Category Archives: microeconomics

We Can End Federal Taxation as We Know It

By Barry Elias | Friday, 18 Dec 2015 06:56 AM

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The way we tax is obsolete.

More than a century has passed since the inception of the federal income tax. It’s safe to say, this system has completely broken down. The complex, voluminous tax code — included in the 70,000-plus 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.

We need tax reform that will increase investment, productivity, employment, income, purchasing power, and economic growth, while keeping inflation and tax compliance costs low. I believe my tax plan will achieve all of these objectives.

The purpose of the federal tax is to collect enough revenues to pay for the government’s annual expenditures. We spent nearly $3.7 trillion in this fiscal year 2015, but only collected about $3.2 trillion, leaving a shortfall of nearly $500 billion, which must be borrowed, and we pay interest on this debt.

Furthermore, we forgo tax revenue due to deductions, exclusions and other preferential tax treatments. Last year alone, that amounted to roughly $1.2 trillion. New types of transactions have spawned an underground economy that is valued at close to $2 trillion per annum, which goes completely unreported. Included in this figure are transactions that occur on eBay and Airbnb; Bitcoin trading; illegal drug trafficking and distribution; domestic assistance; babysitter services; and lemonade stand revenue: The list is endless.

Due to the underground economy, the U. S. Treasury loses nearly $400 billion of tax revenue every year. In addition, social security taxes are only collected on the first $118,500 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 – one that looms large as a nuisance on our calendars in the months leading up to April 15 – has a hidden cost totaling hundreds of billions of dollars each year. This expense includes tax preparation professionals, financial advisers, estate planners, attorneys, lobbyists, Internal Revenue

Service agents, and the time spent by all parties involved. Nearly 6 billion hours are invested in this activity each year.

Tax compliance actually impedes economic growth. We can use the savings and 6 billion hours of time more productively to grow the economy. Our focus should shift towards making value-added goods and services at more competitive prices, rather than complying with an ineffective and inefficient tax code. The environment has also been harmed as we destroy forests to accommodate the massive printing of forms, manuals and instruction booklets.

Lost revenue and the cost to comply with the current federal tax system probably exceed $2 trillion. This is an extraordinary problem that yearns for a substantial solution.

Huge issues 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.

My solution to the current tax conundrum is streamlined and elegant. Instead of taxing monetary inflows, such as income, I propose assessing what is done with the money: it is either saved or spent, and we can derive revenue from both to balance our annual budget.

This plan will minimize tax rates and administrative costs, while maximizing the tax base and transparency. It will also increase investment, productivity, employment, income, purchasing power, and economic growth over the long term for the general population, while keeping a lid on inflation.

My proposal will eliminate all current forms of federal taxation. These taxes include the following: income, social security, Medicare, disability, interest, dividends, capital gains, gifts, inheritances, and corporate profits.

They would be replaced by a tax on savings and consumption. Savings will be assessed at a lower rate than consumption, since a dollar saved generates significantly more jobs and income for society than a dollar spent.

The savings that are assessed would include only liquid financial assets, such as stocks, bonds and cash. These products typically involve the trading of existing assets or the restructuring or retirement of existing debt, instead of the creation of new assets. Too often, financial assets are a method for transferring wealth rather than creating value.

Hence, these savings need to be subject to tax, albeit at a much lower rate than that for consumption.

Excluded from these savings would be direct capital investment, since this activity generates strong employment and income gains. Physical land and buildings would also be excluded due to strong productivity potential, and a low level of liquidity, which might cause extreme market volatility in the event of strong selling pressure to meet tax obligations.

This proposal would balance the federal budget at current spending levels, preserving key social programs like social security, Medicare, disability, Medicaid, food stamps, other welfare programs, and the earned income tax credit, while maintaining a strong defense and homeland security apparatus.

Savings in the form of equities, bonds and cash for individuals, corporations and tax-exempt organizations total nearly $189 trillion, according to the Federal Reserve.

From this amount, the following liquid financial assets would be excluded from taxation:

  • wages and salaries, or $7.9 trillion;
  • $100,000 for a family of three, or $10 trillion;
  • retirement funds, or $25.7 trillion;
  • education IRAs and 529 plans, or $250 billion;
  • direct investment for capital expenditures, or $3.6 trillion (20 percent of GDP);
  • and tax-exempt organizations, or $4 trillion, for a total $50 trillion.

