Just Default Already!

I'm not exactly sure why the US would default if the debt ceiling were not increased. If the debt ceiling were not increased, the US would not legally be able to borrow but could still pay off interest with revenue from existing taxation. I am assuming of course that the US is not just borrowing money to pay off the interest on money they borrowed earlier.

Regardless, it is clear that the Americans need to both increase taxes and cut spending, especially on useless expenditure. That Republicans are not willing to allow increases in taxes is outrageous. In my opinion, the Democrats should just allow a default to occur and let the American people see just how horrible it will be. Th government can cut spending and not built roads, abandon hospitals, stop paying pensioners, and let banks gouge homeowners and businesses with high interest rates. The Democrats can then blame the Republicans for destroying the economy and in the next election should comfortably win.

APN AREIT Fund Yields 9%

As of 16 July 2011, the APN AREIT Fund gives a distribution yield of 9.12 per cent, paid monthly. I have been invested in the APN AREIT Fund for a little over half a year now, and I am very happy with not only the high distribution yield but also the monthly income as well as the stability of the investment income. The payout from the APN AREIT Fund is so stable and predictable that I can make plans for various spending and can reasonably rely on future APN payouts to pay off the liabilities (e.g. if I use a credit card). This predictability, high performance, and stability created by what is seemingly highly compentent active management makes me question the value of unpreditable index funds that pay quarterly distributions that are highly variable.

My hope is that as the income from my APN fund increases, I can devote more of my salary income to investments and rely on the income produced by APN to fund all my living expenses. This means that ultimately I will be able to live without working, which for me is very appealing!

Vanguard Bond Fund Yields 15% for 2010-11

According to Vanguard's website, the Vanguard Index Diversified Bond Fund paid distributions of 15.52 cents per unit in 2010-11. Given that the price of a unit now is $1.01, this equates to an annual distribution yield of around 15 per cent. This is significantly higher than the 5% distribution yield that I am used to, so I began to wonder why bonds did so well last financial year. I am not one to reinvest managed fund distributions and instead have spent the money on buying new running shoes (I will write a post about my shoes later).

It turns out that I am not the only person who noticed this massive distribution on the bond fund. Over at the Bogleheads forums, there is a forum post about the bond fund's massive distribution payout, as well as an associated massive drop in unit prices. The Bloomberg chart below shows the extent of this fall in unit prices.

A Bogleheads member named Tonens gives the following explanation for the anomoly, saying that the large distribution was the product of the strong Aussie dollar.

... [T]he Vanguard Diversified Bond fund is 60% International Bonds, with that proportion hedged to the Australian dollar. The hedging gains as the Aussie dollar appreciated over the last year rather than interest earned likely accounted for the majority of that large distribution.


The total distribution for the fund over the last 12 months its close to 16c (ie about 16%). If the currency goes the other way, it'll contract accordingly.

 
Another member named Asset Chaos explains why the unit price colapsed:

I think you'll find that the price of a unit of diversified bond is not constant. It fluctuates daily in line with the market prices of the bonds held in the fund. The reason that the unit price drops after a distribution is the fund gets paid some interest on its bonds on many days in between the dates on which the fund distributes this income to the unit holders. That accumulating interest is an asset of the fund and so is reflected in the unit price, which is just the total value of the fund divided by the total number of units outstanding. When the fund distributes the interest income, that money is no longer in the fund, so the fund's value drops suddenly on the distribution date. But you as a unit holder still have the same value: you've got a unit's worth of value still in the fund plus the value of the distribution, which you have in the form of cash in hand or in the form of additional units.

It worries me when an investment pays out large distributions accompanied by a fall in unit prices. This is because the fund may be paying for the distributions by eating up capital. However, the explanation that the massive distribution payout is the product of the strong Aussie dollar makes sense.

Carbon Tax Increases Income Tax Rates?

Something doesn't add up with the carbon tax compensation scheme. Take this except from the West Australian article titled Tax cuts to compensate for higher living costs:

To deliver the tax cuts, the tax-free threshold will triple from $6000 to $18,200 when the carbon tax begins on July 1 next year.

A second round of tax cuts will occur in 2015, when the carbon tax switches to an emissions trading scheme, with the threshold lifted to $19,400.

Most taxpayers will enjoy a tax cut of at least $300.

The first an second points are easy to understand. But the third point about most taxpayers will get a tax cut of at least $300 doesn't make sense. The way the income tax system works currently is that you pay nothing for any income you earn up to $6000. Then from $6000 to $37000 you pay 15 per cent. If the tax-free threshold were to increase from $6000 to $18200 then this means that if you earn at least $18200 per year you will save (18200-6000)*0.15 = $1830, and everyone earning over $18200 per year will get this.

