Sunday, November 12, 2017

NOVEMBER 2017 DESERT OF THE REAL INVESTMENT NEWSLETER


 

Not even a lone trapper in the Alaskan wilderness could have missed the fact that markets are at record highs, after pushing through numerous previous records. The markets closed Friday (11.10.17), after a small pullback at 23,422 for the Dow, 2582 for the S & P, and the NASDAQ at 6,751.

 

Higher closes are possible, perhaps likely. But a pullback is also inevitable. Whether the pullback comes in stages, or is a massive correction, is not completely predictable.  But a factor relevant to the run up, and likely the pull back, is record low volatility. 

 

VIX is not the Nick Name for the Fourth Reindeer

 

The Chicago Board Options Exchange (CBOE) VIX VIXis a measure of the expected volatility of the S & P 500 for the next 30 days.  It measures implied volatility, or what the market predicts.[1] It is sometimes referred to as the “Fear” index. It reflects investor sentiment. It formerly has predicted decreases in the S & P.

 

The VIX has remained generally low over the last few months. Historically, a VIX value of ten is very low. But recently, the VIX has spent much of its time below ten, sometimes falling as low as eight.

 

The VIX has seen a spike or two recently. A recent spike happened on November 9th, likely due to concerns that the republican tax plan would be delayed.  One can expect a volcano if it appears that the tax bill will not be passed, or only minimal parts of that proposal are passed. *

 

Where there is Momentum, There is Money. Where There is Volatility, There are Ways to Make Money

 

When markets move, either way, traders make money.[2] When markets reach stratospheric heights based upon discounted events, a substantial pullback is likely based upon the occurrence, or nonoccurence, of such event. So news of the collapse of the tax plan could send markets reeling. Investor sentiment of the possible failure of such tax plan may be presaged in the VIX.

 

Commentators have also noted that because the VIX does not include world markets, it is limited in its ability to gauge investor sentiment.  Others think that the VIX is being heavily shorted, effectively keeping the index low.

 

Get out Your Old Financial Economics Textbooks

 

Finally,  some believe that Fed monetary policy is uber-transparent, allowing market participants “real time” information about monetary policy and permitting market participants to anticipate and react accordinglyThis essentially creates a feedback loop where the market and the Fed match move to move. Market events are ostensibly discounted and the Fed is extremely accommodating. 

 

Investopedia Investor Anxiety Index (IAI)

 

The IAI is a broader, although less technically validated, index. It is based upon the sentiment of Investopedia readers worldwide. It captures three data points, macroeconomics, investor, and debit and credit sentiment. A reading of 100 on the index is considered neutral. The index currently stands at 101.9, very close to neutral.

 

Historically, October and November are the worst months for the markets. We are nearly one-half way through November, but those historical markers may not mean too much in a market like this. 

 

EVERYTHING IS DISCOUNTED, EVEN THE FIVE FINGERS, IN THE DESERT OF THE REAL!

 

* Although this is not generally a political blog, tax modifications, euphemistically called "tax reform," are merely grand plans for the operation of government, as artfully described by the late political scientist Harold Laswell, as "Politics: Who gets what, when, and how." This tax bill is a massive tax cut for wealthy business owners that own pass-through entities such as LLCs and LLPs. Lowering the corporate from 30% to 20% sounds meaningful, and may have some salutary effect. But since the effective US corporate rate is 18.8%, this piece of the bill is a canard. It provides modest tax relief to many middle income tax payers, and raises taxes for others. But the bill also zeroes out popular benefits for politically "weak" constituencies. In the Author Rob's personal view, he hopes the bill fails. The market will tank and he will clean up selling short positions. And a great injustice will be avoided.

[1] Implied volatility is also a relevant value for options. Implied volatility will aid an options trader in determining whether the option is more likely to fluctuate in price than other options. Remember, however, volatility is not a directional indicator. It only predicts price movement.
[2] Actually, there are ways for traders to make money in flat markets.  But that is a topic for another day.

