April 2008


On April 15th, tax day for millions of Americans, Angry Overeducated Catholic posted some, I believe, common sense observations and recommendations on the tax system. One of our erstwhile Angrymen, Angry New Mexican, budding socialist that he is, commented regarding the capital gains tax.

The problem with understanding capital gains is that it is denominated in the same manner as income, that is to say in dollars. In pre-euro days, Britain used ‘pounds’ as a monetary unit and ‘pounds’ as a unit of weight measure without problem — the context usually resolved the ambiguity. In America, thanks to redistributionists and socialists, the context is sufficiently muddied that otherwise clever and analytical people [ANM] are confused.

Capital gains, while expressed in dollars, are entirely different entities than regular income. Funds placed in investment carry additional properties with them — notably risk, for which the investor must be compensated. One of the best analogies for capital gains I have come accross is that of the farmer (investor) and his apple orchard.

The farmer plants an apple tree (e.g. makes a capital investment). Associated with this investment are risks of adverse weather — droughts killing the tree, storms tearing it down, insects devouring the fruit, and some considerable length of time before his investments bear fruit (sorry). As the tree grows, it comes into its first season and produces several bushels of apples. These are the dividends of the investment and can be sold for income. As the tree grows, it becomes more valuable as it produces more and more fruit. If at some time prior to the natural lifespan of the tree, the farmer elects to sell the tree (or the orchard), the apple tree will be appraised on the basis of its condition and how much fruit it produces. If he spent $10 for the original sapling, and received $100 for the mature fruit bearing tree, he has a capital gain of $90.

Taxing this $90 by 40% is equivalent to pruning off live apple bearing limbs and reducing the value of the tree by $36. In order to preserve and increase the income stream (dividends) you want the tree to grow. You want the farmer to take the entire $90 and plant nine more apple trees. Even if he converts his tree into cash, you want to compensate him for the risk of planting the trees in the first place, tying up his money, and perhaps having to replant several trees after the drought, flood, or tornado rips his orchard apart.

And remember, each tree planted needs workers to cultivate the trees, pick and distribute the apples, and generally grow the economy. And if the orchard grows large and requires mechnical harvesting, then the orchard is helping the manufacturing as well as the labor sectors also. This investment behavior needs to be rewarded not dampened by a punative tax system. So AOC is correct when he proposes a capital gains tax of 0%.

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A bit over a week ago, French naval special forces cherry-picked the crew of a Somali pirate vessel from their base after the hostages of the luxury yacht Le Ponant. You can read about the story here. Now said pirates are on their way to trial in France, which means, of course, it’s not too late to screw things up.

Piracy is undoubtedly one of the world’s oldest professions (if not as old as prostitution), as old as water-born trade. It has been making a comeback in a big way over the last decade or so. Given the sheer amount of ship traffic these days—especially with containerization, which has reduced the size of merchant crews—it makes sense. Right now the big area of piracy is around the Horn of Africa, an area that sees lots of ship traffic. This, too is predictable. The Horn has been a lawless place for a few decades now and piracy thrives in places where there are many young men with lots of guns with nothing else to do except pilfer from the ships off shore. In other words, it’s the nautical version of crime anywhere else. More traffic, unemployed young men, and no law leads to more piracy. The Horn has had issues with this recently. For example, the cruise ship that was hit by an RPG from a pirate vessel in 2005.

The big, blue water navy—descendants of the careerist battleship admirals of old—isn’t what’s needed for anti-piracy patrol, though as the French raid shows, blue water ships such as the aircraft carrier Jeanne d’Arc are helpful for making brown water and coastal operations possible. Modern pirates, like old ones, often use stealth and smaller vessels. The Somali pirates are somewhat extreme in this regard as they often engage in daylight raids and are heavily armed, but even so, they’re using relatively small vessels and infantry weapons.

