Tag: government

Cracking Down on Online Gambling Is Wasteful

In an apparent crackdown on online gambling, the US government froze $30m in online gambling winnings of around 27,000 people.  In the past, the government had only gone after gambling processors and betting companies.  Some how, legislation banning online gambling was attached to the Patriot Act following 9/11, forcing all of the online gambling sites to go offshore, mostly to Costa Rica and the Carribbean.  In 2003, PayPal had to pay a fine to the government for processing online gambling payments.  Since 2006, the US has been arresting online gambling executives if they come to the US.  These laws and crackdowns have not stopped online gambling.  In fact, online poker and sports betting has grown dramatically in spite of the legislation banning gambling.

Online gambling has grown into an even more shady industry as the payment processors and site opporatores have been forced into the shadows.  There have been numerous cases of payment processors simply walking away from their obligations and stealing gamblers’ money.  There are also questions about whether pokers sites are fair and whether the sites can be hacked.  In the most publicized case, someone was able to hack into a poker site to see everyone’s cards and win at unprecedented rates.  Players guessed it could have been the site itself or an employee, but they could not prove it.

Online gambling is one of the Internet’s biggest growth industries.  Its a huge waste of resources to go after this industry that has a clear demand in the US.  If the US legalized online gaming, it would be able to tax the $9-12 billion dollars per year that the companies make, plus the government would be able to collect taxes on gambling winnings that are not reported right now.

Opponents of online gambling say that gambling is addictive and its easier to become addicted and spend too much money if its as easy as inputting your credit card information.  They say that gambling is wrong and immoral.  If gambling were legal in the US, the government could regulate how much and how often a customer puts money into gaming websites.  They could also regulate the payment processors and gaming websites to make sure that they are fair and not in the hands of shady characters and criminals.  In the beginning Las Vegas was run by the Mafia and other unsavory characters.  Online gaming is at the same stage right now.  The US should legalize online gaming, regulate it and tax it.  It would bring needed revenue to the government at a time we are running record deficits.

Is GM’s Failure a Forerunner of America’s Problems?

“I think it is important to recognize that General Motors is a canary in this country’s economic coal mine; a forerunner for what’s to come for the broader economy. Their mistakes have resembled this nation’s mistakes; their problems will be our future problems. If the U.S. and General Motors have similar flaws and indeed symbiotic fates, they appear to be conjoined primarily by the un-competitiveness of their existing labor cost structures and the onerous burden of their future healthcare and pension liabilities. Perhaps the most significant comparison between GM and the U.S. economy lies in the recognition of enormous unfunded liabilities in healthcare and pensions. Reportedly $1,500 of every GM car sold in the dealer showrooms goes to pay for current and future health benefits of existing and retired workers, a sum totaling nearly $60 billion. The total future healthcare liability for all U.S. citizens can be measured in the tens of trillions.”  –   Bill Gross, PIMCO

Bill Gross is the manager of PIMCO, the world’s largest bond fund, and made a bunch of money predicting the collapse of US housing.  This means that when he speaks, lots of people pay attention.  In a recent interview with Bloomberg, he predicts, among other things, that the dollar is in trouble and that Americans’ standard of living is probably going to fall, much like I did in a previous post, but the quote above really caught my attention.

Gross’ comparison of GM’s problems to the problem’s facing the US is spot on.  GM’s business plan called for new workers to pay for the retirement and health care of old workers.  This plan worked while GM was producing quality cars and growing, but once GM began to lose market share, it became impossible for the company to sustain itself without major changes.  GM did not change fast enough, leading to its bankruptcy.

Social Security and Medicare work the exact same way, but on a much larger scale.  Current workers pay in to support workers who have retired.  It worked when both the population and economy were growing, but it will stop working sometime in our lifetime.

If this comparison is correct, can we learn from GM’s unwillingness to change, which ultimately led to its bankruptcy?  I think we can.  There is still time to fix Social Security and Medicare, but our government has not done much to solve these problems lately.  It seems to me that the US is burying its head in the sand, just like GM did.  We cannot afford to continue down this path.  It will take huge change to fix these problems, but we must act now before its too late and the US government goes bankrupt, just like GM did, because nobody will step up to bail out the USA.

