The Strange Matter of Stock Buybacks

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Within the last 40 years as economic power shifted from workers to owners, corporate profits take of the US economy has more than doubled. Yet, despite corporate profits at an all-time high, job growth remains anemic, wages are flat, and the country can’t even afford its basic needs. A $3.6 trillion budget shortfall has left many roads, bridges, dams, and other public infrastructure in disrepair. Federal spending on economically crucial research has plummeted by 40%. Public college tuition has more than doubled since the 1980s, burying recent graduates under $1.2 trillion in student debt. Not to mention, many public schools along with police and fire departments are dangerously underfunded. So where did all the money go? After all, public companies have nearly $2 trillion in cash just sitting on their balance sheets. So Corporate America has the resources to deploy a lot of money, invest in new technologies to draw growth, give workers a much-needed raise across the board, hire and train employees, build new facilities, pay off loans, pay shareholders, and pay taxes to the government.

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Since the 1980s, stock buybacks have grown in popularity on Wall Street as this graph shows. As Sen. Elizabeth Warren told The Boston Globe, “stock buybacks create a sugar high for the corporations. It boosts prices in the short run, but the real way to boost the value of a corporation is to invest in the future, and they are not doing that.”

But no. Instead, companies keep spending more and more money on stock buybacks. Once illegal and considered insider trading until 1982, stock buybacks have become increasingly popular especially since the 2008 recession. Today, these buybacks have become one of the biggest trends in the post-financial-crisis stock market and the largest source of net demand since 2009. Since 2010, 1,900 companies have spent money on buybacks and dividends with a combined return of capital to shareholders for them equaling 113% of capital spending. So much that a growing number of companies are borrowing money to fund the buybacks. Thanks to Donald Trump’s massive corporate tax cuts, American companies have lavished Wall Street with $171 billion of stock buyback announcements this year, a record high. All in all, Corporate America has pledged 30 times more buying back its own stock than investing in its workforces. Thus, the money these companies make through their financial manipulations drives record-level profits.

Proponents say they reward these long-term shareholders by effectively increasing their company ownership and help boost a stock’s value by raising its earnings per share. When there’s no other compelling use for a company’s cash, this is a better alternative than risky spending or other big investments. But its critics think that buybacks only make things look better than they seem. Indeed, the EPS rise but not because earnings are growing. In other words, they just exist to make shareholders feel better but nothing really changes. Even some of their fiercest proponents claim they’re overused. And in recent years, evidence shows that buybacks haven’t helped boost stock values at all. Other critics argue that buybacks result in companies acting more like banks that hold assets and earn interests and less like a business making money off selling goods and services. Or invest their profits in their workforce and other productive ventures. According to the Academic-Industry Network’s William Lazonick, “Buybacks are not beneficial or necessary to household savers with diversified investments. The only ones who benefit are those who dump shares and are strictly in the business of timing.”

What are stock buybacks?

Also known as a “share repurchase,” is a company’s buying back its shares from the marketplace. Think of it as a company investing it itself or using its cash to buy its own shares. The concept is simple: because a company can’t be its own shareholder, it absorbs repurchased shares and reduces the number of outstanding shares on the market. When this happens, each investor’s relative ownership stake increases on the company’s earnings.

How are stock buybacks carried out?

They’re made in 2 ways:

1. Tender Offer– company may present shareholders with a portion of all their shares within a certain time frame. This will stipulate both the share number the company wants to repurchase and the price range they’re willing to pay (almost always at a premium to a market price). When investors take up the offer, they’ll state how many shares they want to tender along with the price they’re willing to accept. Once the company has received all the offers, it’ll find the right mix to buy the shares at the lowest cost. Tender offers can be a way for executives with substantial ownership stakes and care about a company’s long-term competitiveness to take advantage of the low stock price and concentrate ownership in their own hands. This can free them from Wall Street’s pressure to maximize short-term profits and allow them to invest in the business. But they should only be made when the share price is below the company’s intrinsic value of its productive capabilities and the company is profitable enough to repurchase the shares without impeding its real investment plans.

2. Open Market– company buys shares on the open market just like an individual investor would at market price. It’s important to know that when a company announces a buyback, the market usually perceives it as a positive thing, causing the stock price to shoot up. 95% of buybacks are these. Yet, they often come at the expense of investment in productive capabilities and aren’t good for long-term shareholders. When I discuss stock buybacks, I’m usually referring to the open market variety which used to be illegal and considered insider trading until 1982.

3. Dutch Auction– an alternative form of tender offer which specifies a price range within which the shares will be bought. Shareholders are invited to tender their stock if they wish at any price within it. The firm then compiles the responses, creating a demand curve for the stock. The purchase price is the lowest price allowing the firm to buy shares sought in the offer. And the firm pays that price to all investors who tendered at or below that price. If the share number exceeds the number sought, the company buys less than all shares at or below the purchase price on a pro rata basis to all tendering at these rates. If too few shares are tendered, the firm either cancels the offer or buys back all the tendered shares at the maximum price.

Why would a company want to use buybacks?

A firm’s management may tell you that a buyback is the best use of capital at a time since their goal is to maximize returns for shareholders. Buybacks generally increase shareholder value, at least on the surface. The prototypical line in a buyback press release is “we don’t see any better investment than in ourselves.” This can sometimes be the case but it’s not always true. Nonetheless, there are still sound motives driving companies to buy back shares. Management might think the market has discounted its share price too deeply due to weaker-than-expected-earning results, an accounting scandal, or a poor overall economic climate. Thus, when a company spends millions of dollars buying up its own shares, it means management believes the market has gone too far discounting its shares. More importantly, share buybacks can be a fairly low-risk approach to use extra cash since reinvesting money into R&D or a new product can be very risky. If these hard-earned investments don’t pay off, then that hard-earned cash goes down the drain. Using cash to pay for acquisitions can also be perilous. Mergers hardly live up to their expectations.

Another reason is that companies don’t want to just sit on money, much for the same reason that investors don’t like holding piles of cash either: inflation erodes cash value, so putting it to work makes sense. During periods of economic growth, it’s better to allocate profits to capital (like a factory) or labor as an investment to the firm’s future. But it’s also risky because the economy could worsen. Though I’m not sure if I actually agree with this since I think stagnant wages are part of why the economy isn’t getting any better. So in periods of economic uncertainty, companies choose to give the cash to their shareholders, which should’ve went to their workers. As the head of S&P Investment Services Mike Thompson told Business Insider in 2016, “In an environment like this return cash to shareholders keeps them pleased with the short-term gains while not committing to large investments that could hurt performance.”

Increased Shareholder Value– there are many ways to value a profitable company but the most common measurements is Earnings Per Share (EPS). If earnings are flat but the number of outstanding shares decreases.

Increased Float– as the number of outstanding shares decreases, the remaining shares represent the float’s largest percentage. Increased demand and less supply means a potentially higher stock price.

Excess Cash– buybacks are usually financed with a company’s excess cash, demonstrating that it doesn’t have a cash flow problem. More importantly, it signals that executives feel that cash re-invested will get a better return than alternative investments.

Improving Financial Ratios– or improving metrics upon which the market seems heavily focused on, which is questionable. If reducing shares isn’t done to create more value for shareholders but rather make financial ratios look better, the management likely has a problem. However, if a company’s motive for initiating a buyback program is sound, its financial ratio improvement in the process might be the result of a good corporate decision. For one, share buybacks reduce outstanding shares. Once a company buys these, it often cancels them or keeps them as treasury shares. They also reduce assets on the balance sheet and increase return on assets and equity. They also improve a company’s price-earnings ratio as the market often thinks lower is better.

Dilution– another reason for a buyback may be a company’s wish to reduce the dilution often caused by generous employee stock option plans. Bull markets and strong economies often create a very competitive labor market. So companies have to compete to retain personnel and ESOPs which comprise of many compensation packages. Stock options increase the share number when exercised, which weakens a company’s financial disposition.

Price Support– companies with buyback programs in place use market weakness to buy back shares more aggressively during market pullbacks. This reflects confidence that a company has and alerts investors that it believes the stock is cheap. Often a company will buy back its stock after taking a hit, which is an overt action to take advantage of discount prices on its shares. This lends support to the stock’s price and ultimately provides security for long-term investors for rough times.

Higher Stock Prices– an increased in EPS will often alert investors that a stock is undervalued or has the potential for increasing in value. The most common result is an increase in demand and an upward movement in the stock’s price.

Tax Benefit– while a buyback is similar to a dividend in many ways, it has a major advantage over dividends of a lower capital gains tax rate. Whereas dividends are taxed at ordinary income tax rates.

Does that mean stock buybacks are good?

Not necessarily. Sometimes buybacks can be a great thing if a stock truly is undervalued and represents the best possible investment for a company. But a company must meet certain specific conditions:

1. The stock should be trading at price to economic book value below 1, meaning that the company is buying back shares for cents on the dollar.

2. The company’s balance sheet and free cash flow should be strong enough to support a buyback without jeopardizing future liquidity or investment opportunities.

3. The company should have more cash than it does profitable investment opportunities.

One company meeting all three criteria is Oracle who bought back $8.1 billion in stock (5% of its market cap), reducing outstanding shares by 120 million. Its shares currently trade at a PEBV of 0.9, meaning it’s buying back shares at a 10% discount rate to their zero-growth value. With $50 billion in excess cash on its balance sheet and $9 billion in annual free cash flow, Oracle has more than enough cash on hand to support its buyback program, and more than it could reasonably hope to profitably invest in the near term as of 2016. Oracle’s buybacks don’t just serve their shareholders’ interests, they also benefit the overall economy. When a company with excess cash and few investment opportunities buys back its stock, it puts that cash back in the marketplace for individual investors to distribute to companies needing capital. In buying back billions of dollars in its own stock, Oracle cheaply retired its shares without comprising its ability to invest in future growth.

While there are buybacks that make sense from a capital allocation standpoint and serve the investors’ best interests like in Oracle’s case, these are normally the exception rather than the rule. In fact most companies buying back stock aren’t in Oracle’s situation. If a company merely uses buybacks to prop up ratios, provide short-term relief to an ailing stock price, or get out from under excess dilution, watch out. Oftentimes, they can be a downright bad idea and can hurt shareholders. This can happen when buybacks are done in the following situations:

1. When Shares Are Overvalued– companies should only pursue buybacks when their shares are undervalued. A company that buys overvalued stock destroys shareholder value and would be better off paying that cash out as a dividend, so that investors can more effectively invest it. As Warren Buffett said to Berkshire Hathaway shareholders in 1999, “Buying dollar bills for $1.10 is not good business for those who stick around.”

2. To Boost Earnings Per Share– since buybacks can boost EPS, a company stock buyback in the market reduces outstanding share count. This means earnings are distributed among fewer shares, raising EPS. Thus, many investors applaud share buybacks since they see increasing EPS as a surefire approach to raising share value. However, contrary to popular belief, increasing EPS doesn’t raise fundamental value. Companies must spend cash to buy these shares. In turn, investors must adjust their valuations to reflect reductions in both cash and shares. Sooner or later this cancels out any EPS impact. In other words, lowering cash earnings divided between fewer shares won’t produce any net change to EPS. Of course, a major buyback announcement generates plenty of excitement since a prospect of even short-term EPS can give share prices a pop-up. But unless the buyback is wise, the only gains go to those investors selling their shares on the news. There’s little if any benefit for long-term shareholders.