Because the military can’t always be there, anti-pirate tactics and devices make sense for civilian ships: Speeding up is a good one, as is staying away from coastal waters in areas where pirates are known to frequent. Various non-lethal (or less-than-lethal) weapons such as the LRAD have also been in development, though such things always seem to have more promise than they deliver. So it makes sense to make harder targets. However, it’s not always possible. Sometimes you have to slow down, e.g., in the Straits of Malacca, which is one of the most heavily traveled waterways in the world, and, until recently, overrun with pirates, until the local governments (Indonesia, Malaysia and Singapore) decided to put their own quarrels on pause and get serious with the pirates.

If you ask me, the most visceral solution is old school: A push in the water after which the proper authorities will take care of the cleanup. They won’t even charge a penny of taxpayer dollars for the service! If you feel this is too old school, machine gun bullets first add a bit of metallic piquancy and crunch. I don’t think the proper authorities are all that discriminating.

The UK, however, has really jumped the shark, deciding that pirates might well be good asylum candidates! The Royal Navy had a long tradition of piracy suppression. In fact, the “classic” era of “arr, matey” Long John Silver piracy was brought to an end in the 18th Century by the anti-piracy patrols of the Royal Navy. Piracy is, after all, not good for business. The Barbary Pirates (this is the “shores of Tripoli” in the Marine Corps’ Hymn) were finished off by the US Navy and Marine Corps in some of their earliest engagements precisely because of the loss of Royal Navy protection after the Revolution. Now, the UK seems to be willing to offer asylum to pirates. Whoever is responsible for this policy—I’m sure it’s being foisted on the RN by someone else—needs to be sent to an asylum. Hearts of Pulp, indeed. Of course, perhaps Britain is simply waxing nostalgic for the piratical past of Hawkins and Drake, in effect looking wistfully on the early history of the Royal Navy rather than the glory days of Nelson?

In sum: Vive La France! Special forces were used for what they do best, bad guys got bagged, and collateral damage was kept to a minimum. Unlike the bangers-and-mash eating surrender orangutans in London these days, Sarko’s brass monkey seems to have some balls.

The staff of the 12 Angry Men would like to offer their congratulations to Angry Virginian, and his new bride, who were married today. Our best wishes to them (and especially to the new Mrs. Angry Virginian… he’s a handful!) on this their happiest day, and for the countless happier days to come, sharing and growing in their love for one another.


Congratulations you too! The Mrs. and I would just like to say “We told you so!” and “It’s about time!”. Seriously though, we could not be happier for you both.
– Angry Midwesterner

May your marriage be truly blessed; May you live to old age together in the company of family and friends; And may you trample your enemies underfoot… or maybe just the first two. Congraulations!
– Angry New Mexican

Oh, wait! I was supposed to say congratulations. 😀 Well I did it.
– Mildly Piqued Academician

Congratulations. May you be fruitful and multiply. (and you can integrate also). Now move out of Virginia.
– Angry Political Optimist

Congratulations and Best Wishes! May you two hold down the east coast while we two hold down the west one. May this be the first day of a long happy life together!
– Angry Immigrant

Most wonderful and pleasant wishes to you both upon this joyous union. May your day be festive for you and those closest to you sharing in the proclamation of your love!
Angry Fascist Libertarian

(Well, I would have posted earlier, but that VRWC party Cheney threw last Wednesday got way, way, out of hand! Anyway: ) May you find in each other true lovers, lifelong friends, equal partners, and models of Christlike and sacrificial charity. Most of all, may your love, friendship, and joy in each other shine out from you and enlighten all you come to know down through the years!
– Angry Overeducated Catholic

Readers might be asking “Where are the Angry Men?” Well, the answer is “busy” with various things. But dead air sux, so here’s a little thing I just noticed on a $1 I was about to spend on my daily coffee.

It’s been said many times that the web has added all sorts of things to our lives that nobody would ever have guessed, be it good or bad. Where’s George? is a web page that lets you track where the money you have has been. You enter your ZIP code and the serial # of the bill. If someone else has already entered it, you can see where it’s been. “Small used bills” might not be quite so safe for criminals anymore… scratch that, along with phone booths, as a plot device.