The net taxable amount after exclusions would approach $139 trillion. A savings tax rate of 2 percent on this figure would raise approximately $2.8 trillion.

Instead of reporting dividends, interest and capital gains, financial institutions would report an average daily balance of liquid financial assets on hand over the course of the year — to minimize or eliminate tax arbitrage opportunities — and send the tax directly to the federal government, another cost saver for the American people. I assume most people will not stash much cash under a mattress, since they would forgo a return on their money, and it’s not a safe methodology.

Americans consume about $12.4 trillion annually in goods and services, according to the Bureau of Economic Analysis. Taxing consumption at 10 percent would raise about $1.2 trillion. An annual tax refund of $3,000 would be provided to each family of three to offset the first $30,000 of essential consumption expenditures, costing $300 billion each year.

Therefore, the total revenue raised would be around $4 trillion: $2.8 trillion from savings and $1.2 trillion from consumption. These revenues would offset the current $3.7 trillion annual budget plus the $300 billion yearly consumption refund.

To generate these tax rates, we divide the tax revenue by the pre-tax amounts for both savings and consumption. That is, a 10 percent consumption tax on a $1 (pre-tax) retail item would generate 10 cents of tax revenue, resulting in a post-tax amount of $1.10 ($1 plus 10 cents).

The Fair Tax proposal, which was presented to Congress in the late 1990s, would divide the 10 cent tax revenue by the post-tax amount of $1.10, to arrive at a consumption tax rate of 9.1 percent. By using the post-tax amounts, as used in the Fair Tax model, the tax rates for my plan would be less than what I have stated: 1.96 percent for savings (instead 2 percent) and 9.1 percent for consumption (instead of 10 percent).

The fair tax proposal would subject consumption to a pre-tax rate of 30 percent (10 percent in my plan) and a post-tax rate of 23 percent (9.1 percent in my plan). The Fair Tax plan does not include a savings tax, but does eliminate all existing federal taxes.

In my view, the Fair Tax plan is far too regressive. It hits the poor and middle class hardest, since they consume a much greater percentage of their income and wealth, as compared with those in the upper economic strata.

I believe my plan is fairer in this regard, and will have mass appeal.

The poorest would no longer pay 15 percent for social security and Medicare as they do today; they would likely pay no other federal taxes; and they would still have access to Medicaid, food stamps, other welfare programs, and the earned income tax credit.

The wealthy would no longer pay any of the current federal taxes, including those on income, payroll, interest, dividends, capital gains, gifts, and inheritance. Expenditures on estate planning would be negligible, and wealth will be preserved, since the average annual return on investment will most likely exceed 2 percent.

The middle class would benefit from all of these proposals, including the participation in the earned income tax credit program and a reduction in tax compliance expenditures.

These benefits and savings can then be directed toward the consumption of essential goods and services, such as food, housing, clothing, healthcare, and education.

Corporations will experience tax-free profits and dividends; lower costs of production, including tax-free labor and capital; and severely reduced tax compliance expenditures. As a result, there would be downward pressure on the price of goods and services produced, which would increase purchasing power for the masses.

On the government side, the strategy would virtually balance the federal budget at current spending levels and make social security and Medicare more solvent.

This simple method would assess the most money at the lowest rate with the least cost and most visibility. This transparency would ensure that virtually all individuals would feel the impact of any tax rate increase immediately, resulting in a call for justification or reform. This check and balance would likely keep the rates low and stable over the long term.

Today, special interest tax benefits are visible to a very select few, resulting in higher tax rates and tax bases for others to offset the lost revenue to the government. This system would also allow us to focus more on the creation of value-added products and services instead of on minimizing the tax liability.

By excluding labor and capital from taxation, employment, investment and productivity will rise, generating greater income, stronger purchasing power, and more robust and sustainable economic growth, while keeping inflation in check.

Low tax rates will likely increase net capital inflows from overseas, including some of the more than $22 trillion of U.S. financial assets that reside abroad, as well as new foreign assets. If these net inflows materialize, tax rates can be lowered while maintaining a balanced federal budget. Moreover, reductions in government spending would allow rates to fall further.

My tax proposal is seen as fair, effective and elegant in its simplicity by a large swath of the political spectrum, including liberals and conservatives. The time has come to end federal taxation as we know it.