America Doesn’t Plan for the Future

The other disturbing trend has been building slowly since the 1980s.  It is a “dumb as we wanna be” mood that has overtaken our political elite, a mood that says we can indulge in petty red state-blue state cat fights for as long as we want and can postpone shoring up our health care system and our crumbling infrastructure, postpone addressing immigration reform, postpone fixing Social Security and Medicare, and postpone dealing comprehensively with our energy excesses and insecurity indefenitely.  The prevailing attitude on so many key issues in Washington today is “we’ll get to it when we feel like getting to it and it will never catch up to us, because we’re America.”    

–    Thomas Friedman, Hot, Flat and Crowded

I was rereading the beginning of Hot, Flat and Crowded today when this passage caught my attention.  It summed up my feelings about our government for awhile now, but even more so now since the financial crisis.  Our government is simply not planning for the future and I’m not sure what we can really do about it.

Government has done little, or nothing, to address energy independence, social security, a sprawling, complex tax code, healthcare, infrastructure, over crowded prisons, underachieving school and job creation.  Instead, government has focused on abortion, illegal drugs, same sex marriage, online sports gambling, online poker, steroids in baseball and short term fixes to America’s major problems.

Both parties, and the system as a whole, are to blame.  First, gerrymandering has robbed America of many competitive election fights, leading to more partisan politicians getting into office, at the expense of moderates who would be more willing to compromise.  Second, the political class has to raise money to continue to be elected.  With the rise of lobbyists, our elected officials face an ever increasing temptation to accept contributions in exchange for influence.  The constant election cycle hurts our political process.  Third, it seems fewer smart people are going into politics.  When the founding fathers were writing the constitution, they were some of the smartest people in the world.  The founding fathers would be ashamed to be compared to today’s political class.  Fourth, the constant campaigning and fundraising pushes elected officials to work on “flavor of the month” and divisive projects, rather than working toward large, long term goals.  Lawmakers who work toward big goals may be thrown out of office by their constituents for not being liberal or conservative enough (ie, working across the aisle on a big issue). 

Its gotten so bad that I wouldn’t trust 95% of politicians, Republican or Democrat, to run a gas station for two years, much less our entire government.  The “dumb as we wanna be attitude” is a symptom of the disease I outlined above.  American politicians think in 2-6 year time frames.  The major problems facing America today cannot be dealt with that quickly.  They require multi-decade approaches that combine government, private business and ordinary citizens.

An example of the dumb as we wanna be attitude is the government’s response to the financial crisis.  The financial crisis was caused by excess leverage by banks, homeowners and consumers.  People were living beyond their means.  The government’s response (both Bush and Obama)?  Start the printing presses and borrow more money.  We are simply exchanging one form of leverage for another.  As I wrote a month ago, I am worried about the US dollar and America’s standard of living.  I believe that our short term approach to avoid any further pain will only worsen the pain in the future.  It does not make logical sense for our government to do what it is doing, expect to make sure that it gets elected again.  We are being as dumb as we wanna be.

An item becomes less valuable as it becomes available in greater quantities, no matter what the item is.  This statement holds true for dollars, just as it does for doughnuts.  It is not logical to think that the US can simply print its way out of massive debts, yet that is the path that the US in on.  I believe we are on that path because its the easy road and the politicians want to make sure they continue to be elected. 

Contrast America’s approach over the last two decades to that of China.  The Chinese government, unlike their American counterpart, thinks in terms of decades, not single years.  For example, in the 1990s, Deng Xiopeng set a goal to make China the leading producer of rare earth metals, the valuable metals used in most high tech products including solar panels, microchips, high capacity batteries and many more.  In 2009, China succeeded.  It now controls 95% of the world’s supply of these valuable metals and have imposed strict export quotas so that industry is forced to move to China.  This is not to say that we should follow the Chinese model, as the ends do not always justify the means, but I believe we can learn a lot of China.  They have lived within their means, saved money and invested it wisely.  China is being rewarded for it now, while the US is being punished.

