Thursday's Top 10 with NZ Mint: How Amazon avoids sales taxes; US air traffic controllers unpaid; A generationally balanced budget; Foodstamp nation; Dilbert

Here's my Top 10 links from around the Internet at 2 pm in association with NZ Mint.

I welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

I'll pop the extras into the comment stream. See all previous Top 10s here.

Number 9 on generational budget balances is very interesting...

1. How to avoid paying tax - The Wall St Journal reports here on how Amazon has set a precedent as a web-only retailer that hunts for low tax places to do business and to avoid sales taxes.

This is one of the problems with a move to a cloud economy, particularly for those economies (like ours) that rely on sales taxes.

Consumers and retailers will game the system to hunt the world for arbitrage opportunities.

We're already seeing consumers using their strong New Zealand dollars and the lack of a 15% GST to buy cheap online overseas.

This is a real public issue in Australia and I'm surprised it isn't talked about.

It's one of the reasons why I think the increase in the GST rate to 15% was a bad idea. Click on the graphic below for an interactive graphic showing how Amazon avoids the red states with high taxes.

Here's the WSJ:

Amazon.com Inc., the world's largest online retailer, hasn't charged sales tax in most states since its founding in 1994. And it has taken some extreme measures to keep it that way.

Among them: Staff traveling around the U.S. have been required to first consult a company map that shades each state red, yellow or green, said three people who have worked for the retailer. These people said they needed permission from managers or company lawyers before entering "red" states because a worker's actions might trigger laws that force Amazon to collect taxes in those states.

Such steps to avoid local levies allow Amazon to undercut in-state retailers by the amount they must add in sales tax, which can exceed 8%.
A close examination of Amazon's corporate practices, based on interviews with more than a dozen former employees and people who have done business with the Seattle company, as well as a review of corporate documents, indicates that the company believes its sales-tax policy is critical to its performance.

2. America's debt deal failure - Americans are now working out the debt ceiling deal has solved nothing. It does little to reduce spending and debt in the long run. It does not include any tax hikes. Much of it has yet to actually be agreed. It was a last minute fudge to avoid immediate default but has done nothing to fix America's massive long term fiscal imbalances.

Here's Daryl Jones at Fortune:

In the short term, according to the most recent scoring by the Congressional Budget Office, the impact of this bill is minimal with a mere $21 billion in cuts in fiscal 2012 and $42 billion in cuts in 2013. Last week we called this a Congressional comb-over. That is, while the amount of cuts to the deficit and the amount that the debt ceiling will be extended are roughly equal, they are on two very different time frames. As noted, in the short term, the bill literally does nothing to alleviate the deficit and if the ratings agencies are being intellectually honest, this bill should not meaningfully change the creditworthiness of U.S. government debt.

From a bigger picture perspective, the deficit projections provided by the CBO, which are the basis on which the spending cuts are predicated, are highly questionable based on a number of the embedded economic assumptions, in particular GDP growth. According to the CBO's January 2011 publication, "The Budget and Economic Outlook: Fiscal Years 2011 to 2021":

"All told, if growth of real GDP each year was 0.1 percentage point lower than is assumed in CBO's baseline, annual deficits would be larger by amounts that would climb to $68 billion in 2021. The cumulative deficit for 2011 through 2021 would rise by $310 billion."

In its economic projections, the CBO assumes 2.9% real annualized GDP growth from 2011 to 2021. Interestingly, that is a noted acceleration from the last ten years, which produced an average annual rate of 1.7% real GDP growth. If the next ten years produce comparable growth to the prior ten years, which is reasonable for an economy that is at 90%+ debt-to-GDP, the incremental deficit in that period over the CBO baseline would be $3.7 trillion, upping Rand Paul's $7 trillion figure to a whopping $10.7 trillion in additional deficits added to the U.S. balance sheet through 2021.

3. How the death of unions increased inequality - Josh Harkinson points at Mother Jones to some new research by Harvard Sociology Professor Bruce Western showing that the decline of unions was responsible for a third of the increase in income  inequality.

