Glibertarians.com 2017 Archive

Category: Taxes

  • Minimum Wage and the Youths

    Alright, here’s what’s gonna happen, I’m gonna start out with a story from my job, talk about minimum wage and why kids don’t work today, then end with a gripe.

    Foreseeable consequences are not unintended.

    So I was busing tables for my $1.50 an hour, you know just watering and cutting bread, when this kid, and when I say kid, I mean a guy who was 23 and had never had a job, who was simultaneously well groomed and unkempt walks in. I thought to myself, “Oh God, fine I’ll water you and cut, whatever.” So I continue on and water him and all that. He was rude to me and the server who I’m friends with so I didn’t like this kid, but fine again, whatever. So as the night picked up, I passed by his table a few times until eventually he drops this line on his parents, “As long as we have a middle class in america we can’t have equality.” Now I had to water and cut bread so I didn’t hear more. But this made me so angry that it almost ruined my night, a night which already had a lot going wrong recently.

    Alright, story time’s over, now it’s time to talk about the minimum wage. Now this is already a loaded topic so I’m not going to step into what is so intricate about it, but instead I’ll cut right to the meat of my argument. It’s not the only reason why kids can’t get jobs now. Much of the refusal to hire kids is due to the following two reasons:

    1. Kids are now less willing to work and are thus less reliable workers who employers are willing to hire
    2. And kids provide a whole slew of issues, to the point where even if they are willing to work, they are not allowed to work in certain places

    But let’s break both of these down. Amongst kids there is a lot of pressure to not only socialize, but also to play structured sports, to the point where they have no time to spare between homework and extracurriculars. The extracurriculars are mostly used by parents earlier in the kid’s life to signal their wealth. These extracurriculars tend to then continue later into the kid’s life until we have the current situation. But what about the liability issues? Well, they primarily start around the following two laws “kids under 16 may not work with food” and “kids under 16 may not handle cash.” I don’t know if these are federal or state, but it meant that until I was 16 I couldn’t get an actual job. There are also safety issues which mean that kids can’t be involved with heavier labor like landscaping unless they get expensive medical testing. This renders most jobs unavailable for kids.

    Now onto the gripe. I don’t earn $1.50 an hour on my actual paycheck, instead it’s $5.50 an hour plus tips. But the payroll tax is so utterly fucked, to the point where out of every $5.50 I never see $4. That’s $4 which goes to the fedgov and not me. Fuck payroll and income taxes together. Anyway, y’all let me know if you have any stories of your own.

  • A Comparison of Cabotage Maritime Regulations Worldwide – Part 3 (of 3)

    Continuing to elaborate upon my previous themes on Maritime Regulation/Deregulation. (here, here and here).

    Part 1
    Part 2

    Asia – China and Taiwan.

    The focus of the paper by Lee, Wu and Lee (2011) is on the liberalization of trade between Taiwan and the PRC as a result of the Economic Cooperation Framework Agreement (ECFA) which was signed and came into effect in mid-2010 – and the resulting expected adjustments in trade surpluses. The removal of import/export tariffs (excepting agricultural goods) reveals an increasing trade imbalance favoring Taiwan over the PRC, but the article does include some interesting notes on the cabotage policies between the nations. Specifically, while historically trade between the PRC and Taiwan was routed through third party ports in Japan, Korea and Hong Kong, as a result of liberalization, since 2008 direct trade has been permitted – although only by PRC and Taiwanese flagged ships (Lee, 186).

    As part of the PRC’s overarching “One China” policy, direct trade between the PRC and Taiwan is considered “domestic” trade and only permitted by “domestically” flagged vessels – which in this case is comprised of ships flagged by either the PRC or Taiwan. Although the authors resist speculating on this point, the resulting trade imbalance previously referenced appears to be an acceptable calculated loss on the part of the PRC leadership as it allows them opportunities to speak to the “One China” policy and include both the imports and exports under the greater Chinese economic umbrella and perhaps the establishment of further precedents through trade routes and associated dependencies (Lee, 187).

    ASEAN

    In researching barriers to effective and efficient shipping services in the inter-ASEAN region, Tongzon and Lee (2016) conducted a series of interviews with various representatives of trade organizations, shipping corporations (government and privately owned) and associated logistics service providers. To limit the scope of the study, three countries were selected as representatives to be extrapolated from – Malaysia for the more developed economies, followed by Vietnam and Myanmar to represent the least developed countries (Tongzon, 410).

    Cabotage legislation is specifically identified as a contributing barrier to increased maritime trade over the course of the discussions – and as the authors note, while Malaysia and Vietnam both employ cabotage policies, they are considered market-responsive. Malaysia is specifically noted for making exceptions for container traffic to and from Port Klang, as well as permitting shippers to opt out of restrictions by paying certain taxes and fees – although these may also be exempted if there is no Malaysian vessel available meeting the requirements (Tongzon, 416).

    It should be noted that while acknowledged, cabotage policies as an average are less of a concern amongst the interviewees responding on behalf of the three featured countries than port infrastructure limitations or shortages of trained personnel. Similarly, while Malaysia is a more traditionally and historically a maritime nation due to geographic concerns than Vietnam or Myanmar, neither of the archipelagic nations of Indonesia or the Philippines were reviewed in this paper. The recent contrasting legislation passed in each of those countries – increasingly strict cabotage limitations in Indonesia over the past several years following the initial passage of Maritime Law No 17 of 2008 (Yee), and the amending in 2015 of the Jones Act-esque “Republic Act of 1937” in the Philippines (Yee), which opened up domestic traffic to international carriers in the process of importing or exporting goods – would provide an interesting counterpoint for future research.

    Conclusion

    In reviewing the current literature available on the topic, there does not appear to be a large volume of academic research addressing the specifics of individual nations’ cabotage policies or legislation. As a matter of self-interest, this topic appears to be of more value to various stakeholders, special interest groups and associated government partners who tend to commission their own studies as a means of influencing policymakers (MARAD).

    While there is literature advocating new policies and technologies for shippers to implement – framed in public policy theory terms, the authors are in some cases unwilling or unable to recommend policy stances that would strengthen the persuasiveness of their arguments and give more rationale for reasonable implementation – Perakis and Denisis (2008), and Medda and Trujillo (2010). In contrast, Brooks and Frost (2004) are fully cognizant of the limitations imposed by the current regulatory frameworks and openly recommend changes that would prove efficient and beneficial to multiple parties – in keeping with the pre-existing trade arrangements.

    Traditionally, countries have tended to be protectionist to industries considered critical to national security, but in the 21st century as manufacturing efficiencies have been diversified and shipping specialties have been outsourced, that argument has grown increasingly stale, particularly when considering the comparatively small groups that benefit from associated protectionism at the expense of nearly the entire whole. As a function of free trade agreements in particular, the removal of cabotage restrictions between partners should be a serious consideration from this point forward.

    In approaching future research considerations on this topic, it would be valuable to first collate all outstanding cabotage legislation on a country by country basis and utilize that as a framework for determining economic impacts – along a framework similar to that utilized by Lewis (2013). Although there are obvious distinctions and variations between countries, a common database would allow comparison between data points such as ship flagging requirements, crewing requirements, maintenance or operation taxes and other economic [dis]incentives. With that information available to hand, it would be a simpler matter to correct for comparative gains and losses associated with these policies and recommend more specific or targeted policy adjustments with accuracy.

