On Coronavirus

These germs of disease have taken toll of humanity since the beginning of things–taken toll of our prehuman ancestors since life began here. But by virtue of this natural selection of our kind we have developed resisting power; to no germs do we succumb without a struggle…

H.G. Wells “War of the Worlds”

Updated Edit: I started this post when COVID-19 was first hitting U.S. shores. So much has changed in four weeks and there’s been so much news it’s been a struggle to keep up. However, with each passing day I was increasingly sure the below is true. I intended this to be a much larger article as well, but the deluge of information is going to cause me to break some of the segments out into their own blog posts.

Our world has changed. Not from terrorism. Not from the results of this election year. But from one of the smallest creatures in nature. At less than 50 nanometers in size, COVID-19 proves that even the smallest thing can make the greatest impact. In a few weeks, its presence was felt already on a global scale; here in the U.S., it’s only been the matter of a week and much has changed.

This blog post is important because I feel like we’re at a watershed moment. Just a few weeks ago, the stock market was at its all-time high. Everything felt business-as-normal. We were deep into an election cycle, with non-stop new and critique about the Democratic candidate for President of the United States. There were also still sports.

Now, we’re looking at entirely different country (or even world). It’s starting to feel like a science fiction movie: closed borders and travel bans, closed tourist locations, churches, restaurants, and schools. People have to stay away from each other. The way we work has been forced to change (more on this below). There are also plenty of unintended consequences, mainly economic ones. The U.S. stock market has been decimated; fear runs amok with heavy selling, with days of heavy buying dispersed in between. It’s an economic whipsaw, panic expressed in red and green numbers day in and day out — no one knows whether to buy or sell. Officially, the U.S. stock market has entered a bear market, suffering the fastest 25% drop in history. To many, this feels like the end of the world.

But there’s something interesting here.

This feels like a watershed moment. Things are going to change, regardless of how this plays out. We are living through history at this very moment. Much will be reevaluated in the coming weeks and months and below is just a sample.

Economic Damage

The economic ramifications cannot be downplayed. The U.S. market has suffered heavy selling as people bail out of stocks. Initially, it began as a result of downgrading the outlooks of large companies due to the shutdown of Chinese manufacturing. Factories in China and South Korea have been shuttered for over a month, and are struggling to restart. The length of closing is or will lead to shortages are less product are being manufactured — and many, many global companies rely on them. The disruption of supply chains has led to lower sales, which began pushing stock prices down. Selling begat selling, and then it turned into a rout.

Worse than a battered 401k or fund balance sheet is how the Federal Reserve has reacted. A few weeks ago, the Fed tried to get in front of the selling by cutting the benchmark federal funds lending rate by 50 basis points (bpts). Simply put, lowering the funds rate makes it “cheaper” for banks to borrow money from the Fed (the lending rate is the interest rate banks pay back to the Fed for borrowing; so if the funds rate is 1%, a bank could borrow money from the Fed at 1% and lend it out at 3% and make 2% profit). Last night, on March 15, the Fed lowered the lending rate to the 0% range. This means banks can borrow from the Fed essentially for free. If that weren’t enough, the Fed also fired up a $700 billion quantitative easing program — which it will use to buy up U.S. Treasuries and mortgage-backed securities (remember those?)

In a nutshell, the Federal Reserve is flooding the economy with fresh money to try and stave off recession. Its primary weapon is the federal funds lending rate — which dictates how “expensive” it is to borrow money. This new rate and QE program have effectively made the dollar “cheap,” and could have severe impacts on the value of our currency. In a black hole of selling, deflation sets in — prices drop, cash is in high demand, and businesses penny-pinch. What would could ultimately have is inflation — or hyperinflation — and severely damage our currency’s purchasing power. The U.S. Dollar is the de facto global reserve, with all other currencies pegged to it (there’s not enough time to go into all this now) and ramifications would be global if it suffers in value.

The economic effects of coronavirus are certainly being felt on a local level as well. In Ohio and Pittsburgh, bars and restaurants are forced to stop accepting patrons, and offer takeout or delivery only. This devastates waitresses and servers who live on tips. Venues and conventions are cancelled:

Pittsburgh Mayor Bill Peduto said the city will adhere to advice from the Centers of Disease Control and will lower the maximum occupancy levels of all events from 250 to 50 individuals. Today, Allegheny County Executive Rich Fitzgerald also urged non-essential businesses, like bars, gyms, theaters, child-care centers, golf clubs, and hair salons, should close or implement alternative work strategies for the next two weeks starting March 16, to help stop the spread of coronavirus.

Even if these places stay open, they may see very little or no patronage. Sales will go down. The service industry is going to suffer. In Portland, my brother-in-law drives for Uber. The amount of rides request for him has fallen off a cliff — no one wants to ride share for fear of contamination. The lack of Uber rides has him looking for Amazon Flex deliveries, but there are way too many Amazon drivers now because they also drive for Uber and have no rides.

