Tag Archives: tax

The Panama Papers

713a3bf3b4f11189c343857ff640f697There is much to be learned from the famous “Panama Papers,” both in their content and in the manner of their disclosure.  The superficial reading, widely published, is that lots of bad people used a certain Panamanian law firm to help hide their ill-gotten wealth.

Naturally, we presume that everyone with a foreign bank account is at least engaging in criminal tax evasion, and probably stole the money to begin with.  The presumed criminals in this case include, not Russian President Putin himself, but his “close associates.”

One theory is that the attempt to smear Mr. Putin was so amateurish that it must have been planned, counterintuitively, by Russian intelligence.

Bank accounts not readily available for confiscation (remember Cyprus) are always in “offshore tax havens,” which has that wonderful Pirates of the Caribbean ring to it.  The mere fact of Mitt Romney owning a blind trust in the Caymans was enough to smear him as a tax dodging fat cat.  A blind trust, hello!  Does anybody on CNN even know what that is?

Here is an editorial in the Wall Street Journal reminding us that, for many of the nationalities featured in los papeles, honest people move their money offshore because their government is corrupt.  Simon Black takes this a step further, warning ordinary Americans to take their money offshore.

Last year, the US government stole more money and private property from its citizens through civil asset forfeiture than all the thieves and felons in the country combined.

The legal issue in each case is whether any tax laws were broken.  The more interesting issue, especially for public figures, is where they obtained the money in the first place.  This may also involve illegal, or at least suspicious, activity.

Oddly, few Western politicians have been implicated.  This could be the result of Western media controlling the disclosures, or our own crooks could simply be using a different law firm.

Some have suggested that this firm was targeted specifically because of its client list.  It is a referral business, after all.  One theory is that the attempt to smear Mr. Putin was so amateurish that it must have been planned, counterintuitively, by Russian intelligence – a “false flag leak,” if you will.

The one indisputable victim here is Panama itself.  The EU and the IMF have long wanted to crack down on Panama as a “tax haven,” as they have previously cracked down on Switzerland.  Financier George Soros supports global tax regulation, and he also supports the agency that broke the story, the ICIJ.

You know this was the motive because the first thing printed in The Economist was a call for – get this – a global registry of beneficial owners.  Do you really think the global tax police will be looking for their own masters’ money?  No, no, no, querido.  They will be looking for your money.

See also:  New World Currency


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Demonize Sloppy Accounting

The Economist describes Bernie Sanders’ candidacy as the biggest-ever student prank. It was certainly amusing watching his interview with Bill Maher, wherein both tried heroically to “undemonize” socialism. Regular readers know that Jeremiah takes a nuanced view of socialism, allowing for redistribution but debunking the statist agenda.

Mr. Maher made the point that Social Security, Medicare, et alia are “socialist” programs – and we like them, so socialism is groovy, right? Well, no. These programs have epic problems, which could be fixed using free market methods. See How to Control Health Costs, for example.


The important thing is to talk about specific policies, regardless of the demonic label, and this is where Sen. Sanders went badly wrong. He repeatedly used the charlatan’s formula, “we can pay for X by taxing Y,” where X is a free pony and Y is something we don’t understand. Like, we can pay for free college by taxing speculation on Wall Street. Yes, he actually said that. Cue cheers from the college kids (except the finance majors).

The right way to analyze this proposal is by splitting it, just as you would split a transaction in double entry accounting. If free college is a good idea, then the funding side can be considered separately. If taxing “speculation” is feasible, then we should do it anyway and reduce the deficit.

Free college might not be a good idea, if costs continue to rise and quality continues to fall, as they have been doing under the current subsidized (but not free) system. The likeliest outcome is that employers will respect a state college degree even less than they do today, if such a thing is possible. This is not to pick on free college, but merely to show that universal free stuff is not always a good idea.

Turning to the funding side, we should definitely tax those bad speculators on Wall Street. They’re the folks who make the price of heating oil go up in the winter. We should put a big fat Tobin Tax on them. What could go wrong?


