Bizarro World

In the Superman Universe an evil mad scientist made a mistake that created Bizarro Superman. Yes, Lex Luthor was very evil. For more than you ever want to know about Bizarro Superman click here. 

Today we live in a modern Bizarro World. While our home planet is not square and all the inhabitants are not clones of Lois Lane and Superman, we do live in a very strange world where German taxpayers bailout Spanish banks. 

Officials in Brussels said the contingency strategy to support Spain could be "austerity-lite", rather than tied with conditions like the Greek and Portuguese bail-outs, to restore confidence more quickly. The bail out could be as much as €80bn(£65bn) rather than €40bn Madrid reckons its banks need.

While I understand the fear that is driving these bailouts, it should be obvious that if it can't continue, it won't continue. It is better to "take your medicine" now rather than later. 

But instead the powers that be hope to kick the can down the road one more time, they have more money they want to steal. But we have reached the point where we have to cut, we have no choice. 

Here is how one Senator puts it. (This is through Karl Denninger.) 

Paraphrased, Jim DeMint said:

If you stop the deficit spending the economy craters (~10% of GDP) and if you continue doing it the economy will crater (since you will eventually hit the wall and be forced to stop, and it will be even worse.)

We live in a Bizarro World where living within one's means is "austerity." 

A Pox on Both Their Houses

A 15% tax rate makes me smileI would laugh too If I got such a tax breakI have never understood the hatred that the Right expresses toward George Soros, nor the hatred the Left expresses toward the Koch brothers. While both are politically active, it seems to me that it is their money to do with as they wish—even to spend it on politics. 

However, I recently read an article that a Facebook friend recommended about the new tax law just passed by the Kansas Legislature and signed by Governor Brownback. TaxFoundation.Org describes the law in this way:

On May 22, Kansas Governor Sam Brownback (R) signed HB 2117 into law. This tax cut bill reduces income tax rates, increases the standard deduction, and eliminates some income tax credits. The legislation also exempts from tax some income of pass-through businesses. The tax reduction is estimated to be around $800 million annually beginning in 2014, totaling $4.5 billion over six years (see Table 1). By comparison, the state’s individual income tax brought in $2.7 billion in 2011.

On the surface this sounds great. Taxes in most states are too high. Government is bloated.  I think having one tax rate of 4.9% is better than the system currently in place in Kansas, all good as far as I am concerned. But the Devil is in the details. TaxFoundation.org describes some of the less mentioned parts of the tax law—in particular the exact meaning of the term "pass-though" business. 

In addition to the individual income tax changes, the new law changes the way pass-through businesses are taxed. These businesses (such as LLCs, S corps, partnerships, farms, and sole proprietorships) are generally taxed not under the corporate income tax, but rather on the income “passed through” to the tax return of the business owner. This income is thus taxed under the individual income tax.

I own such a business so I understand how such corporations work. The point is that these entities do not pay taxes, their shareholders pay taxes on their individual income tax forms, on a pro rata basis. So If I own 40% of a corporation that makes one million per year, I would pay taxes on $400,000. (I wish!) These corporations would give a capital return to the shareholders to pay their taxes. (This is not a dividend, as a dividend would be taxable.) 

Nothing wrong with such a structure. The taxes are paid, just differently. What is odd about the bill that was just passed in Kansas is that the average worker will continue to pay state income taxes on their wage income, but the well-to-do and the wealthy, if they structure their businesses correctly, will pay no state income taxes at all. I can guarantee that these businesses will be structured this way very quickly, if they are not this way already. So those who are employees will pay state income taxes, but those that employ them will not pay state income taxes. 

Why did I mention the Koch brothers at the beginning of this article? While this will not help David Koch as he lives in New York City, this will greatly benefit Charles Koch as he lives in Wichita, Kansas. 

Since Koch Industries is a private company, the second largest in America, the profits of the business are not known. It has revenues of $100 billion a year. (For full disclosure I need to add that my retail lumber yard buys from Georgia Pacific, a Koch Industry company.) 

Let’s do a little "back of the envelope" calculations. Charles Koch will show on his state income tax return for 2012 his share, 40% or so, of the money Koch Industries makes. This is because Koch Industries is a "pass through" company, a Sub Chapter S corporation. To be conservative let’s say it is 1 billion dollars even though a better guestimate would be much higher. Koch would then pay state income taxes of $64 million or so on this part of his return. This has to be on the low side of the taxes he pays currently to the state. 

One of the well-paid workers working at Koch Industries in Wichita will pay 4.9% of his income in taxes above $30,000. How much will Charles Koch pay in state income taxes for the billions in income Koch Industries will make for 2013? Zero, zilch, nada, nichevo. 

Charles Koch will probably save more in taxes from this bill than he will spend on the elections in this election cycle. I have no objection to Koch spending his own money on elections. But I greatly object to the taxpayers of Kansas giving Koch a tax break to do so. 

I suppose it could just be a coincidence that this will benefit Charles Koch and that he is spending $100 million or so on politics in this cycle. (The Kochs spent $10 million for the last year in Wisconsin. ) I suppose it could be a coincidence that the Republican governor Brownback has national ambitions. I suppose it may be an unintended consequence that this new tax bill in Kansas will benefit Charles Koch. I suppose. 

