Why higher taxes benefit the wealthy

The economic landscape seems pretty clear. The great divide.

a. On the one hand, the wealthy citizen abhors higher taxes, even taxes which are raised to address the increasing Federal and state budget deficits. After all, they worked hard for their money. Why should they sacrifice their gains to help others.

b. On the other hand, we have representatives in the Senate and House of representatives and various other spokespersons for the common man and woman. These voices reason that the wealthy have gained the most so they should be most willing to sacrifice some of their wealth for the common good. Who can better afford these sacrifices than the wealthy?

But what is a sustainable solution to this socio-economic puzzle? Certainly we can all agree that the annual budget deficits of $1 trillion dollars ($1,000 billion dollars) cannot continue indefinitely.

I would propose that diminishing this annual deficit, even if achieved by increased taxes will benefit both those of considerable wealth as well as those of modest income. And here is why.

The mere idea that this annual deficit will diminish is likely to have a massive, positive impact on the economy and the financial markets that reflect economic well-being.  And the wealthy stand to benefit significantly from the growth in both the economy and the markets.

I submit that the benefit of increased income of the wealthy will outweigh the sacrifice that they endure through increased taxes. Consider the following example: Row

Row

 Year 1

 Year 2

 Year 3

1

Annual income

 $ 250,000

 $ 300,000

 $ 400,000

2

Incremental tax on investment gains from year 1

 $ 10,000

 $ 30,000

3

Annual taxes

 $ 74,500

 $ 84,500

 $ 104,500

4

Tax as a % of total income

 0.30

 0.28

 0.26

 

5

Gain over year 1

 $ 50,000

 $ 100,000

6

Tax increase over year 1

 $ 10,000

 $ 30,000

 

7

Net change over year 1

 $ 40,000

 $ 70,000

In this example, in row 1, the wealthy taxpayer experiences a significant increase in capital gains from investments as a result of the lower budget deficit.

In row 2 we see that the taxes increase as well, but not nearly as much as the gains.

But as rows 5, 6, and 7 show, the increase in taxes is far less than the increase in income resulting in a substantial net benefit to the wealthy taxpayer.

This example illustrates that if the increase in taxes will result in a lower Federal deficit, then the wealthy taxpayer actually derives a net benefit from higher taxes.

This puts the wealthy taxpayer and the modest taxpayer on the same side of the increased tax argument.

A reduced Federal deficit, even at the expense of higher taxes,  benefits the wealthy earner and the moderate earner alike.

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Why improve the business process?

Over 40 years of work in the business community with an emphasis on business process improvement has given me two important insights:

a. No type of automation or business improvement will occur without the active participation of motivated, creative, imaginative  individuals.

b. These same people  abhor change because change is disorienting.  Change takes us out of our instinctive frame of mind  and requires us to think about what we are doing and why we are doing it.  It also requires us to imagine how our proposed changes will impact others.

Let’s identify the top 11 reasons that continual business process improvement makes sense and is, in fact, a vital part of a dynamic and successful business enterprise. In the spirit of a famous television comedian, we start with reason number 11 and work our way up to reason 1.

–  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –  –

11. You can design your work flow for maximum efficiency.  For example, say a standardized, packaged software solution requires you to go to 5 screens and make 8 clicks to accomplish a particular objective.  If this is something you do often, you can design the system to streamline the activity.  How about one or two clicks to get the job done.

10.  Many of us use two or more software solutions in our daily work.  Often, these solutions require duplication of effort.  They require you to enter information two or more times.    If this is true, it is worthwhile to think about an interface between the two existing solutions.

9.  You and your staff have entered a vast amount of data, often as a by-product of your routine activities.  What is the best way to make use of this data?  How about data mining.  Determine what information can help you make better decisions.  Then go about extracting and working with this data.

8. Sometimes you see all the information you need, but it is not presented in the right sequence.  You cannot, in effect, see the forest for the trees.  Think about whether a different presentation of this information can help you see trends and patterns more clearly.

7. Systems can perform calculations that it would be impossible to do manually.  Some kinds of calculations are not just voluminous, they are hard to do.  Let’s instruct the computer to perform the calculations for us.  Great examples of this are  rate of return calculations, regressions, valuations, or any other types of performance measurement or trend analysis.

6. Another reason to automate the business process is to prevent operational error.  Some procedures in your office involve many steps, either manual or automated.  Let’s automate these steps to save time and to minimize the likelihood of operational error.  Chances are, if your staff needs to perform several steps to accomplish a task, on occasion some those steps will be omitted.

5. A sound business process will provide audit trails for any information that you enter or change.  At all times, you should be able to drill down on a specific number and see all the activity or transactions that have contributed to that number.

4. The key to productivity improvement is delegation.  You need to delegate tasks to your staff so that they will learn and you will be freed up to envision new and better ways to accomplish tasks or use information.  If, for example, you use spreadsheets as the basis of your business process, your staff can help you out, but there is a very high likelihood that they will make mistakes.  And it may take you longer to review their work and find their mistakes than it would take for you to do the work yourself.