But news article talk about most people getting tax cuts of only $300 and that people earning below $80,000 will not benefit!

This makes no sense. Perhaps the government is trying to obfuscate what looks like a tax rise for people in higher tax brackets. My guess is that although the tax-free threshold will increase, to compensate for this the government will increase income taxes in other areas. For example, for every dollar you earn between $18200 to $37000 you may be required to pay 30 per cent rather than 15 per cent.

I wish the government were clearer on this. It does not look good when the government tries to hide detail. If anything it makes me suspicious.

Update 16 July 2011: I have finally worked it out! It's disappointing that the increase in income tax rates was not clearly highlighted in the mainstream media, but the changes are as follows:

• Tax-free threshold will increase from $6000 to $18200
• The 15% income tax rate will be lifted to 19%
• The 30% income tax rate will be lifted to 32.5% in 2012 and then 33% at 2015.

The low income tax threshold will decrease, which, now that I think about it, makes sense because a change in the income tax rates is much more transparent. All in all, I think these tax rate changes comfort with the general principle of carbon tax compensation, which is to target poor people and not rich people. The increases in the income tax rates at the higher end will help make sure that the benefits of the carbon tax compensation only go to those who need it.

I have complained about the carbon tax because there are many problems with it. It doesn't address the problem of jobs moving overseas and it exempts petrol. Furthermore, carbon tax compensation doesn't all go to poor people. Much of it goes to industries. Nevertheless, I completely understand that the job of politician entails compromise. It is no point letting best get in the way of better, as the Greens would have found out when they opposed the CPRS. With a Parliament made up of independents and the Labor party being heavily influenced by trade unions and voters who struggle with rising petrol costs, it makes sense that Gillard make these compromises to ensure that at least something gets through Parliament. All in all, this is a step in the right direction. Taxing big business for their carbon emissions is a much better idea than paying big business to reduce emissions, which is what Tony Abbott plans to do. If Abbott had his way, the money necessary to pay off big business to reduce emissions would need to come from somewhere, and chances are he would introduce some form of carbon tax e.g. by increasing income taxes. Simply increasing income taxes would not punish people who use more electricity, it only punishes people who earn more. By increasing carbon tax you are punishing those people who commit the sin of emitting more carbon and with the proceeds of the carbon tax you can reduce income tax, which encourages single mothers and students to work.

Carbon Tax Released

Finally the full details of Julia Gillard's carbon tax has been released, but as soon as I checked the Commonwealth Treasury website and was diverted to an Australian government website about the new policy, I became annoyed because it was just not clear how much I was going to get. Like the Budget that Labor introduced that cut little bits of spending on a thousand different things, thereby spreading out the pain, it seems as if the carbon tax follows the same philosophy whereby the compensation is spread out over a large number of people, not just low-income people but also pensioners, people with children, people with certain welfare cards, and so forth. It was really confusing.

One of the main features of the compensation is that the tax-free threshold would increase from $6000 to $18000. For someone earning over $18000 per year this is an extra $1800 per year in your pocket ((18000-6000)*0.15=$1800). In my opinion, this is not ideal because this $1800 would go to everyone earning over $18000 a year, including those who earn millions of dollars per year. I have stated in another blog post that I would have preferred to see an increase in the low income tax offset so that millionaires are not compensated.

In addition to this increase in the tax free threshold, there will also be, according to this Herald Sun article on the carbon tax, additional compensation that presumably will come from tax cuts that will be paid to singles earning below $50000: "Individuals will get all extra costs compensated up to an income of $50,000. The compensation means an individual now on $50,000 a year will get $303 in assistance, to cover a $304 rise in their cost of living."

This carbon tax compensation system is far too complicated. I have no idea how much I will get and when I will get it, and I suspect many other Australians will not bother to figure out what they will get because it seems to be dribs and drabs from all sorts of places. The government seems to have divided the benefits into a million different categories.

Furthermore, as I feared, the tax will be levied on only 500 emitters and will only apply if the material is burned. This I fear will mean that companies can dodge the tax by exporting it to countries that have lax environmental laws. What would have been better is a mining tax based on the energy content of what is dug out of the ground. Given that Labor caved in to the big miners and the mining tax discussion is now dead, we must live with what we have, which is the carbon tax and the future transition into an ETS. The system will also be linked in to the international carbon price, and this will hopefully coordinate carbon emission reduction objectives all around the world and hopefully cut off the loophole whereby companies export resources to other countries to dodge the carbon tax.