April 17, 2007

Filed under: General — Tom @ 10:50 am

The IRS’s Default Assumption Is That Businesses Cheat on Their Taxes; Yet Another Argument for the Fair Tax

Filed under: Business Moves,Economy,Taxes & Government — Tom @ 6:17 am

I saved this one for Tax-Filing (or tax-extending, as the case may be) Day.

The IRS has three proposals that it believes will improve tax compliance — and demonstrates its penchant for misplaced priorities:

  • “…. getting more information by making credit card companies report each merchant’s credit card sales to the IRS.”
  • “….. require businesses to issue a Form 1099 not just to all independent contractors but also to all corporate contractors they pay more than $600 a year (say, the local Roto-Rooter or messenger service).”
  • “….. make businesses verify with the IRS the taxpayer ID numbers of all independent contractors and withhold taxes for any who ask.”

….. (but) for all the burden they would impose on small business, these three enforcement proposals would fill less than one tenth of 1 percent of the tax gap, collecting $187 million in 2008 and $19.2 billion over the next ten years. By comparison, improving tax collection on offshore accounts held by U.S. residents would generate about $50 billion a year, estimates Reuven Avi-Yonah, a professor at the University of Michigan Law School.

If you believe that the level of non-compliance is what the IRS says it is (I would argue that many other taxpayers overpay because they don’t understand the tax laws in the first place), and even if you buy into the amount of extra money the IRS will collect (I personally doubt it), the costs of the extra reporting described will be at least equal to the puny $187 million in extra tax collected in the first year.

Meanwhile (again if you believe the Michigan prof’s estimate), the IRS could be directing more of its efforts to an area with over 250 times more tax-collection potential.

Enough of this inefficient, ineffective, demoralizing cat-and-mouse game. It’s time for the Fair Tax. Read more here.

Update on Louisiana’s Governor’s Race

Filed under: Taxes & Government — Tom @ 6:12 am

Non-resident John Breaux said on Friday (HT to Conservative Culture, whose entry was apparently done before Breaux’s announcement) that he “will not be a candidate for governor.”

The correct legal wording is “can not,” but we’ll take it.

Get Ready for Some Big Oil Write-Downs

Filed under: Business Moves,Economy,Taxes & Government — Tom @ 6:07 am

Hugo Chavez is taking over (HT Conservative Culture):

CARACAS, Venezuela — President Hugo Chavez said Thursday that soldiers will accompany government officials when they take over oil projects in the Orinoco River basin next month.

Chavez has decreed that Petroleos de Venezuela SA, or PDVSA, will take a minimum 60 percent stake in four heavy-oil projects in the Orinoco River region and invited the six private companies operating there to stay on as minority partners.

“On May 1 we are going to take control of the oil fields,” Chavez said. “I’m sure no transnational company is going to draw a shotgun, but we will go with the armed forces and the people.”

The projects — run by BP PLC, Exxon Mobil Corp., Chevron Corp., ConocoPhillips, France’s Total SA and Norway’s Statoil ASA — upgrade heavy, tarlike crude into more marketable oils and are considered Venezuela’s most promising. As older fields elsewhere go into decline, development of the Orinoco is seen as key to Venezuela’s future production.

Negotiations over the takeover have yet to yield an agreement and are expected to be difficult as the companies seek a deal that takes into account more than $17 billion in investments and loans related to the projects.

Unless you really believe that Chavez will fairly compensate the oil companies, it appears that whatever values these assets have on their books are about to evaporate.

I would suggest that the companies all simply walk away and let Hugo & Co. try to run the projects with whatever likely-limited expertise remains. Even if the remaining expertise is high, political considerations will more likely than not put a monkey wrench into any hopes of efficient operations. But given that the French are there, they will probably, as they have elsewhere, be all too glad to do a tyrant’s bidding. So a painful, financially disastrous dance with the dictator ensues.


UPDATE: A subscription-only op-ed by Marie Anastasia O’Grady in yesterday’s Wall Street Journal provides much useful background, and suggests that walking away may not be such a bad idea –

Mr. Chávez has been brimming with bravado as he has shredded these oil contracts and told foreigners to step aside because he’s in charge now. But he’d better relish the thrill while it lasts. The move is not good for Venezuela and it will probably end up hitting the commandante of the revolution in the pocketbook. Corruption, incompetence and mismanagement have already taken a big bite out of PdVSA’s productivity since Mr. Chávez began politicizing the company in 2001 (PdVSA is the state-owned oil company Petroleos de Venezuela. — Ed.). High oil prices have mitigated the damage to his balance sheet up to now but they won’t protect him forever…..

The Chávez government says that it doesn’t anticipate any production problems stemming from the change in operatorship or ownership. From a strictly technical point of view, that forecast may be defensible. It is certainly true that both oil extraction and the upgrading processes could be run by any oil company. Still, given the performance of PdVSA under Mr. Chávez, it is highly unlikely that productivity, investment and income won’t suffer.

One problem already looming is labor. Last month Dow Jones Newswires’ Peter Millard reported that, though PdVSA has said that it will retain the 4,000 employees who staff the strategic associations for the foreign companies, union leaders are warning that many of the chemical engineers and processing managers are unhappy about proposed pay cuts and are launching job searches.

A shortage of human capital is already pinching PdVSA. In 2002 Mr. Chávez fired 20,000 workers — many of them skilled — because he didn’t like their politics. Those employees were replaced with politically compliant candidates and production never recovered. OPEC says that Venezuela now produces 2.5 million barrels a day, one million barrels less than in the pre-Chávez era. According to Mr. Millard, this year Nigeria replaced Venezuela as the fourth-largest oil supplier to the U.S.

