Weird Home Computer Tax in Danish "Reform"

After the American Century

With the world's highest taxes, Denmark periodically goes through the ritual of pretending to lower and simplify taxes. What always seems to result is a more complex tax code than before. I will not try to explain the new law, because after reading through it, I am not certain I understand it. That is why Denmark is a paradise for tax accountants, because you literally cannot figure out what the rules are yourself.

Rather than write about the whole complex package, I want to single out one remarkable new tax that has been added. (In any tax reduction plan in Denmark new taxes are always added). This one is for 5000 DK a year, almost $1000 for anyone who gets a computer or telephone from their employer. I hope I am misreading it, but it might mean that even if you have paid for your home computer, as I have (because the humanities faculties generally are broke), just using the Internet hookup would unleash the tax office on me. That's right, if I have a home office and check emails from home at night or on the weekend - that is, if I want to work a bit overtime, the punishment will be almost $1000 a year.

Now if the real purpose of the tax law was to get people to work less, this might make sense. But the stated purpose of the law is to encourage people to work more, to increase the work people are willing to do by lowering the tax rate. Denmark's baby boomers are marching into retirement soon, and the country cannot afford it unless people work for more years and more hours during those years.

This tax seems particularly stupid because it is aimed at anyone whose work involves communicating with Asia or North America (two rather large markets). Think about time zone differences. Send an email at noon from Denmark to Los Angeles (where it is midnight), and the reply will probably come after 21:00. Under the new law, if an employer wants someone to read and respond to that email, and gives them a computer to do it with, the cost will suddenly be $1000. As I read the law, just one message a year would do it. Nothing seems to be in the law about modulating the tax to take account of whether you have the home computer 24/7, only sometimes on the weekends, or just during a busy month. Apparently, it is all or nothing.

What will people do? They will not accept a computer or phone from their employer any more. Instead, they will try to get by with an older machine, typically with older software, that they have at home. Instead of using the same institutional network both day and night, they will sign up for a separate system that costs less than 5000 DK a year. Corporate security will no doubt be compromised. Messages needed at work will occasionally be inaccessibly at home.

This "reform" will make Denmark less efficient. It may well retard the spread and use of the Internet. It will encourage people not to work at night or on weekends. It will hurt the efficiency of international contacts and likely hurt exports. It can easily compromise corporate IT security, as employees use home systems to avoid the extra tax. It could easily make the university a bit less efficient. This is another example of an inane Danish "reform" that was worked out in a private room between a couple of political parties without the benefit of public discussion.

I get hundreds of emails from students in the off hours, and I guess this means I should not answer any of them until I get to the office, no matter how important, such as the one I got an hour ago asking urgently for a letter of recommendation. Thank goodness in the future I will not read such messages until it is too late. Less work for me to do, and no job at all for the student!

The marvel is that Denmark on the whole is such a great place, despite its tax system.

Back to Banking Basics: Learning from Canada

After the American Century

Once upon a time, mortgages were simple. The home buyer went to a bank, which (1) decided whether the house was worth its price, (2) whether the purchaser looked like a good risk, (3) what rate of interest to offer, and (4) how big a down payment was needed to seal the deal. Furthermore, (5) banks kept on hand a decent reserve of capital, in case some buyers defaulted on their loans. In those simpler days, all the risk was divided between just two parties: the customer and the bank. But all five of these elements of the simple mortgage have changed over time, and the disastrous results emerged in the present crisis.

(1) Houses were bought and sold for irrationally high prices. There were years when home prices rose by 20% or more. But salaries were not shooting up that fast, and banks should have considered the potential resale price to be less than the irrationally soaring market price. In Britain, for example, by 2005 people were buying houses for as much as five times their annual salary, but a good rule of thumb in the industry has long been that people cannot afford a house that is more than c. three times their salary. To find a way for ordinary people to pay extraordinary prices, banks invented all sorts of new kinds of loans, including some where the buyer only paid off on interest, without making any attempt to pay down on the loan itself. And so the bubble grew.

(2) Banks failed to make hard-nosed evaluations of whether customers were good risks. In fact, as has been documented again and again, lenders encouraged people to purchase homes that they really could not afford, secure in the knowledge that they would repackage and sell these dodgy mortgages to others. In many cases, banks divided up mortgages, repackaged them, and spread the (as it turns out toxic) risk, and so distributed these risky loans all over the world. By 2008 millions of people were defaulting on their loans, the rate of foreclosures shot up, house prices began to fall, the whole house of cards came tumbling down. In the United States, in January of 2009 alone the number of foreclosures was 274,399. Assuming an average of four occupants per home, that means more than 1 million people lost their house and all they had invested in it, in just one month.

(3) During the years of bad practices, banks also played games with interest rates. In Britain, for example, many banks offered quite low rates for the first years of a mortgage, whose cost then increased dramatically. Borrowers would then go out and pay some high fees to refinance the house and start the process over again, without ever managing to pay off much on the house itself. As a result of such practices and many other manipulation of interest rates, it became quite difficult for consumers to understand what they were really paying for a mortgage. so that "supply and demand" were not as important as (mis)perceptions of capital supply that stimulated irrational demand.

(4) Down payments have fallen over the last century. Back in c. 1920 it was not unusual to demand one third to one half of the total value of a house as a down payment. I am not suggesting that one should return to that standard, but it does put in perspective the developments since that time. After World War II, in the US, veterans could buy a house with a down payment of only $1, as the federal government insured the contract, making it risk free for the banks. Veterans did prove to be good credit risks during the expansive 1950s and 1960s. But the great success of such programs suggested that enormous economic growth could be achieved by extending more credit to more people, notably by asking for smaller down payments. Today, few people put up more than 20% as a down payment, the amount necessary to obtain the best interest rates. In some cases, cash payments were not made, as many people used their pension plans as collateral, putting their old age at risk. Thus there are people in the present crisis who are losing not only their homes but their pensions as well. Others paid higher interest rates but put up as little as a 5% down payment or in some cases even 0%.

(5) As the number of loan defaults snowballed, it quickly became apparent that banks were not prepared. They had not kept decent sized reserves on hand. In many cases, they had purchased mortgage insurance, from companies such as AIG, that is now the dead weight threatening to drown the whole banking system. For AIG became a global player in the mortgage business, giving the appearance of safety and solvency to all sorts of schemes, each of which helped banks to escape from the irritating demand that they actually have some money in their vaults. US banks on average have only about 4% of their capital value on hand in the form of actual money.

President Obama is trying to clean up this enormous mess, but it will not be easy, because the simple borrower-lender relationship has become so complex, with so much division and sale of risk, insurance schemes, and arbitrage that only accountants who specialize in this field can understand the billion dollar details. In the short term, it seems impossible to avoid pumping billions more into the under-regulated industry, to rescue the economic system as a whole. Meanwhile, the public is understandably furious that bankers should continue to be well paid.

Fortunately, there is a model for a better banking system: Canada. There, banks were kept under tighter control, and as a result the Canadians have weathered the world financial storm without much damage. Theie banks did not have so many dodgy mortgages and they had an average of 9.8% capital on hand, more than twice the US average. Canadians did not forget the five essential features to mortgage lending discussed above. In 2008 the Geneva-based World Economic Forum rated Canada's banking system as world's best. Not incidentally, the Canadian dollar today is far stronger against the American dollar than it has been historically.

Obama's Tax Plan Would Increase Equality

After the American Century

President Obama has been forced to spend much of his first month in office dealing with Bush's mistakes, particularly economic mistakes. With the submission of a new budget proposal, however, he has begun to present his own vision. He does not want to spend all his time being a fireman putting out Republican fires. Rather, he wants to redesign the economic fabric so that the economy is stronger and more resilient.

In the short term, Obama is spending lavishly to try to escape the mess Bush created. That is the gigantic budget one reads about. But longer term Obama wants to return to the tax system of that most dangerous radical, Dwight D. Eisenhower. During Ike's presidency (1953-1961) taxes on the wealthiest Americans were high, and although adjusted they remained so during the 1960s as well.

During these years the real income of the middle class (in other words their income once adjusting for inflation), rose steadily. After the weak economy of the 1970s, however, Ronald Reagan pushed through dramatic reductions in the tax rate on the wealthy, which began a sizable redistribution of wealth that has lasted for almost thirty years. I lay out the basics of this change in Contemporary American Society (161-166). Just before Reagan lowered taxes on the wealthiest Americans, the top fifth of all US citizens received 43.7% of all income, while the bottom fifth got just 4.3%. In other words, the top fifth made ten times as much as the bottom fifth. By 2005 the poorest fifth had sunk to just 3.4%, while the top fifth received 51.3%. The top fifth made fifteen times as much as the bottom fifth.

What about the middle 60%, the second, third, and fourth fifth? During the same 25 years all of them, the entire middle class, lost out to the wealthiest fifth. In short, between 1980 and 2005, fully 80% of all Americans saw their share in the nation's wealth drop.

With the collapse of the Reagan-Bush economy and its favoritism for the rich, it is time for a new tax code. Something radical. Something that Dwight D. Eisenhower and Harry Truman each supported. That something is familiar to anyone in Scandinavia, and is called progressive taxation. The object of public policy is not to take money from the poor and middle class and give it to the rich, but to give all classes an equal chance to increase their stake in society.

Expect to hear howls of protest from the Republicans and cries of socialism and fears of big government, and the usual rhetoric of the right. For Obama wants to reverse the Reagan revolution. He wants not just to end the Bush tax cuts that threw the budget into deficit years ago, but also to raise taxes on the top fifth of society, in order to pay for the sweeping changes he wants in energy policy, education, and medical care. Over the next decade, Obama wants to get almost $1 trillion in new taxes from the wealthiest Americans. In case you want to know, they are defined as people with incomes of more than $250,000 a year. (More than 1.4oo,000 DK).

Obama is also hoping to save some money through cuts to the Defense Department, partly from winding down the engagement in Iraq and partly through cutting spending on programs that have outlived their usefulness with the end of the Cold War. I wish him luck but am not too optimistic about this phase of his plans. One would have thought that the fall of communism might have reduced defense spending drastically. Back in c. 1990 there was lots of talk of a "peace dividend." There was talk of spending more money on infrastructure, notably decaying bridges and roads. But there was not much of a peace dividend then, and Obama's first defense budget is larger, not smaller, for the two year period of 2009 & 2010, weighing in at a gigantic $1.3 trillion.

Realistically, Obama is more likely to move in the direction of fiscal responsibility via higher taxes on the rich. He will probably be accused of class warfare, but he is trying to end the pillaging of the poor that began under Ronald Reagan. Obama is rejecting "trickle down" economics. He wants the US government to take more responsibility for health and education, and to give Americans back the growth and equality they had in the prosperous 1950s and 1960s. No doubt he will be called a radical and a socialist for trying to do this. Few sensible people ever mistook Dwight D. Eisenhower a socialist.

For a Nobel Prize-winning economist's positive evaluation of the Obama budget, click here.

"Rumsfeld Wing" for Baghdad Museum?

Postmodern ruins could symbolize Bush Era

After the American Century

This week the partially looted museum of antiquities "reopened" in Baghdad. Only special guests could see the collections, however. Before the invasion, world archaeologists warned the Pentagon that it needed to be protected. It was not. That looted museum is perhaps a fitting symbol of the Bush years. The former director fled Iraq due to threats to his family, and now teaches on Long Island. The museum itself is not ready to receive tourists, due to security concerns.

One of the many ignoble moments of the Iraq War and its aftermath was Donald Rumsfeld's response to reports that priceless collections had been looted. "Stuff happens" he said. That formulation denies human action and responsibility. But "stuff" does not happen. Rather, generals make mistakes, ignore advice, and are directly responsible for the destruction of cultural heritage. And for as long as people remain interested in the ancient civilizations of the Middle East, Donald Rumsfeld will be remembered as a modern barbarian.

Indeed, they ought to build a special wing in his honor. In the "Rumsfeld 'Stuff' Wing" would be placards next to empty spaces and broken pedestals, each describing missing objects. In the center of the room one could place shattered objects, broken in the thieves' scramble. Such a monument would best be placed underground and lit only by broken skylights. Very deconstructive and postmodern.

To save architectural fees in these difficult times, one might build an identical "W" wing somewhere between 9/11 and Wall Street, and place there valueless commercial paper from failed banks, copies of auditor's reports from Lehman Brothers, and repossessed furniture from executive offices. There should be a place, too, for framed copies of some of the millions of dollars in bonus checks issued to the MBAs who masterminded the mortgage market. Indeed, why not inscribe the names of all who received these infamous checks on walls, in alphabetical order, together with the size of their bonuses, so that every Americans can come and see who they were. It seems only fair, as the American people bailed them out.

Click here for more about the "reopened" museum.