Reducing Middle Class Taxes

"There is only one way to kill capitalism - by taxes, taxes and more taxes." Karl Marx

Every time I sit down to write about taxes I get bored and fall asleep. This is sad because the way a society is taxed is important to the way it consumes and spends. Since the start of the nation, US tax code has changed thousands of times. Yet over this period the percent of GDP consumed by the Federal Government has remained consistent. For any group to point to some distant past as an ideal that is some how the best and fairest tax system is foolish, lacks an understanding of history and only supports a preconceived prejudice.

Since the 1950s the percentage of GDP consumed by the Federal Government has varied from 16% to just over 20%. Such a consistent percentage indicates an efficient US Federal Government, limits to economic growth caused by the size of government and the level at which a society will permit themselves being taxed before revolting.

What has not remained consistent is the complexity of the tax code. With each change there is a dual between tax consultants and the government carving up more and more of the tax dollar in tax avoidance. Worse, attempts to use the tax code to stimulate economic or social sectors often result in bazaar unintended consequences. The greatest burden of complexity falls on middle income earners and small companies.

Since the late 1970s there has been a trend of flattening the tax code. Where the highest tax rates in the 1950s was ~90% the highest is now reduced to a third with advocates for the wealthy arguing they are still over burdened with taxes. The greatest burden shift however occurred in Social Security taxes. The result is a squeezing of the upper middle income producer while those at the extraordinary income levels are encouraged to shift income offshore.

The genius of the 1950-60s tax system, destroyed by Reagan / Bush conservatives, encouraged the wealthy to invest in the US. All investment was directly deductible against ordinary income. Thus upper income earners redirected large portions of income towards investment creating more middle class jobs and causing the economy to boom in a win / win fashion. There was a trend away from encouraging investment and towards encouraging consumption. The boom in demand for luxury goods (often foreign) resulted from dramatic shifts in the tax code since the 1980s. Ironically each shift in the tax code has been labeled tax simplification.

The greatest shift in discouraging investment comes from capital gains tax reduction. By lowering capital gains taxes more money is encouraged out of investment channels and into consumption. This shift has also contributes to volatility in investment markets.

The key to a robust and growing economy is the re-investment of capital. Capital gains tax at any level reduces available capital and discourages capital flowing to the most effective and efficient areas of investment. As governments shave off a portion of the gains from each transaction the economic engine is penalized. Since economic growth is always confined to narrow band (in an industrial economy 4% to 10% has been historic) by taxing capital gains the government defeats the entire concept of economic stimulus. Recognizing this concept the government sets up investment programs such as IRAs and 401Ks that allow investment funds to compound tax free. But why limit capital investment if it is capital investment that causes an economy and the job base to grow. This is much like allowing the Golden Goose only to lay eggs on Sunday.

There are several changes the Federal Government could make to the tax code to encourage immediate investment and stimulate the economy.

1. Radically shift in the tax rate on above median incomes back to 1950s levels while eliminating the Marxist AMT. With the shift allow investment deductions against income with no limits.

2. Eliminate the Capital Gains Tax. As long as capital remains re-investment capital there would be no taxes. As the gains from capital investment are consumed the gains are taxed as ordinary income.

3. Eliminate the withholding for those making below the poverty line incomes.

4. Eliminate all deductions, except medical costs, including personal exemptions and mortgage interest.

Let's look at the impact of each one of these.

The first impact would be to reduce the current snafu over Wall Street bonuses. Granted these are generally excessive for people in a failed industry, but would the public be so upset if 90% of such bonuses were reinvested in America. Here I am not talking about adding another room to a Mc-Mansion, but investment in US infrastructure and industry. Yes, in effect such restrictions on investment to US companies become a de facto currency control, but it is voluntary. Instead of funding the Swiss Rolex factory higher incomes are redirected to domestic stem cell research or PV development. Eventually as the economy recovers investment deductions could be expanded to NAFTA on a reciprocal basis.

By eliminating the Capital Gains Tax all investment capital becomes 401K money. Such has been the case in real estate with the 1031 exchange. The draconian tax of ordinary income on removing capital from investment encourages re-investment while not limiting sales. In the case of stocks there would be no reason to hold a stock because of capital gains. Such would create a more robust market as capital flows to the most efficient companies. Let the investment market place determine value and not the desire to avoid capital gains tax. As long as capital remained invested it would avoid taxes.

