Death and Taxes: Unavoidable?

One might be. It’s no secret what a complete and total mess our tax system has become. Not only is the I.R.S. one of the most unpopular organizations anywhere, but it seems to be rife with political corruption that was heavily slanted against conservative political action groups seeking tax exempt status. The I.R.S.’ official in charge of the division that decides these exemptions, Lois Lerner, tells us she did nothing wrong, but nevertheless insisted on taking the 5^th (the constitutional amendment that protects against self-incrimination in criminal matters) before a House committee investigating the debacle. Not cool.

The tax code itself is heavily slanted for the rich who generate the bulk of their wealth by trading stocks and derivatives, paying a tax rate that is a fraction of the rate paid by folks who earn a living (wages and salaries). What’s worse, that beneficial tax rate is applied to those who manage funds on behalf of the rich but who charge a fee based on asset appreciation… even if they do not invest a dime.

We’ve blogged about Apple’s massive use of the corporate loophole that does not charge taxes on foreign earnings until these moneys are repatriated to the United States… so they just don’t repatriate that money at all. If they need to pay a dividend, they borrow that money in the U.S., deduct the interest, and everyone is happy… except U.S. taxpayers. And no, it is hardly just Apple that used this ploy; most large U.S. corporations with significant international operations use this “planning tool” as well.

Some, not Apple, even resort to moving their patents and copyrights off-shore and charge their U.S. affiliates for the use of that intellectual property, effectively shifting domestic earnings to un-taxed off-shore affiliates. Since the domestic corporations are paying for the right to use that intellectual property, it is a deductible cost. But that deductible cost is a profit to the off-shore affiliate!

Parking your money where the rates are low is also “standard operating procedure” for too many American-based corporate operations. Allegations were made about Apple’s purported making a special deal with Ireland. Unsubstantiated sources reported that Ireland agreed to a fantastic negotiated tax rate (a practice permitted under Irish law) of approximately 2% if Apple (through various subsidiaries) parked its huge overseas holdings in that country.

Multiple countries in Europe, Singapore, Hong Kong and several Caribbean nations have enjoyed sucking massive “tax evasion” sums into their banking systems, perhaps even charging fees and a token tax (vastly less than what is required in the United States) with strong banking secrecy laws and exceptionally favorable tax charges. Some think this trend is about to change. “‘Bank secrecy is a relic of the past,’ said Algirdas Semeta, the European Union’s senior official responsible for tax issues. ‘Soon we will see the death of bank secrecy around the world.’

“From the rain-swept avenues of Luxembourg’s capital to the sun-spangled lagoons of the British Virgin Islands in the Caribbean, the authorities are scrambling to shed the stigma of enabling tax cheats and to figure out how to change their secretive ways without driving away lucrative foreign clients… The pressure, increased by the recent leak of a giant cache of confidential files relating to offshore havens, is ‘like a steamroller,’ said Egide Thein, former director of the Luxembourg Economic Development Bureau… [A recent] European Union summit meeting … produced no momentous decisions but did prod Austria, the union’s last stalwart defender of banking secrecy, to accept the idea of sharing information about bank accounts held by foreigners — so long as countries outside the union, notably Switzerland, agree to do the same.”  New York Times, May 22^nd.

But for many, it’s not about tax avoidance (legal) but about tax evasion (illegal), both in the United States and Europe: “[T]he current, escalating assault on secrecy began in 2010, when Congress passed legislation that requires foreign financial institutions to inform the Internal Revenue Service of all accounts held by American taxpayers and by foreign entities in which Americans have a substantial ownership interest… This provided a powerful lever to the European Union to [pry] open opaque financial sectors both inside the 27-nation bloc and beyond. At a meeting of finance ministers in Brussels last week, the European Commission was given the go-ahead to negotiate financial information sharing accords with Switzerland, Liechtenstein, Andorra, Monaco and San Marino.