3. To Benefit Executives– many executives get the bulk of their compensations from stock options. As a result, buybacks can serve a goal: while stock options are exercised, buyback programs absorb the excess stock and offset dilution of existing share values and any potential reduction in EPS. By mopping up extra stock and keeping EPS, buybacks are a convenient way for executives to maximize their own wealth as well as maintain share value and options. Some executives may even be tempted to pursue share buybacks to boost share buybacks to boost the share price in the short-term and sell their shares. In addition, big bonuses that CEOs receive are often linked to share price gains and increased EPS. Thus, they have an incentive to pursue buybacks even when there are many ways to spend the cash or when their shares are overvalued.

4. Buybacks Using Borrowed Money– the temptation using debt to finance EPS can be hard to resist for executives. The company might believe that the cash flow it uses to pay off the debt will keep growing, bringing shareholder funds back into line with borrowings in due course. If they’re right, they’ll look smart. If they’re wrong, investors will get hurt. Moreover, managers assume that their companies’ shares are undervalued regardless of the price. When done with borrowing, share buybacks can hurt credit ratings, since they drain cash reserves that can serve as a cushion when times get tough. One of the reasons given for taking on increased debt to fund a share buyback is that it’s more efficient since the debt’s interest is tax deductible. However, all debts must be repaid at some time. Because what gets a company into financial difficulties isn’t lack of profits but lack of cash. With debt, buybacks become more complicated which doubles the risk since a firm’s leverage levels may cause financial distress in the future and harm shareholders in the long-term.

5. To Fend Off an Aquirer– in some cases, a leveraged buyback can be used as a means to fend off a hostile bidder. The company takes on significant additional to repurchases stocks through a buyback program. Such leveraged buybacks can be successful in thwarting hostile bids by both raising the share value and adding a great deal of unwanted debt to the company’s balance sheet.

6. There Is Nowhere Else to Put the Money– it’s very hard to imagine a scenario where buybacks are a good idea, except when a company feels like its share price is far too low. But if the company’s right about undervalued shares, they’ll probably recover anyway. Thus, companies buying back shares are, in effect, admitting that they can’t invest their spare cash flow effectively. Even the most generous buyback program is worth little for shareholder if it’s done in the midst of poor financial performance, a difficult business environment, or a decline in the company’s profitability. By giving EPS a temporary lift, share buybacks can soften the blow. But they can’t reverse things when a company is in trouble.

Why do companies actually use buybacks?

In theory, corporations should have a distinct advantage over the rest of the market when buying back shares. After all, executives know their industry, the company’s challenges, and their strategic plans better than anyone else. This should enable them to buy their stock when it’s cheap and not when it’s overvalued.

But most companies carry out buybacks for reasons that have nothing to do with maximizing shareholder value. Pressure to hit short-term earnings targets and executive compensation plans often incentivize the wrong metrics which often push companies to buy back stock when it’s most expensive and the money could be better used elsewhere. This is what the Harvard Business Review calls “The Overvaluation Trap.” Data shows that companies buy back more stock during booms and sell them during market crashes. In this way, less like the knowledgeable executives and more like panicky and underperforming investors.

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This 2016 Forbes graph of GE stock buybacks and its valuation. You can see that instead taking the traditional investor advice of “buy low, sell high,” they actually have bought high and sold low. As a result, their stock has lost value.

A graph from Forbes shows this value-destroying behavior for General Electric by comparing between the amount of money spent buying back shares and the price to economic book value, a measure of growth expectations embedded in the stock price. As this graph illustrates, GE bought back an incredible $12.3 billion worth of stock in 2007, just before the market crashed. At the start of the bull market in 2009, the company sold off $600 million worth of its own stock. Throughout the last decade, you can see a high correlation between how expensive GE’s stock is versus current cash flows and how much stock the company buys back. Overall, in the last decade, GE bought back $44 billion of its own shares (17% of its market cap). Yet, its stock fell by 15% over that same time. By inefficiently utilizing valuable capital to buy back stock at inflated prices, GE destroyed value for long-term shareholders. When a company’s equity is overvalued, its executives have to scramble to justify that expensive price. One way to do that is by artificially boosting the EPS through share buybacks. As this Forbes graph above shows, GE does this effectively as the company managed to hit or beat EPS in 15 out of past 16 quarters.

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Business Insider’s graph on IBM also shows how buybacks might make the EPS look good as the number of outstanding shares drops. Despite that the net income has fallen, which isn’t a good sign in most businesses.

Another case is IBM who spent $4.6 billion in 2015 and $125 billion in the decade prior as of 2016. According to a Business Insider graph, from 2010 to 2015, its total share count was down by about a fifth while earnings per share rose 15%. Yet, in that same period, IBM’s actual income went down 11% as sales fell, too. As a result, IBM has lost about $50 billion in market value since 2013, or about 30%.

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Since executive pay is often tied to stock compensation, top Wall Street execs have often been pressured to do buybacks to increase their coffers. Even if it makes no strategic financial sense. It’s part of a phenomenon called greed. This is a Bloomberg graph of IBM’s CEO compensation.

Also, many companies have executive compensation packages incentivizing excessive share buybacks, either directly or indirectly. In GE’s case, a percentage of its bonuses depends on the company returning a certain amount of cash to shareholders. In 2014, executives had to make sure combined dividends and buybacks hit at least $10 billion to get their full bonus, even if that decision made no strategic sense. But it makes perfect sense in regards to greed. Because when share prices go up, CEOs reap a bonanza so the value of their pay also rises in what amounts to a retroactive and off the books pay increase on top of their already humongous compensation packages. As a result, the very people we rely on to make investments in the productive capabilities that will increase our shared prosperity are squandering most of their companies’ profits for their own prosperity. The Academic-Industry Network’s William Lazonick told The American Prospect, “All of those trillions of dollars flowing out of companies are being used to build the war chests of hedge-fund activists for further buybacks or [giving them more] money to play around with on derivatives. When you connect the dots, it’s part of bigger process. This is really a long-run problem that helps to explain concentration of income at top because it’s getting made off the stock market.

Other companies incentivize share buybacks through emphasizing metrics that can be easily manipulated and have little impact on shareholder value. For example, Cisco executives are judge in part on their ability to grow adjusting operating income, adjusted EPS, and operating cash flow. That term “adjusted” is crucial since Cisco uses metrics for judging executive performance exclude share-based compensation. Meaning that executives can pay employees (and themselves) with stock instead of cash, buy back shares to offset dilution, and increase these adjusted metrics to improve real operating performance. In 2015, Cisco bought back 155 million shares. But after effects of employee stock compensation, it only reduced the total outstanding shares by 38 million. So all those buybacks are just trickery executives use to boost their own bonuses.

And it’s not just GE, IBM, and Cisco. According to FactSet data by Andrew Birstingal, the performance of companies engaging in buybacks has been disappointing. “In the past year, companies repurchasing shares saw an excess weighted cumulative return of -1.9% relative to the benchmark, while companies not repurchasing shares saw a return of 9.8% relative to the benchmark,” he said in 2016. On a three-year horizon, those companies buying back shares ended up with a -2.9% return against 11.5% gain for those not buying back stock. A study found that companies completing buybacks outperformed their benchmark before 2001. Yet, those who completed buybacks between 2002 and 2006 didn’t generate better returns since that time than those who didn’t. Based on this research, buybacks aren’t helping share prices in either short- or long-term.

However, the cost of buybacks doesn’t just come from overpriced stock losses, but also from missed opportunities to invest growth and innovation. Over the past decade, AT&T bought back $50 billion in stock which could’ve been used to improve its wireless network quality and catch up with Verizon which doesn’t buy back stock. All those buybacks didn’t keep AT&T from underperforming versus Verizon and the broader market. We tend to think of buybacks as a sign of success proving a company has plenty of cash to throw around. In reality, they amount to admission of failure for a company buying back stock signals the market that it lacks profitable investment opportunities.

So what’s the deal with stock buybacks and the economy?

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Stock buybacks don’t give any incentives for companies to use profits in improving their enterprise and raising workers’ wages. The frequency of buybacks have led to increased economic inequality and more money going to the 1%.

Before the Security and Exchange Commission loosened regulations that gave companies an ability to repurchase stock without facing charges of stock manipulation and a shift toward stock-based compensation toward top executives, corporate money flowed through the broader economy in the form of higher wages or increased investments in plants and equipment. But today, these stock buybacks drain millions of dollars of windfall profits out of the real economy and into a paper-asset bubble. This inflates share prices while producing nothing of tangible value. Corporate managers have always been pressured to grow earnings per share, but where once the only option was the hard work of actually growing earnings by selling better products and services, they can now simply manipulate their EPS by reducing the number of outstanding shares. As a result, it has become a gigantic game of “keep away” with CEOs and shareholders tossing a $700 billion ball back and forth over American workers, whose wages as a share of GDP have fallen in almost exact proportion to profits’ raise. Since buybacks give firms no incentives to share their profits with the workers who truly invest in these companies, pouring their lives into them each day for pay increases and stable opportunities. Or the taxpayers who have an interest in whether a corporation that uses government funding can turn a profit that allow it to pay taxes. As the Academic-Industry Network’s William Lazonick told The American Prospect, “The issue is what are they not doing when they do stock buybacks. What they’re not doing is keeping people employed longer, paying them more, and giving them more benefits. There’s a direct connection between the decline of those norms and the rise of buybacks and the legitimized ideology of ‘Shareholder First.’” Over the last decade, 94% of company profits have gone to shareholders through buybacks and dividends.

This practice isn’t just unfair to Americans, but also to individual harmful to both companies and the American economy. A 40-year obsession with “shareholder value maximization” stock buybacks and excessive dividends have reduced business investment and boosted inequality. Now almost all firms carry out investment through retained earnings. Thus, diverting cash flow to stock buybacks has inevitably resulted in lower rates of business investment. And since the 1980s, corporations have bought back more equity than they’ve issued, representing a net negative equity flow. In other words, shareholders aren’t providing capital to the corporate sector like they should. They’re extracting it. Meanwhile the shift to stock-based compensation helped drive the 1%’s rise by inflating the ratio of CEO-to-worker compensation from 20 to 1 in 1965 to 300 to 1 today. Labor’s steady falling share of GDP has depressed consumer demand, resulting in slower economic growth. It’s mathematically impossible to make the public- and private- sector investments necessary to sustain America’s global economic competitiveness while flushing away 4% of its GDP year after year. If the US is to achieve growth distributing income equitably and providing stable employment, government and business must take steps bringing stock buybacks and executive pay under control. The nation’s economic health depends on it.

What should be done about stock buybacks?

The federal government must reorient its policies from promoting personal enrichment to enhancing national growth. Such policies should limit stock buybacks and raise the marginal rate on dividends while providing real incentives to boost R&D investment, worker training, and business expansion.

According to a 2014 Harvard Business Review, a good first step would be an extensive SEC study of the possible damage that open market buybacks have done to capital formation, industrial corporations, and the US economy over the past 3 decades. For instance, during the amount of stock taken out of the market has exceeded the amount issued in almost every year. From 2004-2013, this net withdrawal averaged $316 billion a year. Overall, the stock market isn’t functioning as a funding source for corporate investment.

