Debunking Krugman (Again): On The Shift From Net To Gross Income Tax Basis
by Zero Hedge - December 31st, 2010 8:50 am
Courtesy of Tyler Durden
It seems anywhere one looks there days, one reads a refutation of Paul Krugman’s tortured “economist” logic. Lately, the NYTer has fallen into the crosshairs of many due to his contention that currently taxes, based on some chart which the Nobelist probably mislabeled again, are at 20th century lows. Of course, cherrypicking data that fits the theory is precisely what economists do. Which is why Krugman may be excused for missing out on a trend so subversive that we have seen it only mentioned by tax attorneys at Weil Gotshal: namely the gradual transition in the definition of taxable income from a “net” to a “gross” tax basis. As Weil’s Kimberly Blanchard explains: “Many observers — most prominently Paul Krugman — write in terms of tax rates being at an all-time low and compare today’s rates favorably with those that existed early in the 20th century. Their implication is that tax burdens are lower today and, therefore, there must be room for tax hikes. But we know that taxes are not lower today. How could they possibly be when government revenues are so much larger, even as adjusted for inflation? The increasing size of the national deficit cannot explain the gap, which was already in evidence during the Clinton years. The average individual taxpayer is frustrated and confused because she hears that tax rates are down but somehow she believes (correctly) that her taxes keep going up. What has occurred is that the base has expanded dramatically, leading to taxes far higher than those paid by individuals historically.” Expect to hear much more of this in the next two years.
Kimberly Blanchard
Weil, Gotshal & Manges LLP
New York
The most significant change was a gradual one that took place incrementally and is proceeding apace: The shift in the definition of income for purposes of the income tax on individuals, from a net to a gross tax base. When I first began practice in 1981, the individual tax was still largely a tax on net income, with few exceptions. The only items of expense or loss that were not deductible, other than capital items, were truly personal items (that is, expenses that did not relate to the production of gross income). That is not the case today. This shift has included, in no particular order:
- phaseout of the personal exemption and the cutback on
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DiggFrontrunning: December 31
by Zero Hedge - December 31st, 2010 8:18 am
Courtesy of Tyler Durden
- Commodities Beat Stocks, Bonds, Dollar in 2010 (Bloomberg) – translation: anything that can’t be diluted does and will do better than things that can be diluted
- How a mortgage clearinghouse became a villain in the foreclosure mess (WaPo)
- Euro Imbalances Mean 80% Risk Bloc Will See Structural Overhaul, CEBR Says (BusinessWeek)
- Estonia Prepares to Join the Euro Zone (WSJ)
- Simon Johnson: Fresh Crises Loom in Europe and the U.S. (NYT)
- That pesky CRE issues still refuses to go away: Commercial property loans pose new threat (FT)
- Krugman on The New Voodoo and hypocrites (NYT)
- Mises Institute on the Hypocrisy of Krugman (Mises)
- Venezuela to Devalue its “Strong Bolivar” Currency (WSJ)
- India Food Prices Still Rising (WSJ)
- Good thing Americans are reading ravenously: Borders delays payments to vendor in last ditch bankruptcy avoidance action, shares plunge (AP)
- Warning on China, U.S. Feed Spat (WSJ)
- China Increases State Company Pay-Outs (FT)
- Australia to Boost Flooding Aid, Balance Budget, Gillard Says (BusinessWeek)
- Porsche Wins Dismissal of Fund Lawsuits Over $2 Billion Losses (Bloomberg)
- Merkel Vows to Defend Euro as `Foundation’ of Germany’s Economy, Wealth (Bloomberg)
Is The Treasury Selloff Over – Net Money Flows Into The TSY Complex, At Year Lows, Are Starting To Rise
by Zero Hedge - December 31st, 2010 7:58 am
Courtesy of Tyler Durden
As the mainstream media finally made a big story out of capital flows after ignoring the topic with impunity for 33 straight weeks (of $90 billion worth of outflows), the question many ask themselves is whether last week’s minimal inflow into domestic equity funds is indicative of a shift in risk sentiment, and more specifically whether the outflows in bonds will if not accelerate, then at least remain at their current elevated levels. Probably the best answer to that will come from looking at not only the price action of the most liquid rate instrument, the 10 Year, but the actual net money flows for all UST contracts. While the first can be done with any charting program, the second is slightly more complex and for that we go to Credit Suisse’s Carl Lentz and Eric von Nostrand.