My wife, Billie Elias, contributed significantly to this article.

Barry Elias is an economic policy analyst. To read more from him, CLICK HERE NOW.

© 2015 Newsmax Finance. All rights reserved.

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Barclays Gets Washed Up in Dark Pools and High Frequency Trading

By Barry Elias | Friday, 30 Oct 2015 07:02 AM

Barclays Bank seems like it is next in line to settle with the authorities regarding its dark pool operations.

In recent years, the Securities and Exchange Commission (SEC) and the New York State Attorney General (NYSAG) have focused on the disruptive nature of dark pools and high frequency trading: especially when used in tandem, as the authorities allege to be the case with Barclays Bank. The SEC and NYSAG claim Barclays misled its clients into believing high frequency traders would be less active in their LX dark pool trading venue.

Dark pools are essentially private, anonymous, off-exchange and opaque venues that permit the trading of exchange-listed securities. This structure helps camouflage the trading strategies of large financial institutions, such as mutual funds, pension funds, hedge funds, and insurance funds to afford them optimal profits or minimal losses. These venues are lightly regulated, require less public disclosure, do not carry the same protective margin requirements as the public exchange marketplaces, and allow banks to forego paying fees to exchanges for trade execution.

Dark pool trading as a percentage of total trading volume more than tripled from 4 percent in early 2008 to nearly 14 percent by the end of 2011, according to Rosenblatt Securities. Haoxiang Zhu, a financial economist at the MIT Sloan School of Management and the author of a new paper in the Review of Financial Studies, cites a study in which 71 percent of financial professionals believe dark pools are “somewhat” or “very” problematic in establishing stock prices.

Despite denying any wrongdoing and fighting this case, Barclays is in serious discussions to pay a fine of $65 million.

Thus far, two firms have agreed to pay fines related to this activity: $14 million by UBS Group and $20.3 million by Investment Technology Group, which has admitted to wrongdoing in its case. A third, Credit Suisse, has a planned agreement to pay an $85 million fine.

To evade recent proposals that would regulate and undermine dark pool trading, some U.S. banks are conducting their derivative trades through non-U.S. subsidiaries that do not have explicit guarantees from the U.S. parent.

The SEC and other regulatory bodies need to keep the playing field level for all, and where possible, prosecute individuals as a more effect deterrent.

© 2015 Newsmax Finance. All rights reserved.

Too Big to Jail Is Being Tested by US LIBOR Trial

Friday, 16 Oct 2015 07:27 AM

Dollar banknotes, handcuffs and judge's gavel isolated on white

Financial behemoths have paid handsome penalties to settle criminal and civil charges related to manipulation of the LIBOR. Now American citizens may be in jeopardy, thereby disrupting the implication that bank employees are “too big to jail.”

In recent years, more than $5 billion have been ponied up by several financial institutions for these transgressions: $2.5 billion from Deutsch Bank, $1.5 billion from UBS, $450 million from Barclays, and $325 million from Rabobank. Other perpetrators include Citigroup, The Royal Bank of Scotland, JP Morgan, Lloyds, and ICAP.

LIBOR, or the London Interbank Offered Rate, is the interest rate paid by banks to borrow funds from other banks. It represents the average lending rate offered by the 16 participating banks. These offers are submitted daily to the British Bankers’ Association for five currencies and 7 borrowing periods, spanning overnight to one year loans. Other lenders, including financial institutions, mortgage banks, and credit card companies set their rates relative to these. It is estimated that $350 trillion of derivatives and other financial products are based on the LIBOR.

The Justice Department issued a memo last month that prioritizes the investigation of employees for financial malfeasance before seeking settlement with corporations. In an important test for U.S. prosecutors, two Rabobank employees are now being tried in a Manhattan federal court for manipulating LIBOR in order to benefit other Rabobank traders’ trading positions that were tied to the LIBOR. The traders on trial are Anthony Conti, a senior U.S. dollar trader, and Anthony Allen, a former global head of liquidity and finance, and supervisor of Rabobank’s Libor submitters, including Mr. Conti. They are alleged to have conspired to rig the rate on or about May 2006 through early 2011.