Another measure we need to do is reining in stock-based pay which should be very limited. Many studies have shown that large companies usually use the same set of consultants to benchmark executive compensation and that each consultant recommends that the client pay its CEO well above average (which is what CEOs want to hear). Thus, compensation inevitably ratchets up over time. They also show that even declines in stock price increase executive pay. So when a company’s stock price falls, the board stuff even more options and stock awards into top executives’ packages, claiming that it must ensure they won’t jump ship and will do whatever necessary to get the stock price up. A 1991 SEC decision allowing top executives to keep gains from immediately selling stock acquired from options only reinforces their overriding personal interest to boost stock prices. Because corporations aren’t required to disclose daily buyback activity, it gives executives the opportunity to trade to trade undetected on inside information about when buybacks are in progress. The SEC at least should stop allowing executives to sell stock immediately after options are exercised. And incentive compensation should be subject to performance criteria reflecting investment in innovative capabilities, not stock performance.

But more importantly, we must transform boards determining other executive compensation. Boards are currently dominated by other CEOs with strong bias toward ratifying higher pay packages for years. When approving enormous distributions to shareholders and stock-based pay for top executives, these executives believe they’re acting in shareholders’ interests. And that’s a big part of the problem. The vast majority of shareholders are simply investors in outstanding shares who can easily sell their stock when they want to lock up gains or minimize losses. Since taxpayers and workers are the people truly investing in the productive capabilities of corporations, they need to have seats on boards of directors. Their representatives would have the insights and incentives to ensure that executives allocate resources to investments in capabilities most likely to generate innovations and value.

If business leaders want to maintain broad support for business, they must acknowledge that a corporation’s purpose isn’t to enrich the few, but to benefit many. Once America’s CEOs refocus on growing their companies over their share prices, shareholder value will take care of itself and all Americans will share in the economy’s benefits. The corporate allocation process is America’s source of economic security or insecurity whether its people like it or not. If Americans want an economy in which corporate profits result in its shared prosperity, the buyback and executive compensation binges will have to end. Sure executives will complain like whiny babies. But the best executives might actual get satisfaction being paid a reasonable salary allocating resources in ways sustaining the enterprise, providing higher standards of living to the workers who make it succeed, and produce tax revenues for the governments providing it with crucial perks.

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The Great American Tax Swindle

Last week, the United States House of Representatives passed the Tax Cuts and Jobs Act which seeks to dramatically cut corporate taxes and consolidate benefits for individuals. In addition, the legislation eliminates the alternative minimum tax and estate tax as well as pare back certain individual deduction. This bill would also offer a new tax rate for owners of “pass through” businesses like LLCs and partnerships whose income from their businesses is taxed as personal income. It’s very clear that the House Republican tax bill will disproportionately benefit wealthy Americans, who’d more likely profit from corporate tax cuts more than non-wealthy Americans and likely exploit the pass-through rate by setting up dummy corporations. According to the Tax Policy Center, the absolute richest Americans such as the top 0.1% earning at least $5 million a year, would receive an average income tax cut of 3% which can translate into $320,640. The middle fifth of taxpayers earning between $54,700 to $93,200 a year would get a 0.5% income boost which will only consist of $360. Nearly half the cut will go to the 1%. Though 61.4% of Americans would receive a tax cut by 2027, 24.2% will see their taxes rise by an average of $2,080. Nevertheless, this bill will almost certainly not become law in its current form since the current version will certainly increase the budget deficit by trillions over 10 years and beyond. But it nevertheless, reflects the Republican Party’s values and priorities which don’t translate into the kind of tax reform America needs as well as disproportionately punishes hardworking Americans and the poor for no reason. Because this isn’t a tax reform bill with ordinary Americans in mind, but major Republican donors and corporations.

Who Wins:

Corporations– Since they’re the main focus on most of the tax cuts. According to the Joint Committee on Taxation, cutting the corporate tax rate from 35% to 20% (like this bill does), costs nearly $1.5 trillion over 10 years. They also gain new, more favorable treatment of income earned abroad, which either isn’t taxed or taxed at an even lower rate than 20%.

The Wealthy, Particularly the Ultrarich– Because they tend to earn a disproportionate share of their income from capital (like stock sales and dividends) and thus benefit from cuts to the corporate tax, which is largely a tax on capital. Should the corporate tax also reduce wages (as some conservative economists allege), corporate tax cuts still disproportionately help the wealthy as huge wage shares go to high earners, not low or median-wage earners. In addition, the pass-through cut could lead some wealthy people who either own pass-throughs or create new ones to shelter some of their income from high rates. Both Tax Policy Center analysis and the Joint Committee on Taxation confirm that the richest Americans will receive the biggest cuts as a percentage of their income.

People Making Mid-to High Six-Figure Incomes– They should arguably count as wealthy or rich, too. By raising the threshold for the 39.6% rate on individual income to $1 million for couples, up from $470,000 today, those with incomes in the $600,000 to $700,000 range will receive a sizeable reduction alongside to the low-end tax cut they get because the new 12% bracket will apply to income now taxed between 15% or 25%. The Tax Policy Center finds that once you reach the 95th percentile like earning $304,600 a year or more, over 70% of them get tax cuts in 2027, with the average change amounting to 1.4-3% of their income.

Pass-Through Companies– Companies like the Trump Organization get a new very low rate. Though the bill includes some provisions meant to prevent rich individuals from using this tax break to shelter income, it only limits the benefit in many cases. Overwhelmingly rich owners of these pass-throughs will still come out ahead. We know this because Kansas entirely eliminated state taxes on pass-through companies which mainly resulted in people to simply reclassify their income to dodge taxes while not actually starting any new businesses.

Heirs and Heiresses– Because this bill first reduces the estate tax (through increasing exemption and applying it to even smaller sliver of the ultrarich) and then eliminates it entirely. Keep in mind this is on those who earn at least $5 million anyway.

Who Loses:

Blue State Residents– Since they will pay higher taxes since this legislation eliminates state and local income/sales tax deductions while somewhat curtails those for property taxes. Wealthy people benefitting from these deductions will likely see this tax hike offset by the other tax cuts in the package. Though this may leave a silver lining when you realize that many blue states are home to Wall Street, Silicon Valley, major media organizations, Hollywood, many large corporations, and high earning Americans like Donald Trump.

The Housing Sector– Since it faces a new limit on mortgage interest deduction. Though the rate cuts largely make up for this in regards to some individual taxpayers, it reduces the incentive to build and buy homes, which could affect lenders, construction workers, real estate firms, etc.

Poor Families– Though they were rumored to receive a tax cut due to change in the refundability formula for the child tax credit, that measure didn’t make it in the bill. Because that credit only goes to families with $3,000 in earnings or more and phases in slowly. Though some in Congress did push to lower the threshold to $0, they didn’t succeed. Instead, the bill includes a provision denying the child tax credit to American citizen children whose parents are undocumented immigrants. Because Republicans don’t want undocumented immigrants having anchor babies to take advantage of that tax credit. Despite that fear of deportation keeps more undocumented immigrants from seeking benefits their citizen children could desperately use. Furthermore, fees extracted by tax preparers standing between the low-income and earned income tax credit aren’t deductible under this plan.

Higher Education– The House bill eliminates student loan tax exemptions and treats graduate tuition reimbursements as income. The Senate bill contains an excise tax on earnings of big university endowments. This will increase the cost of college for many students, result in more borrowers struggling to pay their loans, grad and doctoral students in terrible financial situations, as well as hit colleges and universities hard. Not to mention, such measures will dramatically hurt the economy in the long run by undermining human capital developments and creating a less educated workforce. In addition, it might even cost lives by impeding biomedical research.

Workers– The Republican tax plan treats union dues as taxable income. Poor and middle class people will also see their taxes increase across the board, especially if they earn between $40,000 and $75,000 a year. In addition, it taxes contributions to 401 (k) plans.

Healthcare– The House bill proposes eliminating medical deduction exemptions which will devastate many middle-class families with an illness. Republican Senators are proposing to repeal Obamacare’s individual mandate which will result in 13 million people uninsured, hurt enrollment in Medicaid and Obamacare exchanges, increase premiums on those who purchase insurance, and increase preventable deaths by 15,600 people per year. Not to mention, the Senate bill cuts alcohol taxes which are effective at reducing drink driving, violent crime, and liver cirrhosis while increasing them saves thousands of lives per year. Add to that cuts to Medicaid by $18 billion by 2021 and Obamacare subsidies. All this will only make the healthcare markets worse, not better.

The Deficit– As the Joint Committee on Taxation has reportedly determined that the House Republican tax bill will cost $1.51 trillion over 10 years, which is what the House/Senate allocated for the bill. But it’s still a sizeable increase in public debt.

As you can see, this Republican tax reform effort reflects the conservative allergic reaction to progressive taxation and goes beyond undoing the most progressive gains achieved during the Obama and Clinton administrations. 3 changes stand out in this legislation. First, these taxes are far more focused on owners than workers, even by Republican standards. Second, they take advantage of the ambiguity on what counts as income. Third, it weaponizes that vagueness to help their friends and hurt their enemies. Though to be fair, I’m not sure who counts as which in this scheme. After years of pushing for a safety net that works through the tax code and keep more social democratic forms at bay, Republicans now seem willing to even demolish even those modest protections, some of which benefit many of their voters. And they make it clear that a welfare state based on tax credits and refunds, rather than universal commitments, is all too vulnerable.

The House “reform” bill illustrates that Republicans understand how the economic game’s rules are shifting toward capital and away from labor (even from the rich’s labor). Since 2000, income growth among the 1% has accrued people making their money from owning money, stock, and other financial instruments, rather than to people making money via skills and labor. As a result, corporate profits have skyrocketed since then and increased faster during the Great Recession. However, such growth hasn’t trickled down to ordinary Americans. Wages have been flat since 2000 and recession recovery featured the weakest business investment of the postwar period. This marks a genuine shift in the economy’s organization which economists still struggle to understand. But the Republican tax plan supercharges these changes which are about benefiting not just the well-off, but those well-off because they own capital.

But why? Because the Republican tax plans mainly focus on corporate income tax reductions which will largely benefit concentrated owners of stock, passive owners of pass-through businesses who don’t actively work for the firm, and those inheriting their money. We should also understand that foreigners hold about a third of US-based stock, meaning there will be a significant amount of benefits not going to US citizens. In fact, the Institute of Tax and Economic Policy estimates that foreign investors would receive benefits roughly equal to those going to the bottom 3/5 of Americans.

Much of the Republican tax plan involves changing the definition of “income” in various ways. Now most people usually think of income as whatever their salary is. But it’s more complicated than that. And Republicans are redefining different kinds of income to benefit their friends as well as harming their enemies. Under the plan, Passive owners of pass-through entities get their income redefined in a way that minimizes taxation. Those inheriting money get their inheritance redefined to hide it from taxation. And those wanting to stuff money away to send their kiddies to private school, get that savings defined as non-income, too. All these are payouts to key Republican constituencies.

