TAXES: HERE COMES THE GRIM REAPER! , PART 1

Introduction


This is going to be another serialised article and not just because I think it suits the blog-format better than a long winded newspaper length article. The truth is that I am not a fiscal expert by any stretch of the imagination and that, while I got a good idea of what I want an ideal/utopian tax system to look like and achieve, I am quite open as to how we achieve it and, even more, I am not entirely sure as to how best translate some of that utopian vision into practice (even just theoretically. I have no delusion as to the likelihood of achieving any of it in reality).


The Objective


The whole point of taxation is for the government to collect money to then spend on the purchase of public goods. We might spend endless amount of time on what ought to be publicly purchased and how much ought to be spent on any particular item or public good (or even what is and isn't a public good in the first place). However, that's a discussion best left for later/a different article. The question here is how to collect and from whom.


Lots of people have proposed different systems - John Mauldin (website on the side) has recently written an article on the subject, there's been several pieces on Bloomberg and, in the USA, we've had the hilarious 9-9-9 plan from Herman Cain etc.


My own reflections on the subject are as follow: First and foremost, I want taxes to be strongly progressive. Flat taxes, a popular idea with quite a few people, have the inconvenience of re-creating an aristocracy more or less within a generation - unless accompanied by confiscatory inheritance taxes (death taxes, to the Republicans, if any ever read this blog). I hope I don't have to expand on why an aristocratic society is not a good idea for the rest of us peons.


A secondary objective is that I do not want taxes to unduly modify behaviours, discourage savings/investments (or consumption for that matter) and, in general, mess with economic incentives and the utility maximisation behaviour of the various agents. I would not go as far as saying that I disagree with taxes being used for social engineering as a matter of theological belief but, in practice, I am unlikely to find a tax break I like - even for marriage or kids or other 'worthy' causes such as 'green energy'... If you want the government to incentivise behaviours, it ought to do so via targeted spending, not forgoing tax collection.


The Reality


When it comes to making taxes progressive, many people disagree violently at the idea of high level of taxation on rich people. Several reasons are given - from "this will dis-incentivise high earners to work" to "this is robbery, pure and simple" to the instant classic "why do you hate success?". I will probably expand later on why those arguments are wrong in various ways but the first thing I wanted to do in this stream-of-consciousness post (I am tired, sorry...) is post the following graph.

For some reason, Paul Krugman (of NYT blogging and Nobel fame) prefers the log-variant of the same. See below. I don't. I like the outrageous jump in remuneration at the extreme right hand of the graph to be perfectly clear.

REFRESHING MACRO-ECONOMICS, PART 1

Introduction

This will be more of an on-going series. Plenty of people have expressed their dissatisfaction with the current state of our economic knowledge, especially with regards to macro-economics: Paul Omerod wrote a book or two on the subject and this crisis led to countless criticisms from The Economist to Paul Krugman.

Via 'Money Illusion', Scott Sumner's blog (on the side), I became aware of a new 'school' of thought - the Market Monetarists (the first theory to be born through the blogosphere, says Wikipedia). In a way, his and fellow Market Monetarists relative success push me to try. Sure, I am not an accredited academic in Economic sciences but then macro-economics knowledge is so limited, so primitive in many ways that I do believe amateurs could still make meaningful contributions.

I do not pretend to be Keynes reborn or have the penetrating vision of Adam Smith or even the furious passion and intellectual reach of Karl Marx. But, in this series, I hope to highlight a couple of important points and, even if I cannot model macro-economy mathematically myself, at least point to some general rule of thumbs, both for the politic/public discourse and for professionals to build upon. I suspect that, at first, most people will find some of the points either obvious or not meaningfully different from one school or thought or the other. But I hope that the combination of all the factors will lead to something interesting.

1 - THE PRIMACY OF AGGREGATED DEMAND (AD).

As discussed in other posts/articles, following the stagflation of the 70s/early 80s, supply side economics came to the fore. Wikipedia summarizes its foundation rather well: "Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created by lowering barriers for people to produce (supply) goods and services, such as lowering income tax and capital gains tax rates, and by allowing greater flexibility by reducing regulation. According to supply-side economics, consumers will then benefit from a greater supply of goods and services at lower prices".

GREECE, THE EURO AND EUROPE

NB: THIS IS ANOTHER EARLY 2010 ARTICLE. BUT IT REMAINS QUITE RELEVANT. THE END GAME FOR GREECE AND EUROPE IS NEAR AND THE OPTIONS ARE THE SAME NOW AS  THEY WERE BACK THEN.

GREECE, THE EURO AND EUROPE

A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy..."

Alexander Fraser Tytler, Scottish lawyer and writer, 1770

"Do not trust the horse, Trojans. Whatever it is, I fear the Greeks even when they bring gifts."