3.  We should continually review our business process as it impacts employees, customers, and third parties.  How can we deliver information through the internet to improve the timeliness and reduce the cost of communication.

2.  Of course, use of the internet as a communication tool is a two-way street.  We can also use the internet as a data capture tool.  We can have our customers and clients do our data entry work for us.  As Chase Bank, Lands End, and American Airlines have discovered, our customers are also our data entry clerks.

1. What do all of these business process improvement ideas have in common?  They enable us to elevate ourselves from the operational morass and help to keep our mind clear of minutia.  Let the computer and the process handle that.  We are now free to focus on the creative aspects of our job.  The ultimate business process is one in which we arrive at work each day, turn on our computer, and it tells us what tasks need to be performed today.

No-SQL. The topography of a database

In our previous BLOG on No-SQL databases, we focused on Big Data.  We explored the idea that because of the enormous size of the underlying data, our former notions of data efficiency and order no longer apply.  Rather than spread related data across numerous, normalized tables, we strive to keep related data together.  In doing so, we greatly simplify the task of retrieving and storing data.  When we need it, the data is stored in one complex record in one table.  One read and we have it.

But in simplifying the retrieval and storage of data, we create complexity of another kind.  How do we keep track of data that we formerly parsed out with logical precision to individual tables?

  • Customers can place many orders.
  • The orders can contain many line items.
  • The line items can, in turn represent many products.
  • There are invoices to be sent out
  • Backorders to be dealth with, and
  • payments to be received.

How do we propose to store all of this data in one record? In answering this question, we find that our data takes on an unusual shape or topography.  Each”record” is no longer flat like Kansas.  On the contrary, it has contours, shapes, and texture, like Colorado.

We find that each of our data records are lumpy.  They accommodate all the data necessary to describe the underlying business or information problem.

In No-SQL, tThe records and tables are so different, in fact, that when we refer to them we must use different terms.  We refer to collections rather than tables because the structure of the collections are diverse enough to accommodate many different aspects of one data problem.  And we refer to documents rather than records because a record implies structural uniformity rather than the diversity of information that the No-SQL database can accommodate.

But do not confuse No-SQL documents with a word document or other kind of unstructured computer text files.  These are highly-structured data-rich groupings of information designed expressly to accommodate our high performance data storage and retrieval needs.

In attempting to understand the benefits of No-SQL, we can find a helpful analogy in physics where the conceptual transition from Newtonian physics to Einsteinian physics comes to mind.  In Einsteinian physics, space is no longer Euclidean.  It becomes curved.  And time is no longer purely fixed intervals, it behaves differently depending on the relative speed of the objects in question.

Similarly, in No-SQL we no longer think of documents (formerly records) as uniform in length or field count.  Documents can contain a variety of related information that is stored together to describe our business problem or data problem.

We refer to the topography of the documents (the diverse shape of the records)  in a No-SQL database.  Understanding this topography and knowing that it is dynamic and can be changed over time with relative ease is a powerful concept indeed.

No-SQL. When our logical assumptions become illogical

SQL or Structured Query language has been the prevailing mode of database organization for over 40 years. The fundamental concepts that form the basis of SQL were introduced in the early 1970’s.  And fifteen years later, in the mid 1980’s standards were introduced that enforced uniformity for all SQL database solutions from a wide variety of the most respected and pervasive software vendors in the industry:  IBM, Oracle and Microsoft to name the most prominent.  What more could we ask for?

  • an overwhelmingly logical database structure,
  • accepted by the leaders of our industry,
  • with standard that promote uniformity and compliance across commercial software products.

But beginning in 2006 and more recently, we find two forces emerging that are challenging the leadership, acceptance and viability of  SQL.

The first emerging force is “big data”.  We are beginning to see databases of 500 billion or more records.  These databases span disk storage devices and even span computers themselves.  For the past 40 years, it was reasonable in traditional SQL to make logical connections between related data sets.  For example:

  • An order and the underlying order items are related.
  • The customer and customer payments are related.

But the tables in our databases are beginning to take on sizes that exceed our wildest imagination.  And while the task of joining or connecting these “related” tables seems logically sensible, the practical task of doing so for immense data tables is no longer feasible.

Faced with this dilemma, we begin to question the logical purity of SQL and revisit the most fundamental of our data organization questions and assumptions.  Rather than continually splintering and reassembling the components of a logical data record when needed, why don’t we simply store all related information in one record.

We are finding that the very cornerstone and foundation of database logic is being turned on its head.  As is frequently the case, once we challenge our most fundamental assumptions, absent this foundation, elated ideas also begin to give way.  Things that were previously difficult now become easy.  But the contrary is also true.  Those things which were easy with SQL become more difficult.