But Republicans are also defining income in other ways to punish their opponents. State and local tax deductions Republicans want to repeal primarily benefits those in blue states where those taxes are higher. They also want to treat graduate education tuition reimbursements as income, hitting higher education (which is home to climate scientists and the “politically correct” anti-right) hard. Union dues would suddenly become taxable income. And fees extracted by tax preparers who stand between low-income people and the earned income tax credit aren’t deductible under their plan.

Yet, it’s not just their opponents they want to punish either. House Republicans also propose eliminating all of the medical deduction exemption which would be devastating for middle class households with an illness. And the latest Senate tax bill calls for eliminating the individual mandate which could result in 13 million uninsured. In short, not only are Republicans are using the tax code to swipe at the Affordable Care Act, they also want to do away with their own tools for making medical expenses more bearable. In the past conservatives have explicitly stated that they hoped the growing use of tax-deferred 401(k) savings plans would weaken support and possibly replace Social Security. But today’s GOP almost reduced the cap for 401(k) contributions. What about the Adoption Tax Credit that was part of the 1994 Republican Contract with America? Well, the House tax plan got rid of that, too. And what about students investing in their own educations through student loans? The bill also puts student loan tax exemptions on the chopping block. Tax exemptions, deductions, and benefits are usually considered regressive, poorly targeted, and too reliant on the market. But they do form a coherent social insurance system for middle-class and upper-middle class families. Many of them number among Republican voters. Yet, it’s this very safety net via tax code that Republicans have declared war on in their new tax bill. They could’ve crafted these various deductions into a more coherent system, they’re axing them to cut taxes on the rich. Republicans are so indebted to capital owners that they’d destroy their system in order to appease them. Even if it means proposing a tax plan whose benefit are permanent for owners yet expire for everyone else. They’ve taken the worst trends in the American economy and hit the accelerator.

Let’s not kid ourselves. Trickle down economics has been implemented in US tax policy time and time again since the 1980s and has been shown not to work. When you cut taxes for the rich, you don’t create jobs nor raise wages. If anything, the rich just become richer while corporations make higher profits. Meanwhile, wages remain stagnant while ordinary Americans increasingly find themselves less able to adequately support themselves thank to inflation and rising costs of living. But according to free market purists, market competition should ensure low prices. Except that it doesn’t, especially if it results in large corporations expanding that they either become monopolies or conglomerates. Corporate increases in profits and size don’t translate into higher wages, more jobs, or lower prices. Nor will it benefit the economy or solve any of its problems. The Republican tax plan’s regressive nature is reason enough to oppose it. Should the United States run a deficit, then it shouldn’t be to reduce taxes paid by those at the top. Given recent economic developments, it’s especially irresponsible. Corporations are flush with cash thanks to large profits and aggressively low interest rates. But they’re not investing. Thus, these large tax cuts for corporations will have very little effect on the economy and only amplify the deleterious trends we’re still trying to comprehend.

I don’t doubt that the United States needs to reform its tax code. Wealthy Americans and corporations shouldn’t be the main beneficiaries in tax legislation. If anything, the rich should be made to pay more taxes as well as be held accountable for tax evasion and other financial shenanigans like everyone else. Should we need to eliminate deductions or benefits, let it be rich stuff like any measures pertaining to private jets. After all, if you could afford a private jet, you don’t need subsidies or tax breaks. In addition, we need to tax capital gains from which the wealthy primarily earn their money. The American people deserve better than an egregious tax scam that only benefits the few at the expense of the rest.

The Vultures of Wall Street

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For the United States in 2017, the economy is growing, unemployment is low, and consumer confidence is at a decade-long high. Though this would normally create a retail boom, more chains are filing for bankruptcy and rated distressed than at the height of the Great Recession. Cities across the country are facing 6,800 store closings which has become known as the retail apocalypse. This year 19 retail companies have declared bankruptcy including Radio Shack, The Limited, Payless, and Toys “R” Us. Naturally people like to point at Amazon but e-commerce sales in the second quarter only hit 8.9% of sales. So it’s not like these stores are necessarily hurting for business despite declining sales. Besides, most of the retailers already have online stores.

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Here’s a chart on the stores closing due to the retail apocalypse. Though we often blame Amazon for this and declining sales, the real cause for this is far more insidious than you can even imagine.

However, the real reason why so many companies are sick has little to do with technological disruption. Rather with debt and a predatory financial scheme. Over the past decade, private equity firms bought numerous chain stores and loaded them up with unsustainable debt payments as part of their business strategy. Billions of dollars of this debt comes due within the next few years. As Bloomberg wrote in a recent article, “If today is considered a retail apocalypse, then what’s coming next could truly be scary.” The retail sector has already lost hundred thousand jobs from October 2016 to April 2017. In the following June, 1,000 stores closed within a week. And it will only get worse. This year only $100 million in retail debt came due this year. But there will be $1.9 billion next year and $5 billion on average due between 2019-2025. This threatens retail sales and cashiers who make up 6% of the entire US workforce and a total of 8 million jobs. And since these workers aren’t confined to any one region, the entire country will share their pain. In the Pittsburgh area where I live, 26.8% of retail loans are delinquent. States like Michigan, Illinois, West Virginia, and Ohio are among the hardest hit where retail employment has declined over the last decade and those will likely spread. Meanwhile, any states like Florida, Arkansas, and Nevada have overly relied on retail for job growth and will feel more pain as the fallout deepens. States like Alabama, Louisiana, New Hampshire, Mississippi, and South Carolina have the highest concentration of cashiers. As the debt comes due, expect more displaced low-income workers, shrinking local tax bases, and investor losses on stocks, bonds, and real estate.

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The tragedy of Sears is a major example of how private equity can be so insidious. Once a retail bastion, it’s now facing bankruptcy thanks to overbearing debt and mismanagement by hedge fund manager Eddie Lampert.

The most famous example of this is Sears which is now closing hundreds of stores and facing bankruptcy. Once a bastion in America’s consumer-based economy, it has been run to the ground by none other than hedge-fund king Eddie Lampert. A former Yale roommate of Treasury Secretary Steve Mnuchin, arranged the Sears-Kmart merger and immediately started shifting revenue to shareholders. In addition, he spent $6 billion on stock buybacks to reward investors and raise the share price. More importantly, Lampert personally lent billions to Sears Kmart which increased its corporate debt. As its in-store sales lagged, Sears sold off major assets like its Craftsman brand tools and Land’s End outdoor equipment to pay for the loans. He also split ownership of 266 Sears and Kmart buildings into a real estate investment firm called Seritage. Last year, Sears and Kmart stores paid $200 million in rent on these properties they once owned which ate up its operating revenue. Even as Sears’ very existence is in question, Lampert will likely come out ahead. He’s enjoyed fees from all the lending to Sears and he’ll recoup more money in any restructuring even if Sears has to sell off inventory to do it. As Seritage’s shareholder, Lambert’s hedge funds can profit from higher rents charged to new retail outlets moving into shuttered Sears and Kmart locations. In fact just this year, a Kmart near where I lived and used to shop closed down and I knew some people who worked there.

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This is a Kmart store in Rostraver Township, Pennsylvania that’s near where I live. On June 7, 2017, it was announced this store was closing. I’ve shopped at this place on many occasions and knew some of the people who worked there. Kind of a shame. I’ve also heard that the Kmart in Mount Pleasant Township closed earlier this year as well. Kind of a shame.

Sears’s mismanagement reflects an ongoing pattern of private equity takeover artists benefitting from crippling the companies they purchase. Golden Gate Capital and Blum Capital, the 2 firms behind Payless, paid them $700 million in dividends in 2012 and 2013 on the company’s back. Payless filed for bankruptcy this year and closed 400 stores. Toys “R” Us filed for bankruptcy in September unable to sustain between $400-$500 million in annual interest payments on $5.2 billion long-term debt. Private equity firms, including Bain Capital and longtime firm Kohlberg Kravis Roberts, stripped out nearly $2 billion in cash as debt levels rose. And Toy “R” Us’s profitability was increasing when it filed for Chapter 11 since sales in the toy sector had been rising annually by 5% over the past 5 years.

Toys R US To Close 87 Stores

Toys “R” Us wasn’t among the worst casualties in the retail apocalypse. But its filing for bankruptcy in September came as a shock because its profitability had increased and its business was mostly stable. However, the real reason was that the toy store chain was overburdened with debt to private equity firms that bought it out in 2005.

What you see is a robbery in progress. Private equity firms borrow massively to buy companies and use corporate cash reserves to pay themselves back. Workers contributing the value to the business see nothing but the possible job cut since companies usually cut staff to service the debt. When the company collapses under the borrowing weight, all workers lose their jobs even when sales are up. Though troubled retailers have billions of borrowings on their balanced sheets like Sears, sustaining that load will only become more difficult even for healthy chains like Toys “R” Us. Private equity firms defend that their business model returns companies to fiscal health thanks to superior management. But this isn’t what we see in the retail apocalypse. Retail firms typically roll over debt to buy time and avoid bankruptcy. However, interest rates have increased since the last set of buyouts several years ago, making that prospect more expensive. Now these overleveraged companies are finding it difficult for anyone to agree to refinance. As a result, delinquent payments on shopping centers and other commercial real estate have spiked as high as one quarter of all loans in some parts of the country.

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This is a map from Bloomberg showing the concentration of retail jobs all over the country from 2016. Due to private equity overleveraging, the retail apocalypse will only get worse as debts come due. This could mean millions of Americans losing their jobs.

Yet, private equity firms don’t receive a lot of attention which is why I devised this handy FAQ for you to look at. If there is a reason we should care about private equity firms, is that they play a huge role in our economy. Though not all PE firms aren’t predatory finance schemes, many are. And the fact they’re less regulated than banks only exacerbates matters when these vulture capitalists put a company under. Predatory financial schemes hurt everyone. They kill jobs and businesses as well as ruin communities and whole economies. As of 2012, private equity firms own companies employing about 1 out of 10 Americans. This makes them hugely important since they’re basically America’s biggest employers. If you work for a PE-owned company, you might stand a chance of losing your job within the next few years. Now I’m not a fan of corporate America and have the criticized the retail industry for mistreating their workers on shit wages, unpredictable schedules, and anti-union activities. But I understand the retail industry does play a key role in the US economy. Even a shit job like cashier is a job nonetheless. And people rely on these jobs to support their families. Thus, I believe we need to understand what these private equity firms do and how many of them can be a business’s best friend or its worst nightmare. So here is a handy FAQ for reference. Besides, since millions of Americans will lose their jobs over private equity activities, they should know the truth as to why.

What is a private equity firm?

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This is a diagram of a private equity firm business model. Though I suppose more of an advertisement since it seems to create a positive image.