Thirteen individuals have been charged thus far in the U.S. in relation to the LIBOR investigation. While several defendants have pleaded guilty, including three other former Rabobank traders, none have gone to trial yet. Six former brokers accused of rigging LIBOR are currently on trial in the U.K. This comes on the heels of Tom Hayes’ conviction in London several months ago. He was a former UBS and Citigroup trader sentenced to 14 years for LIBOR manipulation.

Former Federal Reserve Chairman Ben Bernanke believes some Wall Street executives deserve jail time for their roles in the financial crisis, since individuals, not abstract firms, committed these crimes. He lays the blame with the Department of Justice and others who are responsible for enforcing the laws of our country.

Wide swaths of the political spectrum are extremely dismayed with the way the financial industry operates. In the recent debate, democratic presidential candidate Bernie Sanders claimed the banking business model is one predicated on “fraud.” And republican presidential candidate Donald Trump believes too many in the financial industry do not pay their fair share of taxes.

The maximum tax rate for capital gains on financial products is 23.8 percent, while that for ordinary income is 39.6 percent. Further, unlike ordinary income, capital gains are not subjected to social security taxes of 12.4 percent, which is shared equally by the employee and employer.

The only effective deterrent to financial misdeeds is the possibility of personal punishment.

© 2015 Newsmax Finance. All rights reserved.

Banks Bank on Saving Billions Using Bitcoin Blockchain

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By Barry Elias | Friday, 25 Sep 2015 09:36 AM

Banks are investing millions of dollars in the development of the bitcoin blockchain technology in the hopes of saving billions of dollars down the road.

Nine investment banks are collaborating with start-up R3CEV, a New York-based group of trading and technology executives, to develop governing standards and procedures to implement a more effective and efficient settlement system for asset movements between counterparties. They have invested several millions of dollars in seed capital with R3CEV thus far for the research, experimentation and design of prototypes.

The blockchain methodology is viewed as an instant, real time update of payment ledgers in multiple locations without a single, centralized authority overseeing the process. Banks, financial exchanges, and settlement clearinghouses are exploring how to harness this technology for the automatic execution of contracts that could potentially save billions of dollars in bank operational expenditures.

The nine investment banks are Goldman Sachs, JPMorgan, Credit Suisse, Barclays, Commonwealth Bank of Australia, State Street, RBS, BBVA, and UBS. Many banks, including Barclays and UBS, are working toward their own blockchain model or partnering with other start-ups, as a way to hedge their bets and align with the best possible option in the future.

Advocates of this industry collaboration point to the successes of other ventures such as the Depository Trust Clearing Corporation, to clear trades for corporate stocks and bonds, municipal bonds, and money market instruments; the CLS, to clear funds for global currency trades; and the Society for Worldwide Interbank Financial Telecommunication (SWIFT), a global financial messaging system.

Circle Internet Financial recently became the first firm to be issued a BitLicense by the New York Department of Financial Services (DFS), permitting it to offer digital-currency services in New York. The company was founded two years ago and backed by Goldman Sachs.

The DFS said 22 firms applied for the license, including CoinSetter, Consensys, Gemini (founded by Cameron and Tyler Winklevoss), ItBit, and Symbiant, and it expects more approvals shortly.

The BitLicense was originally introduced by then- DFS Superintendent Benjamin Lawsky in January 2014. The license allows digital-currency firms to expand their services while protecting clients with anti-money-laundering compliance and cybersecurity protocols.

Circle is able to offer mobile payment services to receive, hold, and send U.S. dollars and bitcoins via text messaging that does not require conversions from one form to the other.

Circle is pursuing this same option with other currencies, such as the euro.

There seems to be no turning back from bitcoin.

© 2015 Newsmax Finance. All rights reserved.

Market Manipulation Is Menacing to the Middle Class

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By Barry Elias | Friday, 18 Sep 2015 05:54 AM

Wealth and income inequality has risen substantially since the Great Recession, and market manipulation is making matters even worse for the middle class.

Richard Grasso, former chairman and chief executive of the New York Stock Exchange from 1995 to 2003, suggests the average person is severely disadvantaged relative to Wall Street institutions and the causes need to be thoroughly investigated and corrected.

Prompting this remark was stock trading the morning of August 24, when the Dow Jones Industrial Average tanked approximately 1,000 points within the first six minutes on news of a dire Chinese economy that may portend poorly for the world.