Sunday, October 8, 2017

OCTOBER 2017 DESERT OF THE REAL NEWSLETTER


OPTIONS IN OPERATION

This newsletter for October 2017 will take a look at common Call and Put Strategies that a stock investor may employ in his or her portfolio.

ANOTHER MATRIX

Investors buy or sell options because of their beliefs about the future direction of stock prices.  (There are other strategies that seek to earn money from the non-movement of the underlying stock, but that is a topic for another month. The matrix below correlates future belief about stock prices with some common option strategies.

BASIC OPTION STRATEGIES

If an Investor owns ICBM stock and:

1. Investor thinks Stock may rise somewhat or
maintain its current price: Sell Call.
This Strategy is called selling a “Covered Call.” It is a covered call because the option investor owns the underlying stock. If the stock behaves as the investor believes, the investor will receive a premium for selling the Call and will pocket the money from selling the premium. 

2. Investor is concerned Stock will fall: Buy Put.

This Strategy is called buying a Protective Put. Owning the Put will give them the right to exercise the option and sell the stock at the Put Strike Price. Also, the value of the Put will rise so the Investor may close out the position and make money on the position.

COMMON STRATEGIES

Numbers 1 and 2 are commonly used. The analysis below will expand upon these strategies and the assumptions that underlie them.

Selling a Covered Call. This is an income generating strategy that a stockholder might use if they believe the stock price will remain steady or fall a small amount. The stockholder must also be ready to sell their shares if the stock rises or buy back the Call at a higher price. Jane owned 100 shares of ICBM. She felt that ICBM stock might fall or stay about the same. She did not think that the stock would rise, but if it did, she was willing to sell her ICBM stock if she was exercised. She had bought it at $40 and it was currently selling at $52. She sells a Covered Call at $55 and gets a $100 premium. Jane read that selling Covered Calls was a way to generate a little more money from a stock that she would be willing to sell anyway.

If Jane is right about ICBM falling in price or staying the same, she will keep her stock and the $100 Call premium. If she is wrong and ICBM goes up to $55 or beyond, she will have to buy back the Call at a higher price (lose her premium) or  have the Cal exercised and lose the stock. She will make $15 per share from the sale of the stock and keep the $1 premium. (55 Call Strike Price - $40 basis on stock = $15 gain on ICBM share).

The downside for Jane is that if ICBM shoots up to $70, she will miss out on the price increase beyond $55, the Strike Price of the ICBM call. In summary, the assumptions behind a Covered Call sale are:

1. The belief that the Stock will fall somewhat or stay the same. (If you think it will fall a lot, you should sell it!).
2. A willingness to sell the stock at the Strike Price of the Call or buy back the Call at a higher price than which you sold it.


Buying a Protective Put
. This is a common protective strategy to protect a stockholder from fall in the stock price. If Jane holds ICBM and is concerned that it may fall, she has two choices. She can sell the stock outright right now or buy a Put. Jane still likes ICBM’s prospects for the long term. To protect herself from a short-term price declines, she decides to buy a Protective Put. ICBM is currently trading at $52 and Jane buys a Put with a Strike Price of $50. If ICBM falls to $50 or below, Jane can exercise her Put and sell ICBM for $50. She can also sell the Put at a profit.


MORE SPECULATIVE STRATEGY IN A FALLING MARKET

A popular strategy in a falling market is to sell stocks and indexes short. Short selling is a little complex and carries some measure of risk. Another strategy is to buy a Put on the stock that you believe will fall in price.  You do not need to own the stock. It puts less capital at risk than short selling. And it also give the investor leverage. Let’s look at an example:

Jungle Jim does a lot of stock research. He believes that the stock of the American motorcycle behemoth, Hogsome-Darlington (HOG), will fall in price. It is currently trading at $49 per share. Jim thinks that the stock is only worth $40 per share. He also thinks that its next earnings report, to be issued in early January 2018, will be very disappointing and will send the stock falling. Instead of selling HOG stock short, he buys a February 2018 Put with a Strike Price of $55.00.

