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  • Lobbying Power Of Union Financing

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    The Wall Street Journal recently published an article analyzing the actual amount of spending through nontraditional campaigning routes that unions have learned to capitalize on, typically leading to the majority support of the industry's political interests. The effectiveness of how unions lobby voters and politicians has gone somewhat unnoticed in the past due to the difficulty in tracking their total political expenditures.

    The reason it has been so hard to accurately track the amount of spending by unions is because the inconsistent nature of reporting standards across departments. Under the Federal Election Committee (FEC) guidelines, unions are only required to report direct federal and campaign spending donations. But under Labor Department reporting guidelines, unions are required to report a much larger array of political spending, ultimately painting a much clearer picture (see below).

    Teacher unions also report campaign spending under a variety of department guidelines, sometimes misguiding users of the official statements. Top organizations include the American Federation of Teachers and the National Education Association, who spent $33.5 million and $45.89 million, respectively, in 2011 to further their political interests (see below). The Wall Street Journal notedthat, "The two unions typically give to advocacy groups that have been involved in various civil rights struggles and that they think will turn out at the polls". These groups have quietly expanded their influence over the last decade through various political strategies, reifying the need for an unbiased overhaul of the current governing bodies.

    The Labor Department documents show the total amount spent on non-traditional political campaigning, like sponsoring union events, is the large majority of the group's efforts. As the chart below shows, union spending on political campaigns jumps significantly a month before the election. By rallying the support of members into action, they are able to impose numerous policy changes at the local, state, and federal level.

    The time has come to improve of our current political campaign regulators in order to achieve a higher level of democracy in our current political system. Just as high net-worth individuals leverage power through donations, unions also leverage their power through members to impose political interests. Accurate records of the amounts spent, and donations received, towards political lobbying should be unbiased and reflect the true expenditures across all regulatory bodies. Taxpayers deserve access to a nonpartisan resource to track political influences.

    Aug 17 12:45 PM | Link | Comment!
  • Death And Taxes

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    Below is a piece written by longtime friend and former portfolio manager Dr. Bob Patton. Dr. Patton spent 15 years managing money professionally and now trades for his own account. Prior to managing money, Dr. Patton was the Chair of Western Washington University's economics department. He holds two Phds, one in economics and one in divinity studies. Dr. Patton is also an accomplished boxer, helicopter pilot, and hunter.

    The federal tax code, which was 400 pages long in 1913, has swollen to about 70,000. Americans now spend 7.6 billion hours a year grappling with an incomprehensible tangle of deductions, loopholes and arcane reporting requirements. That is the equivalent of 3.8 million skilled workers toiling full-time, year-round, just to handle the paperwork rather than producing goods and services that improve quality of life in the U.S. By this measure, the tax-compliance industry is six times larger than car-making. An incredible 82 percent of taxpayers are so flummoxed that they pay for help. Some 60 percent hire an accountant or tax preparer, while another 22 percent use tax software. The IRS employs about 100,000 people burning through a budget of $300 billion dollars every year just to process the 240 million tax returns that are sent to them every year. A sales tax system would eliminate much of this unproductive effort and expense while stimulating the private sector to create hundreds of thousands of new domestic jobs in the U.S. Economy.

    INTRODUCTION

    On April 1, 2012, the United States claimed another first place accomplishment. We have assumed the first place position of having the highest corporate income tax rate in the world. Many will say great, sock it to those evil corporations. However, this reflects a pathetic understanding of the economics of taxes on businesses. The fact that everyone must come to understand is that businesses really don't pay any tax. They simply build the tax charged to them into the price of everything they sell to the consumer or they reduce wages or dividends. When you come to understand this, you realize that ultimately the consumer is the only entity that effectively pays tax revenue to government. However, most consumers do not realize that the price they pay for goods and services contains a lot of hidden tax. Politicians like to keep it this way so that voters do not have an accurate understanding of just how much government is costing them. One of the unintended consequences of this arrangement is the resulting incentive for businesses to take as much of their activity as possible overseas where they can even avoid the foreign Value Added Tax on everything exported back to U.S. or to other nations around the world. The unfortunate result is that millions of jobs that were once held by American workers have been exported overseas. Until our tax system is dramatically changed, American businesses will suffer from the unlevel playing field created by our own tax system. A progressive and graduated sales tax would fix this problem very quickly with several side benefits. All products imported from foreign companies would be assessed the same sales tax as products produced in the U.S. thus leveling the playing field. The number of tax returns mailed to the IRS would drop from 240 million to less than 30 million. Consequently, the IRS staff could be reduced by at least 90% and their counterparts among tax accountants, attorneys and accountants in private enterprise could be reduced by the same ratio. Tax cheating would be mostly eliminated while the taxpayer would be permanently freed from an incomprehensible tax code and the burden of filling a tax return every year.