“By one estimate, wealthy individuals hold unreported assets worth at least $21 trillion — far more than the entire annual economic output of the United States — in tax havens. Mr. Semeta, the European Union’s tax commissioner, estimates that Europe loses well over a trillion dollars a year through tax evasion and the more divisive and politically delicate issue of legal tax avoidance…

“Indeed, around $3 trillion is invested in mutual funds and other investment vehicles domiciled in Luxembourg [population: 515,000]. Only the United States has a bigger fund industry… Alain Steichen, a prominent Luxembourg lawyer who has worked closely with the financial sector here for years, predicts a potentially serious exodus by depositors who do not want their identities revealed... But, Mr. Steichen added, ‘we clearly have a legacy issue’ because many of those who stashed money in Luxembourg banks in the past to avoid taxes still have accounts — and may now bolt. Such bank clients, he said, will most likely shift to other locations that still offer secrecy. But the list of those is shrinking fast.

“Still very numerous, however, are opportunities for legal tax avoidance. Mr. Semeta, the European Union tax official, acknowledged that halting such practices is hard because fixing tax rates remains the prerogative of individual European states. This means, for example, that Ireland is entirely within its rights to set a corporate tax rate of 12.5 percent, less than half the level in Germany, France and Britain and just over a third the 35 percent rate in the United States.” NY Times.

Want a touch of irony back stateside? The Sequester shut down the entire IRS on May 24^th with four additional scheduled shutdown days scheduled in July and August. “The agencies' employees will not be paid. It is the largest closing of government offices since the government shutdowns of the 1990s.” Huffington Post, May 24^th. Seems like justice for an unfair system that is clearly unfairly administered.

It’s time to shift the massive tax liability from the backs of the middle class and on to those at the top of the food chain that avoid taxes or pay unfairly-set favorable rates.  We know that morality has long since left the building of corporate loophole-driven planners. And since they won’t pay unless forced, guess what?!! Force it! It’s our Congress that succumbed to corporate lobbying and the concomitant campaign contributions that pretty much exempted American companies with strong foreign earnings from paying their fair share. It is Congress that has to fix that problem!

I’m Peter Dekom, and sometime obvious really is!

Drains, Gains and Mythology

As immigration reform winds its way through Congress, there has been a strong push-back from many in the Tea Party block of the GOP. Democrats and Republicans who support the new bill argue that on its face, the legislation has a litany of safeguards to exclude those undocumented aliens who have slipped through the cracks and get federal benefits anyway, particularly a subsection that specifically addresses excluding those who become public charges.  “But Sen. Jeff Sessions, R-Ala., another Republican senator who has emerged as one of the chief critics of the bill, says the law does not properly enforce that provision… Sessions told Fox News that the so-called ‘public charge’ law, as currently written, has been ‘totally ignored’ to date. And he argued that many immigrants will be eligible for benefits much sooner than proponents claim -- including the so-called ‘dreamers,’ young illegal immigrants brought to the U.S. their parents. 

“Sessions said 2-3 million illegal immigrants who claim that status will be able to have access to federal benefits in five years… And, he added, eventually ‘everyone who entered illegally will be able to accept any benefits this country offers.’ … After the 15-year waiting period, the number accessing federal benefits could be an additional 10 or 11 million…  Nevertheless, [Florida Republican Senator Marco] Rubio insists there will be checks at every stage of the process. ‘When you re-apply at the six-year mark, by the way you’re not eligible for any public benefits at that point, you have to prove you're not a public charge,’ he said. 

“A controversial report released [in early May] by the conservative Heritage Foundation estimated that, under the bill, the total cost of legalizing 11 million illegal immigrants could approach $6.3 trillion over the course of their lifetimes. The study factored in taxes those immigrants would pay, but also the services and other benefits that would be spent on them. .. It has come under heavy scrutiny from some conservative economists who say it ignored significant factors - like the possibility of some of these illegal immigrants moving up the income ladder after coming out of the shadows, while expanding the economy and boosting federal tax revenue. Sessions and other critics are unconvinced.”  FoxNews.com, May 8^th.

Rubio’s championing immigration reform has other Republicans saying his work is the death knell for his presidential aspirations. Iowa “Rep. Steve King is already predicting doom in 2016 for Sen. Marco Rubio in the influential Republican caucuses in Iowa, where he said the senator will likely lose based on his immigration reform bill.” Huffington Post, May 30^th. Fear and loathing are not pretty emotions.

For a nation built on immigrants who have risen through the economic ranks over the years, it is a strange argument that these immigrants will always remain at the bottom. Perhaps today, with a deteriorating school system, there may be reasons to fear the future, but if job creation is the mantra, when allowed to live and grow in the United States legally, recent immigrants have been a disproportionate source of new jobs in an era when unemployment remains a core issue.