This Put costs him $3.00 per share, or $300 for the standardized 100 share options contract. Because the stock is trading at $50 and Jim’s Put has a Strike Price of $55, this Put is considered an “In the Money Put”. The Put is considered “In the Money” because the Strike Price is higher than the price of the HOG stock.

Options can be “In the Money”, “At the Money” or “Out of the Money.” For an explanation of these terms, take a look at the chart below:

STRIKE PRICE/HOG STOCK PRICE/PUT STATUS

$55    /   $50  /    Put In the Money by $5 – The Put at $55 give you the right to sell stock at $55 when the going price in the market is $50.
If Strike Price > Market, Put is in the Money (ITM)
$55 /  $50   / In the Money by $5

$50  / $50  / At the Money (ATM)
Strike Price=Market Price
$50 / $50  /  At the Money

$50  /  $55 /      Out of the Money by $5 ()TM)
If Market Price > Strike

Now let’s keep in mind that Jim does not own HOG stock. He is hoping that HOG will fall in price and the Put will rise in price beyond the $3 he paid for it. And Jim knows that as the Price of HOG falls, his Put will rise in price. Remember, a Put gives you the right to sell the stock at the Strike Price. So if Jim (or some HOG stockholder) has the right to sell HOG shares at $50 when the market price of HOG is at $40, he has a valuable right. And as HOG price falls, the value of the Put will rise.

Brokerage firms require that customers execute options agreements to trade options and that they understand the risks involved. In this last example, the risk of buying a Put when you do not own the underlying stock is that the price of the stock will rise instead of fall and that the put may expire worthless. The risk of buying a put is less than short-selling the underlying stock, however. In this case, Jim’s loss is capped at $300, the amount he spent on the Put. But if Jim sells HOG short and HOG rises, he will have to buy 100 shared of HOG to cover. If HOG makes a substantial move upward, Jim could lose thousands of dollars.

THERE ARE ALWAYS OPTIONS IN THE DESERT OF THE REAL!


[i] The Author has discussed the Secular Bear Market in several editions of the Newsletter and on the post of September 19th.
http://desertoftherealecononomicanalysis.blogspot.com/2005_09_18_
desertoftherealecononomicanalysis_archive.html
[ii] http//desertoftherealecononomicanalysis.blogspot.com/2005_10_09_
desertoftherealecononomicanalysis_archive.html
[iii]
http://www.cboe.com/. The website of the Chicago Board of Options Exchange has lots of information on all of these option topics, including Delta. The exchange will also send you a CD with Option information and tutorials.






Sunday, October 1, 2017

Of Idiots and Idealogues

IDIOCY IS TO BE EXPECTED FROM IDEALOGUES.

North Korea, or the easier to write, DPRK, is the last communist country on earth. And it one of the last few absolute monarchies. The DPRK shares this unique distinction with only had handful of fundamentalist Arabic countries. So it combines the worst forms of government. We have Kim Il-Sung (the father), Kim Jong Il (the son) and now Kim Jong-Un (grandson). In the DPRK, Kim Il-Sung has nearly mythic status. Many in the country, some by force but many by choice, see him as the “Father” of North Korea. Then came the “Son” Kim Jong Il, and the heavier, shorter, but probably much more shrewd “Son” Kim Jong Un. In only a somewhat crude metaphorical, and irreligious for the religious, terms, we have two pieces of the Christian Trinity.

THE WHOLLY SPIRIT?

The official state doctrine of the DPRK is Juche. Juche literally means self-reliance, but it is composed of three linked doctrines:
  1. Political Independence.
  2. Economic Self-reliance.
  3. Self-reliance in Defense.

Many scholars have suggested that juche completes the DPRK “trinity.”  It functions as the “holy spirit” that animates the many North Koreans. Call juche what it is, but it has generally worked. The nation is independent of a larger block of mutual defense partners. It engage is some trade, but it hangs on even as the sanction screws are cranked down. But number three is the salient.

