Bitcoin Surges as Predicted

By Barry Elias

June 21, 2014

On April 11, 2014, I penned a piece for Newsmax suggesting a positive prognosis for bitcoin.

The previous day, the price of bitcoin closed at $360.84, according to Coindesk, a digital currency publication.

Within 5 days, the price rose nearly 50 percent.   On June 3, 2014, the price was $665.73, an 84 percent increase.

The current price of bitcoin is $588.52, a 63 percent gain in slightly more than two months.






The End of Federal Taxation as We Know It

By Barry Elias

The way we tax is obsolete.

It’s safe to say, in the century since the federal income tax was instated, the system has become broken.  The complex, voluminous tax code (included in the 70,000+ page CCH Standard Federal Tax Reporter) needs a revolutionary overhaul.

The current system doesn’t raise nearly enough money, Social Security is nearing insolvency, the administrative cost is exorbitant, and economic growth is actually impeded.

The purpose of the federal tax is to collect enough revenues to foot the government’s annual expenditures: nearly $3.5 trillion in fiscal year 2013.  Last year we only collected $2.8 trillion. The shortfall must be borrowed, and we pay interest on that debt.

Furthermore, we forgo tax revenue due to deductions, exclusions and other preferential tax treatments.  Last year alone, that amounted to $1 trillion. New types of transactions have spawned an underground economy that is valued at close to $2 trillion per annum, which goes completely unreported. Consider teenage babysitters, sales on eBay, the room above your garage that you rent to a college student, domestic help, sales of Bitcoin, lemonade stands, illegal drug deals….the list is endless.

We estimate an annual loss of $400 billion of tax revenue. In addition, Social Security taxes are only collected on the first $117,000 of earned income. The professional athlete earning $10 million, for example, pays no Social Security tax on nearly 99% of his pay.

To make matters worse, complying with the current arcane system (that looms as a nuisance on our calendars in the months leading up to April 15) has a hidden cost approaching $1 trillion annually. This includes tax preparation; advisers, attorneys and lobbyists; IRS agents; plus the time spent by all parties involved.  Nearly 6 billion hours are invested in this activity each year.

There’s also a negative environmental impact from cutting down forests to print forms, instruction manuals, etc. Tax compliance actually impedes economic growth. We can use those 6 billion hours more productively to grow the economy. Our focus should shift towards making value-added goods and services at more competitive prices.

To summarize, lost revenue and the cost to comply with the current federal tax system probably exceed $2.5 trillion. This is a big problem!

Big problems have been tackled at other times in our history. At the dawn of the 20th century, when the NY Central Railroad was forced to convert  from steam locomotive to electric trains, the $70 million cost nearly matched their $80 million of annual revenues. Nevertheless, management figured out a way to lay new tracks underground, while the railroad continued to operate. Incidentally, this investment created a huge, unexpected economic boom. As it turned out, Park Avenue was built over the tracks, permitting air rights to be leased to developers.

Herculean problems call for out-of-the-box measures. Our solution to the current tax conundrum is streamlined and elegant.  Instead of focusing on income, we propose capturing two flows:  money saved and money spent.

Revenues can be generated from both.  We believe that savings should be assessed at a lower rate than consumption, since a dollar saved generates more jobs and income for society than a dollar spent.

Savings in the form of cash deposits, bonds and equities total nearly $67 trillion (and that doesn’t include the $2 trillion underground economy).  Instead of reporting dividends, interest and capital gains, financial institutions would report an average of the total financial assets on hand over the course of the year. We assume that most people will not stash their cash under their mattress, as they would forgo a return on their money (and because it’s not safe).

Americans consume $11.8 trillion annually in goods and services, as reported by the Bureau of Economic Analysis.  We believe the consumption of essential products and services – such as food, housing, healthcare and education – should be assessed at a lower rate than luxury items (e.g. the purchase of a loaf of bread would be assessed at a lower rate than a yacht).

Here’s one example of how our method might work. We would assess $11.8 trillion in consumption at an average rate of 13.5 percent (less for essentials; more for luxury items), generating $1.6 trillion. We’d also assess $69 trillion of savings at 2.75 percent, generating $1.9 trillion. Together, $3.5 trillion would balance the federal budget.

Our plan eliminates all federal taxes: income, Social Security, Medicare, capital gains, dividends, interest, inheritance, and corporate profits.  Existing social programs will remain in place, including Social Security, Medicare, and welfare.

We believe our plan will have mass appeal.

The poorest will no longer pay 15 percent for Social Security and Medicare. Instead they’ll pay 2.75 percent on their savings and a small percentage on essential purchases.

The wealthy would no longer pay any of the above mentioned federal taxes. Expenditures on estate planning would be negligible. Wealth will be preserved, since the average annual return on investment will most likely exceed 2.75 percent.

The middle class would benefit from all of these proposals, including a shift from household spending on tax compliance to household spending on essentials.

Corporations will experience tax-free profits and lower costs of production, including tax-free labor and capital and severely reduced tax compliance expenditures.  As a result, there will be downward pressure on the price of goods and services offered to the masses.

On the government side, our strategy would virtually balance the budget and make Social Security more solvent.

Our simple method of assessment offers relatively low and stable rates.  This would allow us to focus on creating value-added products instead of  minimizing tax liability.

This environment will likely promote greater investment and net capital inflows, manifesting in greater employment, productivity, and economic growth. Liberals and conservatives alike believe my tax proposal is fair, effective and elegant in its simplicity.

The time has come to end federal taxation as we know it. _______________________________________________________

My wife Billie Elias provided valuable assistance with this piece.

An updated article of mine on this topic can be found here.


Boston Marathon Will Generate Long Term Economic Growth


Many people are focusing on the lost economic activity in the Boston area due to the tragic events over the past two weeks.  While the region has suffered in the short term, this incident may trigger extraordinary future economic growth.