Western and co-author Jake Rosenfeld, a sociology professor at the University of Washington, looked at the period between 1973 and 2007, when inequality in hourly wages spiked by 40 percent. During that time, union membership for private-sector male workers fell from 34 percent to 8 percent (female workers were never as unionized as their male counterparts). Their paper in the August issue of the America Sociological Review concludes that deunionization's biggest effects on inequality were indirect: 

1) The threat of unionization caused non-unionized employers to raise wages; that threat disappered along with unions.
2) Unions occupied a bully pulpit; knocking them off left the moral case for equality vulnerable to attack. (What do you mean Viacom's CEO isn't worth $85 million?)
3) Workers lost their Washington lobbyists, and with them, any hope of winning political battles for better wages and benefits.

4. Foodstamp nation - Almost 46 million or 15% of all Americans are now on foodstamps. The number spiked in May by more than a million to a record high. Here's HuffPo.

And an excellent chart via Zerohedge:

Digging into the numbers reveals something pecuiliar: virtually the entire surge in monthly SNAP participation is due to one state alone: Alabama, which saw those living on foodstamps jump from 868K to 1.762MM. That's 36% of Alabama's population.

5. Think about this when flying over the US - Thousands of America's air traffic controllers are working without pay because Congress didn't pass some legislation in time.

Here's ProPublica:

After the debt ceiling vote, Congress left for recess without reaching an agreement to extend the operating authority of the FAA, meaning the agency currently doesn't have the authority to collect taxes on ticket sales, which it uses to pay some 4,000 employees' salaries. The lost revenue amounts to about $200 million a week—or more than $1 billion—in lost revenue from the ticket taxes. 

As a result, thousands of workers have been furloughed and may not get paid for days missed. And without FAA officials to oversee airport construction projects, the agency has issued stop-work orders to more than 200 projects across the country, putting an estimated 70,000 private-sector construction workers temporarily out of work as well.

Initial reports suggested that minus the ticket taxes, consumers could reap some savings on air travel—and some may have at first. But some airlines soon changed their minds and raised their prices so tickets now cost about as much as if the tax were still there. In other words, money that would have gone to funding the FAA has gone straight into the pockets of some major U.S. airlines.

6. Now that's an empire - China is looking to break up the rail ministry responsible for the recent high speed crash and all sorts of corruption.

The details of how big this ministry is are astounding. No wonder there's a revolt brewing among China's public over this rail crash.

Here's Bloomberg.

Premier Wen Jiabao has pledged more focus on safety and greater accountability following the July 23 crash that killed 40 people, endangering the Ministry of Railways’ dual grip on regulating and operating China’s trains. Dividing these roles may improve management, financial transparency and safety, said Hu Xingdou, an economics professor at the Beijing Institute of Technology.

“The rail ministry has been run like an independent kingdom for years,” Hu said. “The concentration of power has caused inefficiency and mismanagement, and it’s a hotbed for corruption.”

Sheng Guangzu, who became rail minister in February after his predecessor was removed during a bribery investigation, faces public anger over the accident, ministry ties to suppliers and the burial of a train carriage before rescue work was completed. He’s also wrestling with waning demand for ministry bonds and debts totaling 2.1 trillion yuan ($326 billion), or about 5 percent of gross domestic product.

The department, which employs 2.1 million people and has its own court system, accumulated and retained its powers partly because of a traditional national-defense role, Hu said. The Communist Party has relied on railways to speed troop movements since coming to power, he said.

7. Some sage advice - Beijing based academic economist Michael Pettis has an excellent and informed view on China. He thinks China can avoid a hard landing, but not an ultimate day of reckoning.

Pettis taks first about how China plans to 'grow' its way out of debt by taking on more debt. He thinks it's a bad idea. He's right.

I would argue that we urgently need to see a shift in the economy away from infrastructure, SOEs and real estate towards service industries and SMEs, especially those that are labor intensive. Until we do it is pretty meaningless to talk about a real adjustment in the engines of economic growth.

China has no choice but to adjust, but as long as it is easy to borrow – and I think we have at least four or five more years during which time debt levels can continue rising before we hit crisis levels – the adjustment problem can always be put off a little longer. That is why we are unlikely to get a real sharp slowdown in growth for at least another year or two.