Virgil, Aeneid, Book 2, 19 BC:

INTRODUCTION

By now everyone is aware of the tragedy unfolding in Greece. Its sovereign bond market has become quite agitated with the 10-year Greek government bond trading around 7% and now yielding near 400 basis points more than the corresponding Bunds. At the same time, Greek credit default swaps – measuring the cost of insurance against a Greek sovereign default – have exploded to reach 425bps (see below).

WHAT WENT WRONG WITH OUR CAPITALISM

NB: THIS IS (AGAIN) AN OLD ARTICLE (EARLY 2010), POSTED HERE FOR THE RECORD...

WHAT WENT WRONG WITH OUR CAPITALISM?

INTRODUCTION

Why did this crisis occur? The answer often depends on who you ask. For some, it’s all about greed. Those greedy bankers, they ruined everything. Or maybe it is incompetence. Those incompetent regulators, central bankers and politicians, they ruined it all for the rest of us. If you’re morally inclined, you can say it’s the general populace’s fault as they wanted to live the life of Riley, wanted to spend, consume, and feel rich and they recklessly borrowed to do so. If you’re more technically minded or financially savvy, you can also blame CDOs, maybe CDSs and, in any case, all these fancy derivative products.

While any or all of these explanations may be partially right, they fail to go deep enough and really explain what went wrong and how we ended up with the worst deflationary crisis since the 30s, something we thought we had vanquished long ago.

In this article, we will explore what really went wrong and how it helped generate all the behaviours described above.

ISDA: How in hell does such corruption go unpunished?

http://www.isda.org/dc/docs/EMEA_Determinations_Committee_Decision_01032012Q1.pdf

Has a Restructuring Credit Event occurred with respect to Hellenic Republic?

Vote result: No (!!!!) . 15 "NO" votes - (And not a single 'Yes')

But who vote on this  EMEA Determinations Committee?

Bank of America Merrill Lynch
Barclays
Credit Suisse
Deutsche Bank AG
Goldman Sachs
JPMorgan Chase Bank, N.A.
Morgan Stanley
UBS
BNP Paribas
Societe Generale
Citadel Investment Group LLC
D.E. Shaw Group
BlueMountain Capital
Elliott Management Corporation
PIMCO

i.e. as far as I can tell, big banks likely to have a net SELL position in Greek CDS i.e. the ones who sold the insurance are the ones deciding whether there's been an accident or not. It beggars belief!

A QUICK POST: JAMIE DIMON IS AN IDIOT!

http://www.bloomberg.com/news/2012-02-28/jpmorgan-chief-dimon-assails-pay-practices-at-newspapers-in-bank-s-defense.html

Courtesy of New Deal 2.0 (link to that blog on the side), I came across this particular story. Now, Jamie Dimon is on the record for saying some pretty stupid stuff when it comes to high pay.

But this really takes the cake and then some - "Worse than that, you don’t even make any money!” Dimon said, directing his comments to those in the media covering the company’s investor day and drawing laughter from his audience. “We pay 35 percent. We make a lot of money.” JPMorgan posted $19 billion in profit last year.

I mean. Can Jamie Dimon explains to me, to anyone how his bank and any bank in the whole wide world would have survived if the Central Banks and governments across the planet were not pouring money on them?

When I can borrow at 1%, lend at 5-7% more or less guaranteed (well, as guaranteed as a western government can make it these days) and leverage that spread anywhere between 20 and 50 times, it would take a very special kind of ineptitude to NOT make a killing. An idiot child would manage.

Now. I am not against bailing out the banks. That was necessary. I am not even against allowing them to rebuild their balance sheet strength at our expense (although that's entirely un-capitalist and I think it'd be simpler and fairer to either temporarily nationalise said banks or make equity injections and exercise our shareholding rights aggressively). 

To then have Jamie Dimon parading like the most arrogant peacock of them all makes this reasoned calculus really really painful. It almost make me wish we'd let the banks collapse, just to see his bloody face when he'd lose everything.

DOUBLE DIP RECESSION... OR NOT?

NB: THIS IS AN OLD ARTICLE WRITTEN MID-2010. I AM PUTTING IT ON THIS BLOG FOR THE RECORD...

Introduction

Starting with Greece, the markets have experienced quite a bit of turbulence that was on the way out due to the heavy handed intervention of the ECB and of various EU governments, most notably Germany. But some softer than expected macro data, fears about budget cuts and about tax rises have now grabbed the headlines. As governments try and deal with their national deficits, will we experience a double-dip recession?

DEFICITS: HOW TO PLUG THEM.

Western governments are heavily indebted. If you include future commitments, they are as good as broke. Any increase in interest rates would have tragic consequences as the debt servicing charge would explode upward. Rightly fearing that speculators and bond vigilantes might start to demand higher rates for holding their debt and thus trigger a crisis as in the case of Greece, governments are hurrying, especially in the UK and Europe, to cut government spending, raise taxes and/or lower social benefits.

As is obvious to all economists, such actions will lower overall demand. If the private sector turns out to be less resilient than thought, we will surely experience a double-dip recession. And, of course, tax receipts will then fall as well, thus cancelling any hope to reduce deficit levels.