A private equity firm is an investment management company that provides financial backing and makes investments in the private equity of startup or operating companies through an array of loosely affiliated investment strategies. Usually described as a financial sponsor, each firm takes a bunch of money for a private equity fund and buys up these companies. They do this by usually matching rich people and institutions with more money than they know what to do with to middle market companies who need access to a steady flow of cash. First, the equity firm buys the company through an auction. Second, the firm then increases the company’s value whether through upgrading its accounting system, a procurement process and information technology, or laying off workers and closing unprofitable operations. In return, the private equity firm will receive a periodic management fee and a 20% share in the profits earned. With their investors, private equity firms will acquire a controlling or substantial minority position in a company and then look to maximize that investment’s value. And they generally receive a return on their investment through one or more of the following (if they’re lucky):

Initial Public Offering (IPO)- company’s shares are offered to the public, typically providing a partial immediate realization to the financial sponsor and public market into which it can later sell additional shares. Through his process, a privately held company transforms into a public one. IPOs are usually used by companies to raise the expansion of capital, possibly to monetize investments of early private investors, and become publicly traded enterprises. Companies selling shares are never required to repay its capital to public investors who pass money between each other afterwards. Although an IPO offers many advantages, there also significant disadvantages such as the costs usually associated with the process and the requirement to disclose information that could provide helpful information to competitors. Details of the proposed offering are disclosed to potential purchasers in the form of a lengthy document known as a prospectus. Most companies undertake an IPO with assistance from an investment firm acting in the capacity of an underwriter. Since underwriters provide several services like help with correctly assessing share value and establishing a public market for shares.

Merger and Acquisition (M&A)- one company is sold for either cash or shares in another. As an aspect of strategic management, M&A can allow enterprises to grow, shrink, and change the nature of their business or competitive position. From a legal perspective, a merger is a legal consolidation of 2 entities into one. Whereas, an acquisition occurs when one entity takes ownership of another entity’s stock, equity interests, or assets. From a commercial and economic point of view, both types of transactions generally result in consolidation of assets and liabilities under one entity and the distinction is less clear. A transaction legally structured as an acquisition may lead to placing one party’s business under the other party’s shareholders’ indirect ownership. At the same time, a transaction legally structured as a merger may give each party’s shareholders partial ownership and control of the combined enterprise. This deal may be euphemistically called a “merger of equals” if both CEOs agree that joining together is in the best interest of both of their companies. Meanwhile, when the deal is unfriendly (like when a target company’s management opposes the deal), it might simply be seen as an “acquisition.”

Recapitalization- cash is distributed to the shareholders (in this case the financial sponsor) and its private equity funds from a company’s cash flow or raising debt or other securities to fund the transaction. As a type of corporate reorganization involving substantial change in a company’s capital structure which may be motivated for a number of reasons. Usually, the large part of equity is replaced with debt. In more complicated transactions, mezzanine financing and other hybrid securities are involved.

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As you can see from this infographic, private equity is widespread. As you can see, they’re a major presence in the US economy. Of course, the industries they invest most into are consumer and information technology, which should surprise anyone.

But we should understand that often the effort to fix up the company fails and bankruptcy is the outcome. So while the rewards are great so are the risks. Back in 2012, The Wall Street Journal did an analysis of the 77 businesses Bain Capital invested during former Governor Mitt Romney’s tenure. It found that 22% either filed for bankruptcy or shut down within 8 years of Bain’s investment. Even several companies that initially provided Bain with huge profits later ran into trouble. Of the 10 deals producing more than 70% of Bain’s gains, 4 eventually filed for bankruptcy. But the companies that succeeded were hugely profitable as the Journal concluded that Bain turned $1.1 billion into $2.5 billion in gains in the 77 deals.

So they’re like hedge funds?
Not exactly. Private equity firms characteristically make longer-hold investments in target industry sectors or specific investment areas where they know a lot about. They also take on operational roles to manage risk and achieve growth through long-term investments. Private equity firms and investment funds shouldn’t be mistaken for hedge fund firms which typically make shorter-term investments in securities and other more liquid assets within an industry sector but with less direct influence and control over a specific company’s operations. And hedge fund firms usually bet on both the up and down sides of a business or an industry sector’s financial health.

What is a private equity fund?

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This is a diagram of a generic private equity fund. The private equity firm acts as the general partner while the limited partner investors usually supply the cash for the investments.

Private equity funds usually have a general partner (GP) raising capital from cash-rich institutional investors like pension plans, universities, insurance companies, foundations, endowments, and high-net-worth individuals investing as limited partners (LPs) in the fund. Before buying the company, the GP (who makes all the fund’s decisions), devises a plan for how much debt to use, how the company’s cash flow will be used to service the debt, and how the PE firm will exit at a profit. The private equity firm typically has very little of its own money at risk, only investing 2% or less in the fund while the LPs put up 98% of the equity. But it claims 20% of any gains from these companies’ subsequent sale. Among the terms set forth in the limited partnership are the following:

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Though I’ve already shown a private equity fund’s basic structure, here’s a more detailed chart. You can see the kinds of partners who invest as well as the strategies used.

Term of the Partnership- usually a fixed-life investment vehicle that’s 10 years plus some number of extensions.

Management Fees- annual payments made by investors in the fund to its manager to pay for the private equity firm’s investment operations (usually 1% or 2% of the committed capital to the fund).

Distribution Waterfall- the process in which the returned capital will be distributed to the investor and allocated between the Limited and General Partner. This waterfall includes the preferred return, which is the minimum rate of return (e.g. 8%) which must be achieved before the GP can receive any carried interest, which is the profit share paid to the GP above the preferred return (e.g. 20%).

Transfer of an Interest in the Fund- Private equity funds aren’t intended to be transferred or traded. Though they can be transferred to another investor but such transfer must receive the fund manager’s consent and is at the GP’s discretion.

Restrictions on the General Partner- the fund’s manager has significant discretion to make investments and control the fund’s affairs. However, the LPA does have certain restrictions and controls and is often limited in the type, size, or geographic focus of investments permitted, and how long the GP can make new ones.

Can you describe each private equity firm investment strategy?
Certainly. Here are some in depth descriptions of some major strategies. Though they’re not the only kind of ways private equity firms invests.

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The main investment strategy private equity firms uses is the leverage buyout. This involves buying a company with a combination of equity and debt and using its cash flow as collateral. In fact, it’s usually on the company to pay back the debts. This practice has been prone to plenty of overleveraging and abuse like in the case with Sears.

Leverage Buyout (LBO)- a financial transaction in which a company is purchased with a combination of equity and debt so its cash flow is the collateral used to secure and repay the borrowed money. Since the debt costs less than capital and equity, it serves to reduce the acquisition’s overall financing costs. After all debt costs less than capital and equity because interest payments reduce corporate income tax liability while dividend payments don’t. So the reduced financing costs allows greater gains to accrue to the equity, and as a result, the debt acts as a lever to increase the equity’s returns. Though usually employed when a financial sponsor acquires a company, many corporate transactions are usually funded by bank debt which can also represent an LBO. It could take many forms like management buyout (MBO), management buy-in (MBI), along with secondary and tertiary buyout among others. It can occur in growth situations, restructuring situations, and insolvencies. Though LBOs mostly occur in private companies, they can be employed with public companies, too (in a so-called PtP transaction-Public to Private). As financial sponsors increase their returns by employing a very high leverage (like a high ratio of debt to equity), they’re incentivized to employ as much debt as possible to finance an acquisition. In many cases, this can lead to “over-leveraging” in companies in which they don’t generate enough cash to pay their debt, leading to insolvency or to debt-to-equity swaps in which the equity owners lose control over their business to the lenders. This is the main strategy most private equity firms use and typically finance a buyout of a company with 30% equity and 70% debt. Private equity funds use the acquired company’s assets as collateral and put the burden of repayment on the company itself.

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This is a diagram illustrating how start-up companies are typically financed. First, the new firm seeks out “seed capital” and funding from “angel investors” and accelerators. Then if it can survive the “valley of death” (when the start up’s trying to develop on a “shoestring” budget), the firm can seek venture capital financing.

Venture Capital (VC)- a form if financing provided by firms or funds to small, early-stage, emerging funds either seen as highly profitable or potentially so. VCs invest in these early-stage companies in exchange for a return or an ownership stake in those they invest in. They take on the risk of financing risky startups in hopes that some of the firms they support will eventually succeed. The typical VC investment occurs after an initial “seed funding” round also called the Series A Round. A VC will provide this financing in the interest of generating a return through an eventual “exit” event such as the company selling shares to the public for the first time in an IPO or through its merger or acquisition (a.k.a. “trade sale”). In addition to angel investing, equity crowdfunding, and other seed funding options, VC is attractive for new companies with limited operating histories that are too small to raise capital in the public markets and haven’t reached the point where they could secure a bank loan or complete a debt offering. In exchange for the high risk that VCs assume by investing in smaller and early stage companies, they usually get significant control over their decisions along with a portion of their ownership (and consequently value). They also often provide strategic advice to the firm’s executives on its business model and marketing strategies. Additionally, VC is also a way in which the private and public sectors can build an institution that systematically creates business networks for the new firms and industries so they could progress and develop. The VC institution helps identify promising new firms and provide them with finance, technical, expertise, mentoring, marketing “know how,” and business models. Once integrated into the business network, these firms are more likely to succeed as they become “nodes” in the search networks for designing and building products in their domain. However, VC decisions are often biased as well as exhibit an instance of overconfidence and illusion of control like entrepreneurial decisions in general.

Growth Capital- a private equity investment (usually minority investment), in relatively mature companies that are looking for capital to expand or restructure operations, enter new markets, or finance a significant acquisition without a change or control of the business. Companies seeking growth capital will often do so to finance a transformational event in their lifecycle. Unlike VC-funded companies, growth capital companies usually able to make a profit but can’t generate sufficient cash to fund major expansions, acquisitions, or other investments. Because of this lack of scale, these companies generally can find few alternative conduits to secure capital for growth. Thus, access to growth equity can be critical to pursuing necessary facility expansion, sales and marketing initiatives, equipment purchases, and new product development. Growth capital can also be used to affect a restructuring of a company’s balance sheet, particularly to reduce the amount of leverage (or debt). Growth capital is often structured as the preferred equity, though certain investors use various hybrid securities including a contractual return (like interest payments) in addition to an ownership interest in the company. Often, companies seeking that growth capital investments aren’t good candidates to borrow additional debt, either because of the stability of the company’s earnings or existing debt levels.

Mezzanine Financing- any subordinated debt or preferred equity instrument representing a claim on the company’s assets that’s senior only to that of common shares. It can be structured as either debt (usually an unsecured or subordinate note) or preferred stock. It’s often a more expensive financing source for a company than secured or senior debt. The higher cost of capital associated with mezzanine financing is due to it being unsecured, subordinated (or junior) obligation in a company’s capital structure. Should that company default or go bankrupt, mezzanine financing is only paid after all senior obligations are satisfied. Additionally, since it’s usually a private placement, mezzanine financing is often used by smaller companies and may involve greater leverage levels than issues in the high-yield market which involve additional risk. But in compensation for the increased risk, a mezzanine debt holder requires a higher return for their investment than a more senior debt holder.

Distressed Securities- securities over companies or government entities experiencing financial or operational distress, default, or are under bankruptcy. As far as debt securities, this is called distressed debt. Purchasing or holding distressed debt creates significant risk due to the possibility that bankruptcy may render such securities worthless (zero recovery). Deliberate investment in distressed securities as a strategy while potentially lucrative is significantly risky as the security may become worthless. Doing so requires significant levels of resources and expertise to analyze each instrument and assess its position in an insurer’s capital structure along with the likelihood of ultimate recovery. Distressed securities tend to trade at a substantial discounts to their intrinsic or par value and are considered below investment grade. This usually limits the number of potential investors to large institutional investors like hedge funds, private equity firms, and investment banks.

Why would anyone invest in a private equity fund?