Even Hollywood has felt the pain. Tentpole films have been delayed, new films have had their productions frozen or shelved, and no one’s going to the movies right now. Early estimates by The Hollywood Reporter indicate losses by the movie biz to be as high as $20 billion. Travel bans and Tom Hanks’ getting sick have completely upended tinseltown and there’s a scramble to maintain business; in TV broadcast schedules are disrupted by delayed productions and production halts on new pilots. Shows may not be ready or finished in time. And then there’s the question of insurance for the industry (from the same HR article):

Meanwhile, it is unclear any of the losses will be covered by insurance. “If we are talking in terms of protecting lost revenue due to enforced shutdown or scale-down of operations, some property policies may offer limited amounts of coverage, although many have specific communicable diseases exclusions,” said attorney John Tomlinson, who specializes in insurance and risk management law.

Movie theaters across the U.S. have closed down, with the chain AMC Theaters now possibly never re-opening. There’s also talk of bankruptcy for the theater chain. To attempt to draw some sort of revenue, studios have begun putting new releases online. According to CBS News:

Temporary theater closures could lead to permanent change in the industry. Wedbush securities analyst Daniel Ives, who covers the technology sector, said coronavirus could usher in a new era of consumer behavior that puts some theaters out of business for good. “For the first time since we launched coverage of the exhibition industry, we think the industry is genuinely at risk. There is valid concern that COVID-19 will limit theatrical attendance globally, whether driven by theater closures, capacity limitations, or fear of contamination,” he said in a research note. 

With schools and numerous businesses closed, parents and children are all relying on streaming services for entertainment. If it goes on long enough and Hollywood is willing to put new releases online to rent, there could be a large shakeout of theater chains. Will theaters reopen only to have some eventually close permanently if audiences don’t return? A discussion I saw among filmmakers on Twitter were theorizing the return of the drive-in theater, as it would allow moviegoers the ability to maintain ‘social distancing’ between cars. As a filmmaker myself, I plan to dive further into the future of the entertainment industry in a future post.

The most brutal consequences come from the stock market, where the Dow Jones has lost 30% of its value in only 3 weeks, out-doing the carnage from the 2008 crash. Retirement plans and pension funds have been decimated as the market has turned into “sell everything as quick as possible.” The market can’t determine valuations with manufacturing in China shut down, supply lines strained or cut, and businesses reducing hours or shutting their doors.

What this amounts to is the great tree of the economy is being shaken much like it did in 2008. Healthy or resourceful businesses will survive. Those at risk financially or have been teetering will be wiped out.

Globalization

The decades-long grand experiment of Globalization may end with the COVID-19 pandemic. The active concept of free-trade, open borders, and centralized manufacturing has been put to the ultimate test. There has always been great risk in China owning much of the world’s manufacturing, given their geopolitical and cultural standing. And I’m not even talking about Communism.

In 2018, China owned more than a quarter of all manufacturing in the world, far ahead of the U.S. in second place. If something were to happen there, the world would be severely disrupted. There have been ‘head fakes’ in the past 20 years — SARS, avian flu, swine flu (H1N1) — diseases originating in China, where pollution is heavy, sanitation can be lacking, and population is dense. I can speak for this first hand — I’ve been to Southern China provinces on business trips to factories. On several trips, coworkers came down with illnesses and/or food poisoning (I don’t eat seafood, and wonder if that’s why I didn’t get sick). These past illnesses should have been cause for concern that the world’s manufacturing hub was at constant risk.

Now, with coronavirus, much (if not all) of these factories are shuttered in the fight with the virus. There are shortages and other countries economies are impacted. Tech companies like Apple (or Samsung, with factories in South Korea) have had their supply lines severely disrupted. Apple is the poster child for Globalization: materials are sourced from around Asia; iPhone components (like the display) are built in Japan before being shipped to China for iPhone assembly. With manufacturing spread across borders, coronavirus is the ultimate perfect storm to cause chaos. In an article titled “Coronavirus: Globalists May Soon Become an Extinct Species,” author A. Gary Shilling writes:

The coronavirus’s disruption of supply chains not only unhinges U.S. imports but also raises national security concerns. China is the world’s biggest supplier of active pharmaceutical ingredients and the Indian generic drug industry, which the Food and Drug Administration says supplies 40% of U.S. generic drugs, relies on China for most of its active ingredients. Even after the virus scare subsides, look for more pressure from Washington for more reliable sources of goods, among other protectionist measures. Domestic producers will benefit but so too will those in Mexico. The results will be lower global efficiency and slower economic growth.

To wit, Japan has already begun urging the migration of their companies out of China altogether. From Bloomberg news:

That has renewed talk of Japanese firms reducing their reliance on China as a manufacturing base. The government’s panel on future investment last month discussed the need for manufacturing of high-added value products to be shifted back to Japan, and for production of other goods to be diversified across Southeast Asia.

Another component vastly disrupted by the disease is open borders. “The impact is especially palpable within the 27 countries of the European Union, which has long been governed by a central belief that economies and societies are most dynamic when people and goods are able to move freely across borders,” writes Peter Goodman in a March 5 article in the NY Times titled “A Global Outbreak is Fueling the Backlash to Globalization.” After long refusing the close their borders — maintaining their allegiance to open borders and mass migration — the EU finally caved on March 17 to close the exterior border of the EU. Before that even happened, Europe was already in the middle of a migration crisis. There were concerns over open borders, with mass immigration coming from the Middle East and Africa, many were refugees from war torn Syria. Countries in the EU like Hungary had already closed up access while others continue to absorb scores of foreigners.

