fair and balance in tax reporting

a friend of mine sent me this link to consider: http://finance.yahoo.com/banking-budgeting/article/106769/Do-the-Rich-Really-Deserve-Such-a-Bad-Rap

It actually gave me an opportunity to do a little research on what i think the 'real deal' is. What I mean by that is uncovering just exactly what the super rich people make in relation to how much they pay taxes, so after a little "research" i wrote back this message:

good article, but:

"Approximately one fifth, 20.58%, of all income was earned by the top 2.67%, those households earning more than $200,000 a year." from http://en.wikipedia.org/wiki/Household_income_in_the_United_States

If someone complains that 2.67% of the country pays 20% (or whatever) of the taxes and that's not fair, then they're not giving you all the relevant information to assess the facts. It is said that "there are three types of lies: lies, damn lies and statistics." To be fair and balanced in that statement/complaint, that those 2.67% also make 20% of the money.

The same page also says:

"Roughly one third, 32.5%, of all income in the US was earned by those households with an income over $150,000, approximately the top five percent."

and "The bottom 6.37%, however only earned 0.27% of all income."

I think that's a little more balanced.

***I cut some of the rest of the message out because it was the start of another argument/line of thinking. I didn't even mean to send it to him. Hope he didn't get confused from it.***


for instance, those 400 people they paid 1.77% of all taxes for the year, but i would also like to know what percentage of total income they earned.

Those 400 people made 105 billion total.

It's one thing if you pay 1.77% of taxes, but if you make 5% of the money, then that doesn't "add up"

Nassim Taleb on bonuses

1. I was just saying that i was sick of the bailout. and this comes along.
2. I'm beginning to like this guy (Nassim) more than the wizard of omaha.

How Bank Bonuses Let Us All Down

by Nassim Nicholas Taleb

One of the arguments one hears in the compensation debate is that the bonus system used by Wall Street - as John Thain, former Merrill Lynch chief executive, put it - is there to "reward talent". While I find this notion of "talent" debatable, I fully agree that incentives are the heart of capitalism and free markets - but certainly not that incentive scheme.

In fact, the incentive scheme commonly in place does the exact opposite of what an "incentive" system should be about: it encourages a certain class of risk-hiding and deferred blow-up. It is the reason banks have never made money in the history of banking, losing the equivalent of all their past profits periodically - while bankers strike it rich. Furthermore, it is that incentive scheme that got us in the current mess.

Take two bankers. The first is conservative. He produces one annual dollar of sound returns, with no risk of blow-up. The second looks no less conservative, but makes $2 by making complicated transactions that make a steady income, but are bound to blow up on occasion, losing everything made and more. So while the first banker might end up out of business, under competitive strains, the second is going to do a lot better for himself. Why? Because banking is not about true risks but perceived volatility of returns: you earn a stream of steady bonuses for seven or eight years, then when the losses take place, you are not asked to disburse anything. You might even start again, after blaming a "systemic crisis" or a "black swan" for your losses. As you do not disgorge previous compensation, the incentive is to engage in trades that explode rarely, after a period of steady gains.

Here you can see that this mismatch between the bonus payment frequency (typically, one year) and the time to blow up (about five to 20 years) is the cause of the accumulation of positions that hide risk by betting massively against small odds. As traders say, they have the "free option" on their performance: they get the profits, not the losses. I hold that this vicious asymmetry is the driving factor behind investment banking.

If capitalism is about incentives, it should be about true incentives, those resistant to blow-ups. And there should be disincentives to remove the asymmetry of the free option. Entrepreneurs are rewarded for their gains; they are also penalised for their losses. Now, by comparison, consider that Robert Rubin, the former US Treasury secretary, earned close to $115m (€90m, £80m) from Citigroup for taking risks that we are paying for. So far no attempt has been made to claw it back from him - only UBS, the Swiss bank, has managed to reclaim some past bonuses from its former executives.

For hedge funds and medium-sized companies, the incentive problem might be a simple governance issue between private entities free to choose their contract terms. However, when it comes to banks and other "too big to fail" entities, the problem is severe: we taxpayers in our respective countries are funding these global monsters and are coughing up money for mistakes made by bankers who retain their bonuses and are hijacking us because, as we are discovering (a little late), banking is a utility and we need them to clean up their mess. We, in fact, are the seller of that free option. We should claim it back.

The Obama administration has been trying to set compensation limits for banks under the troubled asset relief programme. But this is insufficient. We need to remove the free option. Beware the following situations.

First, those who are taking risks even outside Tarp or society's protection can still be gaming the system - since their risk-taking can result in a collapse, with the taxpayer having to step in. For instance, Goldman Sachs, the US bank, might want to avoid the limits on executive compensation for its managers. That should be fine so long as society does not have to bail out Goldman Sachs (or, worse, its creditors) in the future.

Second, Vikram Pandit, Citigroup's chief executive, while claiming to want to earn one single dollar a year in compensation unless the bank returns to profitability, is still getting a free option given to him by society. He does not partake of further losses; we do.

Third, leveraged buy-out companies used the free option by borrowing heavily from the banks and taking monstrous risks: they get the upside, banks (hence we taxpayers) get the downside. These partnerships made fortunes in the past on deals that society will have to bail out. They too should have their past profits clawed back.