Filed under Economy


The Bernie Sanders pledge is going around the internet in various forms. Judging by the reaction, promising free stuff has not lost its appeal. To our unending astonishment, Americans still cannot ask even the most basic questions:

  • Which trade policies sent American jobs to China, and how do you propose to fix them?
  • Is there really pay inequity and, if so, what in hell is the EEOC doing?
  • Do “the rich” have enough money to pay for all our roads, schools, and hospitals?

We have no doubt that Mr. Sanders is, quite sincerely, just as ignorant of basic economics as his young supporters. Go ahead and elect him, kids. You will live to see the results.


See also: The People’s Ice Cream

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The People’s Capitalism

President Obama’s proposal to raise the capital gains tax is a good one, and overdue. No, you have not been redirected to Bloomberg – where the president never has a bad idea. This is about restoring the balance to corporate balance sheets. In fact, the tax disparity may already have damaged American capitalism beyond repair.

Stock buybacks boosted earnings per share by 4% or more on 99 companies in the S&P 500, simply by lowering the number of shares outstanding.

Absent tax policy, companies and shareholders should be indifferent to capital gains. If the company has one dollar per share to spend on dividends, and keeps it instead, then the value of the company will increase. Each shareholder can then take his dollar as a capital gain, at such time as it suits him to cash out.

The argument for a lower tax on capital gains is that, with a six or twelve month holding period, it encourages long term investment. Unfortunately, share prices are a lot easier to manipulate than dividends. Companies can borrow, for example, and use tax deductible debt to buy back shares.

Buybacks only make sense if the company has no prospects that will return more than its cost of capital – which, with Fed funds at zero, is not good news. When we look back on this one, it will be called the “buyback bubble.” Along with the capital gains preference, the buyback bubble is abetted by a high corporate tax rate, the tax deduction for interest, and stock based compensation for executives.

Apple is one of the many corporations that, rather than dip into its cash and take a tax hit, took out debt instead to fund a big stock buyback and dividend program.

President Obama should follow up with a proposal to end the tax preference for debt. Ironically, he has proposed a tax on bank assets – which the banks would not be holding if tax and monetary policy had not overstimulated corporate borrowing in the first place.

One good way to end the tax preference for debt would be to dramatically reduce the corporate tax rate. Everyone knows that corporate earnings are taxed twice – once, as income to the company, and again as income to the investor. Less well known is that this tax is regressive.

Let’s say Alice and Bob both own shares in the company and the company pays dividends. Alice, a wealthy investor, will pay tax on her dividends at a marginal rate of 39%. Bob, a working man, will pay 15%, but only after the company has paid its 39% – money that would have gone into his dividend. On the underlying corporate earnings, Alice and Bob are taxed at the same rate.

Corp Tax

So, raising the cap gains tax is a good first step. Additional steps are:

  • End the cap gains preference entirely, taxing all market returns as income.
  • End deductibility of interest – all interest, starting with corporate debt.
  • Reduce the corporate tax rate, so more income flows to personal returns.
  • Raise interest rates.
  • Crack down on HFT and other market manipulators.

These are not anti-capitalist reforms at all. On the contrary, they remove artificial preferences that have distorted our stock market. For example, we have the world’s highest corporate tax rate. Slashing it would repatriate $1.5 trillion, and make America more attractive for jobs and investment. We could make up the lost revenue through progressive taxes on the shareholders, not the companies.

In the old days, ordinary people could invest their savings and earn a good return. Stocks paid dividends, and bonds paid a decent yield. Marx said that “the people should own the means of production,” but capitalism actually made it possible. Americans would cherish their little slice of IBM or General Motors – and they could retire on it.

Broad based participation in the markets would be the best, or at least a partial, remedy for inequality. With an emphasis on unfakeable cash dividends, it would also restore the market’s proper job of allocating capital. The president’s policy objective should be to remove all the distortions – arising from tax policy, monetary policy, and failed regulation – which make the markets unsafe for ordinary people.

See also: Blame Canada

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Blame Canada

We did a double take when we read about Burger King’s tax inversion to Canada. Canada? Burger King is majority owned by Brazilian private equity, so they’re not exactly “corporate deserters,” to use the president’s phrase. They will also enjoy revenue synergy with Tim Horton. Plenty of financial analysis is on FT, as here. So, when did Canada become a tax haven?

