Author: philg

Howard Dean complains that recent Federal tax cuts primarily benefit the richest 2 percent of Americans.  This sounds unfair and unreasonable unless you ask the question whether it makes sense to tax rich people at all.

Consider John Richman.  He works as the CEO of a public company and earns $20 million per year.  Suppose that a greedy state government such as New York tries to tax Mr. Richman.  As part of his job, John is entitled to unlimited free travel on the fleet of corporate jets and with $20 million/year in income a person can easily afford 6 houses.  John has the corporation buy a penthouse triplex in Manhattan that he can use a few days every week but he tries to spend as much as time possible in his beach house in Florida and on his ranch in Wyoming.  When tax time rolls around John declares his residence to be in one of these two states, both of which lack any kind of income tax.

When John shops for Impressionist paintings, yachts, and collectible Ferraris, you can be sure that he is smart enough to have it all delivered to one of his homes in a state free of sales tax.  As long as there is one state in the union without a sales tax, it is impossible to collect sales tax from John for 99% of the stuff that he buys.

Suppose that the federal government tries to put a heavy tax on John’s $20 mil annual income.  John has a lot of flexibility about how he brings his money home.  He can elect to put it into a deferred compensation account so that it won’t be taxed for many years to come.  He can give himself stock options and then take the money out later when the market has risen a bit, thus converting current income to long-term capital gains, taxed at a maximum rate of 20 percent.

Suppose that John accumulates a lot of wealth during his term as CEO.  If the American authorities get really aggressive about taxing it he can afford to hire lawyers and accountants to shield his wealth from taxation.  If worst comes to worst he might put it into a tax-exempt Virgin Islands business or possibly move his wealth altogether out of the United States.  John is presumably retired by this point, in possession of $200 million in wealth.  He doesn’t need to remain in the U.S. in order to work.

By contrast let’s consider Jane Rabblewoman.  She works as a Walmart cashier and shops at Walmart.  Jane doesn’t have enough money to maintain multiple houses.  If she were to move away from her high-tax state she’d not have enough money to afford airplane tickets to travel back to see her friends and family.  Jane’s income is a sitting duck for state tax authorities and it doesn’t really matter how low taxes are in some other far-away state.

Because Jane doesn’t have a second home and a private jet she does most of her shopping locally and thus pays sales tax on the majority of her purchases.

As a point of political rhetoric it makes sense to talk about how the rich should pay tax.  But as a practical matter it seems virtually impossible to collect tax from the rich, except perhaps for property tax.  Could it be that George W. Bush cuts taxes for the rich not because has so many rich friends but rather because he recognizes the impracticality of actually collecting?

[Note that the idea of taxing what’s easy to tax rather than what is fair isn’t original.  The Europeans have a sales tax that is triple what we’ve got in the U.S. and more broadly applied (they call it Value Added Tax and it is between 16 and 25%).  They put in V.A.T. partly because so many people were cheating on their income tax whereas VAT is easy to collect.]

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Edward Tufte’s Q&A forum contains a very interesting thread linking to an air traffic animation prepared by NASA to show one day of air traffic over the continental U.S.  As long as we’re following the Great Man, it is worth linking to an online version of his article in the September WIRED magazine.  Much better to get the full essay (available from www.edwardtufte.com), of course, but this one is just a mouse click away…

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Just back from an overnight party in what Manhattanites would call “the country” (a two-hour drive up the Hudson River)…  New Yorkers are definitely different from the backward academics here in Cambridge.  Lots of guys at the party were classic late 1980s “masters of the universe” Wall Streeters, drinking single-malt Scotch and smoking cigars.  An 11-year-old boy, who attends an expensive private school in Manhattan, responded to the standard “What do you want to be when you grow up?” question with “I want to be an investment banker.”

Managing other folks’ money and taking 2% off the top every year sounds great but there is a dark underside.  One mother noted “I wish that we never had to go back to the City.  Every day that I’m in Manhattan I’m reminded that there are millions of Muslims out there trying to blow us up.  Three of the parents in my kids’ school were killed in the World Trade Center.”

[A fellow who puts money into new insurance companies (where they expect to earn a 15% annual return!) noted that September 11th cost insurers $50 billion, making it the most expensive loss in the history of the industry.]

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Over breakfast at Hi-Rise Bakery in Harvard Square, I read the Wall Street Journal for the first time in many months.  Here’s what I learned…

International business is all about Asia these day, especially China.  New product ideas come from Japan.  New manufacturing plants are built in China.  Europe is mentioned only as a troublesome complainer in World Trade Organization talks, trying to prevent American, Canadian, and Australian firms from labeling wine as “Chablis” or cheese as “Roquefort”.

The editorial page has some really thoughtful witers, notably a former NASA employee saying that the Shuttle is NASA’s Vietnam.  It will never work because the reusable rocket idea is flawed, Homer Hickam notes, and the Shuttle is parked in the middle of a bunch of explosive rocketry rather than safely perched on top of all the nasty stuff.  “Simply put, had that spaceplane been on top of the stack, the destruction of Challenger and Columbia wouldn’t have occurred.”  He advocates replacing the Shuttle with expendable launchers and a new spaceplane.

