by | ARTICLES, BLOG, BUSINESS, ECONOMY
Detroit is not too big to fail.
The city of Detroit must take its lumps, as difficult as they may be to swallow. But the city of Detroit is to blame. They made a very bad calculated error. They thought their decades of cronyism and sweeping promises were good and economically viable. The people didn’t realize, or really didn’t care, that they were sold a lot of snake oil from public service sectors and unions that were promised too-good-to-be-true benefits and rewards.
But Detroit must not be bailed out because there are a great many other localities in the same boat as Detroit, that operated on the same premises. We simply cannot afford this financial baggage. Thatcher warned us decades ago, “The problem with socialism is that you eventually run out of other people’s money.”
One of the most difficult facets of Detroit’s economic woes is the fact that the state of Michigan constitutionally protects the rights of public service pensions. But pensions systems function as a vendor as a budget item to be paid; therefore, there should be no (other) protection for them than any other vendor — to do so is a clear form of cronyism. It is typically very difficult to get constitutional provisions passed at all, and yet some states, like Michigan and New York for example, managed to get it done. So this mindset of economic self-protection has clearly long been pervasive; these states have had the constitutional pension protection in place for some time.
The constitutional protection for public pensions is rather duplicitous because of how such money is protected when finances or the economy sours. You see, when states and cities raise money via taxes, the purpose is not for profit-making, and they don’t make decisions based on profits and such. First and foremost, their job is to take care of citizens. You would think with that being the case, it would therefore be really important to the elected leaders to make certain that the bondholders (who execute money in large quantities to help finances projects to benefit the citizenry) would know that their bond money is protected first and taken care of first. This is common sense.
A lot of the time in municipalities, the bonds that are issued are General Obligation (GO) bonds. GO Bond money is usually considered first in line for protection because of the enormous sums of money issued. Bondholders have to be promised by the locality that they get paid back first as an element of protection, a form of collateral if you will. In exchange for that guarantee, the GO Bonds are usually issued at lower rates than other types of bonds. That iron clad arrangement enables the GO Bonds rates to be very affordable for projects (think “smart money”), specifically because the bond has the guarantee of the locality that the money is financially protected. Other bonds don’t have that guarantee and therefore have a higher rate.
But if there are constitutionally protected items (like a pension system), they get put at the top of the list for protection, even ahead of GO bonds. This is an enormous problem. GO bonds have no actual and true collateral — only the “full faith and credit” of the borrowing locality. What kind of hypocrisy is it now to say to the bondholders that the money which was was borrowed to pay for education and teachers and government projects for the betterment of Detroit citizens now won’t get paid back — because we have to first pay for the teachers and unions and public service retirement pensions?
Detroit must be allowed to go through the proper process and not be propped up. This is a city that continuously and consciously made outrageous and untenable financial decisions with no accountability. A bailout for this behavior and operation will have a rippling effect on other localities which practiced this same kind of cronyism. Why should other taxpayers now be responsible for shouldering such gross economic negligence of a city rife with economic corruption?
by | ARTICLES, BUSINESS, ECONOMY, OBAMA, TAXES
There is an erroneous sentiment perpetuated by the media that our government gives corporate tax breaks for moving jobs overseas, implying that our tax laws favor countries like China and India over the United States. This is simply untrue. Expenses that companies and businesses incur while doing business are rightly deductible (“a tax break”) but no specific tax benefits exist in our tax code for companies who relocate outside of our country.
What you don’t hear in the media, however, is that the real reason jobs are moving overseas is because of terrible business policies here at home. Companies operating abroad can undersell us — not so much because wages and costs are lower, but more importantly because their ability to conduct day to day business is not burdened by a) government at all levels hampering their every move, b) very high tax rates, and c) courts that allow frivolous and anti-business litigation to become a significant cost of doing business. We are part of a global economy now, but the foreign countries are rapidly becoming more user friendly than our own.
