The Tax Man Cometh

by B. Lana Guggenheim


‘Tis the season - tax season, that is. Yours are due April 18th, unless you’ve filed a timely extension.

There is much muttering and moaning about the dreaded tax man, though when pressed, most of us would admit that some level of taxation in return for government services is both fair and necessary. However, today’s tax code is a dizzying labyrinth of laws that seem invented to torture rather than merely tax. It is such exhausting work to navigate that there are entire professions centered around helping people properly file their taxes. Tax laws are so filled with loopholes, it’s as though the system lacks integrity altogether. Unlike individuals, large businesses have the power to gain industry specific tax breaks, and corporate taxes have reduced over time as a result. And the IRS seems to make little effort in tracking down corporate tax law-breakers, resulting in nationwide distrust of this organization.

Why is our tax code such a monstrous mess? Part of the answer is that our tax laws weren’t formulated in a particularly organized matter. Rather, the laws we have evolved and changed in bits and pieces over time, resulting in many layers, some of which are very confusing. In order to collect taxes and administer the Internal Revenue Code, the domestic portion of federal statutory tax, the IRS or Internal Revenue Service was created. Though this name was only made official in 1953, though it was used as early as 1913, the government body collecting taxes has been in place since 1862, when income tax was first levied by President Abraham Lincoln to raise funds to fight the Civil War. By war’s end, the Union had raised 21% of its funds via this tax. At the time, income tax was meant to be a temporary measure, but it continued on to fund the Reconstruction, and was only allowed to expire 7 years after the war’s end. In 1894, the Supreme Court declared income tax unconstitutional (and there was probably much rejoicing, unless you were in the government). In the start of the 20th Century, there was a populist movement for tax reform, ultimately culminating in the ratification of the 16th Amendment in 1913, which essentially stated that the government had the right to tax its citizens without regards to apportionment among the states by population. Since then, income tax has been part of the landscape of the American economy, though less so than it is today. However, even the imposition of a modest income tax caused the IRS a ten-fold jump in their workload, and they fell behind in their duties almost immediately; they were still processing 1917 returns as late as 1919.

The twin pressures of Prohibition and the Great Depression were the next influences on the evolution of American taxes. Prohibition eliminated the income the government received from taxes on the sale of alcohol, and drove an entire economy underground into the hands of a professional class of criminals - gangsters. The financial strain, exacerbated by the onset of the Great Depression, meant that the government sorely needed the income both from taxing alcohol sales as well as from an increased income tax. In 1927, the Supreme Court ruled that illegally obtained income was subject to taxes (and that remains true today, though we would recommend leaving out the specifics of your occupation in such cases), giving the Feds access to money they sorely needed, as well as the legal means to seize some of the gains the gangsters earned from bootlegging. It is this law that ultimately put Al Capone behind bars, when he was nailed and jailed for tax evasion. However, the demise of Prohibition in 1933 did not mean the demise of the income tax, as some had hoped. The New Deal did cut taxes for those earning less than $3,000 a year, but was pretty harsh on the wealthy, who saw their taxes rise. Payroll and quarterly tax withholdings were introduced during WWII, and the marginal tax rates on income at different income levels have fluctuated wildly since then, reaching a height of 92% in 1952 on top individual earners, and down to 28% in 1987. Currently, the top tax bracket hovers at around 35%.

Today, the IRS processes taxes as well as institutes investigations. Some of these investigations are civil tax cases and audits, which are about money owed. If you are subject to an audit, you might end up owing a lot of money, but it is unlikely you will face criminal charges. Most Americans are unlikely to be audited - the odds are somewhere around 1%. If you earn over $200,000, your likelihood of being audited goes up to just under 3%, and if you earn above ten million, or alternatively, if you report no earnings, your chances of being audited go up (approximately 16% and 5%, respectively). So too if you report income from abroad, especially from a place like the Cayman Islands. As the IRS has fewer employees now than it used to (a low in 2012 of  89,000 versus a peak in 1996 of over 116,000), their ability to audit has been impaired, even as the work they have to do has increased. This sounds like good news, but in many cases, audits find that people are owed larger returns than they initially had received, so the inability of the IRS to do its job is more likely to harm than help. This is soon after the IRS had its reputation blackened by the reveal that more than half of its employees willfully violating tax law were not let go, and some were in fact promoted. In such a situation, things don’t look good for either the IRS or the average American.

In addition to audits, some IRS investigations are criminal investigations that center around the violation of specific tax laws. In such cases, even if all the money owed is paid, the case is not likely to be dropped. While the most common crime is tax evasion, other prosecutable ills include money laundering, identity theft, and fraud. The IRS website shows an entertaining list of the top ten biggest such cases in the past fiscal year. But tax-related crimes are a regular occurrence, for the famous, infamous, and average citizen alike. The 1989 case of Leona Helmsley, nicknamed “the queen of greed” by the press, evaded taxes by charging millions she spent in redecorating to her business. She was fined over $7 million and sentenced to four years in prison. Wesley Snipes is estimated to owe the government millions in tax debt, and was eventually convicted in 2008 to three years in prison. The IRS likes to make a big deal of celebrities they catch in tax fraud, hoping to scare the rest of us into being honest on our tax forms, provided we can successfully navigate them, that is.

Where does this money go? Primarily to the military and healthcare, it turns out. Of all the Federal tax revenue, a little under half of the total comes from income taxes, making it the single largest source of federal funds. From there, the budget is divided into discretionary and mandatory spending -- 30% and 64% respectively, the remaining being interest on federal debt. Discretionary spending is decided by Congress through the annual appropriations process, and mandatory spending refers to spending on programs required by law. More than half of discretionary spending is bestowed on the military, about 15% of the total budget, and the majority of mandatory spending is split between healthcare and social security, about 60% of the total budget. Tax breaks, which function as a type of federal spending, outstrip discretionary spending, by about $0.1 trillion - or ten billion dollars. That’s a huge amount of money, but the relative difference isn’t that large - tax breaks account for $1.22 trillion, and discretionary spending for about $1.11 trillion.

All told, untangling the federal budget, the tax law, and our own taxes is a taxing affair.

Works Cited

Brandeisky, Kara. "These Are the People Who Are Most Likely to Get Audited." Time. Time, 14 Apr. 2015. Web. 14 Apr. 2016.

Coleman, James William. "Fraud and Deception: Tax Evasion." The Criminal Elite: Understanding White-collar Crime. New York: Worth, 2002. 31-32. Print.

"Federal Spending: Where Does the Money Go." National Priorities Project. National Priorities Project, 2016. Web. 14 Apr. 2016.

Fishman, Stephen. "What Are the Odds of Being Audited by the IRS? | Nolo.com." Nolo.com. Nolo, 2012. Web. 14 Apr. 2016.

Henchman, Joseph. "How Taxes Enabled Alcohol Prohibition and Also Led to Its Repeal." Tax Foundation. Tax Foundation, 5 Oct. 2011. Web. 14 Apr. 2016.

Henderson, Audrey. "Tax Tips: The IRS Criminal Investigation Process." Optima Tax Relief. Optima Tax Relief, 14 Aug. 2014. Web. 14 Apr. 2016.

"Historical Documents Relating to Alphonse (Al) Capone, Chicago." Internal Revenue Service. Internal Revenue Service, 18 Aug. 2012. Web. 14 Apr. 2016.

"Internal Revenue Service (IRS) 2012 Data Book." The Concise Dictionary of Crime and Justice (n.d.): n. pag. The Internal Revenue Service, 30 Sept. 2012. Web.

"IRS Statistics." Infoplease. Infoplease, 2007. Web. 14 Apr. 2016.

"IRS's Top Ten Identity Theft Prosecutions; Part of Ongoing Efforts to Protect Taxpayers, Prevent Refund Fraud." IRS's Top Ten Identity Theft Prosecutions; Part of Ongoing Efforts to Protect Taxpayers, Prevent Refund Fraud. IRS, 3 Mar. 2015. Web. 14 Apr. 2016.

Okrent, Daniel. "No Closing Time for Income Taxes." The New York Times. The New York Times, 12 June 2010. Web. 14 Apr. 2016.

Prohibition. Dir. Ken Burns and Lynn Novick. Perf. Peter Coyote. PBS, 2011. Documentary Mini-series.

Thomas, Kenneth. "A Big IRS Job and Fewer People to Do It." US News. US News, 30 May 2013. Web. 14 Apr. 2016.

Wood, Robert W. "61% Of IRS Employees Caught Willfully Violating Tax Law Aren't Fired, May Get Promoted." Forbes. Forbes Magazine, 07 May 2015. Web. 14 Apr. 2016.

Panama and the 1%: Shell Games, Taxes, and International Law

By B. Lana Guggenheim

The Panama Papers, as the information leak from a law firm operating in Panama has been dubbed, is the largest information leak in history, clocking in at 11.5 million files, about 2.6 terabytes of data, which is most likely the bulk of law firm Mossack Fonseca’s database, if not its entirety. The well-known Wikileaks cache comparably is much smaller, but is still substantial at 718,000 documents. This event has blown open the operating procedures of offshore tax havens, money saving schemes for the extremely rich, and their less than savory ties to many families, government officials, and rogue regimes all over the world.

Though the story broke only days ago, Mossack Fonseca has been setting up shell companies to shelter funds for decades, and journalists have been poring over the data for months before they released the story. While an anonymous source tipped off the German newspaper Süddeutsche Zeitung, the data they received soon outpaced their ability to process, and they reached out to the International Consortium of Investigative Journalists, consisting of a team of over 400 journalists in over 100 countries, to help. Even so, going through this much data took months.

The results have been immediate and dramatic. Already on Tuesday, the Prime Minister of Iceland, Sigmundur David Gunnlaugsson, tendered his resignation due to he and his wife having been among the many clients who parked their cash in a Panama shell business, Wintris. Considering the scars from the country’s recent financial collapse and painful rebound, there was little tolerance from Iceland residents for their premier's secret money stash, and one tied to the failing investment banks from 2008 at that - which meant there was an enormous and undisclosed conflict of interest. More than $2 billion has been traced to Vladimir Putin and his associates in Russia, and Ukrainian premier Petro Poroshenko, sole shareholder of Prime Asset Partners Limited (PAPL), has come under fire for similar reasons. The candy magnate promised to sell his business when he took office, but Mossack Fonseca set PAPL up as a shell company based in the British Virgin Islands in August 2014, at the time of Russia’s bloodiest attacks on Ukraine, thus saving him millions of dollars in Ukrainian taxes and prompting some to wonder if his priorities were the country he leads or the finances he promised to liquidate. High ranking families in China’s Communist Party are under the lens as well for quietly squirreling their wealth away, and the US and UK don’t have their hands clean either, one client being the late father of British Prime Minister David Cameron. Even Nawaz Sharif, Prime Minister of Pakistan, is under fire, as is the monarch of Saudi Arabia, King Salman bin Abdulaziz bin Abdulrahman Al Saud, and even two cousins of Syrian dictator Bashar al-Assad, Rami and Hafez Makhlouf, among many others all around the world, and in various positions of power.

But how does it all work? One commenter on Reddit charmingly described the issue behind the Panama Papers as people stashing their piggy banks in someone else’s house to hide their savings from their moms, and while some were simply seeking privacy, others were hiding stolen money and engaging in other illegal and unethical activities (you can see it illustrated here.) The reality is slightly more complicated - in order to hide their funds, corporations create new bank accounts and new business ventures based in countries that have low tax rates and/or do not tax on income earned abroad. Such havens include the Cayman Islands, the British Virgin Islands, Luxembourg, Ireland, Panama, and yes, the United States, which is in fact one of the biggest tax havens for foreign money. Ironically enough, the United States holds other countries to a standard of transparency that it does not itself follow, as the USA did not sign on to OECD standards, though Panama did, though with conditions. Because these accounts are held under different names, their origin is hard to trace, and because these countries do not disclose the information to the corporations countries’ of origin, it is easy to avoid disclosing the true extent of one’s assets and thus avoid taxation on it. Banks often seek out relevant law firms, like Mossack Fonseca, on behalf of their clients to complete these services. (Mossack Fonseca created about 200,000 of these offshore entities.) The law firms charge a fee to set shell companies up and maintain this legal fiction, but this fee is often significantly less than the home tax rate rich individuals and corporations are looking to avoid by engaging in this practice. And a legal fiction it is: one building can be home to thousands of companies and accounts that are little more than a mailbox with a gilded name plaque, with no rooms or employees to speak of. But it’s one that allows many to dodge the tax man in a way that beggars belief.

The entire situation is a tangled web of how the top tiers of international finance are open to the rich, but not the average citizen. The offshore banking industry intersects with criminals, terrorists, corporations, and your average billionaire, and often enough, it’s legal - though not always. Academics estimate that about $7.6 trillion is held in overseas tax havens, costing governments a minimum of $200 billion a year in lost tax revenues. Tax havens are an ugly, but integral part of the global banking system. However, not everyone involved in offshore banking is a thieving criminal. Some folks place funds in tax havens totally illegally, but for reasons most of us would support, such as in defiance of authoritarian governments seeking to crack down and restrict potential actors that would upset their monopoly on power.

Mossack Fonseca offices in Panama City. From elcambur.com.ve

Much of Mossack Fonseca’s work isn’t for humanitarian or anti-authoritarian reasons, however. Though the two men behind the firm, Ramon Fonseca and Jurgen Mossack, insist they are the wronged party for having been hacked into and their privacy violated - and they have a valid point - they say that their business is like “selling cars”; they are not responsible if people use their products to do wrong. Still, a number of their clients are involved in some shady business. And while technically their law firm violates no Panamanian laws, among their clients are those placed under international sanctions, and those who have earned their funds through extralegal means. Some of these companies were based in Iran, Zimbabwe, and North Korea, including DCB Finance, which had links to North Korea’s nuclear weapons program. Even in cases when they were not yet sanctioned when Mossack Fonseca helped set up their shell companies, the firm continued to act as a proxy for them after sanctions were put in place. In the case of DCB Finance, Mossack Fonseca continued relations with them until contacted by the British Virgin Islands authorities in 2010 inquiring about a different North Korean company, after which Mossack Fonseca resigned as agents for DCB Finance. They also set up a shell company that hid the millions gained from the infamous 1983 Brink’s-Mat heist at London’s Heathrow Airport, dubbed “the crime of the century.” The company in question, Feberion, was set up a mere 16 months after the crime for the London-based money launderer Gordon Parry, who went to jail in 1992 for his role in the aforementioned robbery, and Jurgen Mossack was aware that Feberion was involved in laundering money from the heist, though the law firm later denied this when pressed. And yet, they only ended relations with Feberion as late as 1995.

The pressure is on, not just for this law firm, but for the various global tax havens to engage in greater transparency and close these legal loopholes. But international banking is likely to face some fallout as well. Banks have already faced an uptick in scrutiny, and are likely to be faced with more, as well as additional regulation and even fines. Untangling the industry’s many offshore entities would also be expensive and traumatic, and would make repairing any reputations difficult, even for banks that claim they weren’t involved in such activities in the first place. Some banks have already begun to overhaul their internal structures. HSBC sold their Panama bank in 2013, and Credit Suisse sold its Gibraltar and Monaco private-banking operations. Some tax havens are also becoming more transparent, as the OECD’s original blacklist of “uncooperative havens” has significantly dropped over the past decade, though Panama, Liechtenstein, and Barbados were still named as such on an EU list last year. Closing all these tax loopholes is going to be a long, messy process, and it is likely that inventive accountants will find new areas to exploit for future clients. But one lesson everyone can learn, from tax accountants to lawyers, is that cybersecurity will be an increasingly significant factor. Leaks this big only happen if someone scrapes the entirety of a database, a security breach that is the stuff of nightmares.

Cited Sources and Further Reading

Beauchamp, Zack. "The Panama Papers Revealed Lots of Shady Stuff. But Some Shell Corporations Aren't so Bad." Vox. Vox, 05 Apr. 2016. Web. 06 Apr. 2016.

Bilton, Richard. "Panama Papers: Mossack Fonseca Leak Reveals Elite's Tax Havens - BBC News." BBC News. BBC, 04 Apr. 2016. Web. 06 Apr. 2016.

Chang, Alvin, and Javier Zarracina. "The Panama Papers Leak, Explained with an Adorable Comic about Piggy Banks." Vox. Vox, 04 Apr. 2016. Web. 06 Apr. 2016.

Clark, Nicola. "How a Cryptic Message, ‘Interested in Data?,’ Led to the Panama Papers." The New York Times. The New York Times, 05 Apr. 2016. Web. 06 Apr. 2016.

Cox, Simon. "Panama Papers: Mossack Fonseca 'helped Firms Subject to Sanctions' - BBC News." BBC News. BBC, 04 Apr. 2016. Web. 06 Apr. 2016.

Díaz-Struck, Emilia, Et Al. "Panama Papers: Who's Who?" The Irish Times. The Irish Times, 04 Apr. 2016. Web. 06 Apr. 2016.

Drucker, Jesse. "Panama Has Company as Bank-Secrecy Holdout, as U.S. Offers Haven." Bloomberg.com. Bloomberg, 05 Apr. 2016. Web. 06 Apr. 2016.

Fitzgerald, Alison, and Marina Walker Guevera. "New Leak Reveals Luxembourg Tax Deals for Disney, Koch Brothers Empire." International Consortium of Investigative Journalists. International Consortium of Investigative Journalists, 09 Dec. 2014. Web. 06 Apr. 2016.

Gardner, Matthew. "Panama Papers and America's Problem." CNN. Cable News Network, 05 Apr. 2016. Web. 06 Apr. 2016.

Garside, Juliette, Holly Watt, and David Pegg. "The Panama Papers: How the World's Rich and Famous Hide Their Money Offshore." The Guardian. Guardian News and Media, 03 Apr. 2016. Web. 06 Apr. 2016.

Golshan, Tara. "The 8 Most Important Things to Read to Understand the Panama Papers Document Leak." Vox. Vox, 04 Apr. 2016. Web. 06 Apr. 2016.

Karmanau, Yuras. "Ukrainian President Under Fire Over Panama Papers." US News. Associated Press, 04 Apr. 2016. Web. 6 Apr. 2016.

Kroll, Louisa. "Panama Papers Fallout: Iceland's PM Resigns, Ukraine's President Pressured, Billionaire Responds." Forbes. Forbes Magazine, 5 Apr. 2016. Web. 06 Apr. 2016.

Maven, Duncan, and Lionel Laurent. "Banks Have a Panama Problem." Bloomberg.com. Bloomberg, 04 Apr. 2016. Web. 06 Apr. 2016.

Mullen, Jethro. "Panama Papers: Rich and Powerful Respond to Claims They Hid Billions Offshore." CNNMoney. Cable News Network, 04 Apr. 2016. Web. 06 Apr. 2016.

Nelson, Libby, and Zack Beauchamp. "How the Panama Papers Brought down Iceland's Prime Minister." Vox. Vox, 05 Apr. 2016. Web. 06 Apr. 2016.

"Panama Law Firm Says Document Leak 'a Crime'" RTE.ie. AFP, 04 Apr. 2016. Web. 06 Apr. 2016.

"Panama Papers: How Did Panama Become a Tax Haven? - BBC News." BBC News. BBC, 05 Apr. 2016. Web. 06 Apr. 2016.

Politi, Daniel. "The Latest From the Panama Papers: Details From the Largest Leak in History." Slate. Slate.com, 05 Apr. 2016. Web. 06 Apr. 2016.

Ryle, Gerard, Will Fitzgibbon, Mar Cabra, Rigoberto Carvajal, Marina Walker Guevera, Martha M. Hamilton, and Tom Stites. "Banking Giant HSBC Sheltered Murky Cash Linked to Dictators and Arms Dealers." International Consortium of Investigative Journalists. International Consortium of Investigative Journalists, 08 Feb. 2015. Web. 06 Apr. 2016.

Schmidt, Blake. "Panama Papers: A Conversation with Jurgen Mossack and Ramon Fonseca." The Sydney Morning Herald. The Sydney Morning Herald, 05 Apr. 2016. Web. 6 Apr. 2016.

Schmidt, Blake. "Panama Papers: Jurgen Mossack Says the Cat's Out of the Bag." Bloomberg.com. Bloomberg, 04 Apr. 2016. Web. 06 Apr. 2016.

Schmidt, Michael S., and Steven Lee Myers. "Panama Law Firm’s Leaked Files Detail Offshore Accounts Tied to World Leaders." The New York Times. The New York Times, 03 Apr. 2016. Web. 06 Apr. 2016.

"Tricks of the Trade." International Consortium of Investigative Journalists. International Consortium of Investigative Journalists, 05 Nov. 2014. Web. 06 Apr. 2016.

Wayne, Leslie, Kelly Carr, Marina Walker Guevera, Mar Cabra, and Michael Hudson. "Leaked Documents Expose Global Companies' Secret Tax Deals in Luxembourg." International Consortium of Investigative Journalists. International Consortium of Investigative Journalists, 5 Nov. 2014. Web. 06 Apr. 2016.

Do Capitalists Manipulate, Deceive, and Cheat? Not as Much as Politicians Do

by Michael Makovi, Guest Writer

Real-world markets, according to Nobel laureate economist Robert Shiller, are all about manipulation and deception.

So he argues in a New York Times article summarizing his new book, coauthored with fellow Nobel laureate economist George Akerlof: Phishing for Phools: The Economics of Manipulation and Deception. According to Shiller, merchants and vendors regularly “phish for” ignorant consumers who they can mislead into acting less in their own interests and more in those of the phishermen.

Shiller claims that the theoretical defense of the free market depends on consumers being rational and well informed — a condition that doesn’t hold true in the real world. Drawing on behavioral economics, he argues that consumers are often possessed with cognitive biases that allow them to be systematically deceived by unsavory merchants. For this reason, Shiller argues, consumers need government regulation to protect their interests. The internal forces of the market are not sufficient.

Deus ex Nirvana

But government regulation is not an infallible deus ex machina. The question is not whether the market fails, but whether the government is more likely than the market itself to correct those failures. Economist Harold Demsetz coined the term “nirvana fallacy” to make this point: it is not enough to find flaws in the real world; one must prove that some feasible alternative is likely to be less flawed. James Buchanan, one of the fathers of public choice economics, compared advocates of government regulation to the judges of a singing contest who, after hearing an imperfect performance from the first contestant, immediately award the second contestant, reasoning that he must be better.

No, the market is not perfect, and consumers are often ignorant and manipulable. But the real question is this: Will government do any better?

Just because the first singer offered a less-than-perfect performance is no proof that the second singer will be any better. Ironically, Nudge author and former member of the Obama administration Cass Sunstein, no friend of economic freedom, accidentally makes this very point in his positive review of Shiller and Akerlof’s book.

According to Sunstein,

Bad government is itself a product of phishing and phoolishness, for “we are prone to vote for the person who makes us the most comfortable,” even when that person’s decisions are effectively bought by special interests.

So yes, people behave irrationally in their capacities as market participants, but they are no more rational in how they cast their votes than in how they spend their dollars.

Buying What You Don’t Want

The difference is that in a market, there are feedback signals, however attenuated. If a vendor cheats his customer by holding back information about his product, at least the customer will learn about the product’s faults after he purchases it, and he will buy from someone else next time. He will likely warn others, too. The consumer may have cognitive biases, but he has the opportunity to learn from his mistakes, prevent others from making them, and correct them in the future. The deceptive merchant will develop a bad reputation, and paying customers are motivated to learn about merchants’ reputations — especially as 21st-century technology develops ever-more-robust reputation markets, accessible through anyone’s smartphone.

By contrast, there are fewer feedback signals in politics and even fewer opportunities to act on that feedback. One vote barely counts, and each voter must vote not for specific policies, but for politicians with a range of policies. Electoral politics doesn’t really offer a choice so much as it imposes a bundle. A vote for a particular candidate implies endorsement of all the policies in that bundle, when the truth is more likely that the voter has selected the least bad option. In the market, customers can easily split their “dollar votes” to purchase only the specific products they want.

In Freedom and the Law, Bruno Leoni notes that we are all doubly unrepresented by politics: we vote for A, but B defeats A in the election. Then, when B is sitting in the legislature, he is outvoted on a bill by C. So in the end, a person is governed by politician C who beat B, who in turn beat the voter’s preferred choice, A.

When Phoolishness Is Rational

In such a situation, it makes sense for voters to be rationally ignorant of the effects of government policies they are helpless to affect. Politicians are free to peddle shoddy products when they know voters have few opportunities to learn from their mistakes — and even fewer opportunities to correct them.

Meanwhile, markets tend to concentrate benefits and costs on the consumers who use a specific product. This internalization of costs and benefits promotes learning and feedback. In a market, a person must bear the consequences of his or her own actions.

In politics, benefits are concentrated on those whom the politician wishes to favor — such as financial donors and special interests whose attention is narrowly focused — while costs are dispersed among those whose attention is elsewhere, including many who focus on producing wealth instead of transferring it.

The combination of rationally ignorant voters and informed and motivated special interests encourages rent seeking. Private benefit and social cost diverge as the political process encourages the creation of new externalities. While markets tend to internalize the costs, politics encourages externalities.

So yes, consumers are often “irrational” and deceived and make mistakes. But, as Sunstein himself tells us, this is true in both politics and markets. The question is, Which institutional environment is more likely to promote learning from mistakes? And which institution — the market or politics — maximizes a person’s ability to correct those mistakes? Shiller and Akerlof have failed to prove that government regulation will detect or correct mistakes better than the market itself can.

This article was written by guest writer Michael Makovi, and was originally published on the Foundation for Economic Education, and can be seen here.

Actuaries: The Statistical Wizards

Numbers play a critical role in the daily lives of everyone around the world, whether we notice it or not. We make purchases, follow time schedules, and measure ingredients for recipes, but those are the numbers that most of us think about consciously when we are completing those related tasks. The numbers that are most important to our lives we may never even have given a thought to, such as our estimated life expectancy, the chances we get permanently injured on the job, or the amount we will need to contribute to our 401k plan each month to have a comfortable retirement. Thankfully, there are extremely well-trained financial professionals who do take the time to think about these crucially important figures and make the calculations that allow us to comfortably go on with our lives without too much worry. These skilled statisticians are known as Actuaries.

Actuaries analyze the financial costs of risk and uncertainty. They utilize mathematics, statistics, and financial theory to assess the risk that an event will occur, and they help businesses and clients develop policies that minimize the cost of that risk. Actuarial work is essential to the insurance industry. Most actuarial work today is done with computers. Actuaries use database software to compile information, and use advanced statistics & modeling software to forecast the probability of an event occurring, the potential costs if it does occur, and whether the insurance company has enough money to pay future claims. Actuaries typically work in teams consisting of other financial professionals, including accountants, insurance underwriters, and financial analysts. There are many different types of specialist actuaries, depending on the type of insurance or financial product or service they are analyzing. Some examples of specialist actuaries are health insurance actuaries, property & casualty insurance actuaries, and pension & retirement benefits actuaries.

Becoming an actuary is a difficult and time-consuming process, which is one of the reasons the profession is relatively small; there were only 24,600 actuaries practicing in the US in 2014. To enter the actuarial field, one must complete a bachelor's degree, generally in mathematics, actuarial science, statistics, or some other analytical field. Related coursework in economics, applied statistics, corporate finance, and computer science are all very useful for prospective actuaries, as they will help with daily tasks actuaries in the workforce deal with. Once graduated with a bachelor's degree, a prospective actuary must take a series of exams to be licensed as an Associate Actuary by one of the 2 main certifying boards. There is also a higher Fellow designation that requires more work experience & exam passing. Typically, it takes between 4 & 6 years post-college for an actuary to gain Associate status, as the exam process is very intense. Most actuaries do not regret their choice, however, as the career is quite lucrative; the mean annual salary in 2014 for actuaries was $110,090, substantially greater than the national average.

If you are interested in learning more about a career in the Actuarial field, check out our infographic below, it is full of helpful information to start you on your journey to a great professional career. For even more information, be sure to come back to our Facebook, Twitter, and Instagram pages all week long to learn more about Actuaries and what a career in this rapidly growing field is actually like.

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The Easy Way to Plan Your Financial Future

Americans today are concerned about the lagging global economy & growth prospects of the economy here at home, especially after learning of the relatively flat final quarter of 2015. The US stock markets have lost over $1 trillion of value in the first month of trading this year, partially due to concerns from abroad, but local issues including the interest rate tightening by the Federal Reserve & the almost historic lows in oil prices have also contributed. In these trying financial times, many Americans are looking for safe harbor for their savings so they can accomplish life goals like retiring, putting children or grandchildren through college, or buying a first home. Fortunately, there is a veritable army of financial professionals waiting in the wings to help educate, inform, & make difficult decisions regarding investments & finances. These dedicated professionals are known as Personal Financial Advisors, and they are eager to help put your money to work!

Personal Financial Advisors assess the financial needs of individuals & help them make decisions on investments (like stocks and bonds), tax planning, and insurance. Advisors help clients plan for short and long term goals, including meeting education expenses & saving for retirement with investments.

They invest client funds based on the decisions made by the client. Many advisors also sell insurance products or provide tax advice, but they need special certifications & must be registered properly to offer these services. As of 2014, there were nearly 250,000 personal financial advisors in the US, and the profession is expected to grow at a rate of 30% from 2014 - 2024, which is much faster than the average occupation. Personal financial advisors earn significantly more than the average American, as the mean annual salary for an advisor is $108,090, compared to $47,230 for the average job. That hefty paycheck comes with a good deal of work as well; 30% of advisors worked more that 40 hours per week in 2014, and many go to meetings at night or on weekends to solicit new clients. They also must be well-educated, as advisors require a bachelor's degree, as well as a great deal of on-the-job training. Advisors with higher degrees or certifications like the Certified Financial Planner (CFP) designation can expect to earn more & may gain more clients also.

If you are interested in learning more about Personal Financial Advisors & how they can help you invest wisely, check out our fact-filled infographic below. Also, be sure to check back to our Facebook, Twitter, & Instagram pages all week to find more awesome financial advisor content!

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Risk Management Expertise: Insurance Underwriters

2015 has been a year of ups & downs for most of the world, but now it is nearing an end. As we approach December 31, and consequently the start of a new year, one thing that many people forget about or just avoid for the vast majority of the calendar year pops up once again: insurance. There may be some of our readers who view insurance as a necessary evil, something that nobody really ever wants, but we all need in case of disaster. Even more people see insurance companies as "black boxes" that take in all of their information & then spit out a rate quote that seemingly has nothing to do with any of the information that was provided besides being way too expensive. However, there are people working behind the scenes at these insurance companies, as well as at other businesses, to analyze the risks presented by the people & corporations applying for various forms of insurance & come up with an appropriate premium amount to cover the risk taken by the insurer. These professionals are called Insurance Underwriters.

Insurance Underwriters decide whether to provide insurance and under what terms. They evaluate insurance applications and determine coverage amounts and premiums. Underwriters analyze the risk factors on an application & must achieve a balance between risky and cautious decisions. If underwriters allow too much risk, the insurance company will pay out too many claims. But if they

don't approve enough applications, the company will not make enough money from premiums. Most insurance underwriters specialize in one of three broad fields: life, health, and property and casualty. Although job duties are similar, the criteria that underwriters use vary. For example, for someone seeking life insurance, underwriters consider age and financial history. For someone applying for car insurance (a form of property and casualty insurance), underwriters consider the person's driving record. Underwriting as a profession most likely got its start in the Age of Imperialism (1700s - 1800s), as banks like Lloyd's of London accepted risks related to long sea voyages in exchange for premiums. The financier who is accepting the risk would put together a contract & quite literally sign their name underneath the area specified for risk information. Hence, we now use the term "underwriting"!

If you want to learn more about the Insurance Underwriting profession, check out our infographic below, which details job duties, how to get into the field, salaries & benefits, as well as statistics on the professionals who comprise the underwriting occupation today. We will be posting insurance underwriting related content all week on our Facebook & Twitter pages, so be sure to stay tuned for more interesting & insightful information!

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Republican Tax Plans: How will they Impact CPAs & Tax Preparers?

I'm sure many of you watched the admittedly entertaining spectacle that was the second Republican Presidential Debate of 2015 last night. During that 3 hour long information & misinformation packed program, many of the candidates touched on their plans for the outdated, ineffective, & altogether noncompetitive tax code America has been saddled with since it was largely enacted in 1986. Some of the prospective Presidents proposed adjustments to the current system of Progressive Taxation that has been in place since the Revenue Act of 1913 officially established the income tax we Americans know today. Different candidates proposed a Flat Tax on income, while others scrapped income taxation altogether for a Fair Tax. What do all of these mean & what affect will they have on the professionals that spend their entire careers working to help average Americans legally deal with the taxation system?

Before delving into the affect these changes may have on CPAs & tax preparers across the country, we need to discuss exactly what these candidates are proposing. Changes to our current Progressive Taxation system of income tax include taxing carried interest, which is basically a performance fee often paid to large fund managers, at normal rates. This change will largely affect the wealthier taxpayers who are currently able to pay taxes on these performance fees at a lower rate than they would had the carried interest been normal wage income. Candidates who advocate a Flat Tax on income are for a single rate for all taxpayers no matter what their income, but this rate varies depending on the candidate (Rand Paul is for 14.5%, while Ben Carson is for somewhere between 10 & 15%). Some of these candidates, including Ted Cruz, also advocate for significant government spending reductions to go along with this Flat Tax, one of which is the closure of the IRS. Finally, the Fair Tax advocated by candidate Mike Huckabee replaces a tax on income with a 23% tax on all purchases.

Now that we know what tax plans have been supported by the Republican candidates who have publicly discussed reforming taxes, how would these plans affect those who administer the tax code & work with Americans everyday to help them navigate through financial & tax decisions? First of all, many of the more radical changes to the tax code advocated last night would abolish the "evil" Internal Revenue Service, or IRS. This crucial federal department is responsible for the collection of the bulk of federal government revenue, which is the source of funds that keep the government functional & working. Abolishing this organization would not only seriously hamper the government's ability to collect tax revenue & monitor the taxpaying (or avoiding) activities of citizens & corporations, it would, as of 2014, put over 84,000 men & women out of work (see page 76 for statistics). The gutting of the tax code would also destroy the currently thriving tax preparation industry, which employed over 65,000 people in 2012 & has large seasonal hiring surges that temporarily increase that figure. The tax preparation companies often give on-the-job training that allows temporary workers to learn important skills that can help them land permanent jobs in the industry. Not least of all, accounting firms that employ CPAs would take a large hit from a massive tax code change, especially in the corporate tax code. Many CPAs at large & small firms alike specialize in taxation & would immediately either have to relearn a new specialty within the profession or switch professions entirely.

As much as candidates from both sides of the aisle, Republican & Democrat alike, love to boast about how they would reform America's broken tax code, most of them have completely ignored the impacts those changes would have on a large subset of professionals that many Americans rely on at least once a year to help them through important financial & tax decisions. Please share this with any accountant, tax preparer, or CPA friends or family you may have, as all should understand what these potential changes could mean for their professional lives. As a CPA myself, I know what kind of impact these changes can & will have. Thanks for reading & please subscribe to the Enky blog for more professional content!


Yours truly,

Mike Coté
CPA & CEO/Co-Founder, Enky Inc.