In the mind of the North Koreans, they did not lose the Korean War. And in fact, the war has not really ended. There is only an armistice agreement in place. And the war ended three years after it began, the 38th parallel. 

The highly militarized regime has a million-man army. It is a defensive fortress. It has the 38th parallel lined with artillery pieces. More than 11.000 are aimed at Seoul. In a shooting war Seoul would suffer hundreds of thousands of causalities. A conventional war up the peninsula to Pyongyang would be fought hill by hill. Fortified position by position. Corpse by corpse.

COOLER HEADS???

The DPRK has been in-artfully cranking out belligerent babble for quite some time.  It has been the policy of America (and all Western nations) not to lower itself to responding to the lunacy. No longer. Kim keeps his place on orange alert all of the time. Militarist propaganda is everywhere. The military is worshipped. And its members are well paid and well treated, relative to the masses. 

Over the years, tensions have ebbed and flowed between the DPRK and the west. Trump has matched Kim’s belligerent mistranslations with two am tweets. The US and most advanced nations would not trade taunts, but Trump is all thumbs. In a most miniscule and certainly unforeseen way, and ever the “business man,” Trump has leveraged “egging on” economies of scale. North Korea likely employs hundreds of bureaucrats to figure out new ways to call American leaders capitalists running dogs. Trump does it solo and without a stipend. But we all digress…

WHY ALL THIS BARKING BACK?
There is an Arab folk saying that says “When dogs bark, don’t bark back.” That thought could be rephrased as “don’t stoop to their level.” Or maybe, “that remark is beneath contempt.” Or maybe do anything but feed the DPRK mouth machine. 

Stunts and chest pounding keep Kim firmly ensconced in power. A bowl of rice a day, a bed on the floor of cold two room apartment and a bicycle to ride to and from the munitions factory. But the is very effective method to what looks like to many America is “madness.” Kim has two goals and they are linked. Stay in power and survive to dictate another day. He has achieved the first and the second seems highly likely. 

When the PDRK got nukes, it got tenure. The history of the last 20 years makes it clear that nukes are necessary for rouge regimes to remain in power. Since the fall of the USSR, Russia can no longer maintain the independence of its former client states. After the first Gulf War, Saddam abandoned both his hamstrung nuclear program and his chemical weapons. Mohammar Khadafy in Libya similarly gave up his quest for weapons of mass destruction. Both men were later overthrown and pulled out of holes to be executed. 

IRAN AND THE KIM BOYS GOT THE MESSAGE…

One of the pillars of juche is an independent self-defense.  Nuclear weapons are the way to assure that self-defense will work and assure the states’ existence. An analogy can be drawn to seemingly inapposite places-Israel and Iran. 

Both Israel and Iran are non-Arabic countries in a predominantly Arab region.  Israel has the US as a strong ally, but does not want to draw directly upon it for its defense. And the last thing the US would wish to do is intervene militarily for Israel. 

Iran has no strong ally that it can call upon. It occupies a very strategic position but is militarily surpassed by US forces. It could obstruct the Straights of Hormuz for a short time, but the narrow passage would soon be reopened and Iran would pay a severe price.
Israel has a core principle that it won’t rely upon other countries for its defense.  To that end, it has nuclear weapons, probably around 100 of them. Iran does not currently have nuclear weapons, but its program is on hold because of an agreement with the US that lifted sanctions.  

MUZZLE THE MUTTS…

Ego and idiocy has no place in measured diplomacy. The facts on the ground must guide the policy choices and implementation. It should not be left to idiots or ideologues. 

THERE IS NOT NUCLEAR DEFENSES OVER THE DESERT OF THE REAL!

.