    WHY IS OUR INCOME TAX SYSTEM SO TERRIBLE?

    The U.S. Income Tax Code has grown over a hundred years into one of the most incomprehensible documents this world has ever seen. Politicians and lobbyists have interacted over the years with bureaucrats in the Internal Revenue Service to create an out-of-control monster that no average person will ever have the slightest chance of understanding. The result is that income tax system has spawned a sizable industry aimed at helping taxpayers report their tax liability to our government. Some will buy special computer programs each year to assist in the preparation of the annual income tax return. Others march into their local professional tax preparer's office and pay out hundreds or even thousands of dollars to have their tax return prepared for them. All through the year leading up to tax season, individuals and businesses spend countless hours trying to keep track of the information that will be needed to file an income tax return. Then the professionals get involved and spend countless hours assisting in the actual reporting procedure. All of these hours and dollars absorbed by the record keeping and reporting process add absolutely nothing to the quality of life in this country. In fact, it would be quite easy to show that this process actually detracts from the quality of life in the U.S. If this time and money was invested in the production of goods and services that people need as they live out their lives, it should be obvious that the quality of life would be measurably improved.

    The income tax system is also used by criminals to steal tax refunds that are owed to honest taxpayers. It is reported that one out twelve taxpayers in Florida find that their tax refunds have been paid out to criminals sending in false tax returns before the real taxpayer has a chance to apply for their refund. This problem then will take many months of work by the taxpayer and the IRS before the issue is resolved. A sales tax system would eliminate this problem and would in fact eliminate the need for any tax refunds to any taxpayers.

    WHY IS INCOME TAX ON BUSINESSES PARTICULARLY BAD?

    The answer to this question requires that the reader understands that, in reality, businesses don't pay taxes. Taxes levied against business are always passed on to the consumer. The tax on business simply becomes another cost item incurred in the process of creating a product or service. There is only one source of dollars to pay for any cost item, including taxes that businesses incur in the course of delivering a product or service to their customers. That source is, of course, ultimately the customer who buys the product or service. So who really pays business taxes? It is the consumer. However, there is a very significant negative effect that results from assessing taxes against business activity. That is the taxes obviously increase the price at which products or services are sold. This is true of everything produced in the U.S. The problem is that it only affects the price of what is produced in the U.S. The price of everything produced in foreign countries is not increased by U.S. business taxes because the U.S. has no authority to tax foreign business activity. Products produced in foreign countries are normally impacted by the value added tax that is assessed by our trading partners overseas. The catch is that when the foreign businesses export their products to the U.S., their governments exempt this business activity from the value added tax. Therefore, products produced in foreign countries enter the U.S. free of the tax burden that impacts the price of everything produced in the U.S. The reader should recognize that business taxes in the U.S. could easily be described as a domestically imposed "tariff" on everything produced in the U.S. while everything produced outside of the U.S. is imported free of this domestically imposed "tariff". U.S. businesses are trying to compete with foreign businesses when the playing field is not level. This is at least part of the reason so many American jobs have been moved to overseas businesses. When our tax policy prevents domestic businesses from competing effectively with foreign competitors, our businesses either close down or move their business activities overseas. Either way the jobs disappear in the U.S. and reappear overseas. Our workforce becomes unemployed.

    AN EXAMPLE: The American consumer can buy a Ford sedan produced in the U.S. for somewhere around $25,000, depending on options. They could also buy a Toyota sedan for about the same price. However, the Ford will have $3,000 to $5,000 of hidden business taxes built into the price while the Toyota was exported to the U.S. free of the value added tax in Japan. Therefore, Toyota can add enough extra quality in their product to attract many American consumers over the Ford. Toyota also would have the option of selling their product at a lower price because they do not have the tax burden to cover when they price their product. The result is that many Americans buy a Toyota rather than a Ford. People who once built Fords are unemployed because the American consumer recognizes a better value in the Toyota. For this reason relatively more Toyotas are being built and relatively fewer Fords are being built. This effect is entirely due to the U.S. tax system. Just think, if the Ford did not have the $3,000 to $5,000 tax burden added to the price, Ford would not only sell more cars in the U.S. but they would also sell more of their cars in foreign markets because of the lower price. Then some of the lost jobs would come back to America.

    WHY DO OUR POLITICIANS CONTINUE TO KEEP BAD TAX POLICY IN PLACE?

    There are at least two reasons why politicians like our present tax system. The most significant reason is that consumers never see most of the tax they pay because these taxes are hidden in the price of things they buy. This will keep most consumers unaware of the actual cost of government. When consumers don't see the taxes they are paying, they are not likely to complain or hold the politicians accountable for the enormous sums of money they are taking away from the consumer and spending in what is often wasteful or low priority agendas that fail to move this country forward. When politicians are not held accountable for their folly, it is much easier for them to get reelected and reelection is always the number one objective of the politician.

