One element of the President's budget is a sham.
The money printing of the Federal Reserve with no anchor to gold has allowed the welfare state to grow to immense proportions. It has allowed politicians to buy votes by spending taxpayer dollars on multi-million dollar Keynesian zero return albatrosses. It has allowed politicians to enslave black people on a welfare plantation of entitlements. Bernanke and his cronies reward mal-investment through their policies. They reward bad behavior (borrowing & spending), while punishing good behavior (saving and investing). West Philly is a testament to failed economic policies, government waste, lack of personal responsibility, corrupt politicians, excessive union costs, and the delusional belief that government can create economic growth. The 30 Blocks of Squalor is descending further into squalor and it will accelerate as Bernanke’s policies further destroy what remains of capitalism in this country.
Hauser's law contends that Federal tax revenues rarely rise above 20% of GDP, regardless of where nominal tax rates are set. The implicit dynamic here is that when taxes exceed 20% of GDP, participants modify their behavior to lower their taxes. Corporations will shift operations overseas. Some high-wage earners will simply work less, reducing their income to lower tax brackets. Small business owners will decrease their compensation, cut back their workload, or simply bail out. Others will leave the high-tax market and slip into the cash/informal economy where the tax rate is zero. In a $15 trillion economy, this suggests the maximum Federal tax revenue that can realistically be collected is around $3 trillion. Currently, Federal tax revenues are around $2.5 trillion, and Federal spending is about $3.8 trillion. That leaves a $1.3 trillion deficit that is filled with borrowed money. Tradeoffs will have to be made. That is the essence of adulthood. Too bad we've become a nation of spoiled adolescents.
To the Execs at Walmart, and all of those other retailers that are feeling the SS pinch, I say "Welcome to the club".
Timing is a bit inconvenient, however.
The European Commission formally endorsed the financial transaction tax agreed to by eleven of the 27 members. The tax will be set at 0.1% for stocks and bonds and 0.01% for derivatives. The tax will go into effect at the start of 2014, by which time the participating countries will give it formal approval.
There seems to be two purposes of the tax. The first is to raise revenue. The EC projects the tax will raise 30-35 bln euros annually where ever and whenever an instrument from eleven is traded. This would seem to block the ability to avoid the tax by moving transactions out of the eleven countries. It reinforces the "residence principle". This essentially means that if some one is a resident of the eleven countries, or acting on behalf of a resident, the transaction will be taxed anywhere it takes place. The other purpose is to deter the high frequency trading, which some officials see as largely unnecessary and potentially destabilizing.
Everyone knows that for the better part of the past year Apple was the world's biggest company by market cap. Most also know that AAPL aggressively uses all legal tax loopholes to pay as little State and Federal tax as possible, despite being one of the world's most profitable companies. Many know, courtesy of our exclusive from September, that Apple also is the holding company for Braeburn Capital: a firm which with a few exceptions, also happens to be among the world's largest hedge funds, whose function is to manage Apple's massive cash hoard with virtually zero reporting requirements, and whose obligation is to make sure that AAPL's cash gets laundered legally and efficiently in a way that complies with prerogative #1: avoid paying taxes. What few if any know, is that as part of its cash management obligations, Braeburn, and AAPL by extension, has conducted a mindboggling $600 billion worth of gross notional trades in just the past four years, consisting of buying and selling assorted unknown securities, or some $250 billion in 2012 alone: a grand total which represents some $1 billion per working day on average, and which puts the net turnover of some 99% of all hedge funds to shame! Finally, what nobody knows, except for the recipients of course, is just how much in trade commissions AAPL has paid on these hundreds of billions in trades to the brokering banks, many (or maybe all) of which may have found this commission revenue facilitating AAPL having a "Buy" recommendation: a rating shared by 52, or 83% of the raters, despite the company's wiping out of one year in capital gains in a few short months.
This trend has been in place since the financial crisis, but the fact that it is accelerating is extremely disconcerting. First off, this is not the kind of behavior that should be witnessed in an “economic recovery.” Second, we need to remember the huge percentage of Americans on food stamps and/or disability. As we have discussed previously, many of them also have jobs. So essentially, a wage and a check from the government is still not enough to survive. They still need to tap into a loan from their 401k plans.