The key driver of this growth will be the use of bionic limbs for amputees.  Dr. Hugh Herr, who heads the Biomechatronics research group at the MIT Media Lab, has been instrumental in developing bionic prostheses that provide extraordinary functionality.   As a double-amputee, Dr. Kerr can attest to the great strides in this area and how beneficial it can be to society.  He believes this technology will become extremely popular and useful in the future, especially given the recent incident at the Boston Marathon.

These bionic limbs are functioning more like our natural limbs and may actually surpass them in the future.  Dr. Herr receives periodic upgrades to his hardware and software, which enable him to continue his passion for rock climbing.  He anticipates the development of future limbs that will enable the user to feel their surroundings, such as sand on a beach versus water in a lake.  He is inspirational as someone who has transformed major liabilities into tremendous assets.  Several months ago, 60 Minutes featured a Department of Defense initiative called Revolutionary Prosthetics, in which artificial limbs are controlled by mere thought.

From an economic standpoint, the long term benefits heavily outweigh the short term expenditures, thereby providing a high return on investment for society.  These benefits include the reduction of secondary disabilities – such as joint arthritis and pain – less rehabilitative intervention, and a more productive, income generating population.  Greater income, lower healthcare costs and a better quality of life will enable a more healthful economic environment in the future.

LIBOR Rate Manipulation

Barclays Bank settles LIBOR manipulation probe.

Source:  St. Louis Federal Reserve Bank

The difference between the LIBOR rate and the OIS rate (Overnight Indexed Swap) represents the default risk of banks as perceived by the market.  That is,  LIBOR is the rate that banks will lend funds to other banks, while the OIS represents a nearly risk free investment.

Historically, this spread has been roughly 10 basis points (1/10 of 1%).  By September 2007 it was 1% – in October 2008 it reached 3.5%.

This suggests the LIBOR rate was severely under reported for many years.  It  permitted banks, such as AIG, to borrow funds at artificially low rates, thereby enhancing profits and transferring risk and losses to counterparties and taxpayers.

Given the extreme volatility of this rate spread, coordination among LIBOR participating banks may have occurred.

US Treasury Secretary Timothy Geithner suggests he learned of the LIBOR anomaly in late 2007 in his capacity as The New York Federal Reserve President.  However, it is not apparent that any action was taken to rectify the situation.

Recently, Barclays Bank agreed to pay $453 million to the US and UK to settle allegations that it manipulated interest rates.  Seven additional banks are currently under investigation.

Global Economy Will Remain Anemic

The global economy will take years to recover from the excess debt accumulated over the past few decades.

Currently, global debt/GDP (private and public) is nearly 300%.  Sustainable economic growth requires this figure to fall below 200%.  Moreover, monetary velocity (quantity of transactions per unit of currency) world-wide is below one.  Long term prospects will improve when this parameter is closer to 1.5.

Therefore, the world economy will remain anemic in the coming year or two.     Fiscal measures that promote long term investment are critical, since additional monetary intervention will have little return on investment at this point in the recovery cycle.

Healthcare Mandate Without Choice and Competition is Not Wise

The Patient Protection and Affordable Care Act (a.k.a. Obamacare) was ruled constitutional by the US Supreme  Court yesterday, based on the ability of the Congress to levy taxes.

Prior to its passage, the president repeatedly claimed this legislation did not contain a tax on the American people.  However, in arguing before the US Supreme Court, the administration claimed the opposite.  That is, the statute is  constitutional because it is a tax.

Notwithstanding this divergent rationale, the legislative policy is severely flawed in its methodology, despite the merits of the individual mandate.

The mandate has merit, since everyone is highly susceptible to requiring medical care.  Uncertainties in life can befall all, leaving individuals to demand healthcare – involuntarily – as a result of accidents and/or genetic anomalies.  Hence, individual responsibility is in order.  That is, contribute while you can, so it’s available when you can’t.

However, the policy is deficient in terms of the lack of funding, competition and choice.   As a result, healthcare expenditures and federal deficits will likely grow at a more rapid pace.

Based on the funding mechanism, many individuals will chose not to participate in the system, since the cost of care is 10-30 times more expensive than incurring the penalty.  As people require care, less money will be in the system to cover the needed services.

More importantly, this legislation reduces competition among healthcare  insurance companies and limits consumer choice.  Optimal economies of scale are realized when firms are permitted access to the entire market and individuals can select the products that best suit their needs at the time.  This law does not permit healthcare insurance firms to compete nationally, and consumers are precluded from selecting a high deductible, catastrophic plan with low annual premiums in lieu of a low deductible, comprehensive plan with high annual premiums. The latter also violates the president’s oft repeated pledge that you will be able to retain your current healthcare plan if you so choose.

In addition, the current legislation lacks meaningful tort reform that would reduce frivolous law suits.  Placing greater responsibility on the plaintiff to file a bona fide law suit could reduce healthcare expenditures that result from defensive medicine and over-utilizing  scarce resources.

This legislation is likely to create more problems than it solves.  Barring substantial changes, repeal may be warranted.




Genealogy and Economics

The data below from the US Census Bureau (Year 2000) indicate how US citizens describe their ancestral roots.  The largest segment (15.2%) are of Germanic descent while only 7.2% are self-described Americans.  The map suggests a majority of US counties possess a plurality of citizens with Germanic descent.

These genealogical data can provide useful economic and business applications.  Incorporating social media with these demographics will enhance targeted marketing, client acquisition and sales cycle optimization.

In addition, Genealogists may also find this information quite valuable in presenting detailed historical information to their clients.

Source:  US Census Bureau, 2000

Source: US Census Bureau, 2000