Enter a model used by the Dutch, wherein a whole postcode will win each month’s lottery. The winnings are divided up between all residents within that postcode, meaning all winners receive around $13,000. So everyone in the community can be that much better off.

So how can these two ideas be combined? Well theoretically, the 40% of winnings taken by the government should be used to benefit its citizens, correct? What if these citizens received the winnings themselves? Could this allow the government to decrease (or eliminate) the amount of taxes taken out of the savings’ winnings?

As an explanation, people would be able to open bank accounts, knowing the interest they earned would be directed toward a pool of money. This money would then be doled out in a monthly lottery but, rather than have one individual win the full amount, a whole postal code could win it. Of course, this probably means winnings will be in the $10,000 range rather than the $1,000,000 range, but it also means 40% wouldn’t be taken out as taxes, since these would constitute a form of payment to citizens regardless.

The devil, as always, is in the details. Would the bank accounts still be private or state owned? And exact amounts of earnings, winnings and (eventual) tax payments would have to be calculated. But if it encourages people to save and not to spend their own earnings on lottery tickets, might it not be worth checking out?

The US, by raising its debt ceiling, has basically extended its own line of credit. This is as if you had maxed out your credit card but then raised the spending limit (don’t expect VISA to offer that option anytime soon) so you could keep on buying. This is good if the money you then spend earns you more money, so you can start paying back what you owe and you never have to default on your monthly payment. Likewise, if the economy picks up the US can use future gains to pay back what it owes. If the economy doesn’t pick up, however, the US will just accumulate more debt and will have the same problem (albeit more severe) in the near future.

So the US needs to earn more money. What would you do if you needed to earn more money? Well, you could start by cutting down on lattes at Starbucks and other measures. Maybe you could eat in more often. Or maybe you could trade in your car for a bike. These are what is called Austerity in economics. The US decides to cut back on its spending. The most affected sectors are usually welfare benefits and development projects.

But, of course, cutting down on spending only takes you so far. You will also have to start making more money. You could do this by getting a second job, a part time job, freelancing, etc. The US tends to do this by raising taxes and public transport fees.

Here is the problem, however. You new job is across town, but you sold your car for a bike. Your freelance job requires a flipcam, but you can’t afford to buy one. Or you have to network more to get that new project, but you don’t have a budget for eating out. Likewise, the US took away benefits and raised fees for its citizens, while asking for more taxes.

There is one other option, however. This is exports. It’s as if you took all your belongings and had one big garage sale (or sold them on eBay or Amazon), or you decided to sell cakes or become someone’s personal assistant. This, too, is good. Except you discover that all your neighbors and the neighboring towns are going through the crisis as well. This is what the US finds when it tries exporting to Europe, which is going through its own economic turmoil. In other words, the US could try to rely on exports, but other countries are going through a process of debt reduction.

So you can turn to other towns further away. The problem here is that they tend to have much lower incomes than your neighborhood. In fact, what if their income and spending were tied to yours? This isn’t common for people, but more common with countries when they peg their currencies, as China did with the US.

So you could maybe move to a cheaper part of town, or a cheaper town. Except if your potential buyers’ income and spending are tied to yours, this means they can suddenly buy less regardless. In fact, when they are going through hard times, they try to find more ways to raise your income and spending so theirs can go up. In other words, the US could try to have the dollar depreciate, and therefore increase its exports, but America’s second largest trading partner, China, has its currency pegged to the dollar, which means the dollar won’t be cheaper for them. In fact they’ll resist a dollar depreciation. On top of this, when investors worldwide seek a safe base, they buy US treasuries and debt, thereby strengthening the dollar further.

So what do you do? The more you cut back, then less you can invest in your career. You can try to sell your goods or offer your services to neighbors, but they’re going through the same problems you are. Moreover, neighboring towns have their salary and spending levels tied to you and your town, so they suffer when you try to cut back as well. At a certain point you run out of a market to sell goods to, and suddenly your credit card is maxed again. Time to raise the spending limit once more?