    Some links don’t work based on library links – article information provided in case anyone else wants to look them up later:

    Lee, Tsung-Chen, Chia-Hsuan Wu and Paul T.-W Lee.  “Impacts of the ECFA on Seaborne Trade Volume and Policy Development for Shipping and Port Industry in Taiwan.”  Maritime Policy and Management.  Vol 38: No. 2, (2011): 169-189.  Web.  12 Jun. 2016.

    < www-tandfonline-com.proxy.lib.odu.edu/doi/full/10.1080/03088839.2011.556674#abstract>

    Tongzon, Jose L. & Sang-Yoon Lee.  “Achieving an ASEAN Single Shipping Market: Shipping and Logistics Firms’ Perspective.”  Maritime Policy and Management.  Vol 43: No. 4,     (2016): 407-419.  Web.  11 Jun. 2016.

    <www-tandfonline-com.proxy.lib.odu.edu/doi/full/10.1080/03088839.2015.1105393#abstract>

  • A Comparison of Cabotage Maritime Regulations Worldwide – Part 2 (of 3)

    Continuing to elaborate upon my previous themes on Maritime Regulation/Deregulation. (here, here and here).

    Part 1

    Canada (aka America’s Hat)
    As the title so aptly states, “Short Sea Shipping: A Canadian Perspective” by Brooks and Frost (2004) approaches the topic of short sea shipping from a Canadian perspective – but gives due consideration to the association with the United States – particularly in connection with NAFTA. In that, Brooks and Frost provide a valuable summary of existing regulations – as of 2004 – in the US, Canada, and Europe while examining what legislative functions would need to be modified in order to broaden acceptance of short sea shipping as a viable transportation method. Significantly, one highlight of existing policies in North America is that NAFTA as a general agreement, made no dispensations for existing cabotage regimes either with respect to the Jones Act in the US or additional, similar regulations in Canada or Mexico – although the latter two countries did sign an additional bilateral treaty to address the issue. Tellingly, given the geographic and port situations between the two countries, it has had far less tangible effect than a liberalization of policies by the US would have produced across the board (Brooks, 399). The basic domestic cabotage policy requirements for Canadian shippers are also similar to those imposed by the Jones Act with respect to flagging, construction, and crewing requirements – and the potential tax liabilities for failing to meet those requirements. In some cases, however, the regulations appear somewhat more piecemeal – and potentially contradictory – than the all-encompassing Jones Act (and accompanying legislation) in the US. For instance, Canadian safety standards for new vessels are reportedly more onerous and expensive to meet than the internationally accepted IMO standards – while at the same time, a number of existing Canadian flagged ropax vessels would not meet the IMO standards if they were formally accepted as a baseline by the Canadian government (Brooks, 399). While Brooks and Frost appear to be in favor of expanding short sea shipping as an alternative to trucking – particularly in the congested I-5 and I-95 corridors – much the same as Perakis and Denisis – they are cognizant that there is no financial incentive (big surprise) to shippers utilizing current technologies – under the current regulatory regime. In order to develop a competitive alternative, particularly focusing on international traffic between Canada and the US – a market with growth potential on the East and West Coasts – both the US and Canada would need to amend their regulatory structure in order to remove port and cabotage restrictions (Brooks, 401). It bears mentioning additionally, that while the EU historically has a more robust short sea shipping sector – even following loosening of EU regulations – the service still fails to meet the just in time requirements for many shippers who continue to prefer rail or truck services for efficiency – even in light of carbon taxes or greater fuel expenditures (Brooks, 398).

     

    The EU
    Similar in tone and content to Perakis and Denisis (2008), Medda and Trujillo (2010) provide another set of good arguments in favor of short sea shipping – while in turn referencing the current policies in place across the globe – but are forced to acknowledge that a number of the current structural and economic disadvantages are still unable to be overlooked without new incentives.
    While on the surface the advantages still appear to outweigh the weaknesses, particularly when it comes to public perception and environmental considerations, the fact that these issues do not necessarily have any impact on concerns espoused by shippers has severely hampered the implementation of short sea shipping in regions where it does not have a historically strong foothold. Medda and Trujillo are also careful to point out that governments to date have neither provided sufficient incentives for shippers utilizing short sea shipping or disincentives for road and rail transportation. Additionally, they are careful to note that in the EU at least, decreasing some road traffic would result in significantly decreased tax revenues for localities relying on said funds for structural maintenance and general welfare – a decidedly negative and potentially unforeseen consequence of implementing more short sea shipping (Medda, 293).

    Noting the importance of efficient shipping technologies within the more limited scope of short sea shipping, the authors also recommend directing more attention towards Roll-On/Roll-Off (RO-RO) and Float-On/Float-Off (FLO-FLO) cargoes as the sort that shippers would see the most efficiencies from backing – in these early stages – in spite of the larger initial capital expenditures (Medda, 296). Similarly, many smaller ports still require significant infrastructure improvements in order to meet shippers requirements for speedy cargo handling – container or otherwise – to justify the increased focus on short sea shipping as a time-efficient alternative to road or rail transport (Medda, 297).

    Paixao and Marlow (2001) provide a detailed chronological summary of EU (and prior to that, the EEC) shipping policies – addressing the various organizations and policy directives that were promoted as the Union expanded and developed. A significant amount of detail is utilized in reviewing the distinctions between mainland Europe and the outlying, more insular regions – and the need to tailor policy accordingly. In a familiar refrain, the adoption of a cabotage system or short sea shipping policy by the EU was reactive rather than proactive in response to the first expansion which added several non-continental members (Paixao, 188). Furthermore, it wasn’t until after several Northern European nations had already established free shipping agreements between themselves that the EU even began to review an official uniform trade policy on cabotage (Paixao, 192). Similarly, the short sea shipping concepts that function efficiently in some regions don’t work as well compared with trucking or rail transport in other regions.

     

    Australia and New Zealand
    The timing of Everett and Robinson’s (1998) research is set in a period in the mid to late 90s during which the Australian government was examining options on modernizing or updating its policies and does not reflect a true change in status or legislation. Additionally, the focus is more on the nationalized state of the largest domestically flagged lines – the Australian National Line (ANL) – and their inefficiency – more than any specific examination of cabotage. Everett and Robinson provide a general history of the Australian National Line and its relationship with the national government, and as a general rule, the observed inefficiencies fall along lines similar to associated protected industries in other nations (Everett, 270).

    Operating from a protected position domestically, the ANL historically posted losses in spite of traditional trade barriers via cabotage policies and favorable government treatment and subsidies. At the time this article was written, several policies had been passed to increase competitiveness by shrinking mandatory crewing requirements, but there were no definitive adjustments to the established cabotage restrictions on the domestic coasting trade (Everett, 283). To date, there have been no loosening of restrictions in this market, although following the recommendations made through the Harper Competition Policy Review, there is a better likelihood of a shift towards more flexibility in response to the markets in an effort to increase market competition and greater benefits to the domestic community (Thompson).