The large sell orders precipitated nearly 1,300 trading halts, as ETF indices were unable to execute transactions in an optimal fashion and prices fell below the underlying stocks they held. TD Ameritrade experienced volumes 10 times larger than average in the first half-hour of trading, causing severe price volatility: 30 percent for Facebook within several minutes as its price moved from $86 to $72 to $84.  (Trading is halted for five minutes when there is a price move of 5 percent or more in either direction.)

Ironically, the ETF products are marketed to middle-America so they can participate in the American dream of investing in a cost-effective and diversified manner. However, the lack of adequate trading liquidity and the capital losses that result may greatly offset the low trading cost.

Grasso believes high frequency traders receive proprietary trading information ahead of others and transaction speed trumps competition and fairness. He suggests the trading of shares on more than 60 venues makes execution at the best possible price quite difficult and costly to the little guy.

Jeffrey Sprecher, chairman and CEO of Intercontinental Exchange Inc., also says the stock market is overly complex and needs simplification.

Evidence of market rigging has been uncovered in the pricing of the gold fix, LIBOR and foreign currency exchange.

Recently, 12 banks and two institutions agreed to pay $1.87 billion to settle allegations that they manipulated the $16 trillion credit default swap market by prohibiting exchanges from placing these products on open, regulated platforms where pricing is more transparent.

The 12 banks named in the suit are Bank of America, Barclays, BNP Paribus, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan Chase, Morgan Stanley, Royal Bank of Scotland and UBS, along with the International Swaps and Derivatives Association (ISDA) and Markit Group, a data provider.

The Los Angeles County Employees Retirement Association and several Danish pension funds claimed the banks influenced the ISDA to deny intellectual property to the exchanges, such as auction price data.

As part of the agreement, the ISDA will form a committee, comprised of banks and investors that are independent of its board of directors, to license credit derivative products to exchange-like venues.

Currently, ISDA decisions are made by its board, which until 2009 was comprised entirely of bank representatives.

Dark pools have also been under intense scrutiny lately. These venues permit stock trading with greater anonymity than on the stock market exchange, amounting to a competitive disadvantage to many.

Credit Suisse tentatively agreed to pay $85 million to New York and the federal authorities for this practice. Last month, Investment Technology, a New York Brokerage, set aside $20.3 million to settle allegations of wrongdoing.

In January, the UBS Group agreed to pay $14 million for creating an unfair playing field using dark pools. And Barclays is in negotiations with the New York State Attorney General and the Securities and Exchange Commission regarding their involvement in this area.

The middle class has been ill-served by the current financial climate. Perhaps progress is afoot.

© 2015 Newsmax Finance. All rights reserved.

Bureaucracy Is Stifling Innovation and Productivity

Hourly productivity rose a slender 0.4 percent on average each year over the past five years — perhaps the weakest advance in the past 30 years.

Total labor productivity, which includes a 12.9 percent rise in the number of hours worked for production and non-supervisory employees, limped along at an annual growth rate of 1.1 percent, according to the St. Louis Federal Reserve Bank.

For perspective, after World War II, total labor productivity increased 2.2 percent each year. However, the demarcation is stark: from 1948 through 1973 it grew on average at a robust 3.5 percent annual pace, but has throttled down since then to only1.8 percent, according to the U.S. Labor Department and the St. Louis Federal Reserve Bank.

The deceleration continues. Following two consecutive quarterly declines, non-farm business productivity — or the output of goods and services per hour worked — grew at a 1.3 percent seasonally adjusted annualized rate in the second quarter over the first, yet only advanced 0.3 percent from a year earlier, even lower than the most recent five year average, according to the U.S. Labor Department.

While these productivity figures are low, the Heritage Foundation estimates they may have been overstated by approximately 21 percent over the past 40 years — 16 percent due to depreciation and 5 percent due to understated import quantities.

Further compounding this issue, recent downward revisions for productivity by the Labor Department have been significant. From 2013 to 2014, these reductions ranged from 20 percent to 300 percent, according to the U.S. labor Department and the St. Louis Federal Reserve Bank, adding less credence to these data.

More employment has generated more hours worked, but low productivity has stifled wage gains and economic growth, which has stagnated recently and hovers near or below 2 percent, after adjusting for inflation, according to the Bureau of Economic Analysis.