           


Friday, September 15, 2017

DESERT OF THE REAL SEPTEMBER 2017 NEWSLETTER



This Newsletter will come at a basic economic problem from a couple of different angles.  The Author Rob hits this topic often and there is a relationship, albeit tenuous. Here is the paradox in question form:

            How does the nation (and this region) attract and retain skilled labor and professionals while planning for a future that will need far less labor?


The nature of work, and the lack of it, will be significant issues in the coming decades. AI and the Robot Revolution will displace many workers. AI is displacing professional workers, such as lawyers and investment analysts. Robots on the factory floor displace labor. And the fast food and the healthcare industry are the next targets for AI and robotics. 

There are those that rightly point out that fears of automation wiping out all work have been overblown. And it has been demonstrated that automation opens up new jobs as it displaces old ones. But past automation displacement has been machinery taking away manual labor jobs. Changing the nature of work from below the neck to above the neck. This displacement is different, however, AI is taking the place of the above the neck workers. AI is smarter, faster and better than wet ware. 

But the topic is as much as matching up the skills required for the future with the higher paying jobs that will exist. On the one hand (as two-handed economists are given to saying), robotics requires trained technicians and engineers. But one the other hand, the work force in great supply are untrained young people, many which cannot even pass drug tests. Here in Northern Indiana, nearly every factory has a help-wanted sign. Restaurants and convenience stores are begging for help.  Some places have to close early because of a lack of help.

HOW CAN WE BE PROACTIVE?

A recent commentary in the Indiana Economic Digest presents the issues well. In an article entitled “These projects can keep Wells County in 'the game' - if it wants,” written by Mark Miller, the issue is both raising the quality of life in Northeast Indiana and providing the skilled work force. Miller describes some community improvements the cities of Bluffton and Decatur are making to their downtown areas.  Along with these improvements will come other efforts at attracting new people into the area? Miller states that the 11-county Northeast Indiana currently has 800,000 people and the goal is to grow to one million by 2031. And not to be snarky, but will the people coming in be the “right people.”

The region needs skilled workers that want to live in Northeast Indiana. And it wants the newcomers to enjoy living in Northeast Indiana because of the area’s quality of life. A tough task. A very tough task.

Northeast Indiana is not the Mississippi Delta or the Ozarks, but it is not Santa Clara County or Seattle. Miller presents the issue as “quality of place.”

Miller states that many younger workers, and mid-career workers are relocating to the place they wish to live. You move where you want to live and the work will appear. And with more work moving online, co-location is very possible.

The Author Rob cannot but see this draw of “Quality of Place” as almost impossible or Northeast Indiana. Fort Wayne is a generally nice small city, but it is not Austin Texas. Northeast Indiana has a good number of small lakes, but it is not Cape Cod.

Sure, we sometimes here that Fort Wayne “is a good place to raise a family.” The Author Rob’s primary care doctor said that when he was moving from the high quality of life Minneapolis suburb Eden Prairie to Fargo, North Dakota. Translated, “a good place to raise a family” means a place with cheap housing.  Fort Wayne has that in great abundance.

These high identity projects such as the one in Bluffton and Decatur generate activity and civic pride, but can these one-offs bring in a meaningful number of skilled technicians, professionals and other high tech workers? The Author Rob doubts it.

Many communities and Ivy Tech recognize the need for training workers for the existing and promised jobs. The apprentice model, very common in Europe, but almost abandoned in America, trains people in skilled trades. Employers contribute much of the funding in these apprentice models.

But in recent years, the training has been commoditized and taught at community colleges and the proprietary colleges.  This shifts the cost to the students in the form of student loans, and ultimately some of it to the taxpayers when students with worthless degrees from unscrupulous college default.

In an ideal world, workers would be happily employed in meaningful work. The Star Trek utopia. But perhaps were are only setting ourselves up for the Blade Runner Dystopia.

LET THE ROBOTS TAKE THE HINDMOST IN THE DESERT OF THE REAL



Monday, September 11, 2017

DESERT OF THE REAL SEPTEMBER 2017 NEWSLETTER



This Newsletter will come at a basic economic problem from a couple of different angles.  The Author Rob hits this topic often and there is a relationship, albeit tenuous. Here is the paradox in question form:

            How does the nation (and this region) attract and retain skilled labor and professionals while planning for a future that will need far less labor?