There are also statistics that actually show how immigrants have contributed far more to federal social benefit programs than they have taken out. “[R]esearchers at Harvard Medical School, measured immigrants’ contributions to the part of Medicare that pays for hospital care, a trust fund that accounts for nearly half of the federal program’s revenue. It found that immigrants generated surpluses totaling $115 billion from 2002 to 2009. In comparison, the American-born population incurred a deficit of $28 billion over the same period.

“The findings shed light on what demographers have long known: Immigrants are crucial in balancing the age structure of American society, providing an infusion of young, working-age adults who support the country’s aging population and help cover the costs of Medicare and Social Security. And with the largest generation in the United States, the baby boomers, now starting to retire, the financial help from immigrants has never been more needed, experts said.

“Individual immigrant contributions were roughly the same as those of American citizens, the study found, but immigrants as a group received less than they paid in, largely because they were younger on average than the American-born population and fewer of them were old enough to be eligible for benefits. The median age of Hispanics, whose foreign-born contingent is by far the largest immigrant group, is 27, according to the Brookings Institution. The median age of non-Hispanic whites in the United States is 42.

“The [Harvard] study drew on two nationally representative federal surveys, from the Census Bureau and the Department of Health and Human Services. Researchers included the contributions of legal residents who were not citizens, a group that is eligible for Medicare if certain requirements are met; unauthorized immigrants; and citizens who were born abroad.” New York Times, May 29^th.

The reality is that a closed-off America is also an America that rejects the lifeblood of new ideas and new energy that built this nation in the first place. We seem to have lost confidence in ourselves and our ability to compete. There is too much emphasis on circling the wagons, seemingly protecting what we have (and seem to be losing anyway), and ignoring the underlying requirements of economic growth. It’s time to lose the fear and rebuild the notion of American hope and opportunity.

I’m Peter Dekom, and my father (a successful journalist), step-father (a military officer who became a career U.S. diplomat) and my mother (an analyst at the Department of State) were all born outside of the United States.

Frustrated? Need an Outlet?

Bricks and mortar vs. the Internet has profoundly impacted the retail world. The statistics say one thing: “In the fourth quarter total e-commerce sales grew year over year 15.8% to $71.60 billion from $61.83 billion in the prior year, according to the U.S. Commerce Department. U.S. consumers spent $42.28 billion online in November and December, a 13.7% increase compared to $37.17 billion during the holiday shopping season in 2011, according to web measurement firm comScore Inc.” InternetRetailer.com, April 1^st. But over half, maybe even more, of all sales are at least influenced by online searches and marketing.

Brick and mortar isn’t sitting idly by. Grocery stores are having delis and bakeries insert warm enticing smells to the stores, with aisles that invite a light stroll. Larger shopping carts produce larger aggregate purchases, some say as much a 40% more. Loyalty programs and traffic/ eyesight cameras track consumer behavior in extreme detail. Savvy clothing retailers organize visual lures to bring folks down critical aisles. Sales are everywhere, all the time. High-end stores try to generate full prices, but except for the top of the food chain, everyone’s waiting for a mark-down. But even the bricks and mortar trends are changing with this massive online competition.

One of the most interesting modern shopping phenomena that has exploded of late is the outlet mall. I see lots of one-off stores who try to lure shoppers with that name, but the mega-venue is a trend that seems to fit these economically impaired times. “The outlet business is growing at a faster pace than the larger apparel market. Outlets posted sales of $12.3 billion over the last 12 months ending in March, nearly 14 percent higher than the $10.8 billion they posted the previous year, according to data from the NPD Group, a market research firm. The apparel market, with sales of $200 billion, grew less than 3 percent over the $195 billion it posted a year earlier…

“Over the last 10 to 15 years, the outlet business has changed considerably, market experts said...‘It used to be that outlets were a clearinghouse, a place where consumers could get overruns, or extras that never sold,’ said Marshal Cohen, a chief industry analyst at the NPD Group. ‘Now, 86 percent of merchandise that is sold in outlets is specifically made for them. While they may have fewer design elements than their premium brands, the consumer is getting a set of standards that is still higher than what are used by more affordable brands.’…

“[Mall developer Simon Property Group] has put such effort [$170 million renovation] into the redesign of the [Woodbury Commons, built in 1985] center because of its importance in the company’s overall portfolio. ‘Today, if a brand doesn’t have an outlet store, you can bet they are looking at potentially opening one,’ said Michele Rothstein, a senior vice president in marketing at Simon.” New York Times, May 21^st.

