Italian Prime Minister calls for a revolution!

Renzi-tax-revolution

September 1, 2015
Spoleto, Italy

In 1543, Polish astronomer Nicolaus Copernicus published his truly revolutionary work, De revolutionibus orbium coelestium.

For centuries prior, humanity had held the Ptolemaic belief that the Earth was the center of the universe.

Copernicus shattered that belief, demonstrating mathematically that it was the sun at the center of the ‘universe’, with the earth revolving around it.

Though Copernicus died soon after his book was published, his ideas sparked a radical shift, not only in humanity’s view of the world, but in how we viewed our place in the universe.

Recently the current Italian Prime Minister, Matteo Renzi proclaimed that it was time for Italy to have a “Copernican Revolution” in its tax code.

I understood the reference immediately.

Long ago, Italy’s tax code was developed based on a government-centric view of society.

This is the idea that government is the source of growth and development, while the citizens merely exist to revolve around and support it.

As such, the country’s taxation was designed to extract as much wealth as possible from the people to fund the government.

This mistaken belief has been shared by so many declining super powers throughout history.

It was the same held by the Ottoman Empire, where the bureaucrats infamously believed that people existed to support their position rather than their positions existing to support the people.

Just like the Ptolemaic model of the universe, this is not just a different way of viewing the world, it’s completely wrong.

What’s required now is a Copernican Revolution– a complete reset to start thinking that productive people, capital, and business are the real sources of wealth and progress.

Nowhere is a revolution in thinking more needed than in the Land of the Free, which has created a tax code so Byzantine and unfair that each year thousands of Americans make the gut-wrenching decision to renounce their citizenship.

The United States, for example, is the only civilized country in the world that taxes citizens who don’t even live in the country on their worldwide income.

Not even the Chinese, French, or Norwegians do that.

But that doesn’t even begin to scratch the surface.

For a country that claims to be the freest and most capitalistic, the US tax code is truly a barbarous relic.

Its 73,954 pages are completely incomprehensible and almost impossible to be fully compliant.

And as people struggle with the inscrutabilities of their tax code, they face outsized fines and even imprisonment for mistakes that would be civil or administrative matters in any other country.

Meanwhile, companies in the US are penalized with one of the highest corporate tax rates on the planet and discouraged from bringing their global profits back home.

This is absolutely nuts in an era where companies can shift jurisdictions in a heartbeat. And there’s a lot of competition out there.

In the United Kingdom, the British government has been working for years to cut corporate taxes and attract international business to its shores.

In the Baltic region countries like Estonia and Lithuania are using the simplicity of flat taxes to do the same.

Singapore and Hong Kong maintain their appeal both with low rates and constant efforts to make compliance even easier.

Even Rwanda, angling at becoming the Singapore of Africa, has made a point to streamline its tax code.

While countries around the world are waking up to what works, the US remains clueless and inert, making no real movements toward reform.

The last major revision to the US tax code was thirty years ago.

Think about that– Top Gun was dominating the box office the last time the most advanced economy in the world reformed its tax code.

Back then there was no Internet. China was unmistakably a third-world country. And US debt was ‘only’ 46% of GDP.

Things are completely different now. And it really tells you a lot that even the Italian government has realized it’s time to make a serious change.

But there’s a big problem preventing the Land of the Free from moving forward: the US government still holds the narcissistic Ptolemaic view that they are at the center of the universe.

They think that you exist to support the government, not the other way around.

This is not something that gets fixed by punching a chad on a ballot and ‘voting the bums out’.

You’d be a lot better off investing your energy and resources towards learning about all the completely legal, no-brainer ways to reduce what they take from you.

It’s like dealing with an unruly child by taking his toys away. And as this gang refuses to fix their own screwed up tax code, it’s time to take their toys away.

There are countless ways to do this, but I’ll give you a great example tomorrow.

My alternative Big Mac Index is screaming that these currencies are cheap

Currency-pile

Spoleto, Italy
August 31, 2015

If you’ve ever picked up a copy of The Economist magazine, you’ve probably heard of the Big Mac Index.

This is an interesting tool where a bunch of reporters from around the world are forced to go into McDonalds and find out the price of a Big Mac in local currency.

In Santiago, Chile, for example, a Big Mac runs 2,100 Chilean pesos, which is around $3. Meanwhile the average price for a Big Mac in the United States is $4.79.

This suggests that the US dollar is substantially overvalued against the Chilean peso.

It’s the same story across most of the world. In Russia, a Big Mac costs 107 rubles, which is just over $1.50.

The reason The Economist uses the Big Mac is because it’s basically the same product no matter where you go in the world.

There are some subtle differences, but McDonalds generally serves the same pink foam disguised as beef wherever you go. So in theory it should all cost the same.

When a Big Mac is too cheap or too expensive, this suggests that the currency is either undervalued or overvalued against the US dollar.

Now I’d like to add a new way of comparing currencies: airfare.

As I travel around the world, I often buy what are known as round-the-world tickets (RTW).

RTW tickets are issued by airline alliances like OneWorld or Star Alliance, and they’re typically very cost effective.

RTW is just like it sounds. You fly, for example, from London to Chicago to Shanghai to Dubai and back to London, all for one special fare.

It’s a cheap, easy way to see the world.

But I’ll let you in on a little secret that I’ve picked up over the years: the price of a RTW ticket varies dramatically depending on the city where you start.

As an example, I just researched a OneWorld RTW ticket with the following itinerary:

Los Angeles – Sydney – Bangkok – Hong Kong – Johannesburg – London – Los Angeles.

Six different cities around the world on five continents.

Now, if I start and stop that itinerary in Los Angeles, the price for a business class ticket is $14,164.60.

That’s not a bad price for a business class experience. But if we experiment a little bit, something interesting happens.

Starting and stopping the journey in Los Angeles means that OneWorld prices my ticket in US dollars.

But it’s also possible to fly the same route by shifting the cities. For example, instead of starting/stopping in LA, I can start/stop in Sydney.

So the route becomes Sydney- Bangkok – Hong Kong – Johannesburg – London – Los Angeles – Sydney.

It’s the same flights to the same six cities, I just start/stop in a different place.

Here’s what’s crazy: if I start/stop in Sydney instead, the price changes. Now instead of $14,164.60, it’s $15,272 Australian dollars, which is about $10,900 USD.

So the same six flights now cost you 23% less.

Note that the RTW ticket is always priced in the local currency of the city where you start.

And unlike the Big Mac Index where the results are skewed by the costs of ingredients, property, and labor, here you’re comparing the exact same product.

I did the same with each city on the list, and the most incredible difference came when I started and stopped the trip in Johannesburg.

Johannesburg – London – Los Angeles – Sydney – Bangkok – Hong Kong – Johannesburg.

Flying to the exact same cities, the price is now 81,395 South African Rand.

Based on current exchange rates, this is just barely over $6,000.

In other words, you pay over $14,000 by starting/stopping in LA, and just $6,000 to start/stop in South Africa, even though you’re visiting the exact same six cities on the exact same flights in the exact same business class cabin.

What’s even more amazing is that if you do the exact same itinerary from LA in economy class, the price is $7,545.

So that means that if someone flies from LA, they’ll pay more to fly in coach than someone starting in Johannesburg pays to fly in business.

Clearly, you’d be better off buying a separate ticket to South Africa and beginning your RTW journey from there.

Or you could spend about $200 and get a ticket to Vancouver, and start a RTW from Vancouver, which costs about $10,000 in business class and gives you a $4,000 savings.

Now, I’m not here to tell you about how to save money on airfare (though I hope you give it a try).

The bigger idea is that it’s clear that the US dollar is painfully overvalued against nearly every currency in the world.

Right now the dollar appears to be the “safe” place to put your money. However, this isn’t based on anything.

The fundamentals for the US dollar are terrible, but people keep dumping money into it like trained monkeys simply because nothing else in financial markets makes any sense.

To be clear, I fully expect the dollar to get even stronger as even more trained monkeys pile into US dollar assets.

But it’s important to show that this perception of ‘safety’ is based on a complete myth. Every credible fundamental suggests that the dollar is dangerously overvalued.

In the long run these things tend to equalize, and the dollar’s strength may end up being the biggest bubble of all.

Of course, it raises the question– if not the US dollar, then which currency is the safe haven? The euro is garbage, the Chinese are fighting a depression, Japan is a disaster.

And that’s precisely the point.

When every option in the financial system is grounded in absurdity, the only solution is to start looking for safety outside of it.