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Though private equity has earned a reputation as corporate saboteurs outside Wall Street, this kind of investment is quite popular among investors. As you can tell from these stats, the notion of private equity won’t go away soon.

Private equity funds are illiquid and managed by active investors. Those familiar with common index funds such as those of ordinary investors might hold in their investment portfolios might lead you to believe a private equity fund investment is foolish. But private equity funds do have a number of good advantages.

1. Taking companies private is incredibly profitable- When a private equity firm takes a company private from the public market, it has 100% of the ownership and thus can claim all its profits and control all capital allocation. Thus private equity firms have unlimited control over what goes on in the company unlike public equity investors. So they could claim all cash flows in the company.

2. Equity returns in short time frames- It wouldn’t be wise to invest in a portfolio of 100% stock if you’ll need the money within the next 5-7 years. Yet, since private equity firms take companies private, they reap the full ownership benefits (profits) and then resell the companies within 5-7 years in the future. During this time period, private equity investors receive equity-like returns in a time period that would only be safe for fixed-income investments.

3. Leverage- Private equity funds take money from investors and then leverage it with bank loans and bond issues from their newly acquired companies to boost returns for their investors. If a private equity firm takes a company private at 10x earnings of 10% per year, it can do very well for its limited partners by leveraging those earnings with cheap debt. It’s kind of like buying real estate, which when leveraged with bank loans, can be an excellent one.

4. Exits- Private equity funds are designed to exist only for a period of spanning less than a decade. When the fund reaches the end of its designed life, it “exits” its holding by selling them. A common exit is to sell a private equity position to a competing firm or to list private companies on the public markets through an IPO.

Why would a company seek private equity financing?

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Here’s a cycle of private equity financing from a firm’s site. Though this seems more catered to investors and has a rather positive spin on it.

Private equity financing provides several advantages to companies such as the following.

1. Active involvement- Unlike other funding options, private equity firms are much more hands on and will help a company reevaluate every aspect of their business to see how it can maximize its value. Having experienced professionals in a business can also result in major improvements.

2. Incentives- Private equity firms need a business to succeed since they borrow a lot of money to make their investments and have to pay that back and generate a return for their investors. Individual partners in private equity firms often have their own money invested as well and make additional money from performance fees if they make a profit. So they have strong incentive to increase a company’s value.

3. Large amounts of funding- Private equity can provide larger amounts of money than other options since deals are usually measured in hundreds of millions of dollars. This kind of money can have a massive impact on a company.

4. High Returns- Combinations of major funding, expertise, and incentives can be very powerful on companies. According to a 2012 study by the Boston Consulting Group, more than 2/3 of private equity deals resulted in the company’s annual profits grow by at least 20% while nearly half of the deals generated a profit growth of over 50% a year or more.

5. Patient Investors- Since private equity firms invest in a company to make it more valuable within a number of years before selling to a buyer appreciating the lasting value created, their investors are less concerned with short-term performance targets though they do have their eyes on the prize. Sometimes such firms are also known to offer private equity back office services to other firms or companies needing them for investments.

What are the disadvantages of private equity financing?
At the same time, private equity financing come with an array of disadvantages such as the following.

1. Dilution/Loss of Ownership Stake- Other funding options let the owner still stay in control of the company despite the investment’s costs. A company may receive much more money with private equity, but the owner has to give up a large share of the business. Private equity firms often demand a majority stake and sometimes leave the owner with little or nothing in ownership. It’s a bigger trade and one many business owners balk at.

2. Loss of Management Control- Beyond money, a business owner can lose direct control of their company. The private equity firm would want to be actively involved which can be a good thing. But it can mean losing control of basic elements in the business like setting strategy, hiring and firing employees, and choosing the management team. Since the private equity firm’s stake is usually higher, the loss of control is much greater. This is especially true when it comes to the private equity firm’s “exit strategy” which might involve selling the business outright or other options that don’t form part of the owner’s plans. Then there’s the fact that private equity decision-making has been shown to suffer from cognitive bias such as illusion of control and overconfidence.

3. Different Definitions of Value- Private equity firms exist to invest in companies, make them more valuable, and sell their stakes in large profits. Mostly this can be good for the companies involved since any business owner would want to create more value. But a private equity firm’s definition of value is very specific and limited since it’s focused on a business’s financial value on a particular date about 5 years after the initial investment when the firm sells its stake and books a profit. Business owners, by contrast have a much broader definition of value with a longer-term outlook and more concern for relationships with employees and customers as well as reputation. Such difference can lead to clashes.

4. Eligibility- Private equity firms look for particular types of companies to invest in which have to be large enough to support those major investments and offer potential for large profits in a relatively short time frame. This means that a company must have very strong growth potential or it’s in financial difficulties and is currently undervalued. A business that can’t offer investors a lucrative investment within 5 years will struggle to attract interest from private equity firms.

5. Debt Accumulation- Private equity firms use significant amounts of debt to perform deals in financial markets. This can significantly damage not only the company who has to pay for the debt but also to investors and financial markets as well. Not to mention, they charge their companies a bunch of hidden fees. They also make the companies sell their real estate and pay a higher rent to remain on the property, too.

6. Lack of Transparency- Though oversight on private equity firms has increased since 2008, they’re still less regulated than more traditional forms of financing. Private equity also adheres to some practices that alarm politicians. One tactic is a fee-waiver conversion which intentionally directs a greater amount of an investor’s capital away from higher-taxed fees and into a more favorably taxed category.
So what’s with the vulture capitalist reputation?

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Though not all private equity firms are vulture capitalists, there are plenty of large firms that have acquired such reputation. One of these was Mitt Romney’s Bain Capital as you can see on this cartoon chart.

Private equity firms are notorious for making money for their investors without regard to stakeholders in the business. In most cases, private equity firms acquire the kinds of companies that are already in poor financial health, lack a competitive environment, or have poor managers. They want to acquire companies cheap and that means buying companies they believe have more value than Wall Street is willing to realize. Sometimes this means buying companies everyone knows will go out of business. Sometimes a private equity fund performs as advertised using reasonable amounts of debt and providing access to management and expertise and financial resources. This usually involved smaller companies with few assets that can be mortgaged but many opportunities for operational improvements.

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This is Joshua Kosman. In 2009, he wrote a book called The Buyout of America arguing that private equity firms are terrible and will cause the next credit crisis. In his intro he writes, “I believe the record shows that PE firms hurt their businesses competitively, limit their growth, cut jobs without reinvesting the savings, do not even generate good returns for their investors, and are about to cause the Next Great Credit Crisis. Leadership is needed to rally opposition to close the tax loopholes that make this very damaging activity possible.” So far this year’s retail apocalypse is proving him right.

However, the reality is that private equity firms almost always buy larger and profitable companies that already have modern management systems in place as well as substantial assets that can be mortgaged. Here, private equity firms use debt and financial engineering strategies to extract resources from healthy companies. This earns them a reputation for using strategies that critics say play out more as “vulture capitalism”- a phrase that some people use to describe the process where investors make enormous profits while needlessly laying off workers. Private equity investors may increase their investment in companies they own by replacing senior management, reducing the workforce, selling off assets, and essentially gutting the company for profit. A private equity firm could buy a sizeable company, load it up with debt, and then take the money out. After improving their short-term earnings through cuts, it can borrow money and pay itself a dividend. In good times, it can collect a disproportionate share of the investment returns. But this can set up that company for failure and financial vulnerability. If the debt can’t be repaid, the company, its workers, and its creditors bear the costs. Yet, even when a company fails, a private equity firm still makes money. For instance, from 1987-1995, 22% of the money Bain Capital invested in funds raised went to companies that eventually went bankrupt. But Bain made $578 million, comprising of the bulk of these companies’ profits. Under Mitt Romney, 4 of Bain’s 10 biggest investments ended up bankrupt yet the firm still made a killing. Today, it’s no surprise that private equity activity’s often said to focus on short-term profits over a company’s long term health.

But do they improve businesses? According to author Josh Kosman, that may not be so. Out of the 25 biggest buyouts in the 1990s, 52% of those companies ended up bankrupt. Among the 10 biggest, private equity improved only one of the businesses. In 3 cases, the results were mixed while the other 6 companies would’ve been better off had the private equity firm not acquired them. A report from Moody’s back in 2012 showed that in the 40 biggest leveraged buyouts that took place from 2005-2008, these companies saw a revenue increase by 4% while their strategic peers saw profits rise by 14%.

Another criticism is that studying private equity returns is relatively difficult since private equity funds don’t disclose performance data. As these firms invest in private companies, it’s difficult to examine the underlying investments. Comparing private equity to public equity performance is challenging because private equity fund investments are drawn and returned over time as investments are made and subsequently realized. Commentators have argued that a standard methodology is needed to present an accurate picture of performance, to make individual private equity funds comparable and so the asset class as a whole can be matched against public markets and other types of investment. There’s also a claim that private equity firms manipulate data to present themselves as strong performers, making it even more essential to standardize the industry. It’s even worse that private equity firms aren’t as regulated as banks.

Can you describe some shady private equity firm financial engineering practices?

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Here’s a chart on the rates in which private equity firms have stripped assets on retailers. Much of this took place in the mid-2010s. Through junk bonds and leveraged loans to fund special dividends to PE owners, retail stores have lost billions in their assets. What a shame.

Certainly. After a buyout, private equity firms often engage in financial engineering that further compromise their portfolio companies. They might have companies take out loans at junk bond rates and use the proceeds to pay themselves and their investors a dividend. They might split a real estate rich company into an operating company and a property company. They then sell off the real estate and repay investors while the operating company must lease back the property and pay the (often inflated) rent. As you can see, this is what Eddie Lampert did to Sears. They may require their companies to pay monitoring fees to the PE firm for unspecified services. Paying these fees reduces the companies’ liquidity cushion and puts them at risk.

What happens to portfolio companies and workers?

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Here is a list of companies private equity firm KKR owns. Some of the these brands you might recognized, especially Toys “R” Us which filed for bankruptcy.

In these situations, financial engineering results are predictable. In bad economic times, these companies’ high debt levels (especially in cyclical industries) make them seriously vulnerable to default and bankruptcy. According to one economic study, roughly a quarter of highly leveraged companies defaulted on their debts during the last recession. Though the financial crisis officially ended in 2009, bankruptcies among PE-owned companies continued through 2015. In 2007, a PE consortium acquired Energy Future Holdings which defaulted with $35.8 million in debt in 2014. In 2006, a PE acquired the Las Vegas-based Caesar Entertainment whose long-term debt more than doubled by mid-2007. In 2015, it declared bankruptcy putting over 30,000 union workers at risk. Rigorous econometric studies back these job loss cases. One study found that through 2005, PE-owned establishments had significantly lower employment and wages post buyout than comparable publicly-traded companies. Though PE-owned establishments experienced higher wages and employment growth than their counterparts in their buyout year. But employment rates at PE-owned companies were 3-6.7% lower after 2 years and 6% lower after 5 years.

What happens to the Limited Partner investors?

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Here’s another chart detailing which companies private equity owns. Many of these will surprise you. But some of them won’t.