In subsequent blogs, we will construct a new logical vision.  We will explore these logical issues, the benefits and costs, as we leave the accepted real of SQL and enter the world of No-SQL.

When the price of oil decreases, what happens to the price of gasoline?

We turn on the morning news and learn that the price of a barrel of oil has reached a 6 month high, or a 6 month low, or has not changed at all.

But what is the impact of these oil price changes on the price of gasoline at our local Exxon station?  One would think that the two prices should move in parallel.  But is that really the case?

The table below illustrates how the price of a barrel oil has changed over the past 8 years.  Alongside the change in oil prices, we see the change in gasoline prices.

Year

 (A)

 

 Gal of gas (B)

Barrel

of oil (C )

Ratio (D)

 

Price of  gas

should be (E)

we overpaid (underpaid) (F)

2005

 2.75

66

  24

   2.54

    0.21

2006

 2.76

43

  16

   1.65

    1.11

2007

 2.76

89

  32

   3.42

    (0.66)

2008

 3.91

146

  37

   5.62

    (1.71)

2009

 2.70

66

  24

   2.54

    0.16

2010

 2.76

78

  28

   3.00

    (0.24)

2011

 3.33

80

  24

   3.08

    0.25

2012

 3.34

77

  23

   2.96

    0.38

Column B above indicates the price of a gallon of gas.

Column C indicates the price of a barrel of oil.

Column D shows the ratio between the two.  In 2006, a barrel of oil was 16 times that of a gallon of gasoline.  Two years later, this ratio was 37.

Based on an average ratio of 26, column E shows what a price of a gallon of gasoline should have cost, if the relationship between oil and gasoline were constant.

Finally, in column F, we see how much we overpaid or underpaid at the gas pump.  At the moment, we are being overcharged by 38 cents for each gallon of gas that we buy.

The levers of politics : Fear and Greed

Many of us are shocked by the degree of polarization that prevails in contemporary politics.

We are excoriated from the right about our moral turpitude and our profligate spending.  We are harangued from the left about our insensitivity to the plight of the disadvantaged and the inordinate benefits that accrue to the wealthy.

But while those on the extreme right and extreme left make the most noise, these are not the groups that will ultimately determine our political future.  Rather, our political future will be actualized by those who reside in the middle, the fat part of the bell curve. We are speaking, of course, about the vast undecided majority that occupies the middle of our political spectrum.

And which way will this middle of the spectrum decide?

We have suffered and continue to suffer from a faltering economy.  Business seems to course through the veins of our economy as does blood through the veins of a patient suffering from chronic low blood pressure.  There is economic activity, but with little or no conviction.

Given this environment, the health and strength of the economy will surely influence the election.  And as with all things economic, our political leaders turn to those reliable levers of control — fear and greed.

Those on top of the economic heap strive to convince the vast middle that they aspire to be wealthier.  That we are all alike in this regard.  Stick with us and you will be wealthy too.  This group, in effect, appeals to the greed in each of us.

Then there are those who claim to represent our fellow citizens on the bottom of the economic heap.  These leaders send out a different message altogether.  They caution that the real danger in our economic future lies in the failure of the economy to sustain the old, the sick and the less well-educated.  We are all alike in this regard, they admonish.  Our neighbor has become the victim of economic indifference.  The next victim will be one of us. The appeal of  this group is directed to the intrinsic fear in each of us.

From a distance, it appears that we are engaged in  a gigantic game of tug-of-war, with 350 million participants.  Which of our fundamental impulses will hold sway.

Do we associate   with the upper class, driven by Greed to better our lot.

Or do we associate with the underclass, governed by fear that the wheels will fall off our listless  economy and we all wind up in the underclass.

In politics, like economics,  fear and greed are the master controls.

Why government savings are just pennies on the dollar

Our federal budget deficit is $1,000 billion dollars each year, year in and year out, as far as the eye can see.  This is an annuity in reverse, every year, on into the future.  After five years, we will have accumulated $5,000 billion of debt.  After 10 years, $10,000 billion of debt.  You get the picture.

So what is the federal government doing about this?  They are looking for ways to reduce spending.  But here is the curious part.  When they find a suitable candidate for expense reduction, they always multiply the savings by 10 and call it a savings over 10 years.  As in a $250 billion reduction in educational expenses over 10 years.  And when we hear of their accomplishment, we are so excited about the $250 billion number that we fail to pay attention.  We never see or hear the part about over 10 years.

And it sounds like a pretty good effort. After all, we are saving $250 billon compared to a deficit of $1,000 billion.  It feels like we are taking a solid chunk out of our annual deficit.

But are we really?   Closer reading, and listening, reveals a painful truth.  The $250 billion in savings is spread over10 years.  In actuality, we are saving only $25 billion each year. 

In other words we are not reducing our annual deficit by 25%.  No, we are reducing it by a mere 2.5%.

And this, after all, is just pennies on the dollar.