But what to do about rising debt levels? This is the real problem China is facing now, and my biggest concern is that policymakers are buying into the argument that China can “grow out” of the current debt burden, just as it did after the banking crisis of a decade ago. In other words, if we keep investment levels high, we can keep growth high, in which case we can safely ignore the huge pile of debt, just as we were able to ignore the huge pile of NPLs that the banks had accumulated in the 1990s.

Then he explains how China didn't actually grow out of its last debt crisis.

Contrary to popular opinion, China did not grow its way out of the previous debt crisis. What happened was very different. By keeping interests rate incredibly low, China was able to do two things.

First, very low interest rates presented a huge subsidy for borrowers, so it allowed them to borrow and invest in every conceivable project, whether of not it made economic sense. Of course all this investment created growth in the present, but because investment was misallocated, it simply meant that in future years growth would be much lower. To that extent, we didn’t have real growth – we simply overstated current growth rates in exchange for being forced to write the growth off in the future. Over the next few years we are going to pay for that misallocated investment in the form of slower growth. That means that much of the growth that allowed us to “grow” out of the debt problem simply involved pushing the real cost of the debt crisis forward.

Second, very low interest rates effectively created substantial debt forgiveness for the borrowers, so again even with the artificially high growth, China did not “grow out” of its debt. It just wrote most of the debt off, at the expense of course of depositors. This is why consumption collapsed during this period as a share of GDP.

For this reason the idea that we can “grow” out of the debt problem once again by keeping investment high is wrong. First, it would only increase capital misallocation and debt levels, and would require even lower growth in the future. We can’t keep pushing the cost off into the future, as attractive an option as that always seems. Second it would put unbearable pressure on household income and consumption, and so ensure that the one thing China needs above all – a rapid rise in household consumption – is all but impossible.

8. Back where we started soon - Tyler Durden at Zero Hedge cites some fresh US Treasury figures overnight showing a sharp increase in America's debt this month and that the new debt ceiling could even be reached within a month....

Sigh...

The new ceiling is not the $900 billion increase as requested, but only $400 billion more than the $14.294 billion previous, or at $14.694 billion. We hope this is some Treasury type or misunderstanding as this new ceiling will be breached in a month. And the last thing we need is this whole debt ceiling drama back again in September.

One thing there is no confusion about, however, is that based on the latest gross debt number of $14.581 trillion, and the just reported Q2 GDP of $15.003 billion, total US debt to GDP is now a post World War II high of 97.2% (and that excludes the GSE off balance sheet debt).

9. A Generational Balance amendment - There's a lot of talk around about forcing governments to run balanced budgets.

Boston University Professor Lawrence Kotlikoff argues in this Bloomberg piece that governments need to think more about a generational balance target, which means the spenders/borrowers of today don't load up debts on the children of tomorrow.

Sound familiar?

This will be a big theme of the future. How do we manage public finances so tomorrow's taxpayers don't pay for today's consumers...

Here's Kotlikoff

Cutting the deficit by $1 trillion to $2 trillion over 10 years sounds like a big deal, but not when our unfunded Medicare and Social Security liabilities, by my calculations, are growing by more than $4 trillion a year.

Whatever you think of the House Republicans, they understand that our country is broke. But they have no idea how broke. They are pushing hard for a balanced-budget amendment. What we need is not budget balance, but generational balance.

If we are going to amend the Constitution, let’s prohibit today’s adults from leaving tomorrow’s generations with higher lifetime net tax rates. A Generational Balance Amendment would specify that, absent prolonged states of emergency, each generation would pay the same share of its lifetime labor earnings in taxes, net of benefits received.

If we keep raising successive generations’ lifetime net tax rates, we will eventually be hitting up our progeny for every penny they earn, leaving them unable to consume or save. If they can’t save, they can’t invest, which means they won’t be able to maintain -- let alone increase -- the economy’s stock of capital needed to produce goods and services.

The Youngsters have hired some young economists to use generational accounting to examine the lifetime net tax treatment of different cohorts. Their report isn’t pretty. It shows that past cohorts received, on a lifetime basis, far more than they put in and that the current young are being asked to participate in a Ponzi scheme.

10. Totally a monkey gets hold of an AK47 and wreaks havoc with a bunch of guerillas (the military rebel kind)