Federal Reserve Chairwoman Janet Yellen recognizes productivity is essential to ensure robust household earnings. Yet, these weak productivity numbers suggest greater employment at modest wages may continue — a possible inflationary threat that could precipitate a hike in interest rates — the first in about 9 years. This places the Fed in a conundrum, since higher rates may squelch long-term business investment necessary for long-term economic stability.

The silver lining in all this has been the increase in productivity of the manufacturing sector. In the second quarter, durable manufacturing labor productivity rose at an annualized 3.4 percent rate over the previous quarter, and that for non-durable manufacturing grew at a 1.2 percent pace.

Michael Mandel of the Progressive Policy Institute observes that innovation has spanned many disciplines in the past, such as energy, information processing, materials, medicine, and transportation. He notes there has been a recent uptick in mining, geological and petroleum engineers due to the shale oil and gas surge, but also highlights a downturn since 2006 in biological, chemical, materials and medical scientists.

He claims, since 2000, the Food and Drug Administration has increased its oversight staff by 50 percent, from 12 employees for every 1000 in each industry it oversees to 18 now. He suggests the FDA stifles innovation by emphasizing efficacy of therapy relative to the established market participants rather than the efficiency of the new product, which can provide similar benefits at lower cost.

Productivity will be empowered when we lift the bureaucratic stranglehold on industry to innovate, create and compete. One fertile area to tap is the energy sector.

There are many well-intentioned projects underway that are developing new technologies to harness domestic energy resources. Molten Salt Reactor technology has been demonstrated to be safe, efficient and affordable. This technology can transform coal and solid waste into ultra clean diesel, gasoline and natural gas. The byproducts can be used as raw materials to produce high strength light weight steel, aluminum, and plastics. MSRs can also process radioactive material, such as uranium and thorium, in a safe and cost-effective manner, enabling the mining of rare earth elements that are essential to our aerospace industry for defense and consumer electronics.

The principle reason for slow progress heretofore has been the relative inertia on the part of the Environmental Protection Agency and the Nuclear Regulatory Commission.

America, if we want more jobs and better pay, we need our government to effect prudent regulatory oversight of the energy sector. Empower the energy sector and we empower our economy and national security.

© 2015 Newsmax Finance. All rights reserved.

Hillary Clinton’s Tax Reform Proposal Falls Short

Hillary Clinton is promoting a tax reform plan that will not achieve her objectives.

Clinton would like to increase long term business investment, since it would stimulate innovation, productivity and economic growth for the masses. A laudable goal, indeed; however, the remedy she prescribes will not cure this patient.

Clinton correctly states that corporate stock repurchases and dividend payments have benefited the corporate boardrooms, C-suite executives and shareholder class at the expense of the working class, since it lowered the level of retained earnings for investment in labor, plant and equipment for many years.

Stock repurchases and dividend payments have equaled, on average, 85 percent of earnings since 1998, excluding two years of recession in 2001 and 2008. In 2014, this figure was about $914 billion, or roughly 95 percent of earnings, with about $565 billion in buybacks and $349 billion in dividends, according to Bloomberg and S&P Dow Jones Indices.

Since March 2009, repurchases total nearly $2 trillion, a prime catalyst for the 191 percent increase in the S&P 500 Index in 5½ years, while stocks with the most repurchases saw a 300 percent return, according to Forbes. During the past two years, sales growth rose 2.6 percent each quarter for these firms, while per-share-earnings more than doubled to a whopping 6.1 percent, according to Bloomberg.

The share of cash flow allocated to buybacks rose to more than 30 percent, nearly double what it was in 2002, while the share for capital spending declined, from more than 50 percent to roughly 40 percent during the same time period, according to Barclays. Low levels of investment have resulted in the highest average age of fixed assets since 1956, reaching 22 years in 2013, according to the U.S. Commerce Department.

Carl Icahn believes the major proponents of quarterly-capitalism are the corporate board members and the chief executive officers, who promote the stock to enhance the value of their equity option plans.

Clinton proposes an increase in the capital gains rate on the wealthiest 0.5 percent to solve the problem.

She envisions doubling the rate to 40 percent for the first two years, and scaling it back gradually to 20 percent over the next four. Currently, the top 40 percent rate applies to assets held less than a year and reverts to 20 percent afterward. These figures exclude the 3.8 percent healthcare surcharge on net investment income.