    Cavana’s (2004) study of New Zealand contrasts significantly with other countries reviewed for this paper. (Refreshing!) New Zealand’s existing cabotage laws were formally removed in 1995 – although international ships transporting cargo between domestic ports must still have delivered imports or picked up exports (Cavana, 182). After almost a decade of unrestricted trade, Cavana was commissioned by the government of New Zealand to determine whether there was any inherent benefit to reintroducing a cabotage program in whole or part. This paper was the end result of analytical discussions reviewing 83 stakeholder submissions to the Shipping Industry Review team assisting in determining how best to increase participation in the New Zealand shipping industry (Cavana, 179).

    As a smaller, more isolated country largely dependent on imports while primarily exporting commodities, New Zealand is in a different position than the US and Canada – although the cabotage policy shifts reflect only a portion of a larger effort to become more of an “open economy” (Cavana, 182). By the time of this paper in 2004, market estimates indicated that international shippers had captured approximately 10-15% of the domestic coastwise shipping market, but even those estimates are difficult to quantify due to the fact that a portion of the resulting increase in traffic also appears to come from international shippers transshipping internationally bound containers between domestic ports for convenience. In this article the practice is referred to as “hubbing” – where one ship will drop off containers at a central port for another ship owned by the same company to pick up – or use feeder services to move to another port for pickup. Container traffic rose approximately 5% per annum between 1995 and the publication of this article in 2004. Accordingly, some of the smaller domestic shippers saw additional traffic as they are received more business participating in the movement of tranship containers between domestic ports (Cavana, 185-186).

    Although the sample sizes are small, initial numbers during the period encompassed by this paper indicate that domestic shipper container shipping costs dropped by as much as 50% and at least one domestic shipper saw a 100% increase in volume. The shipping cost decreases vary greatly depending on the routes, however – due to the fact that most international shipping traffic utilizes a north to south route along the coast. Similarly, in a limited case scenario provided, farmers in one region see a much better return on grain sales due to the cheaper shipping options offered. The low transportation rates offered by coastwise shipping (domestic and international) force railroad and trucking services to maintain low prices to stay competitive (Cavana, 187)
    Consequently, at the time of publication, Cavana recommended against reintroducing cabotage but suggested leaving it open as a future option subject to economic climate shifts. Over a decade after this assessment, cabotage has not yet been reintroduced by the government of New Zealand (NZIER, 45) .

    Some links don’t work based on library links – article information provided in case anyone else wants to look them up later:

    Brooks, Mary R. & James D. Frost. “Short Sea Shipping: A Canadian Perspective.” Maritime Policy and Management. Vol 31: No. 4, (2004): 393-407. Web. 11 Jun. 2016.

    Medda, Francesca and Lourdes Trujillo. “Short-Sea Shipping: An Analysis of Its Determinants.” Maritime Policy and Management. Vol. 37: No. 3, (2010): 285-303. Web. 31 July.

    Paixao, A.C. & P.B. Marlow. “A Review of the European Union Shipping Policy.” Maritime Policy and Management. Vol 28: No. 2, (2001): 187-198. Web. 11 Jun. 2016.

    Everett, Sophia and Ross Robinson. “Making the Australian Flag Fleet Efficient: Dysfunctional Policy Processes and the ‘Play of Power’.” Maritime Policy and Management. Vol 25: No. 3, (1998): 269-286. Web. 12 Jun. 2016.

    Cavana, Robert. “A Qualitative Analysis of Reintroducing Cabotage onto New Zealand’s Coasts.” Maritime Policy and Management. Vol 31: No. 3, (2004): 179-198. Web. 11 Jun. 2016.

  • A Comparison of Cabotage Maritime Regulations Worldwide – Part 1 (of 3)

    Continuing to elaborate upon my previous themes on Maritime Regulation/Deregulation. (here, here and here).

    <The paper these articles were drafted from was original written Spring 2016 – it has not been updated for any modifications or new developments taking place since then.>

    The practice of cabotage – defined by Merriam Webster as “trade or transport in coastal waters or airspace or between two points within a country” has been a key legal aspect of trade for centuries around the world. In the strictly maritime realm, this practice is often referenced using the term “short sea shipping” to refer to coastwise traffic and inland waterways, while “cabotage” is being utilized more frequently in reference to the associated regulatory policies.

    Although there has historically been a potential for international conflict arising from government-imposed restrictions, the last century is notable for both the imposition and review of unwise or shortsighted economic policies that are arguably responsible for net economic losses in a country’s domestic population in spite of documented evidence.

    The United States and the Jones Act (quick recap on themes referenced in previous articles)

    “I used to be a maritime shipper like you…”

    Recognized worldwide simply by name, the Jones Act – formally The Merchant Marine Act of 1920 – has become synonymous some of the most with severe restrictions on trade emanating from a government-mandated cabotage policy. From a strictly legal background, Yost (2013) (excellent paper – HIGHLY recommended for anyone looking for more legal discussion) begins with a detailed review of the Jones Act – and examines the degree that legal decisions have deviated from the original stated intent of the legislation (big surprise?) in the aim of maintaining apparently protectionist stances that have generally been harmful to the overall economy. As a matter of perspective, the author is careful to note that the Jones Act by itself is not a formal tariff (technically-speaking – “the best kind of ‘speaking’”), but functions in a similar fashion as a barrier to entry, limiting competition and protecting the existing participants. (Yost, 62) The higher capital costs lead to higher costs for the customers across the board. While noting that Jones Act compliant shippers are not receiving formal federal subsidies in the way that Amtrak does (specific to the Jones Act alone, not considering additional federal retainer payments), Yost recognizes that the barriers to entry are so steep that the handful of companies providing shipping services to Alaska, Hawaii, and Puerto Rico are essentially operating as government-sponsored monopolies protected from competition. (Yost, 66) In an interesting comparison, the author demonstrates that the current protectionist aspects and legal restrictions are not dissimilar from that of the PRC or Japan and serve no positive purpose towards stimulating domestic economic growth, and in turn advocates transitioning towards a middle-ground policy between Australia’s licensed shipping cabotage policies and the trucking cabotage policies of the EU (Yost, 76).

    Approaching the issues raised by the Jones Act with respect to their economic consequences, Lewis (2013) (referenced in previous articles – highly recommended again) relates a number of studies on various aspects of the Jones Act and related legislation. Through his own calculations, he determines that the net domestic gain through repeal would be between $578 million and $685 million annually. While there would be a significant loss of domestic mariner jobs initially, many of those would be replaced by a steep intake of port services jobs around the country. A clear distinction is recognized between the inland waterways shipping industry – in which a healthy domestic competition has developed, and the vastly more capital-intensive coastal and overseas routes, including Hawaii, Alaska and Puerto Rico in which a very small number of companies have developed near-monopolies due to the restrictions imposed by the Jones Act and associated legislation (Lewis, 83). Lewis is also quick to note that while the trucking and railroad industries both faced heavy regulations earlier in the 20th century, the loosened restrictions in the last several decades vastly increased market participation while simultaneously driving down costs to shippers and consumers and there is no reason to doubt a similar outcome from addressing the maritime regulatory environment (Lewis, 92).