As the chart below shows, as always happens when there are regime changes, the bulk of the actual money move occured well before the marginal buyers, or in this case sellers, managed to move the 10 Year Titanic around. What is curious is that the “Net Lifts” (red line) in the TY and derivatives basket peaked at the end of Q2, and has been declining ever since in a pretty much straight line fashion. We say curious because as the gray line shows, bonds actually continued their ascent, with yields approaching 2% in the start of Q4, and just after QE2 was a go. Indeed, nowhere have we seen a more pronounced sell the news event in 2010 than what happened to long bonds following Brian Sack’s return to POMO markets. Yet while the 10 Year yield is not at either extreme, recently seen just north of 3.3%, the net lifts have bottomed, and the revulsion appears to be complete. Does this mean that with smart money no longer bailing, it has no other choice than to start buying again? And will this lead the actual move in yields lower just like it did 6 months earlier? We will keep readers updated on this very interesting data point which may just be the best leading indicator of what is happening in rates.
And, a curious tangent, the very same Eric Van Nostrand appeared on Bloomberg Surveillance yesterday, with the following circular analysis of why the mere presence of QE2 means that QE2, 3, and infinity…
One Minute News Summary
by Zero Hedge - December 31st, 2010 7:31 am
Courtesy of Tyler Durden
US: Futures are mostly negative in the early AM with a good portion of the trading world closed or scheduled for a half day. Yesterday was lackluster in volume and direction as markets were not convinced by the jobless claims numbers (where even seasonally adjusted results exhibit seasonality) or stronger purchasing manager index results.
Europe: Issuance begins anew next week, but the Italian issuance this week does not paint a good picture of the trends in European yields. We believe the story will play out to its bitter end in 2011 and involve haircuts on sovereign bonds.
Asia: With Tokyo closed and Hong Kong on a half day, markets are largely quiet. The theme for Asia in 2010 will be China attempting to deflate a bubble without popping it and Japan continuing to manage growth at the zero bounds.
from Brian Yelvington of Knight Capital
Happy New Year from PSW!
by Phil - December 31st, 2010 7:27 am
Happy New Year!
It’s going to be a slow trading day most likely. Europe has been trending down all morning (7am) with no one wanting to be bullish into early closes and it looks like we’re down about 1% over there for the day. Over in Asia, the Nikkei was closed and had also finished the week with a 1% drop while the Hang Seng finished their half-day flat at 23,035, up 5% for the year while the Shanghai rallied 1.8% on no volume but it wasn’t enough to save them from closing the year out down almost 14% – kind of odd since the "China growth story" is the main driver for the US equity premise.
The Shanghai gauge’s advance for a third day narrowed its decline for the year to 14 percent, the worst performer among the 14 biggest world benchmark indexes, according to data compiled by Bloomberg. It’s the biggest drop since 2008, when the global financial crisis crimped the nation’s exports. The index jumped 80 percent in 2009 as a 4 trillion-yuan stimulus package and record new lending helped the Asian economy recover. Whether another 4Tn Yuan is waiting in the wings in 2011 remains to be seen. “The previous declines were excessive and the market is performing a technical rebound,” said Wu Kan, a fund manager at Dazhong Insurance Co. which oversees $285 million. “It’s a short-term correction amid weak market sentiment.”
We won’t get into that because I don’t want to be negative today. I’m not even going to say anything negative about Pimpco’s BS $92M fine for using their $1.2 Trillion Dollar fund to manipulate the Treasury markets because, like GE selling key US technology to China, which we discussed yesterday – no one seems to care so why should I? China can buy our aviation technology to build planes that may eventually put BA’s 150,000 workers onto the unemployment lines but we can’t buy property in China as China Daily reports that the nation’s housing ministry will work together with the Ministry of Commerce and the State Administration of Foreign Exchange to monitor overseas capital inflows into the property market.
Joel Kotkin makes a good point in Forbes today about what he calls "The Poverty of Ambition" in which he also suggests the need for Westerners to cheer up and try to…
Matterhorn Closes The Year In Style: “Hyperinflation Will Drive Gold To Unthinkable Heights”
by Zero Hedge - December 31st, 2010 6:50 am
Courtesy of Tyler Durden
From Egon von Greyerz of Matterhorn Asset Management
Hyperinflation Will Drive Gold To Unthinkable Heights
We now live in a world where governments print worthless pieces of paper to buy other worthless pieces of paper that combined with worthless derivatives, finance assets whose values are totally dependent on all these worthless debt instruments. Thus most of these assets are also worth-less.