What happens to the flood of refugees and immigrants headed to the EU and find the borders closed? At the beginning of the month, Turkey said it was opening the flood gates for migrants into the European continent, with Greece countering that it was suspending asylum and stationing troops. According to the New York Times, both moves are illegal under EU law and “International protocols on the protection of refugees, of which Greece is a signatory, also prohibit such policies.”

The EU could possibly collapse as well, as the virus puts serious strains on inter-member trade relations regarding protective medical gear. France and Germany essentially hoarded their protective gear, denying other member states. France, in particular, “requisitioned all current and future stocks of protective masks.”

It’s not just Europe, either. The U.S. has announced an international travel ban — no one comes in or out. Borders with Canada have been closed. “Non-essential travel” between U.S. and Mexico has also been shut down.

So how does Globalization survive with restricted borders, international blame for the virus spreading, and crippled cross-border supply chains? At the very least, Globalization will be rethought when this is over. Some countries may use it as an excuse to break free of the EU or bring more manufacturing home to their countries. Reliance on unfettered, open trade may change. It’s impossible for there to not be geopolitical ramifications — China may suffer the most from this as corporations look to take their manufacturing base elsewhere to a country with less risk. Without widespread manufacturing and employment to grow their middle class, Communist China could slip back into the economic Third World. Will that happen? Who knows.

Regardless, world politics will never be the same.

The New Great Depression

There’s no doubt four weeks in to lockdown the people on the street are hurting the most. In the past 4 weeks, 22 million Americans have filed unemployment claims — by far a record. Now, this comes with an asterisk. For the first time, states are allowing self-employed (aka contractors) to apply for unemployment, and you can file for unemployment benefits if your hours have been reduced due to COVID-19.

While that may bump the numbers a bit, it certainly does not offset the amount of people who haven’t been able to file yet due to state unemployment offices being overwhelmed. States are forcing people to go online to file, but the state sites are crashing from the traffic. Because people have been unable to file yet, the official government U3 unemployment numbers are likely inaccurate at best, heavily underreporting at worst.

I think it’s naive to think that all these people will suddenly return to their old jobs when the lockdown is lifted. Many of these jobs won’t be there — and what about independent contractors and freelancers? These will be the hardest to return to work. Many employees of recognizable brands won’t have locations to return to either as companies close up shop and/or file bankruptcy — namely restaurants and discount stores.

Other industries that may be shrinking include shale, cruise lines, and airlines.

Does Anyone Really Know Anything?

I’ll end it with this bit: does anyone really know what’s going on? It sounds scary to even pose a question on such a scale, but after four weeks I cant help but openly wonder. The symptoms to COVID-19 keep changing or expanding — it was originally a respiratory illness with signs that included fever and cough. Then it expanded to bodily pain. More recently, loss of sense of smell (or taste) and foot sores as byproducts of the disease.

A NYC doctor even went so far as to post that the wrong disease is being treated.

There’s no vaccine. There’s no simple way to test. There’s even questions as to if ventilators are even the right tool to be using.

Where did it come from? Is it natural or a bio-weapon? The U.S. intelligence apparatus is investigating whether or not COVID-19 came from a Chinese bio-lab (that just so happened to be right near the wet market where its origin was originally tied to.

Without answers how can we have a plan? How long with the economic malaise go on? How long CAN it go on? Countries and states are devising plans to reopen for business, perhaps hoping warmer weather will deal with the disease.

There’s always the fear of a second wave coming in the fall.

Regardless of how this turns out, we are undoubtably living through history. Our personal lives and the course of humanity may be steered by this. It sounds overdramatic but how could it be any other way? Over half the population of this planet are in lockdown, forming new habits and getting used to the ‘new normal.’

Things will never be the same.

Does Taxing the Rich Work?

I know what you’re thinking. Why does a blog centered on quitting your job post about minimum wage and taxing the rich? While they’re mostly though experiments, to be financially free and entrepreneurial you must know your economic and political environment. Having a business or investments is highly impacted by what goes on in the political Thunderdome.

As with the thought experiment on Fight for $15, I want to walk through whether or not “taxing the rich” is a viable solution economically. “Tax the rich” has become a battlecry of several 2020 Democrat Presidential Candidates, as well as political policy in a bevy of states such as Oregon, where Senator Ron Wynden proposes taxes on ‘unrealized gains’ of assets of wealth people, or the governor of Illinois wanting to revamp the state tax code to make the wealthy pay more in state tax. Targeting the rich has become en vogue.

But does it work? It has been tried before and abandoned, so why would it work this time? Is it moral or fair? Does “tax the rich” merely promote classism? Is it biting the hand that feeds? Or is there social stability to be gained from it? It’s time to dig into it.

What is Rich?