    <Although here again, we’ve recently seen how “re-regulating” the trucking industry is potentially going to lead to a loss of all those gains.>

    Finally, Lewis, like Yost, points to the EU’s maritime deregulations regarding coastal commerce as an example to be considered in adjusting long-term policies – keeping in mind the government’s push to incentivize and increase short sea shipping as a counterpoint to increased road and rail traffic (Lewis, 101).

    Perakis and Denisis (2008) provide a compelling summary of the benefits of short sea shipping as an alternative to road and rail transportation in the United States. The primary concern of the authors here is to present it as both economically and environmentally efficient – with a focus on the intermodal aspects of such transportation – shifting the containers arriving from overseas from the central coastal ports to more local shipping facilities. There are two types of short sea shipping considered – one involving direct loading of containers (TEU (20 Foot Equivalent Units) or FEU (40 Foot Equivalent Units)) onto barges or similar vessels to be transported for further distribution, and the other involving direct roll-on/roll-off movement of 53ft semi-trailers (Perakis, 593). In both cases, the end state is intended to significantly decrease traffic congestion both in the vicinities of the ports, but also on the feeder interstates associated with the ports. Further assumed benefits include decreased air and noise pollution, decreased expenses associated with infrastructure repair in addition to fuel cost savings in moving tonnage further by shipping than trucking or trains (Perakis, 605).

    On the whole, this analysis appears to be largely predicated from the public policy perspective. The majority of the arguments appear to be focused on decreasing activities that affect public spending outlays negatively or that represent potential public backlash for local or state governments. The actual economic functions as they apply to individual companies potentially more concerned with costs or scheduling are largely relegated to shorter discussions at the end of the paper. Indeed, there is no mention of the Jones Act – much less any other current legislative barriers – aside from its inclusion in a listing of potential obstacles hindering short sea shipping (Perakis, 608). To their credit, the authors do recognize in their conclusion that “SSS needs customized solutions for every emerging transportation market in congested trade corridors. A ‘one-size-fits-all’ approach is unlikely to be effective.” (Perakis, 612).

    Some links don’t work based on library links – base article information provided in case anyone else wants to look them up later:

    Perakis, Anastassios N. & Athanasios Denisis. ” A Survey of Short Sea Shipping and Its Prospects in the USA.” Maritime Policy and Management. Vol 35: No. 6, (2008): 591- 614. Web. 23 Jul. 2016.

  • California Dream’n

     

    Ten years ago, there were numerous articles written about the poor financial state of California during the governorship of Gray Davis and, later, Arnold Schwarzenegger. The State’s financial position deteriorated to the point that bond rating agency Moody’s downgraded the state to the ‘BBB’ range, or just above ‘junk bond status’. This was the first time in the post-Great Depression era that a US state was assigned such a low rating. Since that time, the State has raised taxes to stabilize its finances, and Illinois’ poor financial position has become the topic of conversation. However, California still faces some obstacles going forward, which are primarily driven by its massive Medicaid system (estimates suggest that one in three Californians are enrolled in the Medicaid system) and the State’s reliance on capital gains taxes.

    California’s Current Financial Position

    I’m sure this is so battered because it’s been used a lot…

    As of the end of the 2016 fiscal year, the State boasted a positive General Fund balance. This is the first time that the State has recorded a positive fund balance in more than ten years and represents a marked improvement from the State’s weakest financial position in fiscal year 2012, when it held a General Fund balance representing negative 26% of total revenue.

    The State’s largest source of revenue is its personal income tax which represents 46% of total revenues. Intergovernmental revenue, which is primarily revenue provided by the federal government (mainly Medicaid funding), represents 42% of total revenue and sales taxes represents 12% of total revenue. For the current fiscal year, the State forecasts a slight increase in sales tax receipts and no growth for income tax and intergovernmental revenues. Those projections are 2% lower than previous estimates.

    The State’s largest expenditure is Health and Human Services (Medicaid) which represents 52% of total expenditures. Education represents 32% of total expenditures and is the State’s second largest expenditure. For the current fiscal year the State now forecasts total expenditures to grow by 2.5% over previous projections, including 4% growth for Medicaid and 2% growth for education.

    The State’s largest pension system, the State Teacher’s Retirement System, is 63% funded. Total pension, other post-employment benefits, and debt service costs account for 10% of total State expenditures, which is an average fixed cost. Due to recently passed legislation, the State, local communities, and school districts will face increased pension contributions going forward. At 3.2%, the State’s debt levels, in comparison to other states, are above average.

    Current and Projected Deficits

    Deficit projections for the current fiscal year come in between $400 million to $1.6 billion (representing roughly 1% of total revenues). Additionally, budget estimates for the upcoming fiscal year are forecasting another deficit. The projected imbalances are being driven by the above-referenced flat to possibly declining income tax revenues coupled with growth in the State’s Medicaid system.

    Declining income tax revenues are driven primarily by declines in the State’s capital gains tax (which accounts for 10% of the State’s revenue). Over the past two years capital gains revenue has dropped more than 7%. California’s reliance on capital gains taxes has long made the state susceptible to the variability of market conditions and any economic downturn is expected to negatively impact the State’s overall revenues.

    Spending reduction is for chumps

    Growth in State expenditures is largely being driven by tremendous growth in the State’s Medicaid system. After the passage of federal healthcare reform in 2010 California’s Medicaid system has seen substantial enrollment growth, including a 14% increase in enrollment between 2013 and 2016. Current estimates suggest that one in three Californians are enrolled in the State Medicaid system. Any federal funding reductions to Medicaid would have a substantial negative impact on the State’s financial position.

    To address these budget imbalances Governor Brown has proposed reductions in State revenues for local school districts and state universities. In the past, the State has pursued a similar strategy to address budget deficits. The reductions in State revenue are expected to have a disproportionate impact on school districts that rely heavily on state funding and are already financially weak. These school districts likely will face state funding reductions combined with state mandated increases in pension payments.

    Conclusion

    The State’s financial position remains adequate, though some financial deterioration may occur in the near term. Local California governments that would be most impacted by reduced state funding would be local school districts that are already reliant on state support and have already been experiencing financial strain. Proposed federal funding reductions for the State Medicaid system would pose a significant challenge for California and would further exacerbate expected deficits.

    If no federal reductions in Medicaid occurs, the State’s financial position is expected to remain adequate, but deficits are likely in the near term. Local school districts (which are heavily reliant on state funding) are most likely to be effected by any State deficits going forward.

  • Debt and Growth in America

    The United States Government is carrying a frighteningly high level of debt. However, no serious plan has been implemented, by Democrats or Republicans. This high debt will have deleterious effects on the US, including the effect on taxes, economic growth and “entitlements.”

    This article will steer clear of specific thoughts on social and political upheaval, since it is too hard to predict such trajectories, and are anyway another subject. Of course, macroeconomic trends can be just as tricky, I am sure many people will have differing opinions on how our national debt will affect the economy in the coming decades.

    First, we must cover the current liabilities, debts, and revenue streams of the Federal government. All figures presented will be based on the most recent year available- 2016 data unless otherwise noted.