I’m not really sure what we can do to get our politicians to focus on the big, multi-decade projects that are important to our country’s future.  The only thing I can think of is to educate the voters and demand action on big projects, rather than quick fixes.  Reward congressmen for spending 2 years on fixing social security, not sending pork barrel projects home to the districts.  We are America, but the world is catching up.  I fear they will have caught up because we are falling at the same time they are rising, not because they are rising faster than we are.  I wish there was an easy button, but sadly, there isn’t.  What do you think?

FICA Tax Holiday Will Allow More Businesses To Succeed

Note: This is the second in a series of posts about policy changes that make starting a business easier.  The first post on heath care is here.

According to the US Department of Labor, there are a little over 1 million new businesses created in the US each year.   The popular misconception is that 90% fail within five years.  Although real data only show that at least 25% fail within the first year and at least 44% fail within the first three, that percentage is still very high.  Looking at real numbers, over 250,000 firms go out of business within one year.

Businesses fail for many reasons.  The market may change or a competitor could enter the market.  It could be a bad business idea.  The founder might decide to do something else or not have the time or make the necessary committment.  The business may have poor access to credit or funding.  Margins could be too small or the owner cannot make enough to live comfortably. 

Most startups are taxed by FICA (Social Security and Medicade) at a 15% rate on any net profit they earn.  FICA taxes cost small businesses and startups over 15% of net profits, as business owners have to pay both the employer and employee sides of the contribution.  Unlike the progressive income tax, FICA taxes start at $400 of income and end at a little over $100,000, making FICA a very regressive tax.

The 15% FICA contribution is a huge obstacle for new businesses.  For example, take a person who starts a dry cleaning business that makes $30,000 in net profits in year 1.  The founder has to make enough money to reinvest in the business and pay themselves a salary in order for them to stay in business.   The founder owes around $4,500 in FICA taxes.  Instead of taking home $30,000, less income taxes, the owner takes home $25,500.  For many people, $4,500 can be the difference between keeping the business open for year 2 or closing the business.  The same thing can happen to tech startups, too.  Many small businesses and startups need that little extra push to get them over the hump in the first three years.

I propose a FICA tax holiday for new businesses.  Here’s how it would work:

For the first two years, new businesses do not have to pay FICA taxes.  Instead, their FICA tax liability is “banked” and becomes due in year three, assuming the business is still around.  If the business fails, the founder would not have to pay FICA, but if the business succeeded, the founder would have to pay the FICA taxes from years 1 and 2.  Going forward, the business would pay their taxes normally.  

This plan is very similar to what many professionals like lawyers, accountants and others do with startups that they work with.  For example, its common (at least in Madison) for lawyers to agree to withhold bills for a year or two, or until the company is profitable or raises money.  It allows the startup to worry about business operations and not drown under expenses during the startup period.  If the business becomes profitable, the lawyers get their fees in full, plus more fees in the future.  

FICA taxes would work the same way.  Imagine if instead of 25% of businesses failing in year 1, only 24% failed.  Considering Americans start over 1 million new businesses per year, a 1% drop in the failure rate would lead to 10,000 new businesses making it into year 2.  These businesses would continue to generate profits and create jobs, thereby strengthening the economy.  If more business succeed, the FICA taxes that the government could collect in year three would be greater than the current solution.

I think a plan like this is politically feasible, as it helps both tech startups and small businesses alike, especially with the need to for stimulus during the current recession.  I think it could have broad support from both sides of the aisle nationally, but it may be too big for Congress to act nationally.  It would be interesting if a state would offer a plan like this that offered rebates on FICA taxes for businesses located in the state.  It would be another incentive to get business to stay or move to the state that would not cost much.  I am hopeful that government will think about incentives like this plan to help entrepreneurs of all types succeed.