The rest of the editorial page is devoted to right-wing gloating.  There is an article on how high-tax Democrat-controlled states such as California, Massachusetts, and New York lost population between 1995 and 2000 to Republican-controlled low-tax states such as Arizona, Nevada, Florida, the Carolinas, and Texas.  One reason cited for this migration is the high cost of housing in places such as LA or NYC.  But the author doesn’t explain why, if LA and NYC suck so badly, people are willing to pay $1 million for a tiny residence there…

A reader writes from Rhode Island to attack Howard Dean, a Democratic Party presidential candidate who proposes increased taxes and more ridistribution of income.  The reader, C. Dale Reis, notes that his parents could afford to support a family on a single income because taxes were low back around 1950.  Today, because taxes are so much higher, it takes two incomes to generate a middle-class lifestyle.

Our political system has turned the house and car every few years that my laborer father could afford into transfer payments from his bank account to the social system set up to buy votes for the politicians.  And what the middle class has gotten in return is the breakup of the traditional family and the resulting decline of our moral values.

Mr. Dean professes to care about “the children.” But it has been the increase in taxes over the past generation that has spawned latch-key suburban children, urban gangs, and overly aggressive toddlers coming out of day care.

One of the main editorials is about the latest statistics on SAT scores.  It seems that the black-white gap has grown quite a bit over the past 10 years.  A typical black student will score 206 points lower than a typical white student on the SATs.  Public schools are blamed, of course, with the suggestion that vouchers and school choice are the answer.  A study is cited where the conclusion is that “students who have roughly equal skills and knowledge will have roughly equal earnings”.  At first glance this seems reasonable.  You can’t cheat the marketplace forever, no matter how many layers of racial preferences are imposed by society.  On the other hand, look at all the business executives who earn fat salaries while remaining ignorant of all things related to making products, accounting, and other skills that were traditionally associated with managing a business.  If Carly Fiorina can rise to the top of HP, why can’t a black man get paid a fat salary despite a low level of knowledge and skill?  [One simple comprehensive explanation that the Journal does not consider is whether the racial quotas in colleges and graduate schools has something to do with it.  Why bother to study for standardized tests if you know that the color of your skin will guarantee you a spot in the college of your choice?]

Shifting over to the New York Times there is a fun article on Richard A. Grasso, the head of the New York Stock Exchange.  The Exchange itself doesn’t make that much in profit, only $28 million last year.  Grasso, however, decided to help himself to $12 million in annual salary, nearly half of the entire enterprise’s profits, and $140 million extra in “deferred savings and retirement benefits”.  The extra $140 mil, equivalent to about 5 years of profits for the NYSE, is held in a special account on which he is guaranteed at least an 8% annual return, risk-free.  That’s 10 times the interest rate that investors in money-market accounts are getting.

That’s all the news for today…

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Arrived back home in Cambridge, which gives me an opportunity to return the hated iPaq PocketPC to the much-loved Andrew (thanks!).  A printed-out list of addresses from Outlook would be far preferable to a device with only a few days of battery life (3 minutes per day of usage) and no battery level indicator.  My Handspring Treo with its broken door hinge was sitting on my desk.  It had been there unattended for one month.  The LCD screen was painted with an event reminder.  I touched “OK” and a series of other events came up.  The Treo had held its power for more than one month!

[One of my readers knows some of the folks at Handspring who are apparently taking pity on me and probably sending out a replacement Treo so I may not have to resort to pen and paper for too long.]

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A recent AP story talks about the increasing number of children dying after being left in sealed cars by mistake.  As a society we have 99% of the infrastructure necessary to prevent this.  Most newer cars have an alarm system and automatic climate control.  The alarm system implies a vibration sensor, a microphone (for glass breakage), and a little computer that is up and running all the time.  The automatic climate control implies an interior thermometer.

With a bit of programming the car can recognize that (a) someone is inside the car making noise and moving around a bit, and (b) that the temperature is climbing to an unsafe level (or getting too cold in the winter).  Now what?  If we had a wireless Internet for the price of $3 in chips the car would be able to send an instant message to the owner and the local police to come back and check the car.  (Of course you could do this now if you wanted to buy a $300/year cell phone subscription for the car, which is essentially what the GM OnStar system does, but most people wouldn’t be willing to pay the extra $300/year for something with such a low probability of ever being used.  Hence the need for a better national infrastructure.)

In an age where we spend infinite money and effort on high-tech cures that save a few lives it is a shame to see kids dying for want of a few lines of software and a $50 802.11 base station.