The nature of work, and the lack of it, will be significant issues in the coming decades. AI and the Robot Revolution will displace many workers. AI is displacing professional workers, such as lawyers and investment analysts. Robots on the factory floor displace labor. And the fast food and the healthcare industry are the next targets for AI and robotics.

But the topic is as much as matching up the skills required for the future with the higher paying jobs that will exist. On the one hand (as two-handed economists are given to saying), robotics requires trained technicians and engineers. But one the other hand, the work force in great supply are untrained young people, many which cannot even pass drug tests. Here in Northern Indiana, nearly every factory has a help-wanted sign. Restaurants and convenience stores are begging for help.  Some places have to close early because of a lack of help.

HOW CAN WE BE PROACTIVE?

A recent commentary in the Indiana Economic Digest presents the issues well. In an article entitled “These projects can keep Wells County in 'the game' - if it wants,” written by Mark Miller, the issue is both raising the quality of life in Northeast Indiana and providing the skilled work force. Miller describes some community improvements the cities of Bluffton and Decatur are making to their downtown areas.  Along with these improvements will come other efforts at attracting new people into the area? Miller states that the 11-county Northeast Indiana currently has 800,000 people and the goal is to grow to one million by 2031. And not to be snarky, but will the people coming in be the “right people.”

The region needs skilled workers that want to live in Northeast Indiana. And it wants the newcomers to enjoy living in Northeast Indiana because of the area’s quality of life. A tough task. A very tough task.

Northeast Indiana is not the Mississippi Delta or the Ozarks, but it is not Santa Clara County, California. Miller presents the issue as “quality of place.”

Miller states that many younger workers, and mid-career workers are relocating to the place they wish to live. You move where you want to live and the work will appear. And with more work moving online, co-location is very possible.

The Author Rob cannot but see this draw of “Quality of Place” as almost impossible. Fort Wayne is a generally nice small city, but it is not Austin Texas. Northeast Indiana has a good number of small lakes, but it is not Cape Cod.

These high identity projects such as the one in Bluffton and Decatur generate activity and civic pride, but can these one-offs bring in a meaningful number of skilled technicians, professionals and other high tech workers? The Author Rob doubts it.

Many communities and Ivy Tech recognize the need for training workers for the existing and promised jobs. The apprentice model, very common in Europe, but almost abandoned in America, trains people in skilled trades. Employers contribute much of the funding in these apprentice models.

But in recent years, the training has been commoditized and taught at community colleges and the proprietary colleges.  This shifts the cost to the students in the form of student loans, and ultimately some of it to the taxpayers when students with worthless degrees from unscrupulous college default.

In an ideal world, workers would be happily employed in meaningful work. The Star Trek utopia. Perhaps were are only setting ourselves up for the Blade Runner Dystopia.

LET THE ROBOTS TAKE THE HINDMOST IN THE DESERT OF THE REAL!


Monday, September 4, 2017

TAXES AND THE TROIKA OF TERRIBLE IDEAS


We are a long way from income tax season. But it is never far from many peoples’ minds.  Quarterlies for the self-employed earn disdain. But it means that you are making money. The alternative to paying tax is worse. No income.

Another driver of the discussion is the trillion dollars of debt that mount up because of the structural tax underfunding. Unless and until the nation decides to match up government spending with government revenue, the debt will pose substantial risk to the nation and the world.

Many people incorrectly conceive the problem.  Deficits are nearly always at “record levels” in nominal terms. The nation’s economy grows nearly every year so the actual debt figure will be higher than the year before, even if the national debt as a percentage of GDP falls. The “real” rate is what matters, not the “nominal” rate.