We are overburdening our businesses with convoluted tax codes and paperwork. The host of local, state, and federal regulations and taxes becomes a cost of every product we make and every service we sell. Additionally, the costs of our legal system itself — not just the direct costs of dealing with frivolous lawsuits but also the need to defensively organize business records and processes — constitutes a large and growing tax on conducting business.The end result makes it more expensive to produce a job here and many companies must move overseas to a friendlier business environment in order to remain financially solvent.
I have a close relative who is an owner and executive of a substantial manufacturing operation that he started in Shenzhen, China because of its business friendly environment. I’ve heard from him many times that he went into business, not to comply with government regulations, but to make things. The wages he pays and his operating costs are much lower than they would be here in the US, but that is substantially offset by less skilled workers and high transportation costs. But his taxes are much less than what they would be in the US, and his total legal expenses would be at least 50 times higher here. And he has not suffered a single expensive lawsuit since he started business in China 25 years ago! Is there any wonder why China’s economy is thriving while ours is stagnating?
Simply put, due to government interference, if a company is going to lose money here, it is going to leave. The real reason for jobs moving overseas is that higher taxes, expensive and complex regulations, and stifling legal environment have rendered the United States less globally competitive. Without major changes, we are destined to become a declining force in the business world.
by | ARTICLES, BUSINESS, NEW YORK, POLITICS
Governor Cuomo is on the list of presidential potentials for 2016. His positions on state and federal taxes need to be elucidated in case he becomes a major candidate in the next couple of years.
For instance, Governor Cuomo lashed out against the recent federal proposal to eliminate the Federal tax deductions for state and local taxes. He calls this “double taxation” because it forces individuals to pay two separate taxes – federal and NY State – on the same income- without giving any relief against the federal tax in recognition of the tax paid to the State. Without the deduction, Cuomo warns that tax bills will rise substantially for New Yorkers.
However, the truth is that Cuomo’s attacks are nothing more than an attempt to shift the focus away from New York State failing its fiduciary responsibility to its taxpayers. It currently levies a very high level of taxation upon its citizens. The deduction is simply a subsidy that masks the egregious overspending of the state which creates the situation in which high taxation is necessary to feed the body politic.
Why should the federal government have to subsidize New York at all? If the residents of New York State think that high (some would say ludicrously wasteful) government spending paid for by very high taxes is the right way to run a state, it is certainly their right. But these residents also have no right to ask taxpayers of other states to subsidize them. And that is exactly what happens when the federal tax code enables New Yorkers to reduce their federal tax simply because they pay high taxes to their state.
Furthermore, Governor Cuomo’s outrage over this “tax increase” is blatantly hypocritical. Where was his outrage when the federal government raised tax rates which fall so overwhelmingly on his NY constituents? Where was his outrage when the federal government’s Alternative Minimum Tax (“AMT”) kept exploding the tax liability of New Yorkers (mostly because the AMT does not allow the deductions for state and local taxes)? And where was his outrage against himself when he broke his clear promise and substantially raised NY income taxes on the most productive New Yorkers?
So yes, although the proposal will seriously hurt all New Yorkers, it is essentially and simply a reform that puts all taxpayers around the country on a level playing field. If Cuomo is so concerned with New York’s taxpayers, he should aim to reduce the scope and size of government and the wildly out of control spending that created it, instead of adding to the budget deficit by his latest spending schemes.
by | BLOG, BUSINESS, ECONOMY, NEW YORK
I Love NY (money)
Knowing that Gov. Cuomo’s is considered a possible contender for 2016, his use of taxpayer funds in this regard is appalling. My latest on Canada Free Press this morning:
It is an outrage that Gov. Andrew Cuomo is spending up to $140 million of taxpayer money and funds received for disaster relief, to publicize the advantages of conducting business in New York. New York is indisputably one of the most unfriendly business states, with a Legislature that piles huge administrative burdens onto businesses and a Department of Taxation that is among the most aggressive in the country.