Some are chi chi with lots of super-high-end stores, like the malls in Cabazon, California or Woodbury Commons, New York (above aerial view). Others are flailing attempts by local communities to get highway travelers to stop and take a look, often struggling with unrented space. But for those mega-outlet centers, they often become travel destinations in and of themselves. And those who travel there intend to shop! Admit it, you’ve been lure in to one of these malls? Think this is just an American practice? Try the lovely outlet mall about 30 minutes outside for Florence, Italy: Via Europa 8, Leccio - Reggello (Florence). Monday to Sunday from 10am to 7pm. Yeah, I’ve been there!

I’m Peter Dekom, and harsh economic times create opportunities right and left.

The Continental Divide

How you will react to this blog will depend on how you answer this single question: Do believe that public education is and should be America’s engine for upward mobility and a level playing field for those willing to work within that system? If your answer is “no,” then this piece is really not for you. But if you think that “hope” among America’s non-privileged classes is predicated on education, read on.

As most of my readers know, I like to look at trends and the numbers that support them. And it’s no secret that heavy governmental debt has resulted in massive cutbacks to public education at almost every level within state, federal and local budgets. It’s no secret that our nation’s educational standards as whole are dropping like a stone off a high cliff in comparison to the standardized testing applied around the world… from first to 25^th in science and math, for example. It’s also no secret that children of the wealthy – with opportunity and education that does not depend on public funding or largesse – generally do better than those children who live in less privileged environments. This is nothing new.

What is new, however, is that over the past several decades the gap between the richer children and their performance levels when compared with those in the lower socio-economic rungs (the ones most dependent on the public educational sector) is widening at an unprecedented pace. Sean Reardon (a professor of education and sociology at Stanford), writing for the April 30^th New York Times notes: “One way to see this is to look at the scores of rich and poor students on standardized math and reading tests over the last 50 years. When I did this using information from a dozen large national studies conducted between 1960 and 2010, I found that the rich-poor gap in test scores is about 40 percent larger now than it was 30 years ago.

“To make this trend concrete, consider two children, one from a family with income of $165,000 and one from a family with income of $15,000. These incomes are at the 90th and 10th percentiles of the income distribution nationally, meaning that 10 percent of children today grow up in families with incomes below $15,000 and 10 percent grow up in families with incomes above $165,000.

“In the 1980s, on an 800-point SAT-type test scale, the average difference in test scores between two such children would have been about 90 points; today it is 125 points. This is almost twice as large as the 70-point test score gap between white and black children. Family income is now a better predictor of children’s success in school than race…

“In a study similar to mine, Martha J. Bailey and Susan M. Dynarski, economists at the University of Michigan, found that the proportion of students from upper-income families who earn a bachelor’s degree has increased by 18 percentage points over a 20-year period, while the completion rate of poor students has grown by only 4 points… In a more recent study, my graduate students and I found that 15 percent of high-income students from the high school class of 2004 enrolled in a highly selective college or university, while fewer than 5 percent of middle-income and 2 percent of low-income students did…

“The economists Richard J. Murnane and Greg J. Duncan report that from 1972 to 2006 high-income families increased the amount they spent on enrichment activities for their children by 150 percent, while the spending of low-income families grew by 57 percent over the same time period. Likewise, the amount of time parents spend with their children has grown twice as fast since 1975 among college-educated parents as it has among less-educated parents.” Reardon.

So we shift our problems out of the school systems into the general population as children raised with fewer opportunities and vastly less hope migrate with less-than-required educational achievements into an employment impaired economy. What are their options? Social welfare? A walk into more lucrative criminal activities, from dealing drugs to using guns to enhance their economic condition? They won’t work in the fields picking strawberries. They’re not willing to dig the ditches or bus tables in place now dominated by undocumented aliens. They just plain give up on the system, creating issues that require massive amounts of money in other areas, from the criminal justice system to Medicaid. When a society inflicts a growing loss of hope for a better tomorrow among vast new segments of its population, exactly how long can such a nation last?