    US GDP: 18.87
    Total Federal Governmental Debt: 19.98
    Interest rate: 2.232%
    Debt as % of GDP: 106%
    Interest Spending as % of GDP: 2.36%
    Long-term economic growth trend: 2% (estimated based on post-2010 data)
    Inflation: 1.26%

    Pretty dire straits when debt is above total GDP. Having a debt ratio this high is actually cataclysmic, as pointed out by Salim Furth at The Heritage Foundation due to a phenomenon known as debt drag. I believe this is a fairly intuitive concept. As national debt increases as a portion of the total GDP, it causes a corresponding decrease in the growth of GDP. My personal theory on how and why this happens is as follows: There is a ‘crowding out’ effect by taking investments away from high risk/reward private debts, but also because more and more money is spent servicing debt rather than being spent on goods and services. Why risk your cash when you can get a guaranteed return on investment?

    The exact magnitude of the effect is of course debated but is estimated at between 0.18-0.19% lower growth for every 10% GDP debt above about 84% of GDP and 0.16% lower for every 10% above 60% of GDP (see graph below). This seems to indicate that the effect of high debt is a nonlinear decrease in economic growth; however, we will represent the relationship as a tri-linear curve. For a country with debt at 106% of GDP, the effect would be about -0.82% to the annual increase in GDP. This is massive when one considers the historic growth rate of the US in modern times was close to 3%. However, we find now that the growth rate over the past 10 years has never surpassed 3% (year-long average) and is averaging much closer to 2%. This corresponds freakishly well with the increase in Federal debt. 10 years ago debt was about 60% of GDP, which based on empirical evidence does not seem to have a large effect on growth.

    Another headwind for the US will be the increasing cost of capital. During the fantastic growth of the national debt interest rates were very low, a favorable position for a debtor to be in; however, the interest rates are likely to increase with the new Fed policy to increase the benchmark rates. This means debt will become more expensive to service, and likely return closer to the historical average rate of about 5%. Debt payments will increase, further accelerating the addition of debt. With the increased debt, revenue growth will slow due to a lackluster economic growth (remember that -0.185% of growth per 10% of debt to GDP?). This all points to a rapidly accelerating downward spiral from this point on unless spending can be reined in yesterday. All evidence in recent history points to the fact that reining in spending is a political no-go, for Millennials, the fiscal hot potato has been tossed around their entire lives. Short term pain will be high if spending is to be controlled, and that only gets worse as the deficits grow.

    On top of all this bad news in terms of debt, growth and interest rates we will have acceleration in the costs of the major entitlement programs as the populace continues to age and even grow infirm before their years (some of this can be attributed to the increase in the average American’s waistline). Again, there is no political will to reform these programs. If recent events are any indication, even small cuts to unimportant programs are not possible.

    For this thought experiment, let us assume that the Fed is targeting 3% for inflation and that they get it in 3 years. For the sake of simplicity, say that means the interest rate reaches ~5% on treasuries. This is in excess of 100% increase over the current cost of servicing debt for the US. This means our outlays to service debt will increase; making our current budget, which already relies on deficit spending to go further into the red by the same amount. Last year total debt servicing was $432 billion (including interest paid to the Social Security trust fund). If we assume this will double over the next 3 years when interest rates go up, that is a debt cost of 2*$432= $864 Billion. This is still pretty cheap but will be added directly to the deficit (and thus converted to new debt) as our revenue is unlikely to increase any more than the economy does.

    Let us review our assumptions:
    • (real) Growth rate starts at 2% but is decreased with increasing debt
    • Expenditures and Revenue as a portion of GDP is constant (~3% funding gap)
    • Inflation reaches 3%
    • The interest rates on debt reaches 5%

    Now, take a theoretical person “John” he will retire in 2045 and die in 2063. When John retires in 2045, our scenario would predict a real growth rate of 1%, however, because this includes a 1%/annum growth rate in population, average living standards would cease to increase at this time. John’s kids would probably riot since no one wants to be doing only as well as their parents did. This could change our long-term assumptions, so ignore that possibility for now. In 2063 when John dies, the debt to GDP ratio would be equal to 2.7 and real growth would be -1%. Japan aside, it is not clear anyone would be willing to continue to lend to a country with such anemic growth and high-debt.

    So, right around when John retires in 2045, we’re likely to have a calamity in terms of funding the government (assuming this sort of steady-state worsening of financial conditions nationwide). We’re likely to see outlays hit, especially for social security, already projected to be something like 75% of promised benefits come 2035.

    I think it is reasonable to think that around 2035-2045 something major will change our trajectory, as the combining forces of the elderly being cut off and economic stagnation unheard of in American history caused major political and social upheaval. We will have to have increases in effective taxation rates, decreases in benefits or some kind of default around this time period (or some combination of all three). Combined those efforts would result in an effective decrease in our living standards by about 10% in 2045 without accounting for lost economic growth, which would be another 12%. That is actually a good thing, compared to waiting until 2063 to deal with debt issues when growth would be worse than stagnant, and thus the consequences of the debt carried by the government exacerbated by economic conditions. I would estimate that by waiting until 2063, the decline in living standards by the combination of more taxes and less spending would be close to 16% and an additional 40% loses due to unrealized economic growth.

     

    Further Reading:

    https://www.cbo.gov/ has tons of information on projections, but they are very often wrong, for example:

    In CBO’s baseline projections, the deficit in 2017 totals $693 billion, $134 billion more than CBO projected in January.

    That is a 20% error in the deficit over the course of just one year. You can find the most recent 10-year outlook from the CBO here: https://www.cbo.gov/publication/52801

    http://www.treasurydirect.gov/govt/reports/pd/feddebt/feddebt_ann2016.pdf

     

  • Forget it–it’s Chicagotown

     

    You may have read about the City of Chicago’s financial difficulties. More often than not, the news coverage on this issue often looks for a single cause of the problem, such as pension underfunding or the fact that Democrats are uniquely bad at math. This commentary is too simplistic and overlooks the fact that major cities are complex. Yes, Chicago’s pension system is woefully underfunded, but this doesn’t explain the City’s consistent budget deficits (pensions are long-term liabilities and current costs are relatively small in comparison to other expenditures). Yes, Democrats are astonishingly bad at understanding arithmetic, but this wasn’t always true about ‘Chicago Democrats’ (RIP) who, unlike their Midwestern peers (St. Louis, Cleveland, Milwaukee, etc.), cobbled together strong financial performance during the 1970’s and 1980’s while manufacturing jobs and population declined precipitously in the City.

    I have provided a very brief summary of the issues contributing to the City’s poor financial position, along with providing an overview of the financial difficulty faced by Chicago Public Schools (which is a separate government from the City of Chicago).

    Deficits and Debt

    For over ten years, the City has maintained a budgetary imbalance. Though these deficits have declined over the past four years, they are still expected to continue for the foreseeable future.

    The result of these deficits has been a significant decline in reserves, with the City currently holding just 4% of its revenue in reserve. In general, a local government is considered to be fiscally healthy if it holds no less than 10% of its revenue in reserve. For the current fiscal year, the City of Chicago is projecting to completely exhaust all of its reserves.