Recently, BlackRock CEO Larry Fink proposed something similar: a 40 percent rate that applies to the first 3 years, then gradually falls to zero over the next seven.

In an interview several years ago, Larry Fink, whose firm manages $4.7 trillion, suggested he let the country down, since the financial industry became much too large over the previous three decades and the return on capital relative to labor was excessive. Bill Gross, the former founder of Pacific Investment Management Company and a current portfolio manager at Janus Capital, has expressed a similar view and expects these yields to plummet 50 percent.

The problem with Clinton’s proposal is four-fold:

* Approximately two-thirds of stock trading is conducted on behalf of tax-exempt organizations, such as pension funds and 401(k) plans, which are completely immune from any tax implications and already trade with a long-term view.

* Her proposal does not encourage 99.5 percent of the population to engage in a long-term investment perspective.

* Modifying the capital gains rate will not incentivize the corporate board and C-suite executives to focus on the long-term instead of seeking short-term profits to promote the stock price of their firm.

* Financial trading is based primarily on short-term arbitrage opportunities and speculation that do not promote long-term direct investment in labor and capital.

The key to increasing long-term capital investment is to make it more attractive for businesses to do so.

My tax proposal would achieve this objective by permitting an income tax deduction for all capital expenditures in the year they are made. Currently, these expenses are deducted over the entire life of an asset, which can range between two and fifty years.

In addition, my tax plan will replace all federal taxes with a low tax rate on consumption and savings that would balance the budget at current spending levels; save scores of billions of dollars each year in tax compliance expenditures; increase investment, employment and income; and maintain strong purchasing power.

Clinton’s capital gains scheme will not achieve these objectives.

© 2015 Newsmax Finance. All rights reserved.

Compensation Closely Tracks Productivity: And Both Are Weak

Data suggest that wage-based workers have been severely under-compensated when considering how productive they have been.

A careful analysis of this seems to reflect the opposite.

The claims are based on an apparently flawed interpretation of the data, which suggests inflation-adjusted wages have declined 0.7 percent since 1973, while inflation-adjusted productivity rose 100 percent.

Much of this difference is the result of an under-reporting of total compensation (35 percent), a higher level of inflation applied to this compensation (44 percent), and an over-reporting of employee productivity (21 percent), according to The Heritage Foundation.

Wages measure hourly earnings of production workers and non-supervisory personnel: it excludes salaried workers and fringe benefits, such as healthcare, pensions, bonuses, all commissions, exercise stock options, education and transportation stipends, and other unusual forms of payment.

The Bureau of Labor Statistics estimates that these benefits comprise nearly 30 percent of wage-based compensation. As a share of total compensation, the figure may be approximately 20 percent, according to the Heritage Foundation. In fact, since 2001, benefits grew roughly 60 percent, while wages and salaries increased about 37 percent, says the BLS. Greater compensation accounts for 35 percent of the apparent differential.

The consumer price index — the inflation rate applied to total compensation for the purchase of consumer products — is much higher than the implicit price deflator — the price level applied to employee productivity for goods and services sold to consumers, businesses and foreign entities.

This is due to consumer recall bias of high ticket purchases — such as housing, gas and utilities — hedonic quality improvements, substitution for goods and services of comparable quality, and more accurate business reporting of input and output expenditures. Different inflation rates applied to compensation and productivity are responsible for 44 percent of the differential.

Labor productivity has also been overstated, since depreciation has not been taken into account.

As technological development has progressed in recent decades, so has product obsolesce: this requires replacement with no addition to income or productivity. Net domestic product per hour worked — which subtracts depreciation from gross domestic product (GDP) per hour of labor — has only risen 58 percent in the last 40 years, 11 percentage points lower than the 69 percentage rise in GDP per hour worked.

Also, overstatements of import prices suggest lower input quantities, and this artificially inflates productivity.

This dynamic has been exacerbated in recent decades as imports as a share of GDP rose significantly, from an average of 10 percent in the 1980s and early 1990s to 17.5 percent today.

These factors account for 21 percent of the differential.

All told, since 1973, average annual total compensation rose 1.5 percent, while annual productivity increased 1.8 percent.