As he states: “to think that every single penny earned by every single person working in the UK so far this year has all been spent on paying for the public sector does put matters into perspective.”

Let’s celebrate the first day of the year we actually work for ourselves. As we do this, let’s hope that more people realise how hiking up taxes will only serve to slow down the economy, and will not move us out of debt.

Video by GoRemy

Chris Dillow writes at the Stumbling and Mumbling blog about “The Fairness of 50p” tax rate.  [To be honest I take issue even with the title of this post: “fairness” is not an absolute, and what is fair to one is not fair to all.]

In a nutshell: he is saying that the rich (which he says can mean various things, but which he does not define here) should pay more taxes to the state because it is the state that has made them rich to begin with (I should have warned Ayn Rand fans to brace themselves for that one).

In any case, he presents his argument in 3 main points, and I choose the space of a post, rather than just a comment on his site, to give my own opinion on each. His first point reads:

“1. A high tax is a dividend, paid to the state in return for its investment in the things that made you rich.”

“Even if the state did not educate you”, he says, “chances are it educated your customers”. Although he does not explain why that education is central to these customers purchasing my product, service or labour. And I apologise for sounding sarky, but if I can prove that most my customers were not educated in state schools, may I pay less taxes?

The state also provides peace, in which the economy can flourish. I wonder: without the state are we all crazed animals who feed on each others’ wealth and fear? Did not trade come first, the state second? The state is not detached from peace, of course: it helps maintain peace, more or less effectively. However: we have the same amount of state all over the country, but not the same amount of peace (or safety).

And thirdly within this point: the state helps sustain capitalism. In fact more often then not: when the state gets involved in business corruption and market distortion ensue (automotive bailout, anyone?)

His second point seems to imply that business is corrupt by definition:

“2. The state’s force is a form of countervailing power. Some (many?) of the rich owe their fortune to the fact that they are powerful.”

In other words man is powerful first and rich second, and at that point holds undue influence to extract money from the state. I dare say wealth tends to precede power. Even in politics: wealth helps get you elected. In fact generally the more one grows in wealth, the less he extracts from the state. He will move from state to private health care, send his children to private schools, not depend on public housing, and much more.

In point 3 we look at markets, and so of course we find a negative:

“3. Inequality is a form of market failing.”

This appears premised on the idea that people become rich because of luck or talent, which I presume he associates closely with luck (you are either born with it or not). So this argument can only stand if we deny that wealth can and usually does come from work. Providing a good service, creating a great product, making fruitful decisions: these things generally come from training, work and dedication; not luck.

In any case I find this point moot, as equality is not, nor should be, the goal. Everybody has different desires, different pleasures and different priorities. The goal, to paraphrase Ocean, is that you get out as much as you put in, and you choose how much you put in.

I strongly believe in equality of opportunity as the only desirable equality, and this is achieved by less intervention, not more.

In summary: according to Dillow the state gives us all that is good (governments make you rich!) and the markets all that is bad (inequality is, we presume, bad). The more you have, the more you should contribute towards MPs second houses.

Some states have now tried to have the best of both worlds by requiring that drugs carry an “Unauthorized Substances Stamp”. Yes, the drugs are still illegal, but they require the stamp nonetheless. Admittedly, the lawmakers don’t expect people to apply the stamps to their drugs, but they do hope to be able to receive more in fines if they can claim another crime on top of illegal substances.

To us, this seems very much like double jeopardy since, in essence, drug users are being punished twice for the same crime. Since drug usage is illegal, they could just raise the fines for illegal substance use. Or, of course, they could try legalizing and control its use.

Via article in the Economist, available here.

Here they explain how to see (based on the state in which you reside) if it’s worth investing in stocks or if you should stick to non-taxed investments, like municipal bonds. Remember, the more often you trade, the more often you’re liable to be taxed. Also remember that any deductions you may have (here we’re talking to you rich folks) may be voided if your income comes from untaxed munis rather than stocks. And remember there are many other variables that come into play, each in its own different way depending on your level of diversification and allocation.