Thanks to the NY Legislature, the state demands a payment of an LLC fee every Jan. 30, causing large administrative burdens disproportionate to a small amount of additional tax revenue. It also requires a high minimum-wage, creating an unnecessary and expensive burden on small businesses.
The state also introduced a brand new “MTA” tax with new forms to fill out as a separate levy, simply because they did not want to take the heat for raising existing rates. When a huge outcry against this ridiculous tax was made, the state’s “fix” was to exempt some lower income businesses while making the complications for the remaining businesses even worse.
New York State recently created a new burden on all employers requiring every employer to make specific annual reports to each of its employees in significant detail, a provision clearly intended more to provide fodder for employer lawsuits than to protect the rights of workers. As long as Sheldon Silver continues as Speaker of the NYS Assembly (and a current partner in an anti-business civil litigation law firm), the legislature will continue to make it inordinately difficult to carry on with business in New York. It should be noted that some well known restaurant organizations have sworn never to open any new facilities in New York State, specifically due to its impossible and litigation-friendly business environment.
The Legislature continues to add the latest nanny state employment regulations each year, making New York a gold mine for lawyers to sue employers over technicalities. Its insistence on giving enormous amounts to its public-service unions guarantees that the tax burden will keep growing in the years ahead. And New York has the “only one in the world” statute (called the Triborough Amendment) — that requires the state to continue paying its public service employees on the items contained within an expired contract — making it impossible to negotiate any austerity.
The New York Department of Taxation is no better, as it ruthlessly goes after extra New York City taxes paid by state residents and New York state taxes paid by non-New York state residents. It demands huge and automatic penalties built into tax law on each assessment, penalties that are used as levers to get the New York taxpayer or business owner to agree to compromises that they often don’t really owe.
One anecdote that encapsulates this mentality is the individual who lived with his family out-of-state. He bought a home for his elderly parents in Staten Island and was successfully taxed as a NY City resident. The state’s determination? He had a key to the front door, and a few items of clothing in the closet!
Clearly, for the average person in New York, it is an onerous state in which to do business. If Mr. Cuomo wants to create a better business image, he must make the state a better and more business-friendly place from the ground up. Instead of trying to deceive people with taxpayer funded propaganda into thinking that New York has a healthy business climate, use that $140 million to reform his deplorable Legislature and Department of Taxation. Any non-NY business that falls for Gov. Cuomo’s propaganda campaign gets what it deserves.
by | BLOG, BUSINESS, POLITICS, TAXES
We need more of your money!
The Senate passed the online sales tax bill, formally known as the “Marketplace Fairness Act”. There is nothing fair about this act. It is a back-door way for states to add additional levies on their citizens under the guise of leveling the playing field . From an accountant’s perspective, here’s how:
Most proponents of the bill suggest that there is somehow a dearth of tax revenue from which states are suffering. This sentiment was echoed in the pages of the WSJ by Arthur Laffer. He wrote that “the exemption of Internet and out-of-state retailers from collecting state sales taxes reduced state revenues by $23.3 billion in 2012 alone, according to an estimate by the National Conference of State Legislatures. The absence of these revenues has not served to put a lid on state-government spending. Instead, it has led to higher marginal rates in the 43 states that levy income taxes”.
This is simply untrue. State legislatures have always set their tax rates with the full understanding that they would not collect that supposed $23.3 billion of internet “slippage”. It’s not like there is a line item in state budgets that lists “uncollected online tax” or “tax cheats” with a number attached. Sales tax is one of many levies whose revenues positively fund government spending. This online tax, if passed by the House next and signed into law, will just be yet another tax (and therefore revenue) for the coffers. Higher marginal rates exists because state-government spending levels are higher, not because of some “absence of tax” that forces states to raise rates.
In our states’ budgets, current taxes rates (income + sales, if applicable) are set at levels appropriate to cover the calculations of state spending. 49 out of 50 states require a balanced budget. These states are fully aware that taxes are “avoided” (internet and out-of-state) and therefore don’t count them in their budget calculations. Thus, by passing this new internet tax, you are merely giving the states a free reign to add a tax without taking the political heat for it, under the guise of “fairness”.
