Browsing Category: "Economy"
How the U.S. Tax System Works
If you're new here, you may want to subscribe to my RSS feed so you don't miss anything. Thanks for visiting!
I recently came across this on the interweb. Good stuff.
Bar Stool Economics
Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
* The first four men (the poorest) would pay nothing.
* The fifth would pay $1.
* The sixth would pay $3.
* The seventh would pay $7.
* The eighth would pay $12.
* The ninth would pay $18.
* The tenth man (the richest) would pay $59.
So, that’s what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve.
“Since you are all such good customers”, he said, “I’m going to reduce the cost of your daily beer by $20”. Drinks for the ten now cost just $80.
The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his “fair share?”
They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.
And so:
* The fifth man, like the first four, now paid nothing (100% savings).
* The sixth now paid $2 instead of $3 (33%savings).
* The seventh now pay $5 instead of $7 (28%savings).
* The eighth now paid $9 instead of $12 (25% savings).
* The ninth now paid $14 instead of $18 (22% savings).
* The tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.
“I only got a dollar out of the $20,” declared the sixth man. He pointed to the tenth man, “but he got $10!”
“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got ten times more than I!”
“That’s true!!” shouted the seventh man. “Why should he get $10 back when I got only two? The wealthy get all the breaks!”
“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!”
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!
And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.
David R. Kamerschen, Ph.D.
Professor of Economics, University of Georgia
Inconvenient Information
Today I found that a site I visit on some occasion - economicindicators.gov is being shut down by the government due to “budgetary constraints.” I wondered how that is possible considering the $3.1 trillion proposed budget for ‘09.
This site was even rated by Forbes on their Best of the Web list in the Market Data category. It certainly can’t be that expensive to keep this site up and the value to cost has to be through the roof. The only conclusion I could come to is that this data is inconvenient. The administration is trying to paint a rosier picture of the economy and cold hard data doesn’t support that image.
Upset with this, I did a search to find out if I can get more context around this event. I stumbled upon The Carpetbagger Report. They mentioned this shutdown as well as several other actions to make inconvenient data unavailable.
* In 2005, after a government report showed an increase in terrorism around the world, the administration announced it would stop publishing its annual report on international terrorism.
* After the Bureau of Labor Statistics uncovered discouraging data about factory closings in the U.S., the administration announced it would stop publishing information about factory closings.* When Bush’s Department of Education found that charter schools were underperforming, the administration said it would sharply cut back on the information it collects about charter schools.
Regardless of political affiliation, this is disturbing. Government should move towards more transparency not less. Reducing public information is the characteristic of a closed society not a free one.
I encourage you to write to your congressman/woman to let them know this is not right. Last I checked that information is still available.
Your Wallet’s Worst Nightmare
Of course I’m talking about inflation, the silent mugger that robs you of your buying power.
Here’s an excerpt from a newsletter I receive from the President of Everbank World Markets:
The Fed has turned its back on inflation folks… And here’s some items that you won’t see in the CPI data…
1. Grade-A Large Eggs - Dec. 06 $1.54 a dozen… Dec. 07 $2.10, and current $2.73 a dozen… That’s up 36% in a year!
2. White Bread - Dec. 06 $1.13 a loaf… Dec. 07 $1.28 a loaf, and current $1.62 a loaf… That’s up 12.6% in a year!
3. Whole Milk - Dec. 06 $3 a gallon… Dec. 07 $3.87 a gallon, and current $3.93 a gallon … That’s up 29% in a year!
4. Fresh Whole Chicken- Dec. 06 $1.06 per pound… Dec. 07 $1.17 per pound, and current $1.19 per pound… That’s up 10.3% in a year!These are the things I talk about all the time, in that an individual can feel the inflation eating away at this wallet… This is just some simple food items… I’m not even talking about things like: Tuition… Insurance… Medical… Movie tickets… And so on…
The Bureau of Labor Statistics tells us that inflation is running at 4.1% a year. I guess things average out, but to an individual where the household’s largest expense is housing, auto/fuel, and groceries I can’t imagine that 4.1% would hold. It is just a hunch, but the last time I bought groceries with my wife (and paid attention) I thought she was crazy because the bread was $1.99 and the milk was $3.99. I told her “I swear milk is only 2 something and bread is under a dollar.” She pointed out that you can’t even buy generic bread/milk at that price. Certain I was right, I did the right thing and shut up and Google’d food inflation stats when I got home. Sure enough it was confirmed. I was living under an inflationary rock this whole time. Prices were stable for so long that I stopped paying attention to stuff like milk prices.