Private equity fund performance depends importantly on how investment returns are measured. Private equity firms use the “internal rate of return” (IRR). Finance economists use the “public market equivalent” which compares returns in PE investments from comparable stock market ones. Recent academic studies find that buyout funds don’t deliver outsized returns to investors. Despite industry claims, private equity funds haven’t beaten the stock market since 2006. A recent study indicates a downward trend in PE performance finding that the median PE fund outperformed the S&P 500 by 1.75% in the 1990s and by 1.5% in the 2000s. Private equity returns also need adjustment for PE investments’ greater riskiness. Industry analysts and most investors assume that private equity fund returns should exceed stock market returns by 3%. More than half of US PE funds have failed to meet that standard over the past 25 years. Average PE returns are upwardly skewed by top quartile funds’ outperformance. But recent research shows it’s no longer possible to predicts which funds will outperform the stock market. GPs with top quartile funds have about a 25-cent chance that their next fund will do the same. Same goes for GPs with bottom quartile funds.

What should the US do about private equity firms?
We must hold our politicians responsible for the looming retail apocalypse. After all, our tax code privileges debt by making corporate interest payments tax-deductible. Private equity firms that gut companies and walk away receive tax subsidies to pull it off. This incentivizes them to borrow even more to run the game again. Even more importantly, we need to look at these asset-stripping schemes with more skepticism. The Securities and Exchange Commission can and should police these designed-to-fail corporate bonds resulting from these leveraged buyouts. The SEC should also go after banks underwriting these deals and earning fees off of companies’ misery.

The House Republican tax bill proposed a cap on deductibility on interest payments over 30% of a company’s earnings. The Senate bill defines earnings in such a way to reduce that cap even further. This should discourage some debt-fueled buyouts which private equity firms don’t like. However, the GOP tax plan exempts real estate companies which leaves a gaping loophole. This could help private equity firms that split their business’s operating side from the property side like Sears did. And enable them to put all the borrowing onto the property side and keep deducting the interest. Not to mention, most of the Republican tax bill is a piece of shit that punishes most Americans who don’t own a yacht. So I wouldn’t advocate the Republican tax plan to crack down on private equity anytime soon.

Nevertheless, don’t expect that Donald Trump will do anything about and we shouldn’t be surprised. The Trump administration will likely continue aiding wealthy financiers through regulatory neglect since those people are their donors. Recently, Comptroller of Currency Keith Noreika broke with a years-long crackdown on high-risk corporate lending, signaling that these private equity firms should issue more debt. It’s a shame we don’t have regulators willing to protect workers, investors, and the economy. Because private equity is accelerating a decline that will affect millions in every major city. To do nothing is to let it continue.

The Legal Loan Sharks Among Us: The Matter of Payday Loans

 

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A loan shark is a person or body offering loans at extremely high interest rates. When we hear the term, we usually think about gangsters who lend money to people but enforce repayment through methods like blackmail and threats of violence. However, what you may not know is that while loan sharks are mostly seen as figures in the criminal underworld and organized, they’re not always seen as crooks linked to the mob, especially in the world of small time and salary lending. Historically, it wasn’t unusual for many moneylenders to skirt between legal and extralegal activity. In late 19th century America, the unprofitability and negative societal perception of small loans paved the way for a slew of lenders offering loans at profitable but at illegally high interest rates under a veneer of legality and preyed upon a borrower’s ignorance of the law. The 1920s and 1930s saw a rise of loan sharks who targeted high risk borrowers and small businesses either in dire straits or ill repute as well as enforced repayment through threats of violence. Sometimes these loan sharks were affiliated organized crime but they never had such monopoly. Today our non-standard lenders consist of subprime loans which led to a global financial crisis and payday lending which are both legal. But both are rather exploitative and prey upon those who can’t qualify for standard loans on mainstream sources. Yet, it’s the payday loans that generally don’t receive the attention they should since they’ve come under tremendous scrutiny as a predatory enterprise and must be stopped. Here I provide a small cheat sheet for explanation.

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It’s likely you may see a lot of payday loan ads like this. A payday loan is a small unsecured loan that’s typically due on the borrower’s payday. However, they tend to have an reputation of high interest rates.

What is a payday loan?

A payday loan is a small short-term unsecured loan that’s typically due on the borrower’s payday. They usually range from $100-$1,500 and are often due 30 days or less. A payday loan relies on the consumer having previous payroll and employment records. In a payday loan, a borrower gives the lender access to their checking account or writes a check for the full balance that the lender has an option to deposit when the loan comes due. Other loan features can vary. Though payday loans are often structured to be paid off in one lump sum payment, interest only payments known as “renewals” or “rollovers” aren’t unusual. In some cases, payday loans may be structured so they’re repayable in installments over a longer period of time. Payday loans usually include a finance that may range from $10-$30 for every $100 borrowed or the check’s percentage value.

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While payday loans are legal under federal law, state laws may vary. My home state of Pennsylvania is one of the states that prohibits them outright as you can see from the map.

Are payday loans legal in the United States?

At the federal level, yes and payday lenders are subject to regulation by the Consumer Financial Protection Bureau as well as the Federal Trade Commission along with the Truth in Lending Act that requires them to disclose their finance charges. And there are special protections for military servicemen through the Military Lending Act. However legislation regarding payday loans varies widely between different states. As of 2017, payday lending is legal in 27 states, legal with restrictions in 9, and banned in 14 including my home state of Pennsylvania.

How did payday loans come to be?

The history of payday loans can be dated as far as the early 1900s with some small lenders participating in salary purchases, buying a worker’s salary at less than its value days before the scheduled payday in order to avoid usury laws. Loan sharks and the mafia also had their own payday loan schemes starting from the 1920s. In the 1930s, check cashers cashed post-dated checks for a daily fee until the check was negotiated at a later date and began offering payday loan services in the early 1990s. When banking deregulation caused small community banks to go out of business in the late 1980s which, the payday loan industry sprang up in order to fill the void in the microcredit supply at expensive rates. From there, the industry grew from less than 500 storefronts to over 22,000 and a total size of $46 billion. The number has grown even higher over the years that by 2008, payday loan stores nationwide outnumbered Starbucks shops and McDonald’s restaurants. There are also major banks that offer payday loans as well as companies that offer them online. Deregulation also caused states to roll back usury caps and allow lenders to restructure their loans to avoid them after federal laws were changed.

What do I need to qualify for a payday loan?

According to the CFPB, payday lenders generally require you to have an active checking account, provide proof of income from a job or another source, show valid identification, and be at least 18 years old. Some may have additional criteria like minimum time at your current job or a minimum income to qualify for a certain amount.

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Like payday loans themselves, rollovers and renewals on payday loans also have varying legality among the states. However, they’re usually more or less regulated except in Kansas, Utah, and Nevada.

What does it mean to renew or rollover a payday loan?

According to the CFPB, “Generally, renewing or rolling over a payday loan means you pay a fee to delay paying back the loan. This fee does not reduce the amount you owe. If you roll over the loan multiple times, it’s possible to pay several hundred dollars in fees and still owe the amount you borrowed. For example, if you roll over a $300 loan with a $45 fee three times before fully repaying the loan, you will pay four $45 fees, or $180, and you will still owe the $300. So, in that example, you would pay back a total of $480.” Some payday lenders give borrowers this option if they can’t afford to make the payment when it’s due. Nevertheless, this practice is legal in only 14 states and most of them place limits on this save Nevada, Utah, and Kansas.

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Despite what ads may tell you, most payday loan users are low income workers who usually take them out for recurring expenses over the course of months. This is partly why a lot of users have trouble paying them off.

Who uses payday loans?

According to a Pew study, “Most payday loan borrowers [in the United States] are white, female, and are 25 to 44 years old. However, after controlling for other characteristics, there are five groups that have higher odds of having used a payday loan: those without a four-year college degree; home renters; African Americans; those earning below $40,000 annually; and those who are separated or divorced.” Recent immigrants, Hispanics, and single parents also were more likely to use payday loans. And most borrowers use payday loans to cover ordinary living expenses over the course of months, not unexpected emergencies over the course of weeks (contrary to what the industry states in its ads). So it’s not unusual for borrowers to use more than one. The average borrower is indebted about 5 months a year. In 2013, 12 million people took out payday loans each year.

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Payday lenders may claim to help people in tight spots. But they ensure employees to make tough times last forever thanks to obscenely high interest rates that may be impossible for some to pay off.

So why do payday loans have a shady reputation?

Payday lenders are notorious for their predatory lending practices of exorbitant higher fees and interest rates than traditional loans that don’t encourage savings or asset accumulation. According to the CFPB, “The cost of the loan (finance charge) may range from $10 to $30 for every $100 borrowed. A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400%. By comparison, APRs on credit cards can range from about 12 percent to 30 percent.” If that loan’s not paid on time, then the total cost will be much larger than expected $404.56 within 20 weeks or $2,862.22 within 48. The Pew study states that the average payday loan borrower took out 8 loans of $375 each and paid interest of $520 across the loans within a year.

Payday loans are usually marketed towards low-income households because they often can’t provide collateral in order to obtain a low interest loan or lack access to a traditional bank deposit account. Families who use payday loans are disproportionately black or Hispanic, recent immigrants, and/or under-educated since these individuals are least able to secure normal lower-interest-rate forms of credit. The payday loan industry takes advantage of the fact that most of their borrowers don’t know how to calculate their loan’s APR and don’t realize they’re being charged rates up to 390% interest annually. Those higher interest rates are likely to send borrowers into a debt spiral where they must constantly renew. And according to the Center for Responsible Lending, almost of half of payday loan borrowers will default within the first two years. Taking out payday loans also increases the possibility of economic difficulties that make it hard to pay the rent, mortgage, and utility bills. Such difficulties can also lead to homelessness as well as delays in medical and dental care along with the ability to purchase drugs. Since payday lending operations charge higher interest-rates than traditional banks, they have the effect of depleting assets in low-income communities. A consumer advocacy group called the Insight Center reported that payday lending cost the US $774 million a year in 2013.

Payday lenders have also made effective use of the sovereign status of Native American reservations, often forming partnerships with members of a tribe to offer loans over the internet which evade state law. While some tribal lenders are operated by Native Americans, there’s also evidence many are simply a creation of so-called “rent-a-tribe” schemes where a non-Native company sets up operations on tribal lands. The FTC also monitors these lenders as well. And the fact the Military Lending Act imposes a 36% rate cap on tax refund loans and certain payday and auto title loans made to active duty armed forces and their covered dependents as well as prohibits certain terms in such loans illustrates that the payday loan industry has targeted military servicemen.

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Payday loans are often a debt trap since they target people who can least afford to pay them back. And such debt may lead borrowers to take in more payday loans ensuring a vicious cycle to continue.

How are payday loans a debt trap?

A debt trapped is defined as “a situation in which a debt is difficult or impossible to repay, typically because high interest payments prevent repayment of the principal.” According to the Center for Responsible Lending, 76% of the total volume of payday loans are due to loan churning, where loans are taken out within two weeks of a previous loan. The center states that the devotion of 25-50% of the borrower’s paychecks leaves most borrowers with inadequate funds, compelling them to take new payday loans immediately. And they will continue to pay high percentages to float the loan across longer time periods, effectively placing them in a financial hole.

How do payday loans affect the economy?