What a long and wild ride it has been since then and the forks in the road have been marked with turmoil, disdain and an ever increasing amount of debt for this small nation. The solution for each and every problem has been more money appended by more taxes and more austerity measures and the Greeks keep lining up and will keep lining up until the cash dries up and then other conclusions will be found. You may think it is a never ending story and that the current act will go on forever but that would not be my bet nor do I think it is a likely conclusion. Whether it is the German Parliament or the IMF or some other nation in Europe under the guise of nationalism and prudence who has had enough and rightly says, “That is enough;” there is an ultimate endpoint to this game.
Thirty years ago, the USSR was better known as the "Evil Empire." Fast forward to today, when its successor Russia, is apparently the "Tax Free Empire", and less socialist than France, at least to infamous millionaire expatriate Gerard Depardieu, who as reported previously has paid €145 million in taxes over 45 years, and who demonstratively decided to give up his French passport in the wake of France's socialist 75% millionaire tax (subsequently ruled unconstitutional), and as of today, has just been granted Russian citizenship.
-If you’re employed, you’re a loser.
Time is running out. The cliff negotiations have devolved into two unpalatable options: (1) extend just the middle income tax cuts and extended unemployment benefits and allow about two-thirds of the cliff to happen, or (2) go over the cliff in the entirety. In BofAML's view, given the short time frame and legislative hurdles, the latter appears much more likely. Stock market vigilantes have replaced bond vigilantes as the potential good, bad, and ugly scenarios are devoured flashing red headline by flashing red headline. They, like us, believe that going over the cliff is not a benign “slope” as some suggest. Rather, it accelerates the already-building damage to the economy and markets. The latest evidence is the plunge in consumer confidence. Indeed, this could mark the beginning of the rotation in the uncertainty shock from businesses to consumers. Going over the cliff has many secondary, largely ignored, negative impacts, including tax changes that could damage the housing recovery, as well as negatively impact education and alternative energy, among many others.
To understand this endgame, we need to start with the financial and political basics of wealth and power in the U.S. Put these nine structural dynamics together and the endgame becomes clearly visible: Politically, a Tyranny of the Majority comprised of those who draw direct transfers/benefits from the Federal government, is ruled by the top half-of-1% financial aristocracy who own the majority of income-generating assets. The minority, who pay most of the taxes (the 24.5% between the majority and aristocracy), will see their taxes rise as the aristocracy buys loopholes and exclusions while the bottom 50% pay no income tax. Financially, the Federal government’s spending has outrun the tax revenues being collected. Structurally, Federal expenditures for entitlements (Medicare, Medicaid, Social Security, Veterans Administration, etc.) will rise as Baby Boomers retire en masse over the next 15 years, while tax revenues will stagnate along with earned income. There is no way to square these circles. What few dare admit, much less state publicly, is that the Constitutional limits on the financial Aristocracy and the Tyranny of the Majority have failed.
The use of economic pain to expand governmental control of a nation is not a new concept. It has been a tool successfully used many times in history. The reality that "taxing the wealthy" does not increase revenue or promote economic growth is lost on the 80% of Americans that are economically uninformed and are just struggling to maintain their current standard of living. The path over the "fiscal cliff" is bad for the economy, the average American family and the stock market. However, for the White House, going over the "cliff" is the next move in this elaborate game of chess which will clear the path towards completing Obama's long term objectives of complete socialization of the American economy.
Amidst all the "fiscal cliff" talk of raising tax rates, few dare to ask: have tax revenues topped out? How could tax revenues decline as rates go up? Easy: people modify their behavior in response to whatever incentives and disincentives are present. Make mortgage interest deductible and people will rack up huge mortgages. Reduce the yield on savings to near-zero (thank you, Federal Reserve) and people will save less. Raise tax rates and people will lower their income or move to low-tax locales. As the saying has it, "Money goes where it is treated well." Supporters of higher rates tout studies that find upper-income taxpayers shrug off higher rates, staying put in high-tax states: Do High Taxes Chase Out The Rich? and Superrich stay put in high-tax states like California. On the other side of the ledger is this study from Britain: Two-thirds of millionaires left Britain to avoid 50% tax rate. Which view is correct? Both, as a result of different dynamics. There are at least four separate dynamics in play.