    The City has also issued debt to close its budget gaps over a period of several years. This has resulted in an $8.3 billion debt load for the City ($3,080 per resident), which represents a 75% increase in debt between 2005 and 2014. The use of debt to correct these budget imbalances has also increased the City’s fixed costs. For fiscal year 2016 nearly a quarter of all revenue will be used for the payment of debt service. Most local governments with healthy finances dedicate no more than 10% of revenue toward the payment of debt. Historically to manage this large debt load, the City has often employed financial gimmicks such as ‘scoop and toss’, whereby new debt is issued with a longer maturity to repay existing debt outstanding. For the 2016 fiscal year the City has avoided employing this tactic.

    Significant Long-Term Pension Liability

    The City manages four pension systems: the Municipal Employees Fund (MEF), the Laborers Fund (LF), the Policemen Fund (PF), and the Firemen Fund (FF). These pension systems’ current funding levels are 41%, 64%, 26%, and 23%, respectively (actuaries consider a pension system ‘healthy’ if funding levels are at or above 80%). The poor funding ratio and large combined liability of $20 billion is due to the City having failed to adequately contribute the full annual cost to its pension systems since the mid-1990s, due in large part to the unrealistic 7.75% rate of return assumptions in these pension systems (returns have averaged just under 6%).

    To rectify this situation, the City enacted modest pension reform to reduce the annual contribution and slightly reduce the long-term liability for only the MEF and LF pension systems. This reform legislation was eventually ruled to be unconstitutional by the Illinois Supreme Court.

    In order to make its annual contribution to its pension systems, the City raised its property taxes and instituted a 29.5% utility tax. The tax on water and sewer services will be incremental with a 7.7% increase occurring in 2017; an 8.4% increase in 2018; an 8.2% increase in 2019, and a 5.2% increase in 2020.

    Chicago Public Schools

    The City’s school system, Chicago Public Schools (CPS), is also financially weak. At the end of fiscal year 2015, CPS had operating reserves representing roughly 7% of total revenue and liquidity representing roughly ten days cash-on-hand. In general a school district is considered to be financially healthy if it holds no less than 10% of its revenues in reserve and liquidity is at least fifty days cash-on-hand.

    Additionally, CPS faces challenging demographic issues similar to those that face the city (below). Enrollment at CPS schools has dropped roughly 5% between 2000 and 2010. Further, the percentage of school-aged children in the City (ages 0-19) has declined 17% between 2000 and 2010 suggesting that enrollment is unlikely to grow in the future. In 2016, CPS reported a decline of 3.5% from the previous year. In spite of these enrollment declines, CPS’ total expenditures increased 10% between 2010 and 2015.

    Many of the rising costs that CPS faces are connected to labor contracts that limit classroom sizes and mandate costly employee healthcare and retirement benefits. These labor contracts exert the most pressure on CPS underfunded pension system. In fiscal year 2016, CPS will have to make a $676 million pension contribution which will consume 10% of its total budget. This cost will continue to rise as CPS is under a state mandate to achieve 90% funding in its pension system (which is currently only 58% funded) by 2058.

    To a large extent, the underfunding of the pension system has been due to CPS failing to make its annual contribution payments in recent years. As recently as 2001, CPS’ pension system was more than 100% funded.

    CPS faces labor unrest due to the school district seeking concessions from its teachers’ labor union. Points of contention primarily center on pay increases, health insurance benefits, and teacher pension contributions. Currently, teachers only contribute 2% of their salary in pension contributions while CPS would like to increase that amount to 9% of a teacher’s salary. The teachers’ union went on strike in 2012 over these concession demands.

    Declining Demographic Trends

    Currently the City’s unemployment rate is higher than both the State average and the national average. Additionally the City has experienced declining population for five of the past six decades. Between 2000 and 2010, the City’s population declined by 6.9%. Estimates since the 2010 Census indicate that the City is experiencing one of the largest population declines of the twenty-five largest cities in the country. A high unemployment rate and declining population will further constrain the City’s financial health as it loses taxpayers.

  • The (Small-l) Libertarian Case For a Non-Libertarian President

    What is libertarianism’s best strategy to gain a legitimate amount of power nationally (and then happily cede it to the people)?  Libertarians of the small-l and big-L varieties have sought to gain power by either co-opting one of the major political parties (See; Ron Paul Revolution that the GOP squashed) or by finding candidates to run as a Libertarian that appeal to establishment voters (see: Aleppo).  But I believe there is a third, and overlooked, option: get a candidate who does some libertarian things that irritate the major parties and the deep state apparatus, and allow those actions to result in political hysterics from ultra-partisans while average Americans see no net loss from the actions and in many cases a serious net gain.  I believe this will continue to set in motion a series of events where the government can be shrunk to a level that’s at least tolerable to minarchists and other run-of-the-mill libertarians.

    How libertarian is President Donald Trump?

    The answer is: not very. I think that’s been established.  The man swam in a pool of cronyism sharks his entire professional life. He, through desire or necessity, has been a rent-seeker. He has used eminent domain to further his projects. He has sought special treatment from political entities both domestic and foreign to further his interests.  The man is no altruist. But does that make him distasteful, or does it make the system in which he operated distasteful?  Personally, I will rarely fault someone for utilizing the same processes his competition would use, so long as it does not originate from a position of government authority.  And Trump never held office before his inauguration.  In other words, he never utilized political office for financial gain by, say, orchestrating government access to foreign actors that overwhelmingly donated to your personal foundation or for trade groups and banks that hired your unqualified husband to give speeches at ridiculously over-inflated fees.  In other words, I don’t hate the player, I hate the game.

    And yes,  Trump is allowing Jeff Sessions to wage the drug war, which is a sticking point to a lot of libertarian minds. But I ask you, is it better to wage a drug war and uphold the concepts of equal protection and the rule of law (while allowing Congress to do their job and vote to legalize drugs the right way)? Or is it better to arbitrarily enforce duly enacted laws based on the geography of a person and/or their willingness to bend a knee to the state and support legalization with a ton of unlibertarian strings attached?

    The sadder these people are, the happier I get.

    Some policy positives already achieved and in the works:

    So now we come to Donald Trump’s libertarianism or lack thereof.  The man, no doubt, will continue some of our military adventurism overseas.  But he has already stopped our policy of running guns to terrorists and terrorist-sympathizers in Libya and Syria after the previous admin established those programs and destabilized an entire region, while thoroughly destroying the likelihood that a rogue regime would abandon its weapons programs and try to re-enter the international community (read: we came, we saw, he died). There has been no resurrection of the programs nthe last two administrations ran to ship guns into Mexico through the drug cartels, for different motives yet still in gross violation of Mexican sovereignty.  And perhaps he will continue to not carry out targeted assassinations of American citizens that have never been charged with a crime, which the prior admin was all too happy to do in gross violation of the Fourth Amendment.  Furthermore, he has already started to roll back our country’s association with liberty-robbing agreements like the Paris Climate Accord and the Trans-Pacific Partnership. Both of those agreements undercut the ability for American companies and consumers to freely negotiate what they were willing to exchange goods and services for. Removing our name from them is a step in the right direction, especially if it’s followed up with free trade agreements that haven’t existed in a century or more. That action is yet to be seen, but at least someone had the audacity to upset the globalist apple cart and stop a little bit of the insanity those agreements put us further along the path to.