I’m Peter Dekom, and we are doing all of this to ourselves.

Dust in the Wind

I was wrong. In my many pieces about the Ogallala Aquifer (also known as the High Plains Aquifer), I suggested that it would be 80% dry by 2020. That’s a pretty terrible outcome for an underground water system that once was the size of Lake Huron (10,000 square miles), especially since this massive aquifer stretches from the Dakotas to North Texas and supplies much of the irrigation water for the mid-West grain belt. Oh the prediction is still accurate, but the implication that the entire region that depends on that aquifer for irrigation would still have 20% of that water supply in 2020 is, unfortunately, inaccurate.

You see, the aquifer doesn’t actually distribute that water evenly across its entire length and breadth. If you live in the northern section of over the aquifer, you probably will have enough water for centuries to come. But if you are farming along the southern part of the Ogallala, there’s a good chance you have already run dry… or a just about dry. Farmers down there are facing a devastating future, beginning with a very nasty present. Add the effects of global warming on regional summer temperatures and rainfall.  It’s the Big Drought, one that may not end in many, many lifetimes to come.

“Vast stretches of Texas farmland lying over the aquifer no longer support irrigation. In west-central Kansas, up to a fifth of the irrigated farmland along a 100-mile swath of the aquifer has already gone dry. In many other places, there no longer is enough water to supply farmers’ peak needs during Kansas’ scorching summers…. And when the groundwater runs out, it is gone for good. Refilling the aquifer would require hundreds, if not thousands, of years of rains.

“This is in many ways a slow-motion crisis — decades in the making, imminent for some, years or decades away for others, hitting one farm but leaving an adjacent one untouched. But across the rolling plains and tarmac-flat farmland near the Kansas-Colorado border, the effects of depletion are evident everywhere. Highway bridges span arid stream beds. Most of the creeks and rivers that once veined the land have dried up as 60 years of pumping have pulled groundwater levels down by scores and even hundreds of feet.” New York Times, May 19^th.

When wind-powered pumps were standard, the aquifer easily replenished from rainfall. Diesel pumps changed that balance long ago, and the many decades of constant pumping have taken their toll. Giant pivot irrigators, spraying massive amounts of water in a circular pattern, increased over the years. There were 250,000 acres of irrigated farmland in Kansas in 1950, but that number slowly increased to 3 million acres. When our government (in Bush administration) created a fuel-based ethanol policy that effectively subsidized water-hungry corn (which sucks up 14 inches of water a year), the problem got much worse much faster. And it’s not just grain crops that are slammed. A dairy cow needs 12 gallons of water a day, so dairy farming is also shutting down everywhere in this region.

“Two years of extreme drought, during which farmers relied almost completely on groundwater, have brought the seriousness of the problem home. In 2011 and 2012, the Kansas Geological Survey reports, the average water level in the state’s portion of the aquifer dropped 4.25 feet — nearly a third of the total decline since 1996.

“And that is merely the average. ‘I know my staff went out and re-measured a couple of wells because they couldn’t believe it,’ said Lane Letourneau, a manager at the [Kansas] State Agriculture Department’s water resources division. ‘There was a 30-foot decline.’” NY Times.

As natural disasters strike suddenly, it’s easier to react. A hurricane. Tornado. Fires. Earthquakes. But slow change with tipping points seems to elude our ability to plan, protect and adapt. We have not been a proactive nation, instead deferring maintenance, ignoring slow-build issues, until the ability to fix the problem eludes us or a big disaster requires hugely expensive emergency aid. Large parts of the mid-West will turn into desert and dust. It may be a problem we cannot solve. What other parts of this great land will suffer clearly-approaching environmental disaster… that we are doing nothing about?

I’m Peter Dekom, and I wonder if the United States will start becoming a net foodstuff importer, creating another strain on our trade balance?

Stupidland

America was once a nation of winners, scared of almost nothing, adventuresome, home of the brave, the cutting edge, excellence in invention, and independent in spirit. A nation of immigrants who knew how stupid it was to keep people down, and contain their inventiveness on the basis of their religious or ethnic background. E Pluribus Unum! Upward mobility. The place where the next “new” was definitely going to come from.