Eliminating withholding for lower income wage earners who pay no taxes would encourage companies to hire low income workers. Much of the cost of in employing people in a small business is in withholding, matching Social Security and other costs. By shifting the Social Security burden above the poverty line those working at the lower end would have higher spendable incomes. Since low income workers spend 100% of their income eliminating the 15% Social Security tax provides an immediate boost in spending. Small companies would simply report income on 1099 forms at the end of each year greatly reducing employee costs. Most small companies pay low wages and employ people part time or even pay people under the table. Such barriers to hiring part time and entry level workers would thus be removed, making many more jobs available and making many more small businesses both viable and stable.

Under the current tax code most deductions have already been eliminated. Even mortgage interest on a principal residence now has upper limits. Phasing out the mortgage interest deduction along with charitable contributes would reduce housing costs and stop funding politician's friends and relatives. Since investment deductions are available to all tax payers, investment would substitute for consumption. The one exception is the deducting of medical expenses. A company always deducts its costs of operation to determine profits. Labor should be no different. Medical expenses are a direct cost of income producing labor. The current tax code on medical deductions is a joke at best and not representative to the net income from labor. Allowing medical deductions at 100% including insurance costs encourages people to do preventive care and at the middle income level fund medical insurance.

Here is a synergy that helps the Government save money while contributing to a robust and renewable economy. The current system collage contributes to instability and even corruption. By building a feedback system, the government benefits from a more stable and robust economy. At the same time such changes encourage the lower levels of society to pursue the American Dream.

Eric Von Baranov is the Founder & CEO of the Kondratyev Theory Letter (The Letter). Started in 1974, The Letter follows the 50+ year economic long wave theory as originally developed by the 1920s Russian economist Nicolai Kondratieff. Adherence to this cycle provides Eric with insight on a wide range of topics, including economics, politics, culture and technology. Eric has been published by Minyanville.com and the Psychic Investigator. He sponsors an online conference at http://www.kondratyev.com Please note that a new and improved web site is currently under development.

How to Steal From the American Middle Class

We have survived the Great Depression, World Wars, and the Dust Bowl, Civil Rights, the Cold War, Terrorist attacks, the assassinations of Civil Leaders, Presidents, and the struggle of Labor.

Out of these struggles came the Industrial Revolution, improved living and labor standards and a new dawn of technology and applications that has modernized our way of life. We have in fact crossed over to the information age, the age where technology matters. In the past, Americans built and exported the technologies to be used to help other countries and societies to improve there own way of life. Political structure had little to do with the American Market. Our politics as well as our corporations have shifted from moral profit making to political pandering and insidious greed.

Corporate fairness in trade, practice, pricing, safety in products and social responsibility has been thrown out faster than yesterday's IPhone TM. One must admit that technology is moving much faster these days with improvements to our devices so quickly that by the time we obtain one device, within a short amount of time, another will either take its place or be improved one way or another. Usually this is also achieved by the same company who produced the now legacy model.

Best Buy one of nations top retailers, in response to this issue had put in a program to buy back the old or defunct model, which will discount the newer model. The result of this has not supported the company as it lost over seven percent of its stock value. To be fair our current economic conditions is a contributing factor.

Our financial crisis was not due to any one particular sector failure. This great recession which was powered by corporate, personal, and political greed and pandering in many areas was the primary cause. It isn't a republican or democratic thing; it is a power and greed thing.

Let us start with Wall Street, which is finally being confronted. The opportunity to buy a home was increased by loosening regulations on the consumer. This in itself is not a bad thing. What took place was not just loosening regulations but wholesale deceit on those who were the most vulnerable, the middle class. Mortgage companies were not only reducing the capital requirements but issuing sub-prime mortgages on riskier customers. Wall Street was well aware of this fact, but instead of fixing this problem, they decided to take full advantage of it.