One thing to note is that much of the inflation in food is caused by transportation costs (fuel). High oil prices have a direct impact on food inflation. In fact it is felt more so in Asian countries where the rate of oil consumption is going up faster than the U.S. This is yet another reason why we must strive to encourage mass transportation, less urban sprawl, and alternatives to our oil-based vehicles.
The other factor that certainly can’t be dismissed is our monetary policy. The Fed cut rates down to 3.5% last week. I suspect that today we’ll be looking at 3.00% after today’s FOMC meeting. This will further stoke inflation and reduce the dollar’s value. Since most good we purchase are foreign it reduces our buying power. I guess a nice indicator to watch is to see if Wal-Mart keeps “rolling back” prices as our dollar devalues. I believe they are the largest importer of Chinese goods now of all the chains.
Well I mentioned food, but what about housing? Housing will be pumped up or at least not allowed to deflate with these current low rates. In addition there is some work going on to increase the FHA loan guarantee limits to upwards of 729K from a current 362K (for high cost areas). There is a general concensus that some areas of the U.S. such as San Francisco are as much as 30% overvalued. By passing this type of regulation the Fed doesn’t allow prices to come back in line. This gives the false impression that prices can’t fall. This is exactly the type of interest rate policy that caused the housing bubble in the first place. When I buy a stock at say $100 and then earnings don’t materialize, it may fall to $80. That’s the market. I don’t have the government stepping in to try to boost it back up. That just wouldn’t make any sense from an economics perspective. I sort of went on a tangent, but my point is housing inflation will continue as long as we keep printing money.
The Economy, the Dollar, and you.
I’m evaluating the Fed Cuts, the state of the economy and it plays like a broken record. So I dug up some older posts and checked to see if I still believe them. Here are 2 posts that I looked at.
(11/28/07): In 5 Reasons Why the Market will Drop by q1 2008
I mentioned that the Fed would cut interest rates down to 3% perhaps even 2.5% further weakening the dollar.
What happened: The Fed has cut interest rates down to 3.5% and if they cut again to 3% on Wednesday we’ll be at my target.
Verdict: Almost there. Fed cuts will continue to weaken the dollar and “stimulate” the economy to flat growth.
(11/26/07): In 8 Reason Why the Dollar will Continue to Fall
I gave my reasons why I believe the dollar will continue to fall.
What Happened: The chart speaks for itself. The dollar has fallen 33% from $69.42 to $46.72 in a short 2 months.
Verdict: Dollar is still weak and monetary actions won’t help. The U.S. will see flat growth over the next 6 months at best.
And this week . . .
I will be basing my trades on the below assumptions:
- Dollar will continue to fall.
- Commodities will continue to see high prices.
- Growth will continue to be outside the U.S. in 2008.
This week I will be seeking out plays against the dollar and look at commodity plays. A few like Barracks and Rio Tinto come to mind. Also I will be assessing which international markets appear to be positioned for growth in 2008 and the ETF’s/Funds to invest in them.
If you have any trade ideas along these lines, please feel free to comment.
Why low interest rates are bad for you
AKA - Ron Paul rips Bernanke a New One
One thing about Ron Paul is that he believes what he believes and doesn’t beat around the bush. You have to respect that. He is point blank on the weakening of the dollar and the inflationary effects of the Fed rate cuts. His candid speaking and relentlessness earns my respect.
Also Note NBC’s “Green is Universal” logo.
P.S. I had some problems with my video player and I think I have it fixed now. You may see some broken videos. I’m in the process of fixing them, but if you find some please leave a comment.
Thanks
Dax