When a politician says they want to “tax the rich,” what defines rich? In many cases it’s left intentionally vague — the “rich” being a boogeyman of sorts, the anachronistic caricature of a monocle and top hat wearing Rich Uncle Moneybags from the game of Monopoly. It’s Mr. Scrooge or the bourgeois of The Purge films. So who are The Rich?

According to Charles Schwab’s 2019 Modern Wealth survey, “Americans believe it takes an average $2.3 million in personal net worth to be considered “wealthy.” Another survey by seniorliving.org landed on the same number: $2.3 million as the amount to be considered wealthy.

Elizabeth Warren’s “Ultra-Millionaire tax” targets the rich as any household with a net worth of $50 million or more. Bernie Sanders’ proposal starts the taxing on net wealth over $32 million, a level which fellow 2020 Democratic candidate Tom Steyer agrees with. However, it appears “rich” is a relative term: according to Forbes, the net worth of these three candidates is $12 million, $2.5 million, and $1.6 billion, respectively. So, although Warren and Sanders are millionaires, they don’t consider themselves rich. And as for Steyer, I get suspicious whenever someone who is rich promotes taxing the rich.

So we have a starting point (somewhere between $32 and $50 million) for what qualifies for a “wealth tax.” Federal and state income tax brackets vary wildly (some states have a flat tax while others have no income tax), so we’ll stick with the proposed Federal “wealth tax” as a guideline for what is considered rich.

Do Higher Taxes Equal Higher Revenue?

“Nothing is more calculated to make a demagogue popular than a constantly reiterated demand for heavy taxes on the rich. Capital levies and high income taxes on the larger incomes are extraordinarily popular with the masses, who do not have to pay them.”

Lugwig von Mises

The purpose of raising taxes on the wealthy — or instituting “wealth tax” — is to raise the amount of funds taken in by the state or federal government. But does it always go as planned?

The fallacy of taxing the rich to me is the assumption that those being heavily taxed will just sit there and take it. Take the case of actor Gerard Depardieu after France instituted a 75% “supertax” on their wealthy citizens. The actor famously renounced his French citizenship and moved to Russia, later threatening to sell all his French assets left behind. Depardieu wasn’t alone: an estimated 2.5 million French citizens left their home country to live elsewhere and the loss of labor, combined with “discouraged investment”, crushed French tax revenues by a 14 billion euro shortfall of the 30 billion euro estimated intake. The French wealth tax, called the “solidarity tax on wealth,” was eventually repealed in 2017.

Other European countries tried a wealth tax and eventually repealed it: Austria, Denmark, Finland, Germany, Iceland, Italy, the Netherlands, Luxembourg, and Sweden. (Sweden in particular become notorious for its wealth tax after Swedish children’s book author Astrid Lindgren paid 102% in income tax in 1976. Because she was self-employed, she was subject to both regular income tax and employer’s fees, resulting in being taxed over 100% for that year. The Pippi Longstocking author later wrote satirical children’s book about the incident called Pomperipossa in Monismania)

Due to capital flight, it was estimated that the French wealth tax actually reduced France’s GDP (gross domestic product) by 0.2% or 3.5 billion euros.

But back to the wealthy just “taking it” when higher taxes are instituted. It seems asinine to think that a wealthy person wouldn’t act according when faced with the prospect of the government taking more. University of Toronto economist David Seim found that “an increase in tax is likely to stimulate evasion” in his paper Behavioral Responses to an Annual Wealth Tax: Evidence From Sweden. He found that when a wealth tax went into effect, those targeted would shift taxable assets to tax-exempt assets, thereby legally lowering their taxable net worth below the threshold. In addition, wealth taxes — including Warren and Sanders’ proposed American taxes — is a tax on net worth. This means debt is deductible. So borrowing money would thereby reduce overall taxable net worth — and if you’re borrowing to invest in tax-exempt assets, you’re reducing your taxable net worth even further.

The problem is trying to hit a moving target. Those the wealth tax focuses on are affluent, mobile, and have the ability to fight back (more on that in a moment). It’s human nature to respond to someone (or something) that’s coming to take what you have. The rich business owner defends the assets he’s acquired as a caveman defends the prey he killed. The London Times wrote in 1894 in regards to Britains first progressive tax rates that “even the half starved crow will not wait to be continuously shot at.”

The current income tax structure also allows a bevy of deductions for real estate depreciation or cost of improvements; ‘tax loss harvesting’ allows for losses to be written off against gains, creating a net zero effect. A ‘rabbi trust‘ allows companies to give additional compensation that doesn’t count towards taxable compensation. Or take Senator John Kerry, who simply docked his $7 million yacht in Rhode Island instead of Massachusetts, saving him nearly $500,000 in taxes.

Ronald Reagan’s tax planning is just one simple example of how the rich can easily avoid the upper tax brackets. Someone noticed what a fine golf swing Reagan had, and the answer was that when he reached the top tax bracket, he stopped working and played golf for the rest of the year. Many wealthy doctors (and others) do the same thing, closing down their medical practice around August and then taking a vacation from earning money for the rest of the year. A government cannot force a wealthy taxpayer to work if the taxpayer finds the tax rates personally intolerable, especially if they are targeted for attack.