Wall Street Hedge Fund Managers and Brokers decided to develop a new financial instrument called "Mortgage Backed Securities." These packages were sold all over the world at a premium. The second step was to hedge against these securities, you may ask why you would hedge on something that is supposed to be secure. These managers knew that what they were peddling was just junk, and also realized that there was an opportunity to make some real money when they fail. The next action was to short the securities, in other words to bet that they will fail. Of course this was done in a low key fashion so as not to raise suspicion or mistrust. Here is where it gets really good, not only were they right and the market crashed on these securities, they were paid through the shorts they placed in the exchanges, but they also received the insurance payments when these mortgages went bad. A primary Insurer, AIG went bankrupt, covering these securities and the American taxpayer had to come in and save AIG from complete failure. Freddie Mac and Fannie May also ended up paying for this failure, which I may add were government guaranteed insurers of a major amount of these mortgages that were now "securities."

These white collar thieves, made money on selling a poor product (due to deregulation), investing in its failure and getting additional money for this through insurance payments (private and government guaranteed). Let us not forget, that the mortgage companies and their brokers made billions of dollars in these high risk loans from deceit.

The second prongs of this deception, on the American consumer, were banks and credit card companies. The banks having lowered there standard of practice due to deregulation increased there level of leverage against these secured loans, in some instances they were leveraged forty times more over the liquidated value of these loans. In other words they had less cash on hand to carry the loans if they went bad. This led to bank failures and the American Taxpayer again to rescue to prop them up or liquidate them altogether.

When I was taking accounting courses, I learned about usury. Usury is when someone is charging astronomical amount of interest on a loan. Credit card companies such as Visa and Master Card were using this "Prosperity" in the booming mortgage market to entice consumers to obtain larger lines of credit and multiple amounts of credit cards. When I bought my house, I would receive at least two to three offers from various credit card institutions a day. The enticement was a low interest and high credit line. I remember offers of zero percent for a limited time and then twelve or fourteen percent after the time expires. If you looked at the fine print, there is a section that states that they can at any time raise you interest rate. If you are late, even if you have been a model payer for over five years, they can raise your interest rate to thirty-three percent. If I went and made these same loans, I would be taken to court and charged with loan sharking and usury.

The credit card companies with all there promotions and enticements ended up encouraging the American Taxpayer to spend well beyond its means and they were successful. During this period of time, credit card holders increased there spending into trillions of dollars and became indebted to the credit card companies so deeply, that it would take almost decades to pay back in full what was borrowed. I do believe in the individuals' responsibility but what occurred simultaneously was going literally unnoticed.

The next step was the trade agreements with other countries. Corporate America founded a new way to make even more profits. It was realized that by moving certain operations, factories and services overseas, one can avoid high cost in insurance, taxation and wages in developing nations. Corporate America would then save money by paying low wages (as little as a few dollars a day), save on workers compensation insurance by paying little to nothing for a worker being injured on the job, lower overhead cost due to less or no regulation on labor standards (such as air conditioning or coffee breaks), pay lower or no local taxes, which translates to higher profit margins from cheaper parts, services and labor.

This shift in manufacturing and services were being taken from the American Heartland and sent overseas. These actions then reduced and eliminated millions of jobs that for decades were provided for and by the American worker. In turn, this shift eliminated many jobs from America and lowered the tax base for funding our own government.

To add insult onto injury, Corporate CEOs were and are taking advantage of this shift. The increase of profit has led to an increase in corporate greed. CEOs who received a good salary now have a great salary. Decades ago, a CEO making a few million dollars in salary wasn't a big deal. Yet at this time, CEOs are making multi-million dollar salaries with stock options and other fringe benefits. It is interesting on two levels, one being that due to contractual agreements in this day and age, a CEO or Executive Manager can ruin a company and walk off with multi-million dollar settlements (golden parachutes). The other is that Stockholders' seem to validate this behavior. The idea of corporate entitlement without responsibility is something I thought I would never see. In any business one would want to see fair compensation for the head of the business itself. The other level of interest is what I had learned about business, you want to re-invest in the business for expansion and growth. Today, to expand a business what I see is layoff the workers, cut costs, or acquire a competitor and continue to raise the salaries to those at the top.

This is not to say that all corporations act this way, some companies have standards and would do as much as possible to keep their labor force working. Some corporate executives would lower there own wages to save jobs.