Payday loans actually hurt the economy. Though they’re designed to provide consumers with emergency liquidity (despite being normally used to meet normal recurring obligations), payday loans divert money away from consumer spending and towards paying interest rates which can range from 200-500%. In 2011, payday loans cost the US $774 million in consumer spending, $169 million in 56,230 bankruptcies, and 14,000 jobs. States that have outlawed payday lending have lower rates of bankruptcy, a smaller volume of complaints regarding collection tactics, and the development of new lending services from banks to credit unions.

How long does it take to pay off a payday loan?

Borrowers typically have payday loan debt for much longer than the loan’s advertised two-week period, averaging about 200 days. Though most borrowers do know when they’ll pay them off and about 60% of them pay off their loans within two weeks of the days they predict.

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Payday lenders can be quite ruthless when it comes to collecting the debts. On some occasions, payday lenders have threatened borrowers with legal action that has led to a small percentage serving jail time.

How do payday lenders collect on loans?

Under federal law, a payday lender can use only the same industry standard collection practices used to collect other debts specifically standards listed under the Fair Debt Collection Practices Act (FDCPA). The FDCPA forbids debt collectors from using abusive, unfair, and deceptive practices to collect from debtors. Such practices include calling before 8 o’clock in the morning or after 9 o’clock at night, or calling debtors at work. In many cases, borrowers write a post-dated check to the lender and if they don’t have enough money in their account by the check’s date, it will bounce. When that happens, payday lenders will usually attempt to collect on the consumer’s obligation first by simply requesting payment. If internal collection fails, some payday lenders may outsource the debt collection or sell that debt to a third party. Yet, a small percentage of payday lenders have in the past threatened delinquent borrowers with criminal prosecution for check fraud which is illegal in many jurisdictions. But over a third of states in 2011 allowed late borrowers to be jailed despite the fact that debtor’s prisons have been federally outlawed since 1833.

Then there’s the matter with Texas, which prohibits payday lenders from suing a borrower for theft if the check is post-dated. But lenders get their customers to write checks for the day the loan is given knowing that they’d bounce since the borrowers didn’t have any money. If the borrower fails to pay on the due date, the lender sues them for writing a hot check. Sometimes they can file criminal complaints. This has led Texas courts and prosecutors becoming de facto collections agencies that warn borrowers they could face arrest, criminal charges, jail time, and fines. On top of debts owed, district attorneys charge additional fees. Borrowers have been jailed for owing as little as $200 and most of them who failed to pay had lost their jobs or had their hours reduced at work.

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There are several alternatives to payday loans whether it means borrowing money from work or from friends or taking money from a credit union. However, if you need some fast cash before your next payday, it’s better to pay a late fee on your bills than take a payday loan. Because payday loans are nothing but high interest debt traps.

Are there any alternatives to payday lending?

Yes, there are. Credit union loans have lower interest but more stringent terms that take longer to gain approval, employee access to earned but unpaid wages, pawnbrokers, credit payment plans, paycheck cash advances from employers (“advance on salary”), auto pawn loans, bank overdraft protection, cash advances from credit cards, emergency community assistance plans, small consumer loans, installment loans and direct loans from family or friends. Those who own a car can go with an auto title loan which uses the equity of the vehicle as the credit instead of payment history and employment history. You can also take advantage overdraft protection at your bank, establish a line of credit from an FDIC-approved lender. However, if you should consider taking payday loans, always consider the alternatives or at least try to avoid taking them. So if you need to pay your bills before payday, a late fee might be cheaper than a payday loan finance charge.

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Yes, payday loans work like that. So remember, if you’re a low income worker in need of money, don’t be embarrassed to ask for help from a friend or employer. Chances are they’d probably not put you through financial hell like the predatory payday loan business. I mean such

Why We Need to Raise the Minimum Wage

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When the federal minimum wage law was signed by Franklin Delano Roosevelt in 1938, it was meant to keep America’s workers out of poverty and increase consumer spending in order to stimulate the economy. Since then the federal minimum wage has been increased 22 times with its current value at $7.25 an hour. However, it is a poverty wage which doesn’t keep people from being poor nor has it kept up with the US cost of living. In fact, it’s said a full time job on $7.25 an hour can’t even support even the basic living essentials in all 50 states. Nevertheless, campaigns to raise the minimum wage have recently been gaining momentum across the country ranging from ballot initiatives to grass organizing to major legislative efforts in states and localities. Many have achieved some degree of success. Yet, at Capitol Hill, proposals to raise the minimum wage have gone nowhere, despite widespread popular support across party lines as well as economists. As for me, I feel that not only should the federal minimum wage be increased, it should also be adjust automatically to keep pace with cost of living that doesn’t exempt tipped workers and the disabled. While I do not believe raising the minimum wage would relieve poverty even at $15 an hour, I feel that it’s good responsible policy as well as the right thing to do.

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This graph from the Department of Labor illustrates how the minimum wage has fallen by a third since 1968. If it was automatically adjusted for inflation from that time on, the minimum wage today would at least be $11 an hour.

  1. The Minimum Wage Is an Arbitrary Value-The only good explanation as to why the minimum wage is a poverty wage is mostly due to increases requiring approval by Congress and it doesn’t keep pace with inflation or rising costs of living. This is why the new minimum wage value usually falls from the moment it’s set. The federal minimum wage today is $7.25 per hour. Does it mean it’s higher than it used to be? In terms of real dollars, yes. But in terms of buying power, no. When adjusted for inflation, the current federal minimum wage would need to be more than $8 per hour to equal its buying power in the early 1980s and nearly more than $11 per hour to equal its buying power of the late 1960s. For tipped workers, it’s $2.13 an hour which has remained unchanged for over 25 years. In other words, why the current minimum wage is $7.25 per hour has nothing to do with inflation adjustments. Because despite minimum wage increases, its buying power has dropped and keeps falling. Though President Obama has argued for the minimum wage to increase automatically with inflation which can eliminate requirements for formal congressional action, reduce time between increases, and better help low-income families keep up with rising prices. There’s even a bill called The Raise the Wage Act proposed by Senator Patty Murray and Representative Bobby C. Scott proposing to do just that along with raising the wage to $12 an hour by 2020 as well as set automatic increases starting in 2021 and eliminate the unfair subminimum tipped wage of $2.13 an hour. It’s a policy that makes far better sense the current one. Some states have also enacted rules to do the same thing. So why is the federal minimum wage a paltry $7.25 per hour? Well, since increasing it requires congressional approval, I think it has more to do with politics and employer preference for cheap labor. In other words, it’s an arbitrary value.

2. Most Minimum Wage Jobs Can’t Be Outsourced – While conservatives often argue that raising the minimum wage will lead many people to lose their jobs, we need to understand that most minimum wage jobs are in the service industry. Unlike jobs in manufacturing, it’s unlikely most of them could ever be outsourced overseas with globalization. Besides, when we’re talking about minimum wage employees, their pay has nothing to do with international competition. Because they’re not engaged in the export sector. Competition in the service industry is mostly domestic and localized as well as staffed by local workers and serving a local customer base. In other words, service jobs be in a specific location. The biggest threats to pay in service sectors aren’t foreign countries known for human rights violations but large multinational corporate chains who treat their employees like shit.

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Recent trends show that most job creation has taken place in low wage industries. So it’s no surprise that a higher share of millennials work in low wage industries while lower shares work in mid or higher wage industries.

3. New Job Growth Has Been Concentrated in Disproportionately Low Wage Industries– Today more families than ever rely on low wage and minimum wage jobs to make ends meet especially since job losses during the Great Recession have hit higher wage sectors like construction, manufacturing, and finance hard. And according to a 2012 report by the National Employment Law Project, 58% of all jobs created post-recession were low wage occupations. This isn’t a short term trend either since 6 of the top ten growth occupations projected by the US Bureau of Labor Statistics for the next decade are low wage jobs, such as home health aides, customer service representatives, food preparation and service workers, personal and home care aides, retail salespersons, and office clerks. Raising the minimum wage would boost pay scales in these jobs where millions of Americans spend their careers today. And for many it’s getting harder for many workers to move beyond a low wage job. Thus, raising the minimum wage right now is more important than ever.

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Here’s a picture on the hazards of domestic labor. Now people in these jobs usually earn minimum wage or less. Some of them earn more. But what this chart tells you that it’s anything but easy. In fact, it’s hard and thankless work. The same can go for many low wage jobs.

4. Most Minimum Wage Jobs Aren’t Easy– Those opposed to minimum wage increases argue that anyone could do a minimum wage job which doesn’t require a lot of responsibility. But that has no bearing on reality whatsoever. Service industry workers often have stressful work days as well as unpredictable work schedules. A lot of them don’t have nice work environments either. Not to mention, a lot of these jobs lack health benefits, paid leave, opportunities for advancement, and job security. Many minimum wage employees work on weekends and holidays. A lot of them work 8-hour days while some can work even more. Some even have more than one job if they work part-time. Some may even experience workplace injury or illness. A lot require constant human interaction, time management, and multitasking. Let’s just say there’s a very good reason why a lot of minimum wage jobs have high turnover rates. These aren’t easy jobs anyone can do. They’re thankless, stressful, and grueling jobs while these workers receive little respect for all the crap they put up with on a regular basis. I spent a Christmas season working at Macy’s which paid $8 an hour. I spent hours on my feet that I had a lot of aches and pains. I also had to deal with hours of Christmas music in the background. By the end of my shift I was exhausted. I have often seen ads for many of these jobs which have a long list of duties and responsibilities as well as skills like patience, knowledge, care, and communication. There are plenty of caregiving jobs with educational requirements that pay minimum wage like home healthcare and childcare. Hell, even hairdressers and manicurists can earn low wages and they have to go through cosmetology school. Some low wage jobs can require at least an associate’s degree or even a 4-year college education. Building services may also require special skills. For instance, janitors may have a wide range of duties besides indoor cleaning like maintenance, security, and yard work. The cleaning industry is known for hiring 17-23% of undocumented immigrants as well as posts a median pay of $10.68 an hour (though many school janitors get paid more than the teachers so it’s not always a low wage job). Bank tellers, data entry keyers, cooks, pharmacy assistants, clerks, hotel receptionists, and security guards can also be paid minimum wage. In many ways, I think the terms “low-skilled” or “unskilled labor” just refers to jobs with shitty pay.

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Many people argue that low wage work is such because they don’t require a lot of skills, education, and lack social value. If that were true, then explain to me why Cesar Chavez became so famous for organizing farm workers for better conditions. Yeah, that doesn’t hold up.

5. Most Minimum Wage Jobs Don’t Lack Social Value– When most people think of jobs paying minimum wage, they tend to think about people working at fast food restaurants which only consist of 5% of low wage jobs. In fact, most low income jobs pay poor may have little to do with their value in society. Or if they do, then it might be a reason they’re paid so poorly in the first place. At any rate, they’re all around us which include security guards, nurse’s aides and home healthcare aides, child-care workers, educational assistants, maids and porters, janitors, call center workers, bank tellers, data entry keyers, food preparation workers, waiters and waitresses, cooks, pharmacy assistants, hairdressers, manicurists, fish and meat processors, sewing machine operators, laundry and dry cleaning operators, ambulance drivers, parking lot attendants, and farm workers. Sure there may be people in these jobs who make good money like a janitor at a public school or hairdressers. But we’