Indeed, the incentive system put in place by financial companies has produced the worst possible economic system mankind can imagine: capitalism for the profits and socialism for the losses.

Finally, I was involved in trading for 21 years and I can testify that traders consciously play the free option game. On the other hand, I worked (in my other job as risk adviser) with various military organisations and people watching over our safety. We trust military and homeland security people with our lives, yet they do not get a bonus. They get promotions, the honour of a job well done and the disincentive of shame if they fail. Roman soldiers signed a sacramentum accepting punishment in the event of failure. This is prompting me to call for the nationalisation of the utility part of banking as the only solution in which society does not grant individuals free options to look after its risks.

No incentive without disincentive. And never trust with your money anyone making a potential bonus.

© 2009 The Financial Times

More on the wealth cap

So, the last post was about a wealth cap. The condition behind this argument is the gaping hole in the wealth between rich and poor people, especially in America. The intent i have in proposing a limit on the amount a person can "be worth" is to equalize the chances of people being able to feed and support their family.

I think i've added an option, here they are so far:
Cap income
I would limit the amount a person could earn in a year. 1 mil is too low. how about 10 million? But that is just for business owners. What if we limited total compensation from a company to 1 mil per year.

This would force down salaries of business execs, and on down the line so that more wealth could be spread

We could also configure it so that the highest paid person in the company can earn no more than some multiple of the lowest paid person. If the lowest paid person earns $30,000, a 30x multiple would get that highest paid person $900,000.

Cap total net worth
We could alternately cap the total amount of money a person was worth. If they earn more money, they have to spend it, which pumps money into the economy. We can cap this at somewhere around 50mil,

Abolish trusts
One of the strategies that the rich use to protect their wealth for future generations is to create trusts. Trusts are tax-shelters enabling people to put their money in an entity and dispense it in such a way to minimize taxes, and to avoid the estate tax. I would abolish them. This line of thinking actually has libertarian roots in that it encourages each individual to work to their maximum, and not ride the coat-tails of generational socialism.

Increase the estate tax(new)
This comes with a little subtly. If the assets to be taxed is a owner-operated business worth less than 10mil, then i would think about abolishing the estate tax. I think this is a good cut-off to insure the financial stability of small businesses in succession agreements.


Okay. So there are no real breakthroughs, i think sometime i'll have to sit down and think each of these through more seriously. keep watch.

Trickle Down Obamanomics

So, apparently people have been heeding my warning. I have been saying for a little while on this blog in this post that the disparity in incomes has got to stop. I say the thing to keep an eye on was the multiple. What i mean by the multiple is how much a top-level executive makes as a multiple of how the least compensated person in the company (janitor, etc) makes.

Over all but the last couple of decades, the most highly compensated person made let's say 20 times what the lowest paid worker makes. Now, we see compensation packages of up to 570 times what the average worker makes. You can find good info here , here and here . And you wonder why the rich keep getting richer?

So, recently Emperor Obama has decreed a limitation on the total compensation an executive can get if their company receives bailout money. This is a great slippery slope I detect. I hope, really really hope, that somewhere and somehow that this extends not just to companies who take bailout money, but all companies doing business with the federal government! before we get to that though, let's look at this.

So the companies that take bailout money are restricted from getting extravagant compensation packages for their 'best and brightest'. One consequence of this can be that a company that takes bailout money will shed good, mediocre and bad people like a butterfly sheds its cocoon. Now you have an over-saturation of people who want to be employed as finance gurus who will take lower and lower wages. But their wage demands will compete with one another to lower the bar on compensation.

The other option is for these folks to go abroad, as a friend from Goldman Sachs proclaims, as its easier to make stupid amount of money fleecing the locals. I say good riddance to these robber bankers. So in the short-term, i think executive compensation will reluctantly plummet and the multiplier will drop from some over 500x the average worker's salary to somewhere closer to 100x the average workers' salary. This will then create downward pressure on the luxurious compensation packages of the next lower and lower tiers. this will never reach Peter Drucker's (management guru) 25-1 ratio, but it'll be something significant.

I think to accelerate this trend, what Obama should do is to spread that cap to all companies doing business with the government. I mean if we're really about saving taxpayers' money, how come the CEO of Lockheed Martin gets 24mil a year (757x average) while living off of 80% of the revenue coming from government contracts? I think to really save the government a good bit of money, Obama should spread this ceiling over a wider swath of the economy by extending this ceiling to all companies that do business with the government.

I am against the government bailing out the economy. I think if you really want the economy to pump again, you have to seriously re-design compensation. If the government put a multiplier cap on ALL executive compensation, then there would be a hell of a lot more payroll money to spread towards the bottom of the pile, as well as around. Think, you pay one man the salary of 757 men? What if you cut that in half, you could employ another 300 depending on their skill sets.

Even if driving down the ceiling of executive compensation doesn't immediately spread to employing others. The incresed savings on compensation at least puts money into these banks, which in turn they can lend from.

So I'm all for putting a ceiling on executive compensation. This 'tricke down Obamanomics' would take a serious bite out of the windfall money these executives get. I'm just scared that this has no teeth as no company 'in their right mind' would take anymore bailout money.