Examples of this, is unbelievable, a technology leader after posting record profits, announces that they will now layoff ten of thousands of workers. You may ask "why?" Yet, all one can figure out is this, they are laying off workers to increase profits margins. Since those at the top do not want to give up one cent of salary or bonus, and know that the following quarter shows less sales or demand, they will get rid of the people that helped them post their record making profits. Talk about throwing the baby out with the bath water. This by the way is the rule not the exception. One would have to be able to out sell and innovate there competition, yet if you do not re-invest in your own company and just out for the money, why would you care about those who got you to that point. This behavior is lost among stockholders since all they want is to know that they will get there dividend or raise stock values, they don't really concentrate on long term future planning.

The government has a duty to ensure our Health, Safety and Welfare. Have you ever noticed that when a treaty or some such agreement with foreign countries are made, it is hardly ever published or disseminated? It was just a few months ago that I learned about the Camp David Accords which drafted the peace between Israel and Egypt. Israel won that war and Egypt lost. The truth is that America lost; to keep the peace forever more the American Taxpayer pays around 1.3 billion dollars a year to Israel and Egypt each. This is to keep these countries from fighting each other. In order to keep this funding by our government going, it is argued that it is within our interest that this peace last.

Our foreign policy seems to be formed on the greatest pandering to special interest and the least to actual security. We have become the world's police officers. I thought that it was up to the United Nations to figure out how to implement actions to secure peace in the world. Corporate greed and corruption is so high that getting around even sanctions is easy. It is also very disquieting that corruption is found even in the United Nations personnel who are suppose to be executing and implementing plans that are for the greater good. Remember Saddam Hussein was getting money and products funneled from UN personnel while under sanctions.

Afghanistan and Iraq both are getting billions in aid from the American Taxpayer. Iraq was a real debacle. Yet we won that war, but the spoils belong to Iraq, I don't understand why we spent billions destroying its dictator and somehow we are responsible for rebuilding the same nation, especially when they were never a threat to our security and still not a threat. The fact is that by intervening on false premises, we made things worse not better. We went to Afghanistan to defeat the terrorist, which we have done, yet we created more dangers by staying there. If we just took out the bad guys and minded our own business, we would have more security and less cost.

Due to so much meddling and perceived security problems we are now paying Pakistan to take our billions of dollars in foreign aid to attack us with there terrorist and help them fortify there position against India. All this time, we should have been increasing our own security at home and strategically taking out those who threaten us.

These are the billions of dollars that is being spent on having countries not fight each other, also to kills us or attempt to curtail there own extremist from attacking us. These policies have not made us safer or more secure. These policies are bankrupting the American dream. Not to mention that most of the money spent did not go to the people it was intended to help. Most of this money is going to the personal accounts of those in charge. In matter of fact, in Iraq and Afghanistan, most of the money went to the politicians, contractors and their entourage. The other side of the coin is that a certain amount of the money given isn't even accounted for.

Sometimes I wonder who's minding the store. Private Sector is disenfranchising the American Taxpayer and the Government is not doing its job. The private sector has technically succeeded from the union, giving way to corruption and greed. Politicians are vying for position to the right and the left. Our corporations are suppose to be for and by the people as well as our government. Yet lines are being drawn in such a way that there is a possibility that this government for and by the people is headed to an explosion. Most Americans are reasonable and can use common sense to resolve problems.

At a time when we should be increasing our investment in America and the idea of America, there are those who suggest that corporate profits and an unregulated free market system would be a better solution. It isn't enough, that we are falling behind in education, there are those who are trying to privatize it for profits. Which at the same time are removing the opportunity for those who can not afford it and sending us further behind in resources for the future. It isn't enough that we need more financial oversight, while there are those who are motivated by greed and corruption to decide what is fair or not. It isn't enough that we have the strongest military on the planet, yet there are those who want to increase this ability at the expense of our social programs. It isn't enough that we have a working social security program; there are those who seek to privatize it at the peril of each American. It isn't enough that we for the first time in American history have a health care plan to cover most Americans, while there are those who believe it is better to allow our fellow citizens to die or go bankrupt due to health issues not of there choosing.