It does not matter whether it is the tax rate of 15% Soros gets for his off-shore hedge funds or this new tax break for Charles Koch. The whole system is corrupt. No matter who wins the election in November, we lose.

What Can’t Continue, Won’t

Greece will leave the Euro. There is no choice really. But there is a level of schizophrenia in the Greek voter—apparently 80% want to stay in the Eurozone. Based on the last election most voters are against austerity. The two positions are not reconcilable without large loans from Germany. They will not lend. It is like the little girl who tells her father, “Give me the pretty moon Daddy.” Hysterical crying will follow. This seems to be the official Greek position. 

I do not usually agree with Martin Wolfe, a writer for the Financial Times. His latest article is no exception. But I think he is quite accurate in his portrayal of the consequences of the breakup. 

Start with Greece. It is in a doom loop. Unemployment soared from 7 per cent of the labour force in May 2008 to 22 per cent in January 2012, while the unemployment rate of people aged under 25 jumped from 21 per cent to 51 per cent. Worse, despite fiscal austerity and debt restructuring, the International Monetary Fund estimates that gross public debt will be 160 per cent of gross domestic product in 2013, 50 percentage points higher than in 2008. Moreover, the IMF forecasts that the current account deficit – the balance of trade on goods and services – will be more than 7 per cent of GDP this year.

I think this is accurate and inevitable. The rest of the article is a description of the various consequences of the crisis. In my view he is quite accurate. Have a look. (Note that sometimes links to Wall Street Journal or in this case Financial Times is behind a pay or registration wall. You can avoid this wall by Google. In this case Google “Martin Wolfe” and “permanent” and that will get you there. Do not feel guilty, the papers have designed their websites to allow this.) 

His conclusion is the main thing I disagree with. What can’t continue won’t continue. In this case the Germans cannot continue to loan Greece money. 

Greek exit then would create a choice between big moves to a stronger union and a future of endless crises. It is a choice the dominant creditor nation, Germany, must make – among big steps to integration that horrify many of its people, a future of horrible crises or a horrible break up right now. No good choices exist. But the eurozone must become a stronger union or it will disappear.

It cannot become a stronger union. Will Germans vote to increase their taxes to pay Greek pensions? Really, Mr. Wolfe? Really? 

Nigel Farage in the EU parliament said this recently.

He is mostly right. He is underplaying the troubles that are ahead for Greece-but what can’t continue won’t. Throwing good money after bad will make things worse. Yes most banks in Europe will go under, but they are bankrupt already. The sooner we understand that the present cannot continue, and act, the better off we all will be. Yes, Wolfe is right, even if he exaggerates some—the crisis is severe. The worst thing that can be done is continue on toward the cliff. 

My Dream Car

I really want to buy a Peugeot Diesel Hybrid. It gets very good mileage as a diesel. In addition it has an electric power system. It gets 60 miles per gallon when it is running on diesel. Unfortunately it is too expensive for Peugeot to meet American regulatory requirements. In fact one of these requirements is impossible to meet. The US government defines pollution as the amount of pollutants released per gallon of gas burned, not per mile traveled. So the fact that the Peugeot gets 60 miles per gallon excluding any electric part of the mileage is not factored in. 

Eric Peters has suggested this approach:

A better (because more cost-effective) solution would be to mass-market relatively simple, much-lighter-than-current-average vehicles equipped with updated versions of something like Honda’s old CVCC engine of the mid-1970s fed by a throttle body injector (TBI) teamed up with a modern six speed overdrive transmission or CVT. Such a vehicle, weighing about 1,800 lbs., let’s say, would not need more than about 100 hp (probably less)  to be powerful enough for most A to B driving, would be capable of 60-plus MPG, and – critically – would burn probably 40 percent less fuel than the typical current 270 hp V-6 (and 3,400-plus pound) sedan or crossover – which mostly never sees the high side of 80 MPH anyhow and thus is as pointless as giving a eunuch Viagra.

If such vehicles became mass-market vehicles, the result would be a massive reduction in emissions output (and fuel wastage) without the need to pursue ever-more-elaborate, ever-more-expensive technological solutions in the quest for diminishing returns, tailpipe emissions-wise. Such a machine would not need gas direct injection, or variable cam/valve timing, or multiple sequential turbochargers – just a sampling of the technology the car industry is currently deploying in order to “save fuel” and “lower exhaust emissions” in cars that are morbidly obese and thus require bigger, more consumptive engines that burn more fuel – and produce more total emissions. 

One reason we do not have better mileage cars is that the government will not let us have them. 

Another reason we cannot buy good mileage and emission cars, in this case per passenger, is that the old reliable station wagon is subject to a 25% tariff, but the minivan is not. The result is few traditional station wagons. I would have been a buyer for a station wagon over the last few years as I often have a lot of people in my car, having 6 children and 6 grandchildren. There are a few rare station wagons still made. They are placed on truck chassis and so are technically trucks in order to get by the tariff. 

We have a general lack of common sense in our government. This is similar to religious legalists who forget the purpose of the religious rites they idolize. As Eric Hoffer, longshoreman and philosopher once said: The definition of fanatic is a person who has lost sight of their goal but redoubled their efforts. 

A Prophecy From 2002

If a person claiming divine revelations had made these predictions, we would have had to consider them as potential prophets.