Jeremiah is always coaching you to find the truth behind the news, and this is a great example. America has the world’s highest corporate tax rate, at 35%. If you know this, you also know the headline figure is contested. Many pundits say that, once you back out various credits and deductions, the rate is closer to 23%. If this were true, companies would not be leaving the country. See chart from Bloomberg, below.


The Brazilian capitalists will have done their own tax planning. KPMG reckons that the total tax rate in America is 40%, versus 26% in Canada. To be fair, the tax apologists may be right about certain companies which are able to enjoy the gamut of preferential tax breaks. GE famously paid no tax at all in 2010.

Over the last decade, G.E. has spent tens of millions of dollars to push for changes in tax law, from more generous depreciation schedules on jet engines to “green energy” credits for its wind turbines.

The point is that if you “follow the money,” you can determine which pundits are liars, and which corporations have Washington skills.


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Taxation without Representation

Prior to the Revenue Act of 1913, the federal government was supported pro rata by the states. States are apportioned seats in the House of Representatives according to population, and this was also their share of the federal budget. Congress could levy direct taxes only in proportion to population. It’s easy to see the wisdom in this approach, plus it didn’t require a huge federal agency.

Tax by StateRepresentation was linked to cost sharing. Without this link, there would be a risk that populous states could pass laws shifting the federal tax burden to small, rich ones.

We wanted to see what the House would look like if the original rule were still in effect, so we downloaded the IRS data book and reallocated the seats according to each state’s tax payments.

Federal tax collection, all types, net of refunds, was roughly $2 trillion for 2012. The table shows the current allocation of 435 seats, by population, and our reallocation by net tax.

The third column shows the number of seats by which each state is over (or under) represented relative to the old rule. Another way to think of under-representation is to say that the state is overtaxed relative to its voting power.

Sure enough, richer (though not necessarily smaller) states are underrepresented and poorer ones are overrepresented. Could this result in a legislative bias? Almost certainly.

The top twenty-three states in this list enjoy a voting majority in the House. They have an incentive always to vote for higher income taxes – because the burden will fall disproportionately on other states.

See also: Easy Constitution

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The HFT Tobin Tax

flash-boys-jkt_1Michael Lewis has made a splash with his latest book, Flash Boys, and his declaration that the stock market is rigged. Jeremiah is shocked – shocked! Cue Claude Rains. Wall Street has been in various stages of denial about High Frequency Trading (HFT) since the flash crash. Those not in denial include Charlie Munger, Mark Cuban, Eric Hunsader, and Brad Katsuyama.

“It [HFT] is legalized front-running. I think it’s basically evil …” Charlie Munger

Of all the ink spilled since the 60 Minutes piece, we like the Vanity Fair review best. For sheer entertainment, you should watch the head of BATS come unglued on CNBC. Mainstream broker Charles Schwab is here.

Here is a quick guide to how HFT works. Let’s say you want to buy 100 shares of Exxon for your retirement fund, at $98.50 per share. An HFT bot detects your order and runs in front of it, buying the shares for $98.50. Then, it spams the exchange with bogus orders for $98.51. Your broker’s system, much slower, blindly buys the shares for $98.51. A second later, they’re back to $98.50.

In the old days, this was called “painting the tape.” It has been illegal since 1934. No one has been prosecuted, though, because supposedly the SEC can’t detect it. Some people say this is a cost of doing business, a small price to pay for added liquidity and smaller spreads. Research debunking all of that starts here, on Nanex. Jeremiah is reconsidering his views on the death penalty.

It is true that if you’re going to hold your Exxon until retirement, the extra penny doesn’t matter much. It’s just like a little tax. That’s the funny part.

Socialists at the IMF have been clamoring for a financial transactions tax, named for economist James Tobin. This would be a win-win from their perspective, funding bankrupt governments, and punishing capitalism. So, far no one has noticed the irony. There is already a tax on financial transactions.

See also: Bob Pisani

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