    A second reason that politicians like the present tax system is that it requires hundreds of thousands of workers to administer the system. Many of these workers are members of one or more public employee unions who give generously to the politician's reelection fund. The unions also encourage their members to vote for the politicians who then will help to keep the union employment growing larger every year. Thus the union leaders receive more union dues every year and they can use the money to increase their salaries and give more to the right politicians reelection fund. It works better than the most sophisticated money-laundering scheme. There are also the hundreds of thousands of tax professionals whose jobs depend on the continuation of the present tax policy. At least some percentage of these will continue to be loyal to the politicians who are responsible for creating the industry that provides them their job.

    CAN A FEDERAL SALES TAX FIX THE PROBLEMS WITH THE PRESENT TAX SYSTEM?

    A Federal retail sales tax can be designed in a manner that would collect the same amount of tax, both hidden and visible, from consumers as they are presently paying. The immediate unthinking response that many will express at this point is that a sales tax would be regressive. However, I would challenge these people with the task of making the new sales tax system at least as progressive as the present income tax system. When they start to actually think about it, they would come up with several ideas. Some of these might be no sales tax on food, medical services, gasoline or the first $5,000 of a vehicle purchase. However the sales tax applied to a vehicle purchase would apply to both vehicles produced in the U.S. and vehicles produced in foreign countries. That would give American producers a level playing field for the first time in decades.

    The individual taxpayer would no longer be required to spend many hours and/or many dollars reporting their income tax liability each year. They in fact would have no time or money invested in the reporting of tax obligations because the tax would be collected at the point of sale when they purchased items subject to the sales tax. Under a sales tax system there would be more than two hundred million fewer tax returns being sent to the IRS each year. This means that 90% of the IRS staff could be released to go to work building Fords, or some other useful product. The same would be true for the hundreds of thousands of tax professionals who would no longer be needed to process tax returns for their clients. This would eliminate an enormous amount of inefficiency that exists in our present tax system.

    Under a sales tax system, tax cheating would be substantially eliminated. People who do not report all their income would now pay the same as everyone else when they spent their income. People who take payments under the table would pay the same sales tax as the worker whose income is presently tracked through the payroll tax deduction. People who gain income illegally would also pay the sales tax every time they spend the illegal money. The billions of dollars lost to tax cheaters every year would no longer be lost to government and it would cost government nothing to fix this problem.

    A sales tax system would have the added benefit of tending to encourage saving among consumers. To the extent that it would cause more people to hold back on their consumption patterns to a more reasonable level, we would have fewer people going through bankruptcy proceedings or needing government assistance to meet their living requirements. The sales tax system would help to instill a higher level of personal responsibility among American consumers.

    SUMMARY

    It is way past time in America to overhaul the tax system used to finance government activity. A national sales tax makes a great deal of sense. This still would not release our politicians from the responsibility to reduce government spending and reduce the size and scope of government. A government that spends in excess of 18 to 20 percent of its gross domestic product is a government that needs to go on a serious weight reduction program.

    Aug 17 12:31 PM | Link | Comment!
  • Chinese Spending On Luxury Goods Falls

    Sales of luxury goods throughout China have started to fall upon growing concerns of a hard economic landing. Government officials have recently released data indicating a slowing economydue to a decrease in exports to Europe and because of the "slower than expected" global recovery. Consumers of luxury goods (high net-worth individuals) are typically more aware of the long-term risks that could arise from an economic slow down. Industry sources have noticed a change in spending behavior as this consumer group significantly cuts luxury purchases in anticipation of such uncertainty.

    The Asia-Pacific region has remained the hotbed of growth for the luxury goods market over the past decade. As economic freedoms throughout China slowly increase, consumer spending on luxury goods have followed (see graph below). The Boston Consulting Group forecasts global sales of luxury goods to grow annually at 7% through 2014, with a downside estimate of 3% (given GDP decreases in both developed & emerging economies). The growth that has helped to prop up the floundering recovery is now dissipating over concerns that China's economy has started its slow down.


    Industry wide fears have been raised over this decreased demand, due to the high concentration of sales revenue generated specifically from the Asia region. Burberry (BURBY) recently reported its first quarter sales growth of 16% for the Asia-Pacific region, significantly down from the 67% sales growth in the first quarter of 2011. Similar changes in the rate of sales growth for luxury brands are expected to continue as the Euro-crisis deepens.

    The repercussions from a decrease in luxury good sales will not only impact China's growth but also add stress to the floundering European and American recoveries. It will be interesting to see how the government manages slowing growth as China transitions from a low to medium income economy. At least policy decisions will made faster given the fact that a majority of Chinese companies are state-owned.

    **More information on Chinese Censorship, Market Manipulation, Propaganda, and Strategy.

    Aug 17 12:28 PM | Link | Comment!
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