Charles Adams

Or you just leave altogether like Depardieu or Facebook co-founder Eduardo Saverin, who left the U.S. for Singapore and saved hundreds of millions of dollars in taxes.

Magnus Henrekson and Gunnar Du Rietz studied the history of the Swedish wealth tax. They found that “people could with impunity evade the tax by taking appropriate measures,” including taking on excessive debt to buy exempted assets. The Swedish wealth tax also prompted large outflows of capital and the expatriation of well-known business people, such as the founder of Ikea, Ingvar Kamprad. Henrekson and Du Rietz conclude, “The magnitude of these outflows was a major motivation for the repeal of the wealth tax in 2007.”

Why Europe Axed its Wealth Taxes” by Chris Edwards

The point is, politicians expect to collect x amount in tax revenue assuming that those taxed do not respond or act in any way. Charles Adams wrote an article in 2004 called “The Rich Wont be Soaked” (source also for the quote above) showing that it’s always been this way:

History is full of amazing examples, like the first income tax in the United States, in 1916, when the top bracket was 7 percent; a few years later the top bracket was raised to 77 percent, or 11 times higher. Yet the 77 percent rate did not produce 11 times as much revenue; in fact it shocked the Treasury by producing almost the same revenue as the 7 percent rate did. At the 7 percent top bracket, about 1,300 returns were filed; with the 77 percent top bracket, only about 250 returns were filed. Where did all the top bracket taxpayers go? The rich simply rearranged their affairs to avoid the 77 percent tax rate.

Which brings us to the Laffer curve. Arthur Laffer believed people would adjust their behavior “in the face of incentives created by higher income tax rates.” The result was the Laffer curve, a graph showing more dwindling returns the higher the tax percentage. It essentially is a visual representation of the points mentioned above.

Courtesy of Investopedia

As the tax rate becomes more burdensome, the behavior to avoid increases. This could be through changing investments to tax friendlier ones or not investing at all. The end result either way is less tax revenue.

Enforcement

There is also the matter of enforcing the new laws and costs associated with them.

Recently, the IRS admitted to congress that the poor are far more likely to get audited than a rich person, because it’s easier and cheaper; the IRS told Congress it could be solved by an increase to the IRS budget. Elizabeth Warren’s plan specifically mentions “a significant increase in IRS spending” to help ensure no eligible wealthy person evades audit. After all, Warren, Sanders, and other wealth tax plans are a tax on all worldwide assets. The IRS is going to need to assess assets and wealth held overseas as well.

An even larger problem lies not in logistics but valuation. “All household assets” will be including in a wealth evaluation for the wealth tax. Cash, stocks, and property are somewhat easy to assess. But what about art? Family heirlooms? Will the IRS hire jewelers to assess the value of the family pearls or diamond rings? Maybe the Pawn Stars guys can evaluate what’s in the basement and attics of rich Americans. There seems to be no guidelines on estimating the worth of fringe assets. How about a privately-held businesses owned by the taxed wealthy? With no quarterly earnings report, an auditor will have to assess the full value of the private company — down to desks, equipment, and credit card bills. The valuation of a company can change even daily given the flow of business. And how do you value a multi-national company when taking into account currency exchange rates and overseas assets?

And this would have to be done every year.

Elizabeth Warren address this in her plan:

  • Valuing assets for the purposes of the Ultra-Millionaire Tax will provide an opportunity to tighten and expand upon existing valuation rules for the estate tax:The IRS already has rules to assess the value of many assets for estate tax purposes. The Ultra-Millionaire Tax is a chance for the IRS to tighten these existing rules to close loopholes and to develop new valuation rules as needed. For example, the IRS would be authorized to use cutting-edge retrospective and prospective formulaic valuation methods for certain harder-to-value assets like closely held business and non-owner-occupied real estate.

Bernie Sanders takes it a step further, requiring a “wealth registry,” something not defined on his website but presumably a government record of assets held by an individual.

Both of these creates a dark precedent: the government will come into homes to assess “assets”, taking record of what you own, and assign value to it. While there are guidelines to valuation, they’re ultimately left up to the IRS. Does this mean the IRS would also begin to operate internationally? The Foreign Account Tax Compliance Act already requires U.S. nationals with foreign assets or holdings to claim such holdings and for banks to report the individual’s funds to the U.S. government. But what about art or cars at foreign homes?

Enforcement at home and abroad comes with a cost. More tax officials and inspectors, more paperwork, more travel and expenses just to enforce the wealth tax. These costs go against any revenue raised by the taxes themselves. But do they effectively offset? There’s an issue of scale here: to fully realize maximum tax receipts, expenses associated with enforcement must also be maximized. Costs of enforcement could also rise over time while tax receipts could go down; in theory, the entire intake of tax revenues could be spent on enforcement.