In short, it can get complicated. This is why tax advisors and financial consultants are paid what they are. On the other hand, it would have been nice if Businessweek had included a calculator to figure out these allocations, rather than a picture with some generic tax rates. It seems that if you could set up a calculator where people can enter their personal information and states of residence, it could spit out your real return. Then if you play around with the numbers you could figure out the optimal allocation.

If any of you have a knowledge of taxes, we’d love to work with you on this, and we’d be happy to give you full recognition.

Sin taxes, or Pigouvian taxes, are taxes levied on certain goods and activities whose social costs are not reflected merely in the goods or activities themselves. In other words, a cigarette costs money to produce and distribute, which is reflected in the cost. However, an extra tax is levied on it by the government. This tax (at least theoretically) is not levied just to force smokers to quit, but in order to help pay for the social costs, ie. cancer rates for people in the immediate vicinity of smokers. The same argument can be made for alcohol and gambling. It is a stretch to say the same about junk food.

The main premise for this is that people who eat more junk food raise medical and insurance costs for everyone. Although this would seem like more cause for medical insurance reform (Whaddya know?) than anything else, it also is not entirely accurate. Many people eat junk food regularly, yet are in good shape. They may exercise regularly, have a sturdier metabolism, or any other variety of reasons. By the same token, many people may not have visited a fast food parlor in years and still be obese and unhealthy. Of course, if you follow this train of logic (as The Economist mentions) you wind up with a tax on calories, where fat people pay more than thin. It is very unlikely that any politician who values his or her career would promote this. Another problem is that a junk food tax winds up being regressive, since poorer people tend to eat more of it than the rich in the United States.

Our conclusion? A fat tax, like any other tax, can have unintended consequences. Whether junk food is addictive, or obesity is a disease, are all arguments for other forums. We believe these argument should be made and proven before adding more taxes to the populace; the main reason being that we don’t think they will curb obesity at all which, presumably, is our long term goal.

We do not disagree with Nobel Laureates lightly, but here we simply must, for reasons we will mention briefly, but be happy to delve into in more depth if asked to do so. First of all, a Tobin tax is a tax (or fee) on currency across borders. This means that any financial transaction across national borders will be taxed. James Tobin suggested a rate of between 0.1% and 0.25% and, contrary to popular belief, did not advocate any particular use of the profits of this tax.

The main glaring problem is the fact that this will only work if all countries are involved. If the UK, for example, has a Tobin Tax, a trader in New York can decide to buy shares of a company in Paris, Tokyo or Singapore rather than deal with the tax. If all these countries levy Tobin taxes, companies can decide to be traded in Hong Kong, Sydney, Frankfurt, Bahrain, or a host of other cities. Sweden tried a similar tax in the 1980′s that it had to abandon since people simply stopped trading. Of course, even if every country in the world implemented it, there are many other ways of buying stock that avoid the tax (local branches and consultants will start popping up, offering to do exactly this for investors).

Also, a Tobin tax will dry up liquidity. Speculators and traders have garnered a bad reputation in this crisis, not least because they are an easy scapegoat, but these are precisely the investors that help plug in gaps, that maintain the trading of shares and that can arbitrage price discrepancies. Getting rid of them for the fact that they don’t make markets run smoothly all the time is like outlawing airbags because they can hurt your nose upon impact. It’s missing the point and sidestepping the cause.

We should remember that this last crisis was sparked by the Housing bubble, which had very little to do with either speculators or with international transactions. A Tobin tax would not have prevented this bubble and, once it occurred, it would have then made it harder for any positive changes to take place. James Tobin himself said that a Tobin tax is not feasible. Joseph Stiglitz seems to think otherwise. We think he’s only human, and getting caught up in the ‘post-financial meltdown blame-game’.