….. The expropriation also threatens to destroy a business model that provides more than the pumping, processing and refining of oil. The marketing divisions of these companies play a crucial role in placing product and keeping transaction costs low. The loss of these networks will also harm Venezuelan competitiveness.

Finally, and perhaps most important, there is the damage to Venezuela’s investment profile. PdVSA is already hurting for cash because profits that would otherwise be plowed back into exploration and development are being siphoned off by the government to advance political and social causes. In a robust investment climate, this misallocation of capital might be compensated for by the private sector. But so far investors have had a predictably bad reaction to their loss of property at the hands of Mr. Chávez.

….. Exxon Mobil CEO Rex Tillerson said last month that if the terms of compensation offered by Venezuela are not acceptable to the company, it would leave Cerro Negro entirely. That would mean eating a loss, but with Mr. Chávez pulling stunts like he did in January, when he slashed production quotas for the foreign companies so that he could meet OPEC cuts without hampering PdVSA sales, the risks of walking away may be lower than perceived. In the end, an Exxon exit would probably end up costing Venezuela even more.

Column of the Day: Don Luskin vs. the Bad MEWS Bears

Filed under: Economy,Taxes & Government — Tom @ 6:02 am

Of course, you know who wins.

In his latest Smart Money column, Luskin skewers the MEWers, and myth that if it weren’t home equity cashouts propping up the economy, the decent economic growth of the past four years wouldn’t have occurred:

MEW stands for “mortgage equity withdrawal,” and that means the cash that homeowners can extract by refinancing their houses, or taking home equity loans. Over the last several years, as home prices have risen and interest rates have stayed low, MEW has been running at a record pace.

Now that home prices have stopped rising, MEW has fallen off. And the bears think that’s going to be enough to trigger a recession.

Before I explain why the bears think that, let me remind you who these people are. These are the people who have been wrong about the economy and the stock market for the last four years. The S&P 500 index, including dividends, is up 101% since the bottom in October, 2002. Back then was when Bill Gross, the bond manager, put out his famous call for “Dow 5000.”

Since then the bears have invented lots of new ways to be wrong. They said that high energy prices would kill the economy, and the stock market. They said rising interest rates would do it. They said the federal budget deficit would do it. That the trade deficit would do it. That outsourcing jobs to China and India would do it. They said that Hurricanes Katrina and Rita would do it.

But nothing did it.

Now the story is MEW. With housing prices off, and with the subprime mortgage market in disarray, the bears say that the American consumer won’t have a source of ready cash anymore. No cash, no spending. No spending, no GDP growth. No GDP growth, no bull market.

In fact, the bears are saying that, if it weren’t for MEW, we wouldn’t have had an economic expansion or a bull market at all. This whole thing, according to them, has been a debt-financed spending binge made possible by MEW.

….. none of it has any basis in fact.

First, this whole thing is based on a fallacy that somehow MEW represents money in the economy that wouldn’t have existed otherwise. But since MEW, by definition, is produced by mortgage debt, then the money must have already existed. Someone had to have it initially in order to lend it to the mortgage borrower. Why is it so important whose hands the money is in? The bears don’t even think about that.

Second, pretending for a moment that MEW actually means anything, nobody really knows how big MEW has been over time.

….. Third, nobody knows how much of MEW — assuming we even knew how much MEW there was to begin with — goes into consumer spending, as opposed to savings or investment.

….. MEW volume, according to the bears’ dubious statistics, surged from 2002 to 2005 during the real estate bubble. If all that MEW money went into spending, then why don’t we see a surge in spending growth during those years? (the second page of the link has a graph that illustrates the point — Ed.) Or for that matter, why is there a surge in the late 1990s, when MEW wasn’t particularly doing anything at all?

It’s simple. The bad MEWs bears are wrong. MEW is irrelevant. It didn’t prop up the economy when it was running hot, and it’s not going to kill the economy now that it’s running cold.

Positivity: ‘A miracle brought him here’ — Blind couple tying knot in Jewett City

Filed under: Positivity — Tom @ 5:57 am

From Jewett City, CT:

Apr. 8, 2007

When Tammy Robbins heard Bob Chabotte’s miraculous story of survival after a devastating motorcycle accident, she was determined to meet him.

After all, they had something in common: Robbins has been blind since birth, and Chabotte lost his sight in the accident.

But she had no idea he would turn out to be the love of her life, or they would be planning a wedding less than a year later.

“My heart just went out to him after hearing his story, and I wanted to meet him,” Robbins said. “It took me nine months to track him down, but then he came to my house and never left.”

And with the help of a good friend, the couple are hoping to raise enough money for a special wedding day and a few days away to spend together.

Annie Kudelchuk, owner of Altone’s in Jewett City and longtime friend of Chabotte, donated the hall at the restaurant for the wedding and is holding a pasta dinner fund-raiser later this month.

“They love each other and want to be together, and I want to help,” she said.

Robbins first heard of Chabotte through an October 2005 article in the Norwich Bulletin. She wasn’t able to locate him until July 2006, but both agree it was worth the wait.

“We just have so many things in common,” Chabotte said.

“When he hugged me that day,” Robbins said, “I just knew it was where I belonged. A miracle brought him here.”

Chabotte, 37, was living in Florida when the 1996 accident happened. In addition to his sight, the crash took his sense of smell and partial use of his right leg. Pronounced dead three times, doctors only gave him a 5 percent chance of survival.

Today, Chabotte is back to working as a mechanic. He, Robbins and her son, Aaron McCollum, 14, are enjoying life as a family. The couple will marry May 5.

“I’ve always wanted a family, and now I have a perfect one,” said Robbins. “Now I hope we can have a perfect wedding, too.”