Unintended Consequences

Because this is a thought experiment, we can assume the above headache of multi-national asset holding valuation gets done on Amazon CEO Jeff Bezos (a favorite target for Warren and Sanders). His numerous holdings and assets are assessed and valued. It comes in close to Forbes’ October 2019 valuation of $103 billion. Under Elizabeth Warren’s plan, Bezos would be subject to 6% wealth tax (2% tax since it’s over $50 million and additional 4% billionaire surtax since the number is over $1 billion). 2% tax on $1 billion is $20,000,000. The 4% surtax on $102,999,999,999 is $4.2 billion (rounded up). Combined, that’s $4.22 billion owed in wealth tax (which does not include Federal, state, and local income tax or capital gains taxes). And this amount is conservative compared to CNBC’s estimate of $9 billion Bezos would pay under Sanders’ 8% wealth tax.

Here’s where it gets interesting. The likelihood Bezos has that amount in pure cash is highly unlikely. His personal wealth comes from his ownership in Amazon, specifically his shareholdings. To cover the $4.22 billion owed, Bezos would have to sell 2.5 million shares of Amazon stock (based on its current valuation of $1,745 per share). But even then that wouldn’t be enough because Bezos would owe capital gains tax on selling the stock. He would have to sell additional shares just to cover capital gains on the 2.5 million shares AND the shares he was selling to cover the tax (as of this writing, long term capital gains tax on Bezos’ tax bracket is 20%)

The result is that Bezos is forced to reduce ownership in his own company to pay wealth tax; the selling of 2.5 million shares by the CEO would also likely cause panic in stock (including knowing he’d have to sell more the following year), driving it down in price as investors get spooked. Since Amazon is a commonly held stock in 401ks, IRAs, and pension portfolios, all are hit by the selling. Bezos is not alone in the tax. Other billionaires will be forced to sell company stock to pay wealth tax bills, thus retirement funds will bear the brunt of reduced stock value from each of these companies.

The other choice Bezos and other owners have is to liquid company assets to pay the tax bill. This is money taken out of the company — money that could be reinvested for growth or was originally earmarked for new projects and initiatives. The loss for the company translates into higher costs passed on to customers or cutbacks in jobs or pay. This would also likely result in a stock price decrease.

In either case, by the time the next tax season rolled around, the overall valuation would be less — either by selling off $4.22 billion (plus capital gains tax) in stock or by reduced stock price in the company due to devaluation. Maybe the following year, Bezos is worth less than $100 billion. Yes, he’d still be subject to the wealth tax at 6% (or Sanders’ 8%) but the tax receipts would be less than the previous year. So the amount of tax receipts would drop, offsetting less of the enforcement costs and costs to social programs instituted by the president candidates.

Think of it this way: Social program (SP) plus additional wealth tax enforcement costs (EC) equal the projected tax receipts from the eligible billionaires in the United States.

SP + EC = Billionaire Tax Revenues

The balanced equation gives the presidential candidates what they want – their taxes pay for their new spending. But if Bezos and other billionaires suffer a reduction in net asset value, the tax revenues will go down over time. Now the social program and enforcement costs are not being covered by tax revenues and there’s a shortfall. Now you have to either reduce the SP spending (which would be unpopular), or reduce EC spending, which makes it more difficult to enforce the tax which would likely result in even less tax revenues. The only other choice is more government debt to make up the shortfall.

What happens if Bezos pulls a Depardieu and leaves? Now he isn’t contributing any tax revenue (except for his one-time exit tax) and the shortfall is that much larger. He may decide to do just that: at some point, Bezos will have sold enough Amazon stock to threaten his voting ownership and control of his company. The value of Amazon stock could plunge if he lost control due to lack of ownership — further reducing the value of American pension plans and retirement portfolios.

This also raises the moral question of is it right to take away ownership of someone’s company just because it was successful to a high enough degree? Wouldn’t this de-incentivize future entrepreneurs and business people? After all, why build a company beyond a certain point if a wealth tax will cost you ownership? It’s Ronald Reagan hitting the green all over again.

So there you have it. While the wealth tax attracts populist attention, the reality behind it is murky at best. It has been tried in the past and ultimately withdrawn due to failure to meet results. If anything, the shift in behaviors will create disruptions in the economy — and worse the possible flight of capital to foreign shores. With less to wealth to tax, the shortfall needs to be made up somewhere, either in increased government debt or taxes on lower classes who can’t leave.

Based on this thought experiment, do you think a wealth tax is still viable? Comment below!

Why Isn’t Personal Finance Taught in School?

Internet Meme

Think back over your school days. In elementary school we had the basics: writing, grammar, English. Maybe American history. Math. Nature studies. Middle school? English literature, algebra, European history, and civics. High school? College level classes, more English literature, biology, physics, and more history. There were shop classes and home economics. And there was always gym classes.

If the purpose of education is to prepare a young person to go out into the world, find a job, make it in society, then our students are woefully unprepared. After twelve years of education, not one student is better prepared to manage their personal finances — or even understand how taxes and interest work. Over the course of our lives we, of course, use English. We use some math. History might come in to play at some point in the future. But we use financial knowledge. Every. Single. Day. So why is it not taught?

This latest post began while watching an interview with Robert Kiyosaki about the origins of Rich Dad, Poor Dad:

Kiyosaki recalls asking his fourth grade teacher why they don’t learn about money (10:30). She replied that they “don’t teach money at school” but couldn’t answer his question as to why. Kiyosaki continues, saying he eventually asked his father — who worked for the department of education — why money isn’t taught in school. His father’s reply? ‘Because the government doesn’t let us teach it. It’s not in the curriculum.’

