Tag Archives: taxes

What resources did the public administrator charter social media to manage?

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Western government has followed a basic pattern for centuries. Enter a geographic area and settle it by managing its resources. The activities surrounding the extraction, processing, and distribution of resources are regulated and taxed by government with proceeds going toward the maintenance of government operations and institutions and the promotion of the social fabric. Government administers the control of resources via private hands by issuing “trading companies” a license to carry out the economic and financial activity necessary for resource management including the sale of finished products and services to consumers.

As a side note, you will find going forward that I will refer to private sector actors as “traders” or “trading companies.” Sometimes I will refer to private actors as merchants as well. The practice of trade and its importance in the activities of national government will be addressed more in future blogs but for now when I discuss the private sector I am describing the exchange of goods and services in markets where one asset, i.e. cash, is exchanged for another asset, i.e. goods, services, and the public administrator is regulating those exchanges on some level.

You will also find going forward that I will use public administrator and government interchangeably. Most Americans include the legislative and judicial in their perception of government. While the legislature and judicial branches set the legal parameters within which public administration occurs, government is about action hence the term executive when describing the branch that takes actual action in carrying out policy. Thus, arises another reason for using public administrator when describing action taken by government.

I can at a firm like US Steel and argue that they were chartered to create a taxable event in the mining of metals used to create steel. Archer Daniel Midland was likely chartered to create a taxable event in food production. Delta Airlines, chartered to create a taxable event in transportation. And Facebook? What resources has Facebook been chartered to manage and organize?

Given its mission to connect the world, Facebook’s charter appears to have been granted for the extraction and management of personal information in order to build an audience to which traders can advertise their goods and services. The taxable events public administrators are hoping for include the purchase of advertisement from Facebook which leads to taxable corporate income, and sales taxes generated from the sale of a trader’s goods and services with taxes going to state and local governments.

I am calling out Facebook because they are currently king of social media, but this analysis of public administration and social media could apply to any other social media firm including Twitter or LinkedIn. I guess a significant number of academics would not take to the argument that the government (and by government I am referring to the entire federal-state-local structure) issued a charter to mine the data of American consumers but that is the resource that Facebook and other social media sites extract, organize, and distribute for the purpose of making a profit, a taxable event.

Facebook’s business model for garnering consumer information and converting it into profit has been on Congress’ radar for months now especially given Facebook’s poor stewardship over personal data released to third parties. Implementing modifications to how it manages privacy may have a negative impact on net income, reducing the amount available for taxation. Last week, Facebook stock took a one-day hit falling 20% in value as concerns circulated about how its implementation of new privacy initiatives might impact its costs of doing business. I doubt if this price fall included any potential Trump administration action on privacy, but if not, any additional action on the part of the Trump administration or independent “Fourth Branch” agencies such as the Federal Trade Commission may contribute additional headache for the company and its shareholders.

Political intelligence that matters to markets

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A business or an investment fund is simply a betting pool for people who have coin or credit. The bet represents all the information that the investor has acquired over some period and the dollar amount of her bet represents the minimum cost of the information acquired. This means that the actual cost of creating the investment fund, asset, or business means nothing to the investor.

All that matters is an outcome that recovers her cost for accumulating information that helps her determine whether her preferred outcome-a return of and on her capital-will be realized. Information on sunk costs mean nothing to her (much to the chagrin of the run-of-the-mill economist).

For information traders entering information markets what should matter is providing information that addresses existential threats to profits and revenues. The information trader must have awareness of the outcome the investor is interested in.

Investors watching political markets are interested in whether a decision poses an existential threat to a firm or a firm’s profits or revenues. Existential threats posed by government come in the form of a revocation of a license, denial of access to natural resources, or denial of access to financial capital. The investor wants to know the likelihood of the occurrence of these events.

In hind sight this is why the Trump Effect became vacuous. The expectations surrounding the Trump administration’s impact on investment never took into account government’s prime operational mandate which is to exploit the natural environment of a physical area. It does this by managing the extraction of resources from that physical area. In the case of American government, it has determined that extraction would best be carried out by a private sector driven by a profit motive.

Businesses provide efficient methods for extracting resources and converting the resources into “taxable events” i.e. goods and services for sale. Businesses convert human resources into taxable events by employing labor thus making humans available for taxation by government.

The subsequent uncertainty experienced by the financial markets post Mr Trump’s inauguration was the result of investors listening to the “emotional marketing” of the 2016 campaign. Rhetoric regarding bringing back manufacturing jobs into a political economy that favors information as its primary resource or building more bridges to nowhere via infrastructure knowing that the multiplier effect is limited by a project’s termination date was baseless but pulled on enough heartstrings of investors that they forgot or were forced to overlook even further government’s prime mission.