  • Got any other cool things the web lets you do you wouldn’t have thought of before? (Discussion boards don’t count, that’s just globalizing the office water cooler.)
  • Got anything the web does that really yanks your chain?

Discuss!

As you can tell by reading the comments, my article on hybrids generated a ton of interest and comment. On top of the actual comments, we’ve had a bunch of discussion on our super-secret internal email list. Given the quality of the discussion in the aforementioned article, we’d like to give everyone a chance to continue the conversation.

For those of you who missed the first edition, I basically argued that hybrid automobiles only start to make sense for the typical American driver (as defined by the DOT) when gasoline reaches the economically crippling $10 a gallon. Mere “European” gas prices won’t cut it. Inflation, which is largely driven by gas and commodity prices these days, will not make matters any better as it increases prices across the board. If anything, hybrids are even more screwed.

So what do the 12 Angry Men have to say?

Angry Overeducated Catholic
Right, in fact hybrids in general (even at the SUV level) aren’t yet worth it economically. But they may be worth it for early adopters (who by definition buy such goods before it is economically rational to do so), nerds, and greenies.

Of course it would be far more worth it for the greenies to drive their old, decrepit, smog-producing VW minivan to a rally for greatly increased use of nuclear power, which would do far more to reduce fossil fuel emissions and oil dependencies than any number of hybrids.

But you can’t drive a pro-nuclear rally around to show off to your hippy friends, so that doesn’t work out…

Status good is spot on. (Note: Strictly speaking economists don’t use the term “status good” but such things would be a type of Veblen good.)

Mildly Piqued Academician
Right, in fact hybrids in general (even at the SUV level) aren’t yet worth it economically.

Well, not accounting for externalities. And “worth it” is tricky. It ain’t just gas mileage, or no one would ever get the add-ons to a car… or buy anything but the basic economy vehicle that gets you around.

But they may be worth it for early adopters (who by definition buy such goods before it is economically rational to do so), nerds, and greenies.

Right. If the nerds and greenies (big overlap there, obviously) need to justify their purchase, they can go right ahead. Fundamentally this is no different than the lawyer justifying his purchase of an Infiniti as a sign of having “made it.”As David Brooks has noted, it’s become acceptable to spend lots of money on high end “basics” such as a fancy kitchen among the bobo class, aka the current upper class.

Status good is spot on.

That’s true. But many other goods fall into that camp. Early adopter markets are quite important for the eventual broadening of the market. When fleet vehicles such as taxis, cop cars, etc., end up going hybrid you’ll see a big shift. Third gen hybrid may well push this as it will be cheaper, smaller, and better. In this case, the early adopters did
the rest of the world a big favor. 🙂

Angry Overeducated Catholic
Well, not accounting for externalities. And “worth it” is tricky. It ain’t just gas mileage, or no one would ever get the add-ons to a car… or buy anything but the basic economy vehicle that gets you around.

Right. I meant in simple economic analysis based on fuel efficiency. As you say, very few people buy their car for entirely (or even primarily) economic reasons. Otherwise the Fusion, Milan, and Altima could not all successfully compete—being the same car with different shells and options. Fortunately (for them) external options make a difference.

Right. If the nerds and greenies (big overlap there, obviously) need to justify their purchase, they can go right ahead. Fundamentally thi is no different than the lawyer justifying his purchase of an Infiniti as a sign of having “made it.”

Yes, and there’s nothing wrong with either. Both also signal to one’s peers that one is a member in good standing of the group and agrees with the aims and beliefs of the group, and such signals are of great importance to us naked apes.

As David Brooks has noted, it’s become acceptable to spend lots of money on high end “basics” such as a fancy kitchen among the bobo class.

Yes indeed. Or to spend lots of extra bucks on organic food at faux farmers’ markets like Whole Foods. I suspect part of this a legitimate interest in these things and part is a desire to be able to consume conspicuously without appearing to be a wasteful and evil conspicuous consumer.