So I began to wonder: how is education curriculum set? Why doesn’t the government allow personal finance to be part of public schools? (Note: I never attended private school, so I cannot speak to if it is taught there or not, but feel free to comment if you did. I’d love to know!) It seems not only common sensical that it would be taught, but given these horrendous metrics, Americans are in desperate need of financial literacy:

  • 41% of Americans use a budget (inversely, 59% of Americans don’t track or understand how much they spend every month)
  • The average American college graduate leaves school with $37,172 in student loans, most with no immediate plan to pay them off
  • Two-thirds of Americans would have trouble scrounging $1,000 for an emergency
  • 35% of Americans (!) have debt in collections with the average amount being $5,178
  • A National Endowment for Financial Education study found only 24% of millennials show “basic financial literacy” while 69% of the surveyed rate their own financial knowledge as ‘high.’

So what’s the deal? Before diving into a ‘Conspiracy of the Rich’ that keeps the average person money stupid, I wanted to learn the origins of our public education curriculum. I began to dig to find out just why what’s taught is taught.

It begins with the Prussian Education system.

The Prussian Education system was founded in 1763 by Frederick the Great. The system became the model for compulsory attendance (e.g., you have to go to school), national testing, and, per Wikipedia, “prescribed national curriculum for each grade, and mandatory kindergarten.” It also maintained a specialized training for teachers, essentially teaching teachers how and what to teach. This might be the most important facet, as teachers were not existing specialists or professionals, but professional teachers. The person teaching math or science would not be a mathematician or scientist.

The Prussian system was imported to the United States in the early 19th century, with early advocates including American education reformer Horace Mann (who eventually went to Germany to inspect German schools first-hand). The Prussian system was designed to serve the kingdom, training the populace to be soldiers, farmers, and eventually factory workers when the Industrial Revolution arrived. This is why you hear contemporary education referred to as “factory model” or “industrial era.” Indeed, it freaked me out a little bit when I realized that the reason for “bells” to signal start and end of classes was to train young people for the bells and whistles of the factory, denoting shift changes.

The Prussian system would later be refined in 1892 by the Committee of Ten. The committee’s recommendations became the basis of our modern education system: 12 years of education, eight of which are elementary followed by four years of high school. Curriculum was focused on English, mathematics, and sciences (such as chemistry, physics, and astronomy). The higher sciences such as psychics and chemistry were reserved for the high school level. English, mathematics, civics, and history would be taught at every level.

In the report linked above, there is no mention by the Committee of Ten of finance, money, or taxes.

So is our current system just outdated? What would it take to add personal finance to the curriculum? Why hasn’t it been? In 2013, a poll from Harris Interactive (sponsored by Bank of America) showed 99% of adults agree financial literacy should be taught in school. A 2013 Time magazine article entitled “Why We Want-But Can’t Have-Personal Finance in Schools” cites four major reasons finance has not been part of the curriculum:

  • Only one in five teachers feels qualified to lead a personal finance class, according to a University of Wisconsin study. So we don’t have enough instructors.
  • Personal finance concepts are not part of standardized tests like the SAT or ACT. As the saying goes in education circles: If it’s not tested, it’s not taught.
  • Education is run at the state level. So there is no federal authority to mandate personal finance classes, and each state has its own ideas on how to go about it.
  • There is little academic agreement as to what kind of personal finance instruction works. Many educators are waiting for clarity before they sign on.

There seems to be a catch-22 in regards to ‘feeling qualified’ to lead personal finance classes. Teachers don’t feel qualified to teach it because they never learned it themselves. In fact, these surveyed teachers may be struggling with their own financial literacy.

I’ve personally always been amazed that taxes are not taught at some level in school. These are something every American must file once per year, yet there’s no education or even explanation on how it all works. But, according to the Time magazine article above, teachers don’t really understand it either. I would say financial literacy should start at home, but parents weren’t taught in schools either. A 2011 Charles Schwab survey of 1,132 teenagers between 16 and 18 revealed 42% wanted their parents to talk to them about how money works. Only 32% of the surveyed teens knew how credit cards and interest worked. But if the parents aren’t knowledgeable (or comfortable enough) to talk about it, then the ignorance is passed on. It’s a death spiral of financial ignorance.

I couldn’t find an explicit reason why finance was left off the educational menu. One could infer that it wasn’t important in the 19th century — money still existed, bills had to paid with interest, although there was no personal income tax (except from 1861-1866 where it was enacted to pay for the Civil War) but property taxes and tariffs existed. Kiyosaki seems to insinuate that it’s more sinister, that financial education is left off the table explicitly to keep people dumb about money. His entire modus operandi for his Rich Dad series is to teach people about financial literacy because it’s not taught in schools.

He is right in that the failure to teach financial literacy in school falls on the government. Some states have taken the initiative, but it appears lacking, according to “Survey of the States“, a Council for Economic Education report. Seventeen states require high school students to take at least one course in personal finance. However, the report also shows “there has been little increase in economic education in recent years and no growth in personal financial education.” So states are aware of the problem, some have made an attempt to change it, but overall it appears to be half-assed or not a priority. I suspect it will take adding personal finance to standardized testing to get the ball rolling, coupled with education of teachers so they can teach the subject.