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We like to think that ours is a world where, for the first time, technological innovation in one corner of the globe can have repercussions many thousands of miles away.  Historians would beg to differ.  From The Prize:

“The local pearling trade had been Kuwait’s number-one industry and principal source of foreign earnings.  Whether or not he knew the name, Sheikh Ahmad [the owner of Kuwait at the time] had good reason to be intensely annoyed with a Japanese noodle vendor from Miye prefecture, one Kokichi Mikimoto, who had become obsessed with oysters and pearls and had devoted many difficult years to developing the technique for cultivating pearls artificially.  Eventually, Mikimoto’s efforts paid off, and by 1930 large volumes of Japanese cultured pearls were beginning to appear on the world’s jewelry markets, practically destroying the demand for the natural pearls that divers brought up from the waters off Kuwait. Kuwait’s economy was devastated; export earnings plummeted, merchants went bankrupt, boats were laid up onshore, and divers returned to the desert. … The little country faced a number of other economic dificulties [in the early 1930s].  The Great Depression had more generally crippled the economies of Kuwait and the other sheikhdoms. So bad had conditions become that slaveowners along the Arab coast were selling off their African slaves at a loss, to avoid the maintenance costs.”

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Adults have a tough time getting along with each other, especially when they are of opposite sexes and sharing a domicile. Most adults, however, are very happy to live with their children. High-income women in their 30s often put these two facts together and come up with intentional single motherhood. They find a sperm donor, spend nine months producing the baby “in-house”, then hire a nanny or two once the baby arrives.

Why can’t a man be more like a woman? What stops a high-income older man from hiring surrogate mothers to produce kids and an au pair or two to take care of them when he is at work or otherwise unavailable?

In the old days, of course, a mature man was not necessarily precluded from the standard marriage route. Ferdinand de Lesseps, the man behind the Suez Canal, got married at the age of 64. To a woman of 20. They had 12 children. Today, however, except in some Third World countries, a woman of 20 is likely to prefer a young good-looking mate.

One potential obstacle to this approach to single fatherhood is that apparently American courts are not anxious to enforce surrogate motherhood contracts. For example, a woman could decide that she has grown attached to the baby that she has carried to term and elect to keep the baby. That isn’t so bad necessarily. A man could hire 3 surrogate mothers, expecting a yield of 2.2 delivered children. What if one surrogate repudiates the contract to hand over the baby. Can she then sue the father for paternity? Could that mournful situation be prevented if the man purchased donated eggs from one woman and hired an unrelated woman to handle the pregnancy?

And in an age of outsourcing Java coding, something for which many months of training are required, to the Third World, why not outsource surrogate motherhood? Suppose that a man has a budget of $50,000 per child. A smart healthy college-bound woman in the U.S. would probably reject that amount, only slightly more than the cost of one year at a top university. Consider, however, a woman with a good genetic patrimony in a country where the average income was $5,000 per year. Ten years of salary for 9 months of work! A bit of labor (literally) today and enough capital to buy a house and perhaps start a business. Perhaps that $50,000 is beginning to sound attractive. Not to mention all the other advantages of production in a foreign country. Obstetrical care and hospital fees are vastly cheaper in any country other than in the U.S.

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After a month traveling, I’ve concluded that the best way to lose weight is by eating every meal at McDonald’s.

Suppose that you go to a Whole Foods-style supermarket, at which all manner of incredibly delicious gourmet items are for sale. You spend $200 to stock the fridge. But really you ought to eat all the fruits, vegetables, and prepared foods while they are fresh. The result: massive gluttony and weight gain.

Suppose that you go to a reasonably nice restaurant, costing $20-30 per person. The menu will list an incredibly tempting array of food. It all sounds so great that you order an appetizer and a main dish. You have a tough time deciding among the main dishes and you’re sad that you can’t order two. The appetizer is actually big enough that you are beginning to feel full when the main dish comes. The main dish is heroic in size, the kind of feast that Homer describes the heroes at Troy as having consumed. You’re not really all that hungry but you ordered it so you feel like you should eat at least half. The result: massive gluttony and weight gain.

Eat at home or eat at a restaurant. Either way you get fat.

The solution is McDonald’s. If you can remember one piece of medical advice from my brother (“Don’t eat anything a caveman wouldn’t have eaten”), you skip the fries. For a beverage it is unsweetened iced tea or Diet Coke. So far, zero calories. All you need now is a sandwich. The bread isn’t really on the Atkins diet but otherwise a McDonald’s sandwich is vastly smaller and lower in calories than anything you’d get in an upscale restaurant. Best of all, the menu at McDonald’s won’t tempt you into excess. The sandwiches aren’t all that delicious. If you’re really hungry they can taste pretty good but have you ever been sad that you couldn’t order both the Big Mac and the Quarter Pound with Cheese?

Market opportunity: write a book entitled “The McDonald’s Diet” that explains how to lose 5 lbs/week eating only in McDonald’s.

[This is not a completely original idea, of course.  Don Gorske has been at it for 30 years, coincidentally only a few miles from Oshkosh, Wisconsin, the site of the big airplane convention where this idea began to take shape.]

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My hosts here in Omaha, Nebraska have the September 1, 2003 Forbes magazine in their kitchen.  One quote that might amuse you…

There are three roads to ruin:
women, gambling, and technicians.
The most pleasant is with women,
the quickest is with gambling,
but the surest is with technicians.
— Georges Pompidou

(Of course, the French definition of a “technician” is more akin to what we would call a scientist, engineer, or “technologist”.)

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