So the world financial system is a house of cards where each instrument’s false value is artificially supported by another instrument’s false value. The fuse of the world financial market time bomb has been lit. There is no longer a question of IF it will happen but only WHEN and HOW. The world lives in blissful ignorance of this. Stockmarkets remain strong and investors worldwide have piled into government bonds in a perceived flight to safety. Due to a century of money creation (and in particular since the 1970s) by governments and by the fractal banking system, investors believe that stocks, bonds and property can only go up. Understanding risk and sound investment principles has not been necessary in these casino markets with guaranteed payouts for anyone who plays the game. Maximum leverage and derivatives have in the last 10-15 years driven markets to unfathomable risk levels, with massive rewards for the participants.
In the meantime central banks are cranking up the printing presses but as Bernanke recently said quantitative easing is an “inappropriate” description of what should be called “securities purchases”! Who is he kidding? What the Fed is buying has nothing to do with “securities”. There is no security whatsoever in the rubbish the Fed is purchasing. They are buying worthless pieces of paper with worthless pieces of paper. This is the Ponzi scheme of all Ponzi schemes.
Let us be very clear, this financial Shangri-La is now coming to an end. The financial system is broke, many western sovereign states are bankrupt and governments will continue to apply the only remedy they know which is issuing debt that will never ever be repaid with normal money.
So why does the world still believe that the financial system is sound?
- Firstly, because this is what totally clueless governments are telling everyone and this is what investors want to hear.
- Secondly, whether governments apply austerity like in parts of Europe or money printing as in the US, investors
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The Shadow Banking System: A Third Of All The Wealth In The World Is Held In Offshore Banks
by ilene - December 31st, 2010 5:20 am
Shadow Banking and Tax Avoidance – privileges for the ultra-wealthy… Ilene
Courtesy of Michael Snyder of Economic Collapse
You and I live in a totally different world than the ultra-rich and the international banking elite do. Many of them live in a world where they simply do not pay income taxes. Today, it is estimated that a third of all the wealth in the world is held in offshore banks. So why is so much of the wealth of the globe located in places such as Monaco, the Cayman Islands, Bermuda, the Bahamas, and the Isle of Man? It isn’t because those are fun places to visit. It is to avoid taxes. The super wealthy and the international banking elite think that it is really funny that our paychecks are constantly being drained by federal taxes, state taxes and Social Security taxes while they literally pay nothing at all. These incredibly rich elitists make a ton of money doing business in wealthy western nations and then they transfer virtually all of their profits offshore where they don’t have to contribute any of it in taxes. It works out really great for them, but it sucks for the rest of us.
It is estimated that approximately $1.4 trillion is held in offshore banks in the Cayman Islands alone. According to an article in Forbes magazine, there is a total of approximately 15 trillion to 20 trillion dollars in offshore bank accounts, brokerage accounts and hedge fund portfolios.
A recent article in the Guardian stated that a third of all the wealth on the entire globe is held in offshore banks and that the vast majority of international banking transactions take place in these tax havens….
On a conservative estimate, a third of the world’s wealth is held offshore, with 80% of international banking transactions taking place there. More than half the capital in the world’s stock exchanges is "parked" offshore at some point.
All of the biggest banks in the world are involved in playing this game. All of them have big branches in these various tax havens. All of them work very hard to ensure that the tax burdens on their ultra-rich clients are as light as possible.
Nobody knows for sure how much money big governments around the globe are missing out on from all this tax avoidance, but everyone agrees the number…
The Transfer Payment Problem…
by ilene - December 31st, 2010 5:04 am
Courtesy of Dr. Paul Price, Beating Buffett
Not everyone seems aware of how big an impact government transfer payments (food stamps, unemployment compensation, welfare checks etc.) have had on the “recovery”. There has never been a time in America’s history when so many people were ‘on the take’ as opposed to contributing to the general good of society.
Global Economic Intersection estimates in “Personal Transfer Payments and GDP,” the accumulated value of “extra” transfer payments Americans received from 2008 to 2010 — that is, the amount over and above the long-term trend — worked out to about $569 billion.
The push has been towards layering on more and more taxes on the productive segment of society in order to fund the living expenses of those that live long-term on the efforts of others.
Almost 50% of all American’s now pay zero or less than zero (adjusted for refundable tax credits) in Federal Income taxes. If you are on the receiving end, all government expenditures are just fine (or desired) as they are ‘free’ to you.