Debt as a percentage of GDP is a better way to look at deficits.  The highest national debt for the nation as a percentage of GDP was at the end of World War II. Financing the war was a mammoth moral and financial undertaking. Debt to GDP was about 160% after the War. It fell to under 50% in 1980, then ramped back up in 1981. It fell again to 70% in 2000, but skyrocketed during the Great Recession of 2008.  Further tax cuts will further increase it.

NATIONAL SALES TAX TO REPLACE INCOME TAX

Every few years there are “tax simplification” ideas floated. Some of the most troubling proposals are the so-called “Fair Tax,” a national sales tax of around 15%.  It sounds simple, because people are already accustomed to state and local sales tax. The [Un]fair Tax is usually pitched as being a tax that is under everyone one’s control.  Don’t spend much money and you don’t pay much tax.  But this ignores reality.  Most Americans live paycheck to paycheck, even many middle class people. Even if food is exempted from the tax, they will pay close to 15% of their income in federal tax. A person who earns one million dollars per year will spend perhaps 40% of their earnings. The rest will be saved and invested.

There is another thing to consider. Sales tax is usually imposed only on goods, not services. This makes the [Un] fair tax even unfair, as lower income people take on DYI projects out of necessity. Richer people pay others for services[i].  Lets take a look.

Johnny Paycheck, Mama Paycheck and the little Paychecks  $50,000.

The average American family pays $550 per month on food.  $550 * 12= $6,600.

$50,000 - $6,600=$43,400.  90% is spent on taxable goods.  $43,400 *.9= $39,060.

$39,060 * 15% = $5,589.

This is an effective tax rate of 12%.

Fletcher Grift, Muffy Grift, and the little Grifts.  $1,000,000.

The Grifts pay 900 per month on Food. $900 * 12 = $11,800.

$1,000,000 - $11,800 = $988, 120.

The Grift kids go to a private school. They pay for lawn care, pool care, cleaning services, repair of their Lexus SUV and Porsche Carrera.  School costs $80,000 per year. They save  $250,000 per year.  All told, they pay $211,000 for goods in a year.

$211111* 15% = 31,665 in tax paid.

This is an effective tax rate of 3.1%.

Who’s cheatin’ who[m].

TAX “SIMPLIFICATION.” NOTHING, EXCEPT FOR THE HIGH EARNERS’ INCOME TAX BILL, IS “SIMPLIFIED

Income tax “simplification” comes in many flavors. There is no doubt that the IRS code is long and many of the provisions are difficult for anyone except a tax accountant or a tax lawyer to understand. [ii]  One variety of “simplification” is compressing the number of tax codes from the current seven to three. Below is the current tax rate schedule.   

2017 tax brackets (for taxes due in April 17, 2018)
Tax rate
Single
Head of household
10%
Up to $9,325
Up to $13,350
15%
$9,326 to $37,950
$13,351 to $50,800
25%
$37,951 to $91,900
$50,801 to $131,200
28%
$91,901 to $191,650
$131,201 to $212,500
33%
$191,651 to $416,700
$212,501 to $416,700
35%
$416,701 to $418,400
$416,701 to $444,550
39.6%
$418,401 or more
$444,551 or more
Tax rate
Married filing jointly or qualifying widow
Married filing separately
10%
Up to $18,650
Up to $9,325
15%
$18,651 to $75,900
$9,326 to $37,950
25%
$75,901 to $153,100
$37,951 to $76,550
28%
$153,101 to $233,350
$76,551 to $116,675
33%
$233,351 to $416,700
$116,676 to $208,350
35%
$416,701 to $470,700
$208,351 to $235,350
39.6%
$470,701 or more


Trump has released rather simplified versions of his tax plan. Meaningful detail is difficult to come by.  He proposes three rates: 10%, 20% and 25%. It raises the tax on capital gains from 15% to 20%. Trump also proposes a maximum of 15% income tax earned from “pass-through entities” such as LLCs and S-Corporations.  Most all small to medium businesses are owned in this manner[iii]. This means that the owner of a local manufacturing company could pay a lower effective tax rate than the plant manager or the plant engineer.   