This is not just about stealing money from the middle class, those who are in poverty, and those who have now been abandoned and there future held in jeopardy, it is about stealing the American way of life and inevitably its soul. I am saddened, I am angry and I hurt for the promise that is America, it is the country which on entry has in its very foundations "Give me your tired, your poor, your huddled masses yearning to breathe free, The wretched refuse of your teeming shore, Send these, the homeless, tempest-tossed to me, I lift my lamp beside the golden door!"

It is truly the promise that is America, that all can come and that they will be taken care of. It is "We" the people that will provide for the Health, Safety and Welfare of every citizen, not just those who are privileged.

Our true democracy lies within our ability to educate, provide opportunities for employment or entrepreneurialism, and to secure our republic by taking care of the health, security and welfare of all our citizens.

I am part of the" We."

John Tebar

Accountant, Life Coach, Entrepreneur
johntebar@msn.com

Indian Cricket: The Best Way To Produce A World Class Indian Cricket Team

India has a huge pool of people playing competitive cricket. Given this fact, it must not be too difficult to produce a world-class team. However, this is where India has failed consistently over the last 75 years. Fixing this is not at all a complex task. This article provides an overview of a simple mechanism to pick the right people to build a world-class team and the role numbers and analysis can play to achieve this goal.

Cricket is a game rich in numbers. But a straight forward approach of just picking the people who have the highest batting and bowling averages will not necessarily result in the best team. At least, this is what we are led to believe and thus, the role of selectors is hailed as being important. While this is not completely true, there might be some wisdom in this. A deeper analysis of what the selectors are supposed to do illustrates this well.

1. Selectors look at obvious displays of talent. A Sachin Tendulkar could not have been picked at such a young age if the selectors did not have an eye for talent. Waiting to see his performance in domestic competition might have been just a waste of a couple of years when it was obvious that he was good enough to take on the world at the age of 16 itself.

2. Selectors look at the external conditions in which a player performs. A hundred scored on a bouncy pitch might be given more weight than a double hundred on a flat batting beauty.

3. Selectors look at the quality of the opposition and thus, give more weight to runs or wickets against stronger oppositions. Good performances against touring test teams are a sure-shot way to catch the selectors' eyes, which is why we see so many people being picked purely on the strength of one great performance against a strong touring team.

A few pertinent questions at this point in time are whether we really need selectors to do this job, does this method of picking players breed consistency and excellence in performance of the team and are the selectors absolutely objective in their assessment. The team's performance speaks for itself and clearly, there is a lot left to be desired in this area.

The one point solution is simple: Eliminate selectors. Replace them with robust statistical and analysis models. After all, India boasts of smart IT people and smart mathematicians - why not use them build an automated model to pick the right people to represent the country?

A few basic things to build this model:

1. An objective framework for assigning the difficulty levels of the external factors, the opposition and the "pressure" factor to be developed.

2. The simple batting and bowling average must be weighted with this "difficulty" factor.

3. This common system of measurement must be used to grade the performance of all the players playing in age-group and domestic cricket competitions in the country.

4. Only the top performers from each category should be allowed to move to the next level.

5. This assessment must be repeated periodically (say every 6 months) and laggards must be purged.

A valid objection to this whole system could be that prodigies like Sachin Tendulkar might get delayed before entering the national team as it takes time to build data about performances that will merit a national call-up in this scenario. This might well be the case (although a good model can even take into consideration some prodigious talent and give it special weight) but this need not necessarily be a bad thing. Overall, this model will ensure a great team and therefore, a delayed entry of a prodigy by a couple of years should not impact the team's performance, which is the main measure of success for a cricket team.

Conclusion

The role of statistics and IT is vital if India is to build a world beating team. Companies with capabilities in this area, such as Metrixline, must not only look to work for corporates but must extend their capability to organizations like BCCI to build a better Indian cricket team.

Ravi Kumar is one of the founders of the Chennai-based e-commerce company, http://dilsebol.com/, where users can create, customize and order their own t-shirts, mugs, mousepads, ceramic tiles, coasters etc. After graduating from IIMA, Ravi worked as Area Sales Manager with one of the world's largest beverage companies and as Business Consultant with one of the big 4 Consulting companies before establishing DilSeBol in 2007.