Civil servants at all levels (e.g. police, firemen, teachers and bureaucrats, while gainfully employed are fiscally raping the general taxpayer population with their overly generous pensions. In my area (Chester County, Pennsylvania) teachers routinely retire right now with over $78,000 in annual pension payments (after 30 years and age 62) on top of their social security. Due to the state retirement system’s rules they actually ‘earn’ more per year in retirement than they averaged during their working years.
Cities, states and the Federal government are all going bankrupt to support transfer payments to those who either don’t work or are done working. This cannot continue without collapsing under its own weight.
If We Close Our Eyes, The Monster Will Go Away
by ilene - December 31st, 2010 4:41 am
Courtesy of Charles Hugh Smith, Of Two Minds
Refusing to face the need for radical change and adaptation only makes the eventual adjustment more traumatic and less likely to succeed.
As an initial reaction to unwelcome crises, denial serves a psychological purpose. Closing our eyes and hoping the Monster will go away is the first stage of eventual acceptance and engagement with unwelcome reality.
Clinging to denial sets up pathology, anger and collapse. If we continue to keep our eyes closed, and demand the Monster go away because we don’t want to deal with change and challenge, then we either detach ourselves from reality altogether (a pathological psychosis perfectly depicted in the classic film Sunset Boulevard) or we rage in fear and dread at the challenge/Monster, as if it is somehow unfair that change has occurred without our express permission.
The longer we close our eyes and hope the Monster will magically go away when we finally open them, the more likely our eventual collapse.
As a nation, two years after the demise of the status quo, we are still closing our eyes hoping the Monster goes away. Frequent contributor U. Doran recently sent me Hiding a Depression: How the Government Does It by Daniel Amerman, a blow-by-blow description of how Federal and state spending has expanded to replace the private-sector GDP which has vanished.
The article notes how this massive replacement of the private sector by Federal (borrowed) spending has gone largely unremarked.
In other words: if we close our eyes and borrow 10% of the nation’s GDP ($1.4 trillion) every year (or perhaps more accurately, $2 trillion a year) from now on, then when we finally open our eyes the Monster of change and challenge will have magically vanished and everything will be as it was before the Monster’s terrible appearance.
Yes, this is childlike. We have turned to the Central State as our Mommy and Daddy who will save us from the Monster.
Unfortunately, our own desires and derangements are feeding the Monster that is threatening us with change--a dynamic illustrated by the classic sci-fi film Forbidden Planet.
The more we cling to our deranged dependence on systemic fraud, exponential expansion of credit, corporate cartels/political Plutocracy, Central State largesse, corporate-media propaganda and a financial system that breathes misrepresentation of risk, the stronger the Monster becomes.
A close friend has been consulting for a…
“There’s a Huge Difference Between What is Good for American Companies Versus What is Good for the American Economy”
by ilene - December 31st, 2010 3:15 am
Courtesy of Washington’s Blog
As I wrote last year:
Some of the top economists say that America has suffered a permanent loss of jobs:
JPMorgan Chase’s Chief Economist Bruce Kasman told Bloomberg:
[We've had a] permanent destruction of hundreds of thousands of jobs in industries from housing to finance.
The chief economists for Wells Fargo Securities, John Silvia, says:
Companies “really have diminished their willingness to hire labor for any production level,” Silvia said. “It’s really a strategic change,” where companies will be keeping fewer employees for any particular level of sales, in good times and bad, he said.
Former Merrill Lynch chief economist David Rosenberg writes:
The number of people not on temporary layoff surged 220,000 in August and the level continues to reach new highs, now at 8.1 million. This accounts for 53.9% of the unemployed — again a record high — and this is a proxy for permanent job loss, in other words, these jobs are not coming back. Against that backdrop, the number of people who have been looking for a job for at least six months with no success rose a further half-percent in August, to stand at 5 million — the long-term unemployed now represent a record 33% of the total pool of joblessness.
Nobel Prize winner Edmund Phelps and Pacific Investment Management Co. Chief Executive Officer Mohamed El-Erian say the fallout from the deepest recession in more than five decades is driving the so-called natural rate higher, perhaps to 7 percent.
And Former Labor Secretary Robert Reich wrote yesterday:
"The basic assumption that jobs will eventually return when the economy recovers is probably wrong. Some jobs will come back, of course. But the reality that no one wants to talk about is a structural change in the economy that’s been going on for years but which the Great Recession has dramatically accelerated.
Under the pressure of this awful recession, many companies have found ways to cut their payrolls for good. They’ve discovered that new software and
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(