    Get us out of this circus, please!

    As for civil liberties, Trump is still an unknown quantity.  His statement about “roughing up” suspects is problematic to say the least. And I can only hope it was hollow bluster. But even so, it sets a very poor example and he should correct it immediately.  Now, having said that, he has not furthered Obama’s policy of killing Americans without due process, but that’s not going to be enough.  His willingness to stop going after businesses that exercise what should be a fundamental right to free association looks good so far. As do his overtures to Second Amendment causes. As does his willingness to tackle Affirmative Action and Title IX insanity.  Holy crap, I just realized he’s been the best president on civil liberties we’ve had in recent memory. People that overlook the substance of these actions due to his boorishness need to reassess what their priorities are, in my opinion.

    Furthermore, our business climate has benefited greatly from having an outsider installed as the head of the regulatory apparatus.  Trump has already vowed, and started to carry out, a dismantling of the bureaucracies that stifle economic growth and freedom for Americans.  From the onerous EPA regulations to CAFE standards being rolled back or passed to the states, there has been a serious uptick in confidence from the business and manufacturing sectors that Trump will get the government out of the way of prosperity.  The hilarious irony there is that Trump was a crony his entire life, as I mentioned earlier.  But perhaps he had no choice but to play the game the only way that could lead to success: do what the government tells you and push others out.  Now, when given the reins, he seems to be more than willing to eliminate programs that he personally benefited from but that create barriers to entry for others.  Yes, he could have opposed the system while benefiting from it. But let’s not pretend he’s some awful hypocrite because he played the hand he was dealt. Business “leaders” like Elon Musk, Mark Bezos, Mark Zuckerberg, Bill Gates, etc, etc, etc have done the same thing and so did their forefathers like Ford, Carnegie, Mellon, and others on back through the ages as long as there was a government agent with a hand in their pocket.  So I’m willing to forgive that.

    Be happy for this.

    And lastly, he put what appears to be a strict constructionist on the Supreme Court in Neil Gorsuch.  That is a marked improvement on any names mentioned by establishment candidates on either side of the aisle during the last campaign.

    The other intangible positive results of a Trump presidency:

    Another thing libertarians have always sought is a diminished reverence for elected officials and other “public servants” whose goals are often at odds with those of the people.  Trump’s mere presence has caused probably 2/3 of the political spectrum to demand the reverence for the office be scaled back.  They are now calling for more power in the hands of the states or localities and even ::gasp:: the people, on occasion.  These are people that have been statists to the core. They are the Big Government democrats and NeoCon statist Republicans.  And they are finally unified in an effort to diminish the role of the Executive Branch.  This serves to re-establish the separation of powers that has become all-too-muddy with much of the congressional responsibilities being passed to Executive Branch agencies in an attempt to deflect responsibility and ensure easy reelection for entrenched politicians.  The more responsibility that is pushed back into the laps of our directly elected officials and down to the state or local level, the better for us.  It helps us create a more diverse political environment where “laboratories of democracy” are able to compete for ideas and human investment, rather than an all-powerful centralized state controlling everything. And one need look no further than minimum wage laws (since we have them, I’ll address it) to realize a top-down approach where the minimum wage “needed” in New York is imposed on small towns in New Mexico or Wyoming, where the cost of living doesn’t even come close, is a horrific idea.  The Trump era is returning us to an ideal the founders embraced in that respect.

    And he is returning us to another ideal the founders cherished: temporary service from business-people and non-careerist politicians.  The flood of people on Trump’s coattails from all sides of the political spectrum is refreshing. Sure, many are moneyed and or celebrity candidacies. But so what?  Its a step in the right direction any time we start to end political dynasties and careerists that sit in the Senate for 30 years as they grow further and further out of touch from average Americans.  More turnover from political novices has a much better potential upside of shrinking our government than does further entrenching those who have pushed us to near financial ruin and reduced individual liberty.

    Pucker up!

    The net result so far (in my opinion):

    So let us all embrace the non-libertarian president. For one of these reasons or for another I might have missed. But embrace it nonetheless, because it has already borne libertarian fruit, and I suspect it will continue to do so for many of the right and some of the wrong reasons. Its the best we could have hoped for and probably the most libertarian moment in America for a hundred years.

  • First Shots Fired in the Tax Wars

    Now that Team Red has demonstrated their utter hackery by suddenly changing their minds about dismantling the government-controlled health insurance system and demonstrating their deep and abiding love for expansive government, the next ripe target is so-called “tax reform.” Team Blue is already manning the ramparts in the certain fear that any adjustments in the tax code will be away from their moneybags and toward the Team Red moneybags (we know for certain that actually cutting taxes and pushing all the moneybags away from the trough is as likely as the sudden heat death of the Universe).

    So it was with that thought in mind that I approached a Vox article written by the reliably mendacious Matt Yglesias as a general hit-piece on Trump. The article doesn’t disappoint, it was the expected (and at this point yawn-inducing) brew. The section on taxes drew my attention: as expected, the well-past-damn-lies use of statistics, cherry-picked quotes, emotional appeals, and the Diana Moon Glampers view of the purpose of economic manipulation.

    Back on the policy front, Trump says of his tax plan that “if you add what the people are going to save in the middle income brackets, if you add that to what they’re saving with health care, this is like a windfall for the country, for the people.”

    Trump’s actual tax plan would raise taxes on millions of Americans while delivering a windfall to the rich…

    According to the Tax Policy Center, the average American family would see its after-tax income rise by about $760, while families in the top 1 percent of the income distribution would see their incomes rise by about $175,000 — more than triple the total household income of the median American. Trump’s plan also features a big corporate tax cut.

     

    Now, being the sort of suspicious and cynical guy that I am, and admittedly not a news junkie, I wondered if the part about “would raise taxes on millions of Americans” was complete bullshit, the usual dishonest conflation of “tax rates” with “taxes,” or even “millions of Americans” being people in the dreaded 1%. So I followed the links to the source, the Tax Policy Center, which according to Wikipedia is “non-partisan.” From the article:

    Without those revenue-raisers, nearly all US households would get a tax reduction, averaging about $4,400. The tax cuts would be highly regressive, with high income households getting much more than those with low- or middle-incomes. However, if a half-dozen tax hikes are included in a revenue package, the average tax cut would shrink to about $2,300 and about one-in-five households would pay more tax than under current law.

    OK, this was the expected mendaciousness- the tax cuts are significant, and surprise surprise! the folks who pay more taxes get proportionately more reduction (i.e., the rate would be the same or smaller, but applied against a larger number). I guess that’s what they mean by “regressive.”

    It was the very next several paragraphs which floored me:

    TPC could not model an actual Trump tax plan since far too many critical details are unknown. For instance, the Administration has been sending mixed signals about whether it wants a tax bill to raise as much revenue as current law or whether it prefers a version that reduces overall taxes and add to the deficit.