Until then, hopefully people like Robert Kiyosaki or Dave Ramsey will continue to get guide people. Or maybe blogs like this one can help someone find their way. Perhaps it will be those who are financially literate that will teach future generations.

How to Build a Budget

The dreaded “B” word

“Either tell your money what to do, or end up wondering where it went.”

Dave Ramsey

I used to hate budgeting. Not that it seemed like too much work…just something about that damn “B” word used to cause me to groan and not want to do it. Maybe there was some stigma attached to the “I’m on a budget” mentality. It made me feel poor, cash-strapped, and destitute. The truth is, I can’t live without a budget now. I’m not poor. I’m not cash-strapped or destitute. I’m in control. Every month I fill out my budget and my money gets to work.

I started budgeting in December 2017. I was doing a good job of putting every spare cent towards my debt. The bills got paid first, then everything left went to credit cards or student loan. When December 1 hit, I knew I had to set some aside for Christmas presents, but I wasn’t sure how much I’d have. I knew I DID NOT want to use credit cards for gifts (and undo all the payoff work I had spent the past six months accomplishing) so I made a budget. I determined all the “had to pays” like bills, gym memberships, and minimum student loan and car payment. From there I determined what I could spend on gifts and then what extra I could pay on credit cards (I was not going to let up on my momentum).

The next thing I knew, I had done my first budget.

I used that formula for the next month, then the next, and all of 2018. I still use it. It became more intricate. I put in formulas. I began to estimate what I thought my paychecks would bring in and budgeted accordingly; I was always conservative on my income estimates so I didn’t actually over budget. And you know what happened? I ALWAYS had money left over each month.

So let’s walk through it. For the columns, I have “Expenses”, “Budget”, “Actual”, “Percent Met”, and “Notes.” The first column is self explanatory. “Budget” and “Actual” are my estimated amount and actual amount I end up paying or can afford. For some of the expenses, like “LA Fitness” and “Hulu”, those are the set amounts every month which I just pay (LA Fitness is on there twice because I pay for my wife’s membership). That’s why the Budget and Actual amounts always match. “Percent Met” is just math porn for me: I like to know how far over or short I am on my estimate. For example, my savings this month I was able to pay extra to so I was way over 100% to my estimate. Lastly, notes are for personal comments or reminders. The $100 to my emergency fund was replenishment (I keep $1,000 in an immediate emergency fund for when shit breaks…not sure what I had to use it on back then but the $100 was to make up the shortage).

The second group of rows starts with “Current Bank.” Current bank is what I’m starting the month with. Because pay days didn’t always fall on the 1st of the month, I had carry over money from the previous month. This row shows what I’m starting with. The next two rows are pay days with my estimated pay and actual pay (I was wage plus commission, so it was impossible to predict my actual paycheck). The fourth row is money made from freelance work. I also have a row reminding me to pay myself 10% — I’m a huge fan of this ‘rule’, where I immediately put 10% of my income into savings. This line had a formula to determine immediately what 10% of my income that month was. “Remainder at end of month” showed me what I had left over, so I knew this was money I could either spend, save, or invest. I also tracked retirement contributions, and how much of my expenses were mandatory (i.e., gym memberships, hulu, stuff I couldn’t miss payments on or were on autopay) and optional (putting money aside for a movie project or E-Trade).

You may have noticed that some of the big bills were missing: mortgage and car. How about utilities? Food? Gas? For those bills, my wife and I split them. We have a joint bank account for paying those bills. Long ago we determined the monthly cost of our mortgage, car payment, utilities, and estimated food and gas costs. We each contribute the same amount from each of our paychecks into the joint account, which then pays those bills. This ensures 1) we don’t mix all our money and end up arguing over personal purchases and 2) all those bills get paid first. This is why my income looks so low on the spreadsheet — I’ve already deducted the amount that goes into the joint account. The rest are my personal bills.

Regardless of how you do it, those bills still need to be paid! So if you’re making your own budget, please make sure you include them on your month budget. I guarantee if you make a budget, you will find money. Maybe you’re overspending somewhere. Maybe you can cut an expense out or save somewhere. When I was trying to determine my wife and I’s monthly expenses for the joint account, I tracked every purchase for a month: grocery bills, gas for the car, weekly take out meal…I kept all the receipts and determined what we spent on average per month.

Budgeting is about being in control. You’re in control of you money, which helps you be in control of your life. It doesn’t have to be a rigid lifestyle either. Budgeting doesn’t mean not doing anything fun or enjoying yourself. Every month I allocate $100 to blow on whatever I want. It can be more if there’s leftover money in the budget. Or, I can save it away for a future larger purchase or trip. It’s not a monastic lifestyle. I don’t wear ratty clothes and have an empty house devoid of furniture and appliances. If you’re going to Quit Your Job, you must be in control of your finances!

If you’re interested in learning more about building a budget or getting control of your finances, check out these books below: