Bad Actors

This isn't what I am talking about.

One reason a lot of people get snookered by bad deals, is that I think a lot of us have good hearts and think well of other people.  We would not steal or con others out of money.  If we found someone's wallet or cell phone on the sidewalk, we'd turn it in to the police or try to find the rightful owner.   We'd do unto others....

Not everyone feels that way.   And not just a few people, either.

There are people, as I mentioned in my last posting, who would just rather not work and sit around and get shitfaced all day long.   Some of them are fairly harmless, in that they just want to get as fucked up as possible without harming others - too much.   But of course, their agenda of continuous partying does affect us all - as eventually, the rest of us have to pick up the slack and pay for their health care and for their food stamps, welfare, SSI, or whatever it is that keeps them alive as long as they live.

But others.... Well, they will take you for every nickel you have and not feel a nanosecond of remorse over having taken your life's savings away.  Take this friendly fellow in the wheelchair, who pretends to be mentally disabled, but then laughs and admits he takes home $100,000 a year, begging.  What is appalling about this behavior is that there are people who are truly needy, and his con-job makes one reluctant to give to the needy as a result.

But of course, he is pretty small potatoes.   There are other "bad actors" in the world - a term used in the law.  A "bad actor" is someone who, well, does bad acts.   He is not merely someone caught up in circumstance, but rather someone who intentionally acts in a bad way, for his own financial gain.

And folks like this have an easy time of it, too, because folks like you and me don't think he exists.   So, when we see some "homeless" person on the street, we feel sorry for them, because it would never occur to us that the "homeless" person might actually be wealthier than we are, and playing us for a fool.

When we hear about someone who was "wrongfully incarcerated" we immediately become sympathetic, and listen to their tale of woe and wrongdoing by the Police.   He seems like such a nice guy - how could he be guilty of anything?   And those mean, old Police!  They gave us a ticket last month - we know they are no good, right?   People are quick to extend sympathy for convicted murders, thieves and drug dealers, but have little sympathy for the victims of their crimes.

I was watching police chase videos on YouTube, and the comments section was interesting.   Most of the viewers, it seems, were quick to condemn the Police, but few defended them.   If the Police made one tiny mistake in a traffic stop or in a pursuit, they were chastised.   But the criminal, who is driving a stolen car, wanted for credit card fraud, held up a liquor store, had drugs in the car with their children - or whatever - is given a free ride.   All we are concerned about, is his "rights".

You know what?  Uh-uh.   A common statistic batted around is that we incarcerate more people in this country than anyone in the world, except China.   I say, good.   Of course, if you ask them, they are all innocent as new fallen snow.   The reality, of course, is something different.   Our crime rate has dropped dramatically in the last two decades.  I think incarceration has something to do with it.

Now, a lot of people say that drug offenses are one reason so many people are in jail.   This may be true, but it oversimplifies the situation.   Most drug offenders are in there for selling hard drugs such as cocaine, crack, methamphetamine, heroin, and the like - drugs that kill people.   You know what?  I don't have a problem with them being in jail - because their customers steal everyone's shit to pay for their habits.

There are isolated cases where at first, it appears an injustice has been done.   Consider this poor slob, who was sentenced to two life sentences for selling LSD.  At first blush, it would appear that the fellow got a bum deal, until you realize that (a) he was selling LSD, (b) he stupidly sold LSD to police officers in one of the oldest setup gags known to mankind (if only he had read my blog!) (c) he turned down a 10 year plea bargain in order to protect his Dad, who was dealing drugs with him, and (d) this was his third offense, so he had been caught before and knew that "three strikes and you're out."

It's not like this guy was blindsided by this.   He had two previous convictions to think about where this was going.  He wasn't some small-time dealer, but a major supplied to the Grateful Dead tour.   Now he is trying go get clemency, but his supporters apparently were doing too many bong hits and forgot to get the clemency petition in on time.   Sort of ironic, no?

Does he deserve life in prison?  Probably not.   Does he deserve prison?  Well, yea.   Because you know that these are not the only crimes he committed,  just the ones he was caught and convicted for.

And that is the problem with criminals.  They like to play on the sympathy of the civilian population by minimizing their own actions.   The cast their own bad acts (as this LSD dealer does) in a good light.  And of course, they don't talk about all the other illegal shit they did, either.

Obama has promised to offer clemency for some offenders - a move that even Fox New applauded.  However, he has yet to sign any large number of clemency petitions.   The reasons for this are varied.   To some, it is a political thing - pardons or clemency petitions might make him look "soft on crime" and he doesn't want approval ratings to drop.  But hey, if Fox News is saying its a good idea, then maybe that isn't an issue.   But I think a greater problem is this:  A lot of people who are incarcerated for drug crimes have other circumstances which make pardoning them or granting clemency problematic.

These folks aren't in jail for possession of an ounce of weed.   They are in for serious crimes - selling meth, coke, heroin, or other hard drugs.   And usually, there are other crimes they have committed, but for one reason or another, cannot be convicted for.   Al Capone was only convicted for tax evasion.   If you look at that in the abstract, you might be convinced he was a "nice guy" and should get a few years in white collar prison, and then maybe parole.  After all, what did he do?  Forget to file tax returns?  That's not so bad, is it?

So it is tough for Obama, because if he pardons someone, it might turn out later that the dude did something awful, and you pardoned him.   You have to be careful.

And these mandatory minimum sentences - people on both sides of the aisle criticize them, but so far no one has moved to rescind them.   What's up with that?   It is political suicide to be "soft on crime" these days.  It would be ironic if a Republican House and Senate passed such a bill, though.

Jerry Brown issued pardons to 105 people who already are out of jail (sort of pointless - it allows them to serve on a jury or get a gun permit, but it doesn't expunge their criminal record).   And after he did this largely meaningless act, he had to rescind one as it turns out the guy was, well, a bad guy.  And the bad guy was a white collar criminal.

So why do we have such a high incarceration rate in this country?   Are we a bad country?  Are we bad people?  Is our judicial system "broken?" 

Maybe.   But I doubt it.   When you read these stories of "injustice" and start to pick away at the edges, you see something else underneath.   You read about some joker sent away forever under the "three strikes" law, and people are all upset.   "He just robbed a liquor store is all!" they say.   But what they don't say is that it was his third offense.   Laws like "three strikes" were enacted because honest people got tired of getting their shit stolen or being mugged, robbed, or held up.   We want to send these people away, and away for good.

What we are saying is this:  Our society is a better place if you are locked up for life, or even a really, really long time.   And no, we don't care about you being rehabilitated or whatever.  We just want you gone, and gone for good.  This isn't vengeance - just getting bad actors out of the way.

In the old West, they would hang people for even trivial offenses - cattle rustling and horse thievery.  Today, we'd call these "property crimes" and not even investigate them.   Back then, people got tired of their shit being stolen.  And they knew if they put someone in jail, they'd be right  out and back at it again.   So they solved the problem by removing that person from the population - permanently.

So why are there so many people in jail in America?   I think in part because we are a free country.   It is hard to get caught, as criminals have so many rights, and the police have to follow an arcane set of procedures in order to even make an arrest - and even more to make a good arrest with a conviction that will stick.   So a lot of crime goes on in our society - much unreported, most unsolved, and even those solved, unconvinced.  And of the convicted, many overturned on appeal.

As explained to me in Criminal Law class, if you commit a crime, there is a very small chance you will be detected.   Even if detected, there is a small chance you will be arrested.  If arrested, a small chance you will be charged.  If charged, a small chance you will be convicted.  If convicted, a good chance your conviction will be overturned on appeal.   As you can see, at each step of the process, the "Dragnet" we use for catching criminals is more like a very loose sieve - with most of the "fish" slipping cleanly through.

This latter point bears mentioning again.  Statistics are hard to come by as the Police don't want to advertise the fact that basically, you can get away with most crimes.    About 1/3 of all murders are unsolved.  If you remove murders by family members and friends, that number would skyrocket (as most murders are committed by someone who knew the victim).  For things like property crimes, it is harder to parse, as most States don't report the number of unsolved crimes.  In Idaho, 79% of all crimes are unsolved, and I don't think Idaho is an outlier - I think it pretty much represents the conviction rate for most property crimes in America.

This means when someone breaks into your home and steals your stuff, odds are, they will never be caught, never be prosecuted, and you will never get your stuff back.   The only upside is, that criminals like these usually commit the same crimes over and over again, so eventually, they may get caught - not for all their crimes, but for at least one.

Still have sympathy for the guy in jail who "just stole some stuff"?   We trivialize this as "just property crime" and then suggest that people get insurance and then file a claim.   But insurance costs money, and the more stuff gets stolen, the higher your rates go.  So in effect, we all pay for these criminals' lifestyles - living large on your booty, with you picking up the tab.

Sorry, but I have to say, let them rot in jail.

It seems that as of late, a large percentage of people in this country are becoming more sympathetic to criminals than the police.   The police are routinely pilloried as bullies and murderers, who just gun down people for no apparent reason.  But again, when you pick apart these stories, they start to unravel rather quickly.   The "unarmed teen" had just robbed a store - his only weapon being his enormous strength and size. The "unarmed grandfather" resisted arrest - and had a record of 30 convictions. These are hardly innocent actors or ordinary citizens.   These are folks who live outside the law and are willing to just take what they want from society which sounds fine and all, until you realize it is you they are taking from.

Part of this stems from America's romantic notions of criminals. We all loved Tony Soprano, breaking hearts and kneecaps, one at a time.  We boo'ed the FBI agents on that show (who were portrayed as uncaring, corrupt, and banal) and cheered Tony as a modern day Robin Hood.   But the reality of the Sopranos of the world (even on the show) is that they exploit people, ruin people, maim people, and kill people with regularity.   Why are we romanticizing this again?

And this is not a new phenomenon.  Back in the 1930's at the height of the depression, people romanticized Bonnie & Clyde, or Al Capone, Pretty Boy Floyd, and a host of others.  They had colorful names and were "sticking it to the banks" - and gunning down innocent people in the process.

Japan went through this phase with their Yakuza movies. Their form of organized crime largely crippled their banks and the damage is still being felt today. Mafiosa would infiltrate legitimate businesses and strong-arm banks into making loans - which they would  never pay back.  And yes, in crime-free Japan, people who didn't cooperate would be found floating in the river.

I had a run-in with a Japanese mobster once.  It wasn't pretty.  While making a reservation for the JR rail, a heavyset man in a purple suit, with oily curled hair came into the office.  He was missing his pinky.   He started shouting at the reservation agent, who was a young man.  The shouting escalated and the Yakuza man started smashing travel brochure displays and then slapping the young reservation agent right in the face - several times.

I asked the young lady waiting on my what was going on.  "Nothing is going on," she said, smiling.  Loss of face prevented her from even acknowledging the fight in the next booth. Being a foreigner in the country, I wasn't sure what to do or say.  I didn't want to run afoul of the mob - or the Police.   I was appalled that in this "crime-free" country, someone could just come in an assault a customer service rep and get away with it.  With impunity.

The Japanese movie industry made a series of movies that basically glorified the Yakuza - sort of like Godfather in Japan.   And the public ate them up - that is, until they got fed up with the crime and corruption and the corrosive effect organized crime has on society.  Today, Yakuza movies more often than not portray the gangsters as the bad guys.

I just don't get it. Why do film makers glorify criminals?   Why do Hollywood stars have sympathy for convicted murderers?  Why are so many modern musical lyrics all about gang members and the crimes they commit?  Why does the left embrace the culture of criminality?

In part, it is youth. Youth is attracted to crime for the same reason they are attracted to drugs. It is dangerous, edgy, sexy.  Criminals are often thought of as handsome and risk-taking. People - particularly young people - admire how a criminal takes what he wants and doesn't put up with any guff from society.   And this all sounds fun and romantic until they take from you, which happens in short order, as young people are more likely to be victims of crime.

The sad reality is that criminals are not romantic dashing figures.   Most are just incredibly selfish people, if not outright sociopaths.  These are not people stealing a loaf of bread to feed their starving children.   These are folks who just want more and are prepared to take it from others using whatever means available.   They are often not very bright (at least the ones that get caught) and they are often cowards.  They can also be sadistic, cruel, violent, and dangerous. The reality of criminals is anything but romantic or heroic.

So, what's the point of all this?   Well, if you think the police are bad and crooks are good, think about where you are going with this.   Because unless you want to become a criminal yourself, there is little point in embracing or romanticizing this lifestyle.  Listening to music that glorifies crime and watching movies that glorify crime may sound like fun, but these things have a corrosive effect on our society - and your soul.

Because once you go down that road, you are basically programming your brain to think that crime is good, and hard work is for chumps.   In other words, weak thinking.  And weak thinkers never get ahead - for very long, at least.

Being against the Police really doesn't make much sense either.   As I noted before, the success rate in prosecuting criminals is astoundingly low.   If you are murdered by a stranger, odds are, they won't figure out who did it.   If your stuff gets ripped off, they aren't going to catch the bad guy and get your stuff back.  But if you are a regular citizen, the most you have to worry about is getting a speeding ticket, and that ain't gonna happen if you don't speed.

Protesting to protect the rights of robbers and thieves really doesn't make a lot of sense.   The police aren't your enemy.   They have a difficult job to do.   Just because you got a speeding ticket is no reason to take the side of criminals.   Because let me tell you, criminals  aren't on your side.

Reversal of Fortune

What causes homelessness?  Lack of financial discipline.

What if you gave a homeless guy a pile of money?   Would they turn their life around?  Showtime producers made a movie, where they gave a random homeless man $100,000 and then filmed what happened.   He spent it all, in short order, and six months later, was, well, homeless.

The "Reversal of Fortune" movie illustrated this very well.   To a man who is a dumpster diver, making $25 a day so he can buy food and beer, any amount more than $100 was "a lot of money" and $100,000 might as well have been an infinite amount.   He failed to realize that such a sum was really trivial in today's world - perhaps enough to live on for 4-5 years at or near the poverty line -  maybe ten years at his $25-a-day former income.

So, he spent the money.  He bought a friend a car.  He bought himself a $35,000 truck.   He bought a girlfriend a car as well.   And then he hung out in bars and drank up all the rest - spending close to $10,000 a month.

Six months later, he was back to being homeless.

The producers of the show even took him to a financial adviser, but he eschewed the advice, on the grounds that the adviser "wanted all his money."

His family bugged him to get a job - but of course, he just wanted to get drunk all day long.   Alcoholism is a big problem among the homeless - along with drug addiction.

Lottery winners typically do the same thing - squander vast amounts of money in a short period of time.   These folks don't need more money in their lives, they need financial discipline.   Without the latter, the former is just a waste of cash.

A lot of people on the far left think that the sole problem the homeless have is "lack of money".  They think the same about the poor.   They think that the cause of poverty is the symptom - that lack of money is not the result of poor financial planning, but vice-versa.

The problem with homelessness or poverty is that lack of money is the symptom of the condition not the cause of it.

These folks decided to give a homeless man $100 and see what he did with it.  In part, he bought food and gave it to other homeless people.   I am not sure, however, that he wasn't aware he was being filmed (they had a camera in his face when they gave him the money, and he saw what car they got into).

But you know, in a weird way, what he did makes economic sense.  In a homeless community, people rely on each other, and if you are down one day, maybe a buddy is "up". So by giving food to other homeless people in the park, he is "banking" goodwill. Later on, he can ask them for a favor, since he helped them at one time. Pretty smart thinking. A survival skill on the street, no doubt. If he kept the cash, well, it would have been spent on booze. These people aren't necessarily stupid, they just have pretty severe problems.

These folks decided to give a homeless man a house (although it appears they are renting it for him for a year).   I will be interested to see how that works out - after a year, then what?  Unless he can get a job or have someone pay his rent perpetually, he will be back where he started.  Even if they gave him a real home, he would have to pay taxes on it, utilities, insurance, and maintenance.   Without a source of income, how does that play out?

I would be interested to see the results of that experiment, after a year.

(UPDATE:  I cannot find any video on his Youtube channel with an update on what happened to the homeless man.   There are a lot of ads for his videos, though!  Homeless man looks very well dressed in the video.  Are we being pranked?)

Then there is fraud.  We know that some homeless folks are faking it, or at least exaggerating their situation to get more money.  Last year, it was the shoeless beggar, who turned out not to be homeless at all.  Well, technically he is, as he doesn't own a home but has to live in an apartment.

Then there is this guy - who begs for a living and then drives home in his car.

Or this guy - who pretends to be mentally disabled, but then laughs when caught and says, "I make $100,000 a year doing this!"

There are more than a few.  And while not all of them are making $100,000 a year, a lot are making pretty good money - because in addition to your handouts, they get food stamps and other assistance, if they bother to ask for it.  If you get $1 in food stamps, you qualify for a free Obama phone.   And bear in mind that all begging money is tax-free, too.

That's why I think it is better to give that $100 or $100,000 or whatever, to a homeless shelter, than to some random guy on the street.  You could be giving it to a fraudster.  You could be giving it to someone who is just going to spend it on good times and blow it all in short order.   I think if you really want to "change someone's life" you have to give them more than money - they need guidance.

And they may not want your guidance.

There is a sponsor on NPR who says they are "researching to find the root causes of homelessness" or some such nonsense. 

I can save them a lot of research money and give them the lowdown in a few bullet points.

• A vast majority of homeless people have mental health issues.

• A vast majority have drug/alcohol issues. 

• Many just live for the moment or the day.

• All of them have problems managing money. 

The last problem is the big one.  If you can't manage money, then no matter how much you have ($100,000 or even $27 Million) or how little ($100) you will end up broke in short order.  No matter how much money you throw at people - or how many houses you buy them, or whatever, they will end up broke in short order, unless you can teach them how to manage money.

The fellow who was given $100,000 spent it all and was happy doing that.  He wanted to "live for today" and wasn't interested in saving or investing.   And quite frankly, he probably made the best choice.   Why?  Well, he really couldn't do something like buy a house with it, as he had no income stream or means of keeping the house.   With no money to pay taxes, insurance, utilities, maintenance etc., the house would fall apart in short order - and be lost to tax auction.

Similarly, something like a car is impractical, if you don't have the income stream to support it - and a place to park it.   Money alone didn't solve his problems.   But it did allow him to have a really good time, for a short while.   A very short while.

And that goes back to the second-to-the-last issue - living for today.   You can't instill financial responsibility in someone who doesn't want it.   We live near a small city that is mired in poverty.   Most of the folks living there squander their meager incomes on lottery tickets, rent-to-own furniture, buy-here-pay-here used cars, payday loans, title pawn loans, rent-to-own "bling rims" and other bad bargains.   You could try to teach these folks better financial habits that would put more money in their pocket and make them investors instead of consumers.    You wouldn't get very far.

Simply stated, they don't want to hear it.

It is like the response I got from my "Never Lease a Car!" and "Never Cosign a Loan!" postings.   The folks that do this don't want to hear that they are being foolish.   In both cases, usually there is a car involved - the young college graduate who wants a fancy luxury car, but can't afford it, gets one through leasing.   He wants to show off at the high school reunion.   The younger man, asking Grandma to co-sign on a Camaro largely wants the same thing.

People want today.  They want to live for today and in that regard, they are little more than homeless people who aren't homeless just yet.   But for a steady income stream, they would be living on the street.  They lose their job, and bam!   The inevitable will happen

Homelessness could happen to a lot more Americans, but it doesn't, mostly because so many folks hang on, living "paycheck to paycheck" and staying barely ahead of their creditors each month.   It needn't be that way, of course.   Putting money aside and investing - and cutting out "living for today" with fancy cars and smart phones - allows you to live more securely and realize that homelessness is not one lost paycheck away.

WANTS versus NEEDS (and evasive answers)

When people give elusive answers, you know something is up.

I was recently on Reddit, which is a horrible place to hang out. Not as evil as 4Chan, but almost as bad.  Mostly a bunch of bored IT professionals and teens, just trolling each other.  But one user asked whether she should co-sign her friend's student loans, as his grandfather "suddenly" refused to sign.

So I sent her links to my NEVER CO-SIGN A LOAN and NEVER CO-SIGN A LOAN, PART DEUX postings, and like a chorus of others said "don't do it!!!"

But her friend had a sob story. He couldn't take a semester off, he said, because they would not let him "back in the program".  What the program was, was not said.   First elusive answer.   And there was no other way to go about this, other than to co-sign student loans.  No way to cut the budget.  Second elusive answer.  No way to get a scholarship.   Third elusive answer.

After some prodding, it turns out he is majoring in "music therapy" which I said was "interesting" but since this is my blog, I will say it sounds like a load of hooey and unless you have at least a masters in it, forget getting one of the four job openings available in the country.  Not only that, if you do get one of the four jobs in the country, good luck getting paid enough to pay back your student loans.   And talk about a specialization!   A very narrow field of study, to be sure.

As for his budget, well, no answer.   It is funny, but college students today require cars - usually brand-new ones, it seems (and Grandma co-signs the loan) as well as a smart phone and a wardrobe of Abercrombie shirts.   Sacrifice is for suckers.   She never answered that question, so we'll never know.

But the third one floored me.  He went to the school with his tale of woe, and they offered to give him a full scholarship to cover room and board in the dorm.   His problem was, he didn't want to live in the dorm, but rather in an apartment with his girlfriend.  

My sympathy meter went to zero at that point.  Room and board are half the cost of college, and if you are serious about college, well, you can live in a dorm room and study instead of live in apartment and get laid and party.   What are your priorities?

But you see this all the time with financial matters.   Very few people in America have problems with financial NEEDS.   Rather, they get into trouble over WANTS.

I related before the person who asked me for help with their $5000 credit card debt.  I went through their finances and found at least $1500 a year they could take out of their budget (maybe far more) by cutting cable TV and going to a lower level of Internet service (or even using WiFi at the cafe - they were retired, after all).   I suggested they cut out restaurant meals and expensive cocktails until the debt was paid off - they spend hundreds a month just on that alone!

But she would have none of that.   What she wanted was $5000, please, to pay off the credit card and "get a new start".   And of course, I said no.  The sympathy meter was pegged at zero.   She had luxuries like Cable TV and was buying $10 Margaritas - when I watched Netflix and drank beer.  And I am supposed to subsidize her lifestyle?

And the same is true in the co-signer situation - in every scenario that people present, asking you to co-sign a loan, it is for a WANT not a NEED.   The WANT a new car.   They NEED bus fare.   They WANT a new house.  They NEED an apartment.   No matter what, there is always some "Plan B" that doesn't involve co-signing.

Elusive answers are like police tape - and they tell you that a bad deal is coming around the corner.  As an Attorney, I get elusive answers all the time - and know that I will have a "problem client" as a result.  Elusiveness and vagueness are forms of passive-aggression and a way of concealing true goals and reasons for doing things.

In the legal business, I find that these sorts of folks provide me only with the information that leads to the legal conclusion they wanted to hear.  Opposing data is discarded or de-emphasized.   And maybe they do this to themselves - self-filtering negative data so they believe in a particular goal or scenario.   Maybe we all do this to ourselves - believing that a new Jet Ski will "save us money" over renting one, or whatever.

I told the young lady not to co-sign the loan.   The point is probably moot - her credit rating at age 21 isn't sufficient to support such a loan.  But it was interesting how she posited the question - leaving out key facts in the situation - in an effort to solicit a particular answer.

Shame on Ford (misleading mailing)

It's that time of year, again, when you get tax statements.  What better way to slip one under the radar than to send an advertisement as a tax statement?  Click to enlarge.

Ford should be ashamed of itself.  A recent mailing (above) is sent out in an envelope that is formatted to look like a year-end tax statement.  As a Ford Shareholder, I have gotten these in the past (1099-DIV).  So I open the envelope.

It ain't a tax statement.

Instead, it is an ad for Ford, suggesting that I buy a new Ford and then write-off the cost on this year's taxes.  For me, that would be sure aduit-bait of the first order.  Kind of sleazy, Ford giving tax advice to sell cars.  I wonder how many people will get in trouble over this.

The kicker is, if the vehicle has over 6,000 lbs gross vehicle weight, you can "expense" the cost over one year, as opposed to "depreciating" the expense over a number of years.   So instead of a string of little deductions for a few years, you get one big deduction for one year.   And this is why BMW designed the X6 with a 6,000 lbs gross vehicle weight rating.  The first car designed with the IRS code as its technical specification!

Now, as I noted before you cannot deduct your way to wealth.  Yes, you can buy  a car and deduct the purchase price (if it is used SOLELY for business) from your gross income - if you run a business, that is, and you need a vehicle for that business.   If you work at a "job" then no go.

And while this might reduce your tax burden, it is hardly like getting a free car.   Your taxes may be reduced by the amount of your marginal rate, times the price of the car.

Plebes at "jobs" like to toss around terms like "write-off" without knowing what it means.  For example, there would be some sort of waste at the company, and Johnny Lunchbucket (who caused the waste) would say, "Well, they can just write it off!" like the company somehow makes money form his idiotic mistakes.

It doesn't.  It merely doesn't have to pay taxes on them.

And the same is true for cars and trucks used in the business.  Yes, they are a deduction.  No, you don't make money on deductions - they are expenses.

Some folks think that since a vehicle is a deduction for their business, you should buy or lease a new one every two or three years.  After all, you'll get a deduction on your taxes!

But financially, that makes no sense.  Let's crank some numbers to find out why.

Joe runs a plumbing company (which is him and one assistant) and he has a van he paid $25,000 for, new.  Now regardless of whether he depreciates the vehicle over several years or writes-off the cost in one year, the net effect is that he gets a deduction in his taxes equal to the cost of the van.

So let's say in scenario #1 he keeps the van for three years and then buys (or leases) a new one.  The analysis for leasing is really the same as buying (as a lease really is a purchase) except that the costs are higher.  Let's assume his marginal tax rate (combined State & Federal Income) is 30%.  He saves $7500 on his taxes by deducting the cost of the van (it really isn't a "savings" though - it is just not being taxed on what is an expense).

Coincidentally, using the 50% depreciation for every 5 years rule, his van depreciates by $7500 after three years.  If he sells the van now, he'll get about $17,500 for it.   Now if we assume that the cost of a new van is the same, the total cost of depreciation over six years is $15,000.

Now, let's assume that he decides to keep the van for six years instead.  The tax deduction is the same, but now the van is worth maybe $11,000.   The cost of depreciation over six years is $14,000 - a savings of about $1,000.  Now at first glance, you might think, "Gee, he would come out ahead buying a new van every three years - with two $7500 deductions, that's $15,000 right there - and it cancels out the depreciation!"

And you'd be wrong.  You'd probably be confused by the "missing dollar puzzle" as well.  The solution to that problem is very simple.  The reason why it seems a puzzle is how they present the data.

And the same thing happens here.  By presenting a "deduction" as a profit or some sort of income, it makes it seem like, well, you can deduct your way to wealth.  But like I said, a deduction is merely not paying taxes on your expenses.  And increasing your expenses is not going to make you a profit.

Let's assume Joe make $100,000 a year, which is a nice round number, and his plumbing truck is his only expense.  And let's assume the flat-taxers have won, and Joe's 30% marginal rate applied to his whole tax burden - to make the math easier.

In Scenario #1, he buys two vans over six years, and deducts $50,000 (the cost of his vans) from his income, minus the resale value) or $25,000 (when you fully depreciate or deduct the cost of an asset, you have to add back in the resale value).   So his net taxable income over six years is as follows:

Income:   $600,000

Cost of Van #1:  -$25,000

Resale of Van #1: +$17,500

Cost of Van #2:  -$25,000

Resale of Van #2: +17,500

Net taxable income:  $585,000

Total Tax @30%:  175,500

Net income after taxes: $409,500

In Scenario #2, the situation would be as follows:

Income:   $600,000

Cost of Van #1:  -$25,000

Resale of Van #1: +$11,500

Net taxable income:  $586.500

Total Tax @30%:  175,950

Net income after taxes:  $410,550 

As you can see, when you look at the overall income, Joe comes out ahead by keeping the van longer, as his net after-tax income goes up even as his taxes go up as well.

Now, of course, this does not take into account a number of factors.  For example, after three years, Joe's van may need new tires or other repairs, which may wipe out the cost savings.

And then there is tax bracket.   I am assuming here that the deductions are not large enough to put Joe in a lower bracket.   That would affect the calculations as well.

And then there are more esoteric things like convenience.  Joe is "on call" 24 hours a day for plumbing emergencies.   If his van breaks down, or is in the shop, that is time away from his calls and lost income (as well as lost reputation).   He may decide, rationally, that it makes more sense for him to buy a new van every few years so that he is insured of reliability of the equipment - and he may decide, rationally, that this trade-off is worth the extra cost.

Of course, the resale numbers here are conjecture.  As a commercial van that is used heavily, it may not yield $17,500 in resale value - and the savings maybe far more than the $1050 shown above.  And more likely, a heavy-duty van would likely cost more than $25,000.  A larger truck might cost $50,000 or more, and this would put a real dent in Joe's income, which means less net take-home income for him, even if he gets to drive a shiny new truck all the time.

And of course, if we go to replacing the vehicles every two years the situation gets even worse.

And there are, of course, other games people play with automotive deductions - legally or illegally.   For example, if you are a Real Estate Agent, you may be tempted to deduct the cost of a car as a "business expense" as you need it to show houses (and it has to be a Mercedes or other luxury car, of course!).   But if you use the car for personal use, that may not be an allowable deduction (and you could be audited).

Rather than trade-in their used vehicle, some sell it to a friend or family member for a reduced price (again, more audit bait).

Others may choose to use their personal car, and then deduct a fixed amount for mileage, which for 2014 is 56 cents a mile.   If Joe drives 15,000 miles a year (the national average) he may be able to deduct $8400 per year for the use of the van.  Using this number, keeping the van longer makes more financial sense.

Over six years, at 15,000 miles, he could deduct $50,400 in automobile expenses.   This would, however, have to cover his gasoline, repairs, registration, and the like.  But the amount of deduction would not depend on the resale value of the van - or its purchase price.   He could buy a used van and deduct it by mileage and get the same number as for a new van.

Let's assume the van gets 20 mpg and gas is $4 a gallon - that yields $3000 a year in fuel costs.  Assume repairs,etc.  average $500 a year.     That means fuel and repairs come to $21,000 over six years.  That leaves a deduction of $29,400 which is more  than the purchase price of the van, new.

In this scenario, Joe could come out ahead, particularly if he took good care of his van.   The mileage deduction works better if you have fewer repairs and expenses, and use less gas.  It also works better when you have a cheaper vehicle.   Obviously, Joe would come out behind, if he was buying a $50,000 van instead.

Deducting based on mileage has one other advantage:  You can use a vehicle for both personal and business use.  And for a self-employed person, this often makes more sense.   Rather than try to keep track of oil change costs and how much gas you put into your car, you can just keep a log of how many miles you've driven for business, and then simply deduct this from your income instead.

For me, this is not an issue. I don't need a vehicle exclusively for my business, so I cannot legally deduct such a vehicle from my taxes.  However, I do take the 56 cents a mile deduction for trips to visit clients, or to visit the Patent Office, or even to buy office supplies or to visit the post office.   It is a lot easier and less hassle (and less audit bait) to do it this way.   But then again, I'm not a plumber, like Joe.

Netflix: Sudden Death

Will Netflix fade away or die suddenly?

Yesterday, the online streaming world changed, forever.

As I noted in an earlier posting, Netflix stock is wildly overpriced.   It is only a matter of time before the other online streaming and PPV services start to take away more and more market share.   And more and more new online streaming services are coming down the pike.  I predicted that Netflix was headed for trouble.

And then, suddenly, something happened yesterday that changed everything.

Sony has either pulled off the biggest marketing scam in the world, or truly is a victim of North Korean aggression.   It doesn't really matter which, the effect is the same.   They've created a hype and a buzz about a movie that according to some critics, is largely forgettable.   And they did this all without having to spend a penny on advertising.

And then they did something very amazing - they decided to release the movie on Youtube for $5.99.   Now, YouTube has been quietly experimenting with Pay-Per-View movies for a little while now.  I first noticed this the other day when I tried to download a movie on my tiny drioid netbook (which is connected to a flat-screen television) and it said that "Your version of Android does not support this movie."  I tried again with my PC and noticed they wanted $1.99 to watch the movie in question.  Suddenly, the world changed.   YouTube was no longer a place to post your funny cat videos, but a serious outlet for Pay-Per-View content.

And the Sony/Interview event is a "coming out party" for YouTube's PPV capabilities - which the public is now fully aware of, thanks to Kim Jong Un.

So what does this mean for Netflix?   Well, as I noted before, their library is shrinking rapidly.   I logged on last night to see if I could watch the Charlie Brown Special or even the stop-motion-animation Rudolph.   No go.  Not even "Christmas Vacation" is available on Netflix.   In fact, their selection of Christmas-themed movies was paltry.  The best I could do was this Charlie Brown Parody video on YouTube.

I stopped subscribing to Netflix's DVD mailing program about a year ago.   I was finding the selection of movies (particularly new releases) to be rather paltry.  If you could find a new release, you'd have to wait a month for their one copy to cycle through the system.    I found I was renting movies that I never watched - which would be sent back after a week, unwatched.  It also seemed they sent me movies I never recall ordering.   Their "hard copy" DVD library was thinning out as well.

Could Netflix die off suddenly?  It is a possibility.  Aereo suddenly shut down service last month when a Supreme Court decision basically said that their entire business model was illegal.  Car-sharing services like Uber and Lyft could find themselves (and are finding themselves) in the same position, as municipality after municipality sends them "cease operating" letters and they are hauled into court for operating illegal taxi services.

Netflix's Achilles' heel isn't legal - well, it is related to Copyright law - but rather a matter of its library.   As more and more studios and networks and other "content providers" pull their content from Netflix in favor of their own outlets, online services, or whatever, Netflix finds itself with less and less to offer.   Even old television shows (like Ironside, Mannix) have evaporated from Netflix, with little or no explanation as to why.

And that is one reason Netflix is scrambling to produce "original content" such as the US-copy of the British series, "House of Cards" (the British version, like most television, is better).  Netflix has to find content - or create it - or die.

And it is funny, when I mention this to other Netflix users, they say the same thing.    "Gee, it seems like lately, all they want us to watch is old Discovery Channel shows or documentaries about Hitler" (anything with Nazis is always listed as "Popular on Netflix").   The selection of shows used to be in the thousands, maybe tens of thousands.  Today, it seems like hundreds.  Maybe a hundred.   Maybe their crappy user interface just makes it seem that way.

And this is the ultimate problem with "dot com" or Internet website-based companies.   Things can change in a real hurry.   The dot-com investors look at Netflix and say, "This is the future of movies!  Look how great it is!  Look how many movies they offer!" - and they buy Netflix stock and assume that it will be "going places" forever.

But, alas, this was all coming apart like, well, a House of Cards.   You see, Netflix's early success was due to an advantageous contract signed with the nearly defunct cable channel STARZ.   STARZ had access to a huge catalog of old movies and television shows, and they licensed this to Netflix for nearly nothing.   Due to some poor wording in STARZ's contract with content providers, the licensing of movies for streaming was not considered to be very lucrative.   STARZ, in turn, licensed this content to Netflix on the cheap, not thinking this would go anywhere.

But in 2012, the STARZ contract expired, and almost overnight, the Netflix library shrunk by more than half.  And since then, more and more content providers and Copyright holders have pulled content from Netflix in favor of their own, or competing streaming services - or in some instances, in favor of nothing at all.

The rest of Netflix's library?   Well, other than their own content, there really is no guarantee that can't go away as well - as licensing contracts with content providers expire.   Already, Netflix's library is so limited that customers are starting to notice.

Netflix already is no longer the "go to" place for movies.  Where this leaves us, is unclear.  I for one, cannot see spending money for Neflix, and then money for yet another service, and then pay PPV fees on YouTube, and then pay fees to Warner or MGM or other studios.   $8.99 a month will turn to $899 a month in no time.   I will simply choose to watch less, which is probably a good thing.   

It is sad, but the content providers see Netflix making a buck, and figure they can make ten bucks.  It will be the death of Netflix.

So, what will happen to the stock?   With a P/E ratio of 90, people were clearly betting than Netflix would increase in popularity and increase in profitability, over time.   Clearly, neither is going to happen.   Netflix had a monopoly on the market, and the market hates monopolies - in this case, not the consumers (who got a lot of movies for cheap) but the content providers who would prefer to see a more competitive marketplace, in terms of outlet for their content.

So, Netflix stock is going to tank, and tank big-time - at least until the P/E ratio is rationalized.  It is currently trading at $342 a share with a P/E ratio of about 90.  I would think the stock price would be more realistic at $76 a share (yielding a P/E ratio of about 20).   The problem is, as the library shrinks, customers could start to drift off, cutting income.   As content providers demand more in royalties, margins could also shrink - profits would decline and the P/E ratio shrink further.  You see where this leads - to an even smaller stock price.

Of course, it could all turn around tomorrow.  The movie studios and television producers could suddenly decide that it is "Christmas for Netflix" and renew their content contracts with Netflix at really advantageous prices, thus boosting profits by a factor of five, making the stock undervalued, if anything.  And if these contracts were for like, 99 years, well, Netflix would be set.

Funny thing, though, given the track record of the movie studios and television producers, I doubt this would ever happen anyplace other than Bizarro world.   In other words, Netflix is fucked, completely, utterly, big-time, and forever.

And the idiots who bought the stock at $350 a share?   Well, these are the same idiots who bought Facebook, thinking that a website is forever.    Facebook isn't about to crash right away - but their growth has stalled - and is shrinking among the prime teen/20's demographic.   It is only a matter of time.

Time.   A few years back, I wondered what was keeping Sears and Radio Shack in business.   Surely these places would go belly-up any day now?   Well, here it is, 2015, and they are still chugging along.   Clearly I was wrong about Sears and Radio Shack, which are healthy businesses with good cash-flows and cash reserves, increasing sales, and high profit margins, that will stay in business forever, right? (Warning:  Sarcasm light is ON).

Actually, no.   Both Sears and Radio shack keep shedding stores, customers, and CASH.   You can't keep running a business forever, when it is losing money.   It is not a matter of "IF" these companies will go belly-up, but when.   And whether that "when" is 2011 or 2016 is really irrelevant.   It is going to crash, just as housing prices did in the 2000's  (I sold out in 2005, calling it two years too early).

Similarly, Netflix will continue to soldier on for many years.   But the halycon days of Netflix are over - it will be a niche player in the emerging market for streaming television.   Without an extensive film library, the compelling need to subscribe to Netflix no longer exists.   You can't run  whole network based on old British murder mysteries and Hitler documentaries.