In agreement with these results are Harvard Professor Martin Feldstein, the former President of the National Bureau of Economic Research; Dean Baker, director of the Center for Economic Policy Research and staff member of the Federal Reserve Bank of St. Louis; and Georgetown Professor Stephen Rose.

During the 25 years from 1948 through 1973, labor productivity rose 3.5 percent each year.

However, since then productivity increased a paltry 1.5 percent annually for 36 of those 42 years, according to the San Francisco Federal Reserve, the Bureau of Economic Analysis and the Bureau of Labor Statistics. Spanning the seven outlier years, from 1996 to 2003, productivity grew at a 3.5 percent clip during the internet boom.

This is not a very good record of achievement.

Making matters worse, median compensation rose less than average productivity, since productivity has increased less for lower-skilled labor than those in high-skilled technologically driven professions.

Since 2000, the Pew Charitable Trust estimates inflation-adjusted wages and salaries have fallen 3.7 percent among workers in the lowest tenth of the earnings distribution and 3 percent for those in the lowest quarter, while those near the zenith have seen a 9.7 percent rise.

How do we increase both compensation and productivity?

Lower the cost of education by implementing new technologies for effective content delivery and instruction geared toward global demand in the marketplace. Total cost of attendance at selective universities for one individual — including tuition, fees, housing and food — now exceed median household income by as much as 20 percent. This cost structure is stifling access to opportunity and innovation.

Reduce healthcare expenditures by implementing a payment system based on positive quality assessments — such as outcome benefits — instead of one driven by the quantity of product and services delivered. Healthcare purchases as a share of GDP rose from 5 percent in 1960 to nearly 20 percent today — a fourfold rise. This too undermines future robust economic growth.

Implement my tax plan, which will lower the cost of employment and capital to generate higher business investment, stronger productivity and greater income growth for the many.

There is a better way.

© 2015 Newsmax Finance. All rights reserved.

Financial Disruption: Part II

The asset management business may never be the same, despite record levels of assets under management and annual profits.

In 2014, global assets under management totaled $74 trillion and annual profits reached $102 billion, according to the Boston Consulting Group. However, lurking beneath these seemingly rosy figures are disruptive economic and technological forces that may upend this industry.

Since 2007, asset management costs have skyrocketed 44 percent, according to the McKinsey consultancy firm. These extraordinary expenses are due to the technological infrastructure that is required to support the sales, marketing, and distribution of highly complex financial products. The cost increases have outpaced revenue and asset growth, slenderizing profit margins in North America, western Europe and the emerging markets. Further, the growing cost structure may not subside any time soon.

While new asset flow has reached its highs, much of the asset level growth has been due price rises in stocks and bonds. These markets exploded when the Federal Reserve expanded the monetary base four-fold and lowered the discount rate to near zero. In addition, much of the new money streamed into passive products, such as exchange-traded funds that track indices: these require less active management and have lower profit margins.

Also looming on the horizon is the likely prospect of higher interest rates: as interest rates increase prices of stocks and bonds fall to maintain competitive asset yields. Profit margins may fall 16 percent with an interest rate rise of 1 percentage point, according to McKinsey.

These asset managers have begun to diversify into debt products, such as leveraged loans, since they escape the regulatory burdens faced by banks. This is of concern, since these firms have the potential to become systemically important financial institutions that would require the maintenance of adequate capital reserves, especially since banks are unavailable as market makers to maintain market liquidity for any buyer and seller.

Another danger is the rapidly accelerating industry consolidation. In 2013, the top 10 US asset managers experiencing positive net inflows, such as Vanguard, BlackRock and State Street Capital, received 53 percent of the total. By 2014, this figure grew to 68 percent, since much of the flow was in the form of passive products — a segment dominated by a few firms, including Vanguard.

Perhaps more dire than the underlying economic fundamentals, the asset management model is under heavy attack by the technology industry.

Since the financial market is based mainly on short-term, speculative and arbitrageur trading methods, algorithmic portfolio managers have been moving into this space at a rapid pace, catering to the retail market.

A new threat recently came in the form of a Google alert. This technology behemoth is seriously considering a move into the industry after commissioning a project feasibility study. Coupled with virtual currencies, technology may be the new normal in finance.

Given this trajectory, the financial industry may be unrecognizable in the decades to come.

© 2015 Newsmax Finance. All rights reserved.

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