Looked at it another way, it is unconscionable for Congress to pass this legislation without requiring that states lower their marginal rates so that the new tax makes everything revenue neutral. Higher marginal rates as they are already burden taxpayers. This internet tax doesn’t fix anything — because there is nothing in their budgets to be “fixed”. True tax reform (a true “fix”) always means broadening the base and thereby reducing the overall burden of taxes. Instead of that, what we have with this bill is a revenue grab.
Another fallacy for supporters is that including the internet tax in transactions is simply a matter of adding a quick, little tax line where there was none before. But it is highly irrational for legislators to believe that compliance with multiple tax jurisdictions for vendors will be an easy and unburdensome process. The recordkeeping will be excruciating.
This tax nightmare is similar to the 1099 fiasco originally included in Obamacare a couple of years ago, which expanded the reporting requirements to include all payments from businesses aggregating $600 or more in a calendar year to a single payee. Because of the insurmountable amount of reporting and paperwork that would have been associated with it, that provision was swiftly and subsequently repealed.
The effect of distressing our businesses to comply with this online tax collection will be a drag on the economy. Can you imagine vendors needing to figure such things as whether marshmallows are a taxable food/candy in some jurisdictions while it might be a non-taxable food in others? To think that software can seamlessly make this distinction is ludicrous, especially software run by the government. When has the government ever actually streamlined anything? And implementing such a convoluted tax while businesses are already having to deal with sorting out the egregious complexities of Obamacare compliance will certainly hurt businesses even more.
Internet tax collection for 9,600 local tax jurisdictions or even just 50 states is too much. If such a tax is to be passed, it should be either a tax in which every state accepts one set of rules OR a tax payable to the state-of-sale only — which would ultimately be better for tax competition overall.
The economy is suffering enough. Adding yet another tax for citizens, which also requires burdensome compliance for businesses, is not the way to do it. Laffer was correct when he observed that “the principle of levying the lowest possible tax rate on the broadest possible tax base is the way to improve the incentives to work, save and produce—which are necessary to reinvigorate the American economy and cope with the nation’s fiscal problems”. This proposed tax doesn’t do that. In its current form, it is just another revenue stream for our bloated, overspending government.
This is no “Marketplace Fairness Act”. It is an atrocity.
by | BLOG, BUSINESS, ECONOMY, OBAMA, POLITICS
Yesterday, I wrote about Obama’s 180 degree turn from proposing the sequestration cuts and vowing to veto to keep them, to blaming Congress during the Presidential debates, to currently blaming Republicans for sequestration. (more…)
by | BUSINESS, ECONOMY, HYPOCRISY, TAXES
During the State of the Union last week, Obama issued a call to raise the minimum wage once again. He cried forth, “Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9.00 an hour”. What he fails to comprehend or deliberately ignores is that the impact of such a policy on small businesses — the backbone of our economy — would be devastating. Higher wages inhibits a business’s ability to grow and invest. (more…)
by | BLOG, BUSINESS, ECONOMY, OBAMA
The idea that government spending is necessary in order to keep an economy going is a Keynesian theory that hasn’t proven worthwhile in the last four years. At the same time, business growth has been sluggish to non-existence because of – not in spite of – current government policy. (more…)
by | BLOG, BUSINESS, FREEDOM
This past week, The Hill reported that the cost of Obama’s regulations for his first term were $518 billion, with nearly half of that –$236 billion – coming in the year 2012 alone. Expensive and prohibitive government policies such as these are the driving force behind the mass exodus of businesses abroad. (more…)
by | BUSINESS, ECONOMY, TAXES
Obama wanted to let the Bush tax cuts expire for all. During his push all through election season, he tried to sweeten the deal with targeted tax breaks for small businesses. But this plan and strategy only clarified Obama’s lack of any real world business experience as well as his continuous capacity to undermine the economy. (more…)