    Beyond those threshold questions, the White House outline left out many critical details. For instance, during the campaign, candidate Trump said he’d increase the standard deduction but eliminate both the personal exemption and head of household filing status. The April outline repeated the promise to boost the standard deduction but was silent on the two revenue-raisers.

    In other words, “We have no idea of what the plan we’re criticizing actually is.” But it gets better:

    As a result, TPC created a stylized version of what the key elements of a Trump plan might look like. It first analyzed the tax cuts that the White House outlined in April, adding key assumptions to fill in unspecified details. For instance, TPC assigned income ranges to the proposed tax brackets, which the Administration did not.

    In other words, WE JUST MADE THIS SHIT UP OURSELVES. And THAT was what got cited, and Yglesias still had to apply the usual lying sack of shit spin and misquotation to it.

    Ladies and Gentlemen, Journalism Circa 2017.

  • Foreign Footy – Euro Edition

    From the Staff: By popular demand (or at least a couple of vague questions about it) we will be presenting a (somewhere between weekly and sporadically) column on the soccer, or football as most of the world calls it. Also, to keep it really interesting, we will also include Australian Rules Football and Rugby Football. First up is…

    Euro Futbol! And a lesson in Spanish tax compliance.

     

    It’s silly season in European football. Sillier than normal so far, because thanks to a new TV deal, Premier League clubs have more money than ever, and they’re spending it left and right. Manchester City spent £35 million to replace a keeper they bought for £17 million last season (after it took about 3 games to realize he sucked). Outside of England, not much is going on, though there are lots of big money rumors. Makes sense, because the transfer window (the period during which player transfers are allowed to take place) doesn’t start until July 1.

    Even though it’s mid-June, the first qualifying round for the UEFA Champions League starts in a week, featuring teams from countries where you could probably get onto a top division club if you wanted to.

    Champions League, First Qualifying Round (First games June 27/28, second games July 4/5)

    Víkingur (Faroe Islands) v Trepça ’89 (Kosovo)
    Hibernians (Malta) v FCI Tallinn (Estonia)
    Alashkert (Armenia) v FC Santa Coloma (Andorra)
    The New Saints (Wales) v Europa (Gibraltar)
    Linfield (Northern Ireland) v La Fiorita (San Marino)

    Expect each of the victors to lose to bigger opponents in the Second Qualifying Round.

    Since not much is going on, we’ll go to an actual libertarian subject: Taxes. More specifically, the Spanish government prosecutions of Lionel Messi, Neymar, Cristiano Ronaldo, and possibly Jose Mourinho for tax evasion.

    Under Spanish law, individuals who spend 183 days or more in a year in Spain are considered to be residents for tax purposes. Since footballers would naturally spend more than 183 days a year in Spain, they became residents for tax purposes (even if their true home was elsewhere), and thus owed Spanish tax on their worldwide income.

    In 2005, the Spanish government approved Royal Decree 687/2005, which allowed a foreign resident who has relocated to Spain from another country the choice of being taxed as a Spanish resident or non-Spanish resident. The choice was valid for five years. By choosing to be taxed as a non-Spanish resident, such individuals could avoid Spanish tax on their worldwide income, paying Spanish tax only on income actually earned in Spain. This came to be known as the “Beckham Law” because the first foreign individual to take advantage of it was David Beckham, after his move from Manchester United to Real Madrid.

    What all of this meant was that such individuals would not pay Spanish tax on their non-Spanish derived income and would pay a 24% tax rate on their Spanish income, as compared to the 24 to 43% progressive rate paid by Spanish residents. The law also disallowed deductions, meaning it was only applicable to higher net-worth individuals.

    In November 2009, the Spanish government reversed the law, and individuals entering Spain after January 1, 2010 would not be able to benefit from the law. The law was fully repealed by 2014. Higher net worth individuals, of course, looked for ways to reduce their tax burdens.

     

    Lionel Messi, who had entered Spain before he law had taken effect, was the first to face prosecution for tax evasion (or tax fraud, according to Spanish authorities). According to the Spanish prosecutors, Messi and his father had used companies in Belize and Uruguay to sell his image rights, thus hiding the income from Spanish authorities. Messi and his father were thus accused of hiding €4.1 million in income from Spain as a result.  Messi ended up paying €5.1 million in back taxes, was convicted of tax fraud and sentenced to 21 months in prison (suspended, because all Spanish prison sentences under 2 years are automatically suspended where the individual does not have a prior record) and paid another €1.7 million in fines.

    My taxes are thiiiiis high!

    Neymar’s case has less to do with taxes and more to do with an outright fraud case, though taxes do play a part. When Neymar moved from FC Santos to Barcelona, the transfer fee was a reported €17.1 million. At the time, 40% of the ownership of Neymar was in the hands of DIS Esporte, a Brazilian investment group. As such, they were entitled to 40% of the fee, or €6.8 million. The accusation, however, is that an additional €40 million fee was classified as a wage instead of a transfer fee. This had the effect of reducing Barcelona’s tax burden (for which they’ve already paid a €5.5 million fine) and potentially defrauding DIS of an additional 40% cut from that €40 million. Like Messi, Neymar is unlikely to see prison even when he’s convicted.

    How about we settle at 3 million?

    Cristiano Ronaldo, who moved from Manchester United to Real Madrid in 2009, is now facing a similar fate to Messi. Ronaldo’s lawyers claim that, since he entered the country before the termination of the law, he had the right to protection under the Beckham Law. Ronaldo, according to Spanish prosecutors, was paid €153 million in December 2014 – just before the full repeal of the Beckham Law – for image rights for a future time period, 2015 to 2020, where the Beckham Law would not be in effect and the tax burden would be higher. Ronaldo fully paid his required taxes on that amount. Again, like Messi and Neymar, he’s unlikely to face prison even if convicted.

    Hark! The Taxman Cometh?

    And now this week, Jose Mourinho has been accused of a similar fraud, with Spanish prosecutors accusing him of evading €3.3 million in taxes between 2011 and 2012.

    Are you saying I might have to assume this position?

    But back to Ronaldo, this has him fed up with Spain, and there are rumors abound that he could be headed back to England and Manchester United for a ridiculous sum (£175 million plus £60 million rated goalkeeper David de Gea according to one rumor). Outside of very famed clubs (Barcelona, Madrid, Paris St. Germain), players are seemingly starting to become more interested in heading to England (or Monaco) than to Spain and France, because of the tax burdens their footballing income create.

    I’ll try to end every one of these columns with a footballing quote. This one comes from the greatest manager in football history, Bill Shankly. On football and on the Merseyside derby.

    I’ve seen supporters on Merseyside going to the ground together, one wearing red and white and the other blue and white, which is unusual elsewhere. You get families in Liverpool in which half support Liverpool and the other half Everton. They support rival teams but they have the same temperament and they know each other. They are unique in the sense that their rivalry is so great but there is no real aggro between them. This is quite amazing.

    I am not saying they love each other. Oh, no. Football is not a matter of life and death … it’s much more important than that. And it’s more important to them than that. But I’ve never seen a fight at a derby game. Shouting and bawling … yes. But they don’t fight each other. And that says a lot for them.