole. In addition, since 1986, state and local governments have not been allowed to offer 401(k) plans although existing governmental 401(k) plans were grandfathered (Tax Reform Act of 1986 § 1116 (P.L. 99-514)). 

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Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

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