That was then, before we began to covet what we had, grew our own kind of fear that “they” were going to take it from us, and began a long history of exclusionary policies that have taken American competitiveness down a couple of very significant notches. Even though the majority of recent U.S. jobs have come from small businesses, so very many of which were founded by immigrants, we fear immigrants, believe that a bevy of Boston Marathon bombers lurk in every batch of newbies seeking fame and fortune in the “promised land,” and think that those damn foreigners are taking jobs away from hard-working Americans. Keep America for Americans! It’s basic Tea Party 101. Forget the fact that the real “Americans” are the “native” ones! The rest… immigrants and their descendants.

Aside from the fact that American companies have trouble finding local-born Americans to engage in stoop labor to pick crops, dig ditches the old fashioned way or engage in the most difficult and menial construction and domestic housekeeping jobs, they even have problems with super-qualified potential immigrants. At the top of the value spectrum, where foreign-born and often educated scientists, engineers and mathematicians crave U.S.-based opportunities, despite the chronic labor shortages among these senior levels of expertise, we make immigrating to the United States living hell for these experts and their families, even though studies repeated show how valuable they are in creating jobs for everyone around them.

Canada has watched our chronic stupidity with glee. Let those ultra-smart, super-educated non-white tech experts struggle with U.S. visas for themselves and their loved ones! Piss ‘em off enough with bureaucratic rules and barriers to entry! Yep, Canadians just love this stuff. You see, Jason Kenney, Canada’s minister of citizenship, immigration and multiculturalism, took a 4-day visit to our Silicon Valley mid-May. Before he left, he said (brazenly gloated) the following in an interview in Vancouver, British Columbia (Canada): “I think everyone knows the American [visa/immigration] system is pretty dysfunctional… I'm going to the Bay Area to spread the message that Canada is open for business; we're open for newcomers. If they qualify, we’ll give them the Canadian equivalent of a green card as soon as they arrive.”

The San Jose Mercury News (the voice of the Silicon Valley) summarized it this way on May 17^th: “[J]ust days before Kenney was set to tour San Francisco and the South Bay to promote his new visa for startup entrepreneurs, a giant red maple leaf emerged on a billboard off Highway 101 on the route from San Francisco to the heart of Silicon Valley, part of a Canadian advertisement encouraging tech workers here temporarily to migrate north permanently.

“Modeled on an idea first introduced but never passed in the U.S. Congress, Canada's new ‘startup visa’ grants permanent residency to entrepreneurs who can raise enough venture capital and start a Canadian business… ‘H-1B problems?’ asks the South San Francisco billboard, referencing America's temporary visa for skilled foreign workers. ‘Pivot to Canada.’”

The Silicon Valley has lobbied long and hard on this issue. They’ve generated concessions in the legislation pending before the Senate, but they still think that even with these proposals, they will still have to develop jobs overseas to provide them with the expertise they require:  “The industry achieved its main goals in the draft Senate bill: an easing of the green card process and an expansion of the number of skilled guest worker visas. That draft, though, includes language that it considers excessive regulatory oversight of when a company can hire a temporary foreign worker and lay off an existing American worker.

“Executives from Silicon Valley companies say such language would effectively keep them from using the larger numbers of temporary work permits, known as H-1B visas. They also warn of more jobs being shipped overseas. They are backing proposed amendments that would reverse those provisions… ‘The amendments are very important because they allow high-tech companies to use the visas as intended rather than creating regulations that make it so difficult they cannot practically be used,’ the Silicon Valley Leadership Group, which includes I.B.M. and Oracle, said in an e-mailed statement on [May 17^th]. It added that most technology companies already hire a preponderance of American workers.” New York Times, May 19^th.

Let U.S. hard patent applications drop, just as China’s and India’s applications are accelerating! We having such a strong economic recovery – NOT – that we can afford to keep solid value-producers and their families out of our country while poll-watching slogan mongers in Congress continue to vote and act against this nation’s best economic interests. Jingoism trumps genuine “really care about your country” patriotism every time! Are we out of our minds?! Why are we now a nation dominated by fear?!

I’m Peter Dekom, and it seems as if we have managed to elect one of the stupidest Congressional delegations in living memory!