Also, the financial markets can’t risk forgetting that the U.S. is a federal system and states have to be considered when assessing the American economy. States have to be on board with any policies that address contraction or expansion of licensing or access to natural resources. For example, it is one thing for the federal government to increase access to radio frequencies by mobile telephone companies. But if the states do not put in place rights-of-way policies that allow mobile phone companies to deploy tower facilities, then having a license to transmit wireless signals is meaningless and the firm faces a scenario of less revenues.

When discerning what information matters, the focus should be on political information that threatens the continued existence of a firm or threats to its revenues and profits. Investors need to discern between the emotional or campaign marketing noise and substantive political intelligence that addresses a firm’s existence.

A person living in the internet shouldn’t have to pay taxes

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Nyota Uhura is on a quest to digitize herself. She creates digital product on her laptop, transmits her finished product to her clients via the internet, and gets paid primarily in cryptocurrency. Every now and then she accepts fiat currency issued by a nation-state in part because as a mini-sovereign she likes to have a reserve currency for emergency use or in case a hole-in-the-wall restaurant on a south Florida beach doesn’t accept BitCoin.

She probably spends too much time socializing in cyberspace. Facebook and Instagram keep her in touch with her brothers and sisters in Congo or her cousins in Brooklyn. As a busy creative she sends out for food via Uber Eats and uses Uber or Lyft to get around.

She is not naive about the public safety protection that Atlanta markets to its residents. She has a home security service that she communicates with via broadband. She uses her laptop as a surveillance camera courtesy of her broadband access provider. She keeps a shotgun and feels confident in her self-defense skills. If she were a pilot, she would avoid Atlanta’s biggest amenity, Hartsfield-Jackson International Airport and opt for the smaller Charlie Brown airfield.

Why then, she asks, should she even pay taxes?

Her friends rebuttal is that she should contribute to the public services that she uses to get around; that she should pay for use of the streets and use of the police protection. On a national level, she should support Medicare and the national defense, and social security because these programs help provide security for her future.

And she should be ashamed of herself for not showing the ultimate allegiance to her government by avoiding the use of America’s fiat currency. Her failure to use it, they argue, only negatively impacts the nation’s economy by devaluing the dollar through shrunken demand.

Nyota expected the canned rebuttal from her friends and family. She responds, however, with a rebuttal they are not prepared for, one based on value. Being coerced by a false sense of duty and obligation to pay for sub-par protection services makes no sense to her. She hasn’t bought in on the police’s public relations campaign that they are there to protect the public and would like her taxes reduced by whatever the city assesses as her contribution. She has no enemies in Russia, North Korea, Syria, Afghanistan, Iraq, or Iran other than the enemies created by U.S. policy. Since she didn’t create these enemies, she would also like her taxes reduced by the amount of her contribution to these services.

Nyota pays a sales tax when she eats a cheat meal at McDonald’s. She also contributes to the transportation tax when she pays her Uber driver for a lift to the grocery store. She literally works in another jurisdiction, cyberspace, and because of this, Nyota believes she should not have to pay a federal income tax, especially to a government that provides low value protection services.

A strong legal and political argument will have to be crafted and promoted to bring about these changes, but at least Nyota is thinking about exit.

My simple take on what a city is

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People move to Atlanta for various reasons. An individual may be a recent college graduate that received their first job offer from a company located here. Others are moving here to start a new business or expand an existing one. Some are leaving a traumatic experience that occurred in another city, like death in the family or divorce hoping that Atlanta provides a platform for a new life. Others simply like the weather and the city’s southern charm.

Whatever the reason, I think continued success here needs to be based on a couple realities about cities in general and Atlanta is particular. While we tend to look at a city from a perspective of what can this city do for me, we should round out our perspectives by asking what does this city expect from me? What is its role? To whom do the benefits of a city truly flow?

I admit that my connection to Atlanta is far from emotional. The city doesn’t feed an emotional need for me. While I would not want to live in a town with one traffic light and no movie theater, I don’t rely on a place for happiness.

What I appreciate and do need from a city is its ability to function as a hub for trade. A city should foster an environment that drives thought. It should have the infrastructure that provides an adequate platform for the exchange of ideas. It should, as a community or society, provide a safe environment for exchanging information. Since people are the primary source of information, people should feel safe and secure moving about and engaging with each other.

City governments promote themselves as suppliers of protection and infrastructure for its city’s residents. City governments exercise a near monopoly over protection services, organizing and regulating violence in order to meet their marketing message. I won’t get in to how individuals can and should compete with government to provide these services for themselves, but for now bear in mind that individuals can, but government does its best to dissuade the individual from doing so.

To stay viable as a service provider to taxpayers, city governments are expected to create public policy that supports the city’s function as a trading post in the digital age. For example, reviewing and approving broadband provider requests to use public rights-of-way to lay cable or construct and deploy cell towers in an expedited fashion provides information entrepreneurs increased assurance that they can conduct commerce in the city. It also provides broadband providers assurance that they can maintain returns on their capital while meeting their customers needs.

The city’s other function is that of a tax collector for its investors i.e. bond holders, members and employees of government, income-transfer beneficiaries. It aims to turn every resident into a tax-generating event, whether through the payment of sales taxes, property taxes, or business licenses. By providing infrastructure i.e. cell towers, streets, airports, the city contributes to the increase in the number of information seekers and information providers that trade in its jurisdiction, leading to an increase in entities that pay taxes and the amount of taxes collected.

How does knowing this contribute to your success in Atlanta or any other city? You can best guess the value you are bringing to Atlanta’s table when you understand what is being traded in the city, the information that is being demanded. You can best structure your labor or entrepreneurial activities to meet those trading needs. You become an asset.

Unfortunately, the State will wish to extract a significant portion of your success via income taxes. We’ll save that for another discussion.

 

Bitcoin doesn’t threaten U.S. position as a tax and customs jurisdiction

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Back on 16 November I posted a brief post opining on whether the federal government would go after Bitcoin, the cryptocurrency that has appreciated immensely in value this year. I wrote that if anything, the Federal Reserve would consider issuing there own digital currency. Federal Reserve Bank of New York president William Dudley alluded to the central bank issuing its own digital currency back on 28 November although nothing definitive has been set.

Readers should bear in mind that the primary role of the United States government is to conduct a resource extraction and protection scheme over its physical jurisdiction. To carry out these main functions it taxes citizens and businesses. Bitcoin is property and where an investor enjoys gains from the sale of that property, the United States Treasury will be there to collect. According to a 2013 report by the General Accounting Office, right now the biggest tax problem surrounding cryptocurrency is ensuring that taxpayers either investing in or using Bitcoin for transacting commerce are aware that they may be liable for taxes.

Fortunately for taxpayers investing in or using Bitcoin, the Internal Revenue Service does not have the resources to implement a tax compliance approach specific to virtual economies and virtual or cryptocurrency. The GAO recommended that at the least the IRS use a low cost information distribution approach, its website, to make taxpayers aware that they may be liable for income taxes as a result of investing in cryptocurrency.

Whether you agree with Warren Buffet’s assessment on Bitcoin, something that isn’t real and producing no dividends hence scheduled to implode, what’s real is that the Internal Revenue Service is ready to collect.

How does regulating Facebook optimize returns on resources?

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Farhad Manjoo writing for The New York Times argued in a recent article for increased regulation of “The Frightful Five”; Amazon, Apple, Facebook, Google, and Microsoft. For Mr Manjoo, their increasing intrusion into personal privacy and growth in the retail sector market should raise concerns on the part of regulators.

My takeaway from Mr Manjoo’s article is that government is moving further and further away from the opportunity of being simply a fair allocator of capital to oppressively regulating its distribution to the point where growth in the value of capital is squashed.

In addition, the Frightful Five have no monopoly on natural resources. They do not control land or access to air or minerals. As demand grows for internet services so too does demand grow for electricity use of the part of internet companies. In an article for Forbes.com, Christopher Helman estimates that internet firms account for 1.8% of electricity consumed in the United States. On an annual basis, internet companies are spending $7 billion a year to consume 70 billion kilowatt hours per year of electricity.

And given their two percent contribution to total greenhouse gas emissions, companies like Google have been purchasing energy from renewable energy sources with a 2017 goal of going 100% renewable, according to a piece by Adam Vaughan for The Guardian.com. As a consumer, Google and other internet companies aren’t in the energy extracting and generation business, making them susceptible, like any other consumer, to the whims of energy companies that actually have a license to extract, generate, and distribute energy.

In terms of human resources they higher relatively few people compared to other large companies in different sectors. The data processing, hosting, and related services sub-sector, within which companies like the Frightful Five belong, employed 364,000 people in September 2017, according to data from the U.S. Bureau of Labor Statistics. This total represents approximately .23% of the approximately 156 million people employed in the United States.

What the Frightful Five are first and foremost are tax revenue generators. While not responsible for extracting and managing the United States’ natural resources, by employing 364,000 wage earners and providing platforms for the sale of goods and services including advertisement, internet companies are providing a tax revenue stream for the United States government that didn’t exist twenty years ago.

How much in taxes would the United States be willing to forego by regulating the profit centers of internet companies? For example, in 2016, Alphabet, the parent of Google, had tax expenses of $4.7 billion at a tax rate of 19%, while Microsoft posted tax expenses of $3.3 billion at a tax rate of 16.5%. Apple paid $15.8 billion in taxes at a tax rate of 25.8%.

As Congress considers a corporate tax overhaul and the impact reform may have on its coffers and the deficit, does Washington want to risk reducing the tax revenues that keep its bond holders calm?

Rather, a better scenario for bond holders would be for government not to interfere in the Frightful Five’s ability to generate taxable income. Since internet companies do not manage directly the United States’ natural resources via extraction or distribution, there should be less reason for regulating these entities.