There is another think to notice. Top rates are eliminated. Every rate above 25% is eliminated. Cutting and lowering the number of tax rates simplify nothing.[iv] They may sound good to the most simple-minded, like the many millions of southerners, Appalachians and high plains hillbillies that live off of government largesse like Medicaid, SNAP benefits and Social Security Disability. These folk cling to the elegiac[v] life that they have lived since the early 1980s, a life in states that are net takers from the federal government. And anything would be simple for people that have not paid income taxes for two generations.

 The Trump tax plan simply cuts revenue without replacing it with other revenue increases or commensurate cuts in government spending. Medicaid, SNAP and SSDI elimination in Red states might be a good first cut.

PAUL RYAN AND THE “POST CARD” TAX RETURN

A quixotic quest is always ongoing to make filing taxes simpler. The 1040EZ form is a good cut at simplification for many taxpayers. But it can only address wage income and does not support itemized deductions. But even this quick fix is more than many people will tackle. Many people of all levels of income and sophistication run to preparation firms to do what a sixth-grader could do.

House Speaker Paul Ryan is peddling a proposal for a “post card” return. But there’s just one problem. Unless you are filing a 1040 EZ, you cannot merely fill out a postcard.[vi]

Filling out the “post card” is easy. But calculating the figures to put in the postcard would require the same number of schedules and forms that support a 1040. Remember, though, simplicity sells well to simple minds.

FILING TAXES COULD BE SIMPLIFIED AND STREAMLINED. BUT IT WON’T

There are two groups vehemently opposed to filing simplicity. First is online and shopping mall tax preparers like Intuit, H.R. Block, Liberty Tax Services and the thousands of mom and pop tax preparers. One can understand their opposition. But there is another large group of filing simplification.  Anti-tax conservatives.
These anti-tax zealots believe that complicated rules and burdensome filing requirements will keep many Americans frustrated and angered by the IRS. 

Simplifying filing can be done relatively easy. [vii]  Japan, the UK and other countries have a system that is called “precision withholding.” The taxing authorities take out the correct amount of tax from wages. If they need adjusted for charitable contributions or other tax events, this is often done automatically with the data the taxing authorities possess. Such proposals have been proposed in the US but have gone nowhere.

WE ARE ALWAYS GOING SOMEWHERE IN THE DESERT OF THE REAL!






[i] Some states, such as New Mexico, charge sales tax on services. This takes a lot of the regressivity out of the sales tax.
[ii] Many people have the idea that the law should be simple and understandable. A laudable goal. But is it expected that the average person should be able to pick up a schematic for a computer chip or the blue prints for the Lucas Oil Stadium and be understandable to a lay person. Another reason the IRS code is complex is because rich people and large companies have legions of lawyers looking at loopholes to dodge paying their taxes.
[iii] And it is not just small medium companies that are LLCs. Here is a list of the largest privately owned companies in 2017 in the US. ihttps://www.forbes.com/sites/andreamurphy/2017/08/09/americas-largest-private-companies-2/#3bf84b2f247c   This list contains companies such as Koch Industries, Albertson’s store chain and the Mars candy company.
[iv] Three tax rates or thirty can be easily calculated on a $.99 dollar store calculator. Also, see https://www.vox.com/policy-and-politics/2017/8/30/16219906/paul-ryans-postcard-tax-return
[v] A book entitled “Hillbilly Elegy” offers solutions to the problems of the rural white people. Some are good solutions. They should try them. And be less quick to cast others as underserving moochers while selling SNAP benefits for heroin, booze and tobacco. https://newrepublic.com/article/138717/jd-vance-false-prophet-blue-america
[vi] http://www.businessinsider.com/republican-trump-post-card-individual-tax-return-plan-2017-4
[vii] https://www.vox.com/policy-and-politics/2017/8/30/16219906/paul-ryans-postcard-tax-return