October 30, 2009

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Everything You Know About China Is Wrong


October 20, 2009

free textbook

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Mort Zuckerman – The free market is not up to the job of creating work

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FT, Published: October 18 2009 19:21 | Last updated: October 18 2009 19:21

America has always been a country that thrives on hard work, thrift and self-reliance. We have all absorbed Benjamin Franklin’s maxim: “Early to bed and early to rise, makes a man healthy, wealthy, and wise.”

This helped create jobs. In an application of Schumpeter’s notion of creative destruction, the US lost 44m jobs in the last two decades of the 20th century, but simultaneously created 73m private sector jobs. A stunning 55 per cent of the total workforce was in new jobs by the turn of the century, two-thirds of them in industries that paid more than the average wage. This is no fluke. It is because we benefit from a unique brand of entrepreneurial bottom-up capitalism.

Today there is no evidence of job creation. Quite the opposite: unemployment is rising and millions of jobs have disappeared. In place of thrift we have become a nation of debtors, staggering beneath mortgages that exceed the value of our homes, and credit lines that exceed our ability to repay. But the “Great Recession” has also changed the nature of unemployment, making it harder for those out of work to find a job. Only by investing in infrastructure and innovation can we mend the system.

About a third of the 15m jobless have been out of work for at least six months. This is the highest proportion since records began in 1948. Meanwhile, those in jobs find their work week reduced to an average of 33 hours, again the lowest in 60 years. Firms are cutting hours, wages and benefits rather than laying off still more workers. Today all elements of labour income – jobs, hours and wages – are under pressure.

Many Americans who lost their jobs now have no way to replace their lost income. Take unemployment benefits, which pay about a third of the lost salary, up to a cap. Generally, the requirement for the benefit is to have worked full time on the last job for at least a year. But more than half the unemployed do not qualify because they had been in their jobs for less than a year before the axe fell; or worked part-time; or were independent contractors. Only 43 per cent are eligible for unemployment benefits. Even for them, the anxiety is intense: 61 per cent worry their benefits will expire before they find a job. This is driven home by the dramatic increase in those dependent on food stamps, up by 6.2m since the recession began. Food stamps now feed a near-record one in nine Americans.

These men and women are well aware that long-term unemployment will make them harder to re-employ. Their fears are justified: there are now nearly six people available for every job opening – up from 1.7 per opening when the recession began.

The mix of the labour force has also changed. The proportion of over-55s working has risen 8 per cent. They felt forced to keep labouring away because the value of their homes and investments declined. In fact, 63 per cent of workers aged 50 to 61 expect to delay retirement, thus restricting openings for younger workers. During the last two recessions, those in their mid-40s to mid-50s showed employment gains, while younger workers bore the brunt of cutbacks.

Of course this time younger workers have not escaped – a quarter of teenagers, about 1.6m youths, are without work. The unemployment rate for young Americans has exploded to 52 per cent, a post-war high. But even the 45-to-54 age group has seen job losses, with employment down by more than 1.2m. These are people who should be in the prime of their wage-earning years. It will take these older workers longer to find jobs; some will have to settle for considerably less pay.

Another consequence of the prolonged recession is that many more men than women have lost jobs, probably because women are paid less. Women’s share of the workforce may have reached a record 50 per cent last month as a result.

Alas, the prospects for re-employment are diminished by the fact that many jobs may never come back, for example in finance and car manufacturing. This means growth alone will not fully employ America again. If there is any growth in jobs, it will come mostly from healthcare, education, restaurants and hospitality services. Healthcare alone made up all the net jobs created in the last decade. Such service jobs cannot, however, support growth and innovation.

We knew the skies had darkened but now we learn the unemployment figures are worse than previously thought. This is the only recession since the Great Depression to wipe out all job growth from the previous business cycle. The broader measure of unemployment, the “household index” encompassing people who are unemployed and underemployed, has reached a record 17 per cent. The household survey revealed staggering job losses of 785,000 for September. It includes about 571,000 people who dropped out of the workforce last month, presumably because they despaired of finding work.

Similarly, unemployment for the 12 months to March was understated by 824,000. The US lost about 3m jobs in the first three months alone. Jobs have been lost for 21 months in a row, the longest losing streak since publication started in 1939.

The US Bureau of Labor Statistics limits the official unemployment rate by its definitions. For example, if people stop looking for a job for four weeks they don’t count as unemployed. Absurd! An estimated 2.2m discouraged workers thus are not counted in the unemployment numbers. Were they included, the unemployment rate would be 11 per cent, not 9.8 per cent – and this does not include another 1.8m who retired or became stay-at-home parents.

The official rate does not include 1m people who once worked in residential construction, where three-quarters of jobs have been lost. These people did not show up on the employment rolls when they were working, and do not show up on the unemployment rolls now they are out of work – but they are still (illegally) in the country. Nor does it include approximately 2m people who have entered the labour force since the recession began and are still without jobs. If it were not for short-time working, the same work could probably be done in the normal work week with 3.5m fewer staff, which would drive the unemployment rate up another 2.5 percentage points.

No wonder job anxiety has soared. Soaring unemployment numbers have undermined the confidence that we might be nearing the bottom of the recession. The outlook is bleak. If there is a recovery, firms will fill additional work loads by adding hours to the truncated work weeks.

Since spending depends on employment it is critical to determine whether the labour market will remain weak. Given the level of household debt, the drop of confidence, the decline in the value of homes and the tightness of credit, it is hard to see how consumer spending will rise enough to improve economic prospects beyond a weak recovery – which creates few new jobs.

Labour markets have not faced such problems in more than 70 years. The official unemployment rate will shortly cross 10 per cent. Half of US retailers say they will be adding fewer seasonal jobs this holiday season. We may be looking at long-term, double-digit unemployment with official unemployment figures that understate the extent of the problem.

Only massive programmes are equal to the challenge of restoring stable growth to our economy. One such programme would be to establish a National Infrastructure Bank, advocated by prominent Democrat Felix Rohatyn, to which the government would assign the $65bn (£40bn, €45bn) annually allocated to support infrastructure construction nationally. The bank would have the capacity to borrow, with federal guarantees, an additional $200bn. This programme would ensure a rational rather than a political investment in infrastructure, and provide long-term infrastructure development on a major scale with a maximum multiplier effect on the economy.

A second programme would be a 100 per cent tax credit for increases in research and development by American businesses. In this way we could stimulate and incentivise the capacity for innovation and technical creativity and thus produce another Schumpeterian period of growth for America. There is no time to lose.

The writer is editor in chief of US News & World Report and chairman and co-founder of Boston Properties

October 11, 2009

How Income Taxes Work

Filed under: Uncategorized — ktetaichinh @ 7:07 pm

The First Income Tax

When you get your paycheck at the end of the first pay period at a new job, it’s always interesting to see your net pay. Most of us expect more than we get. By the time you get your check, it has been cut up like a pizza, with several entities taking a piece of the pie. The entities that take money differ from person to person, company to company and state to state. However, almost every income earner has to pay federal income tax.

We generally don’t think much about taxes except during the annual tax season. It’s probably the most dreaded time of the year for millions of Americans, yet we circle it on our calendars along with holidays and birthdays. But little joy is connected to April 15, which is the deadline for filing tax forms. (This deadline doesn’t always fall on the 15th. For example, in 2006, April 15 fell on a Saturday, so Americans got an automatic two-day extension on tax-filing.)The American tax system is a huge machine with a tax code that seems more complex than rocket science. In this article, we will examine how individual income taxes work, take a look at the history of income taxes in the United States and consider two alternative tax plans that are often discussed.

In 1863, the federal government collected the first income tax. This graduated tax was similar to the income tax we pay today. Those who earned $600 to $10,000 per year paid at a rate of 3 percent. A higher rate was paid by those who earned in excess of $10,000. A flat-rate tax was imposed in 1867. Five years later, in 1872, the national income tax was repealed altogether.

Spurned on by the Populist Party’s 1892 campaign, Congress passed the Income Tax Act of 1894. This act taxed 2 percent of personal income that was more than $4,000, which only affected the wealthiest citizens. The income tax was short-lived, as the U.S. Supreme Court struck it down only a year after it was enacted. The justices wrote that, in their opinion, the income tax was unconstitutional because it failed to abide by a Constitutional guideline. This guideline required that any tax levied directly on individuals must be levied in proportion to a state’s population.

In 1913, the income tax became a permanent part of the U.S. government. Congress avoided the constitutional roadblock mentioned above by passing a constitutional amendment. The 16th Amendment reads, “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.” The 16th Amendment gave the government the power to levy taxes on individuals regardless of state population. The Underwood Tariff Act of 1913 included an income-tax section that initiated the system we use today. During World War II, the federal government began withholding taxes, also known as the pay-as-you-earn taxation system. This gave the government the steady flow of money needed to finance the war effort.

The Tax Process

Today, the American tax system can be likened to a perpetual motion machine. While most Americans tend to only think about the tax system and the Internal Revenue Service (IRS) as the month of April approaches, it’s actually a never-ending process. Let’s take a look inside the tax system and examine its various steps. For our purposes, a good way to explain how the system works is to watch one American income earner — let’s call him Joe — as he goes through a year of the American tax process.

The tax process begins when Joe starts his new job. He and his employer agree on his compensation, which will be figured into his gross income at the end of the year. One of the first things he has to do when he’s hired is fill out all of his tax forms, including a W-4 form. The W-4 form lists all of Joe’s withholding allowance information, such as his number of dependents and child care expenses. The information on this form tells your employer just how much money it needs to withhold from your paycheck for federal income tax. The IRS says that you should check this form each year, as your tax situation may change from year to year.

Once Joe is hired and given a salary, he can estimate how much he will pay in taxes for the year. Here’s the formula:

  1. Start by assessing gross income, which includes work income, interest income, pension and annuities.
  2. Subtract any adjustments (examples: alimony, retirement plans, interest penalty on early withdrawal of savings, tax on self-employment, moving expenses, education loan interest paid). The difference is the adjusted gross income (AGI).
  3. Once the AGI is calculated, there are two choices: Either subtract a standard deduction, or subtract itemized deductions, whichever is greater. Itemized deductions might include, but aren’t limited to, some medical and dental expenses, charitable contributions, interest on home mortgages, state and local taxes and casualty loss.
  4. Next, subtract personal exemptions to end up with taxable income.
  5. Go to the IRS tax tables if taxable income is less than $100,000, or to the IRS tax rate schedules if it’s more than $100,000. This is where it gets a little complicated, because the United States uses a marginal tax rate system. There are six tax brackets: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent. How the tax rate works depends on income and marital status.
    • For those using the tax table, look for taxable income on the chart to find gross tax liability.
    • For those making more than $100,000, use the tax-rate schedule to figure gross tax liability.
  6. From your gross tax liability, subtract any credits. Credits may include such items as child care. The difference is the net tax, which is how much to pay or how much of a refund to expect.

At the end of each pay period, Joe’s company takes the withheld money, along with all of withheld tax money from all of its employees, and deposits the money in a Federal Reserve Bank. This is how the government maintains a steady stream of income while also drawing interest on your tax dollars.

Filing Income Taxes

Toward the end of the tax year, Joe’s company has to send him a W-2 form in the mail. This happens by January 31. This form details how much money Joe made during the last year and how much federal tax was withheld from his income. This information can also be found on Joe’s last paycheck of the year, but he’ll need to send the W-2 to the IRS for processing purposes.

At some point between the time Joe receives his W-2 and April 15, Joe will have to fill out and return his taxes to one of the IRS service and processing centers. Once the IRS receives Joe’s tax returns, an IRS employee keys in every piece of information on Joe’s tax forms. This information is then stored in large magnetic tape machines. If Joe is due a tax refund, he is sent a check in the mail in the next few weeks. If Joe uses e-File or TeleFile, his refund can be direct-deposited into his bank account.

Alternative: Flat Tax

Humorist and travel writer Stanton Delaplane once offered this lighthearted suggestion for a simplified tax form: “How much money did you make last year? Mail it in.” While that may be a drastic way to change the tax system, there has been no shortage of people proposing new tax systems since the 16th amendment was passed in 1913. If you follow presidential campaigns, there is usually talk from some of the candidates on revising the tax system. Here’s a quick look at two of these alternative tax plans.

We currently use a marginal tax system, also called a graduated tax, in which the percentage you pay in taxes varies based on your income. Under a flat tax system, you pay a flat rate on your income. In other words, there is a single tax bracket for all taxpayers. A common percentage thrown out for a flat-tax system is 17 percent. This is the rate proposed by former presidential candidate Steve Forbes and U.S. Representative Dick Armey.

Proponents of a flat-tax system say that it would do away with the complicated tax code and tax forms. The flat tax would need only one form, about the size of a postcard and consisting of only 10 lines. You would merely add up wage, salary and pension income, subtract any personal allowances and pay 17 percent of your taxable income. Deductions and credits would be eliminated under this type of plan.

Critics of the flat tax say that it would favor the wealthy and could put a higher tax burden on those who make less money. Under Dick Armey’s proposed flat tax, any family with a taxable income less than $36,800 would pay no taxes. However, it would raise the taxes of some people who now may pay only 15 percent in taxes. The group who would benefit the most is wealthy Americans who now pay upward of 33 percent in federal income tax.

On the next page, you’ll find out about another alternative: the National Sales Tax.

Alternative: National Sales Tax

Even more controversial than the flat tax is the idea of abolishing the federal income tax entirely by repealing the 16th amendment. In place of an income tax, some propose the use of a national sales tax. Former U.S. President William Clinton pointed out that one flaw with this system is that it leaves the government without a steady flow of income.

Alan Keyes, who ran unsuccessfully for the 2000 Republican presidential nomination, is one of the biggest supporters of doing away with a federal income tax. He believes that we could finance the government through sales taxes, tariffs and duties. Keyes has argued that a national sales tax would put more money back into the pockets of the consumers, letting them decide how to spend their own money. He says that the income tax should be replaced with the kind of taxes that people already pay. This plan would do away with the IRS and any need for a tax code.

Opponents have said that replacing the income tax with a national sales tax would put a heavy burden on the less wealthy, who buy a lot of the products that would be taxed. They say that in order for a national sales tax to be fair, it would have to be applied to the purchase of stocks and bonds in addition to consumer goods. Another problem facing a national sales tax is that it would probably double the current taxes on consumer goods, and could force local and state governments to initiate or increase state income taxes.

Taxes are a bitter subject in almost every country, and the United States has had a decidedly tumultuous relationship with the issue. America has one of the most complicated tax systems in the world, and it grows more complex every year. In the end, whether you agree with paying taxes or not, you probably have April 15 circled on your calendar, embedded in your brain and on your list of dreaded days.

For more information on taxes and related topics, check out the links on the next page.

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