That’s true. But many other goods fall into that camp. Early adopter markets are quite important for the eventual broadening of the market.

Yes, and there’s nothing at all wrong with status goods—together with other luxury goods they form a huge component of the economy, after all.

When fleet vehicles such as taxis, cop cars, etc., end up going hybrid you’ll see a big shift. Third gen hybrid may well push this as it will be cheaper, smaller, and better. In this case, the early adopters did the rest of the world a big favor. 🙂

Exactly. If hybrid tech pans out the early adopters will be those who kept it alive long enough to do so. And if it fails, they’re the ones who took the risk (and loss) to give it a try. Entrepreneurs of consumption, as it were… 🙂

Mildly Piqued Academician

Yes, and there’s nothing at all wrong with status goods—together with other luxury goods they form a huge component of the economy, after all.

They always feel a little “dirty” though… Why else would bobos go through so much trouble putting on counter-cultural airs? Why else would people like Richard Nixon famously go on about wife Pat’s “good Republican cloth coat” in the Checkers speech? Honestly I think that the argument that bobo-ism represents nothing more than changing tastes of the upper class is spot on.

Angry New Mexican
So, to paraphrase AOC from the comments of the original article are hybrid car owners
“driving around the block displaying your Goreon commitment to the admiring public,” like the folks who shop at Whole Foods (evidently including Obama… no wonder the wacky left opposes The Clinton Restoration(TM))? Are they really interested in engaging in self-promoting faux-greenery, namely saving the planet without sacrifice (or at least without their sacrifice… the opposition to Tata Motor’s ultra-cheap car betrays this hypocracy)?

Or on the other hand, are folks who buy hybrid just crazy first-adopting geeks (I can relate, I bought a 1st gen Iomega Zip Drive back inthe day), who will eventually help move the technology to the mass market?

Only time will tell… Readers, what’s your call?

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ObFascism Tag: Boboism is nothing new. Adolf Hitler practiced it personally—put on of being a “man of the people” while living in luxury himself—and it’s a part of the denouement of previous romantic movements.

In case you missed my last article detailing my passionate hatred for the latest bit of consumer stupidity, known as hybrid automobiles, I’m back with a sequel piece. Here I’ll be employing the mighty power known as algebra to explain why buying a hybrid automobile makes no economic sense, except in what would be best classified as a nightmare scenario. To illustrate this, I want to compare the Toyota Prius with (in my opinion at least) one of the best inexpensive cars on the market, the Toyota Corolla. The cars are of a similar size and equal seating capacity (5). So what makes the humble Corolla more than a match for the mighty Prius from an economic perspective? The answer is simple: cost.

Consider the following vital stats about the two automobiles:

Car City MPG Highway MPG MSRP Range
2008 Prius 48 45 $21,100 — $23,370
2008 Corolla 28 37 $14,405 — $16,415

According to Uncle Sam, it’s plausible to assume that the average driver puts about 15k miles on a car every year. Likewise, according to the DOT, the average American keeps their car about 4.5 years. That’s not a whole lot of time to recover the cost of the vastly more expensive Prius. But with the price of gas these days, it has to be a good deal, right? Wrong.

Assuming that the cars depreciate at an equal rate (or you just crash them into a tree and get nothing from your insurance company) and that inflation (now pushing 4% per year) drops to zero, here’s where the Prius becomes cheaper as determined by the price of gas (here we only consider the lowest end model of each car):

When the Prius Price of Gasoline (per gallon)
Costs Less $2.00 $3.26 $5.00 $8.00 $10.00
Years 22.8 14.1 9.1 5.7 4.6

So for a Prius to be more economically sensible for the “average” American, gas has to cost $10.00 a gallon. And this is assuming 0% inflation. The numbers get worse when you factor in a 3% inflation rate. Assume that the gas price listed is the price today and that the cost of gas increases inline with the 3% inflation rate (Ben Bernanke and I are both being hopeful). Then the crossover point looks like:

When the Prius Price of Gasoline (per gallon)
Costs Less $2.00 $3.26 $5.00 $8.00 $10.00
Years 36 18 11 6 5

So unless we assume that gas prices are going to head up significantly faster than the inflation rate, it’ll still take $10.00 per gallon gasoline to make the mightly Prius cost-competitive with the humble Corolla. Perhaps that’s something to think about the next time you head to visit the Toyota dealer…

Well, once again the dreaded Tax Day has come again in the United States. As millions scramble to finish their returns at the last minute, and millions more are reminded for a moment about how painful, frustrating, and stupidly complicated this year’s taxes were, perhaps you will give me a moment to indulge a fantasy:

Imagine there’s no 1040
It’s easy if you try
No capital gains tax
Eating away our pie
Imagine all the people
Keeping all their pay…

Imagine there’s no AMT
It isn’t hard to do
Nothing to evade or cheat for
And no Schedule-C too
Imagine all the people
Earning cash in peace…

You may say I’m a dreamer
But we’re growing every day
I hope someday you’ll join us
And the world will keep its pay!

(With no apologies to Lennon, that socialist twit.)

While many taxpayers are lucky enough to use 1040-EZ (as long as they don’t mind missing out on half the deductions allowed), anyone who has ever: bought a house, received any money for contract work, sold any stock, earned any sizable amount of interest, earned any dividends, used a car or possession for business, or done any of a hundred other fairly common things knows the joy of the full 1040. And that’s a joy that they get to enjoy for a longer time each year, as the code grows in complexity.

This year, in fact, we were treated to the wonderful spectacle of a recursive function in the capital gains worksheet: Box 22 depended upon Box 10, Box 10 depended upon Box 37, and Box 37 (naturally) depended upon Box 22. A literal Catch-22 right there in the 1040! So what did the taxpayer do: why fill out boxes in order over and over again until the numbers stopped changing. Yes, this year’s tax form required iterating over a recursive function. It’s official: advanced mathematics is now required to accurately fill out an American tax form. I guess we should just be thankful the function converges…this time.

So, enough whining. What should we do?

Scrap the damn tax code!

No band-aids, no simple patches like the mid-80s reforms, no more kicking the problem out for another decade or so. Scrap the cobbled together, rickety, ideologically-driven, overly-intrusive, economically regressive thing, and start again.

But what to replace it with? The Flat Tax? The Fair Tax? The As Yet Unknown Tax? No Federal Tax? (That last one’s for states rights fanatics like Angry Midwesterner.) Before I try to lay out a positive, let me shoot down some perennial red herrings:

We can’t have a [flat/Fair/no] tax – it’s regressive!
Now this objection can have a reasonable meaning, which is: the very poor must use the vast bulk of their money for necessities, and the very rich use almost none, so a tax code should respect that each tax dollar is a greater burden on the poor than the rich. And that reasonable objection has a simple and reasonable answer: set a personal deduction large enough to ensure that the poor pay little or no tax.

Sadly, most fans of “progressive” taxes don’t give a damn about the poor—they’re besotted by the sin of envy and want to soak the rich and damn the cost! For these folks, the answer above is worthless because it only benefits the poor, it doesn’t punish those evil, evil rich. You’ll pardon me if I see no reason to respect the wishes of a bunch of folks eager to punish the deadly sin they hate (greed) by enshrining the one they love (envy) in law.

Any tax code we come up with will just get hijacked again—and be just as complicated soon!
This is actually very reasonable, and a useful cautionary warning. But as an objection to doing something it’s pretty wrongheaded. Just because every system can be abused doesn’t mean that some aren’t better than others. Given that the current code kills a sizable forest every time they need to print a hard copy of it, I find it very hard to believe that much simpler systems will somehow be easier to corrupt.

Now is not the time for radical reform—we have massive deficits and are in a recession!
No, now is exactly the time for change, especially if those things are true. Taxes are, almost always, regressive economically: the more taxes the less growth and the greater the chance of recession. Lower taxes, and you spur growth. Ah, but simplify taxes, and you reduce the burden of complying ($200-$500 billion dollars annually), which lowers the effective tax burden (taxes plus fees to file taxes). So a simpler system would spur growth even without lowering taxes. Anyone who’s run their own business, done contract work on the side realizes this. The current system burdens the self-employed with significant costs.

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So, away with these objections, and on to the glorious future!

Well, actually, I don’t have a nicely laid out, detailed plan for tax reform any more than anyone else does. But, to avoid the label of coward, I’m willing to stick out my neck and recommend a general outline of one. First the general principles: the poor should not pay tax (they’re poor), those who work should not be punished (they’re industrious), those who invest should not be punished (they generate capital), those who start businesses should not be punished (they are the engine of growth).

So, the plan:

  1. A flat income tax of 25% Easy to calculate, easy to file.
  2. A standard personal deductible of $20,000 per adult and $5K per child. Make less than that? No tax for you. Creates these effective tax rates:
    Effective Rate by Income
      $20K $35K $50K $100K $250K $1 million
    Single 0% 11% 15% 20% 23% 24.5%
    Single Parent (2 children) 0% 3.5% 10% 17.5% 22% 24.25%
    Family (2 children) 0% 0% 0% 12.5% 20% 23.75%

    Progressive!

  3. No capital gains tax. (That’s right: 0%! Don’t whine too much though, lefties, look on down the page.
  4. No tax on interest or dividends. (That’s right: 0% But wait, progressives, you’ll get your day!)
  5. No corporate taxes. (That’s right: 0% here too! Think about it: corporations don’t pay taxes, they just pass those taxes on to shareholders, customers, or employees. If they simply avoid taxes through clever bookkeeping. Breathe steadily, lefties, good news follows!)
  6. Earned Income Tax Credit: reward the working poor who are stuck, for the moment, with low-paying jobs. Exact mechanic to be worked out, but we should be generous while always making it more profitable to take a better job!
  7. Nothing else. No other deductions. No tax loopholes. No tax shelters. No tax-free trusts. No mortgage deductions. You get a personal deduction, you pay 25% on what’s above it. That’s it.

Now, before I’m hauled outside, doused in environmentally friendly fair-trade organic vegetable oil, and set alight, let me point out why this is a win for the soak the rich crowd:

Who pays taxes in America? Despite campaign rhetoric, it ain’t the poor. In fact, it’s the rich. The top 10% of income earners (those making $103K and up) control around 46% of the wealth but pay over 70% of the taxes! This means, of course, that most of those nice deductions, exclusions, etc. benefit the wealthy. A 25% rate might seem like a tax break, since the current top rates range from 28% ($77K-$160K) to 35% (above $350K), but those rates on on taxable income—after deductions have had their day. A 25% rate on all income above $20K should compare pretty favorably to 28% on income left over after well above $20K in deductions have been applied.

So why would the rich approve? Because a flat tax allows them to calculate their burden easily, estimate the economic costs of various options easily, avoid expensive tax preparation and record-keeping, and eliminate the expensive audits or penalties which arise from the inevitable mistakes in the current ridiculously complicated tax environment.

And, best of all, eliminating compliance costs and flattening rates will spur an economic boom. Wealth, individual income, and tax revenues will rise, and the tax base will grow as new workers enter the pool.

My numbers are rough, and doubtless need fine-tuning. We’ll need a bunch of work to get things right, and we’ll have to work across the political divide to get a tax code that rewards hard work and investment without unfairly hurting hard-working blue-collar folks. But we can do it! We can revolt against this bloated tax code shoved upon us by a political class of lawyers and lobbyists and return to something simple and sensible. Fourteen states have done it, seventeen nations have done it, and we can do it too!

You may say I’m a dreamer
But we’re growing every day
I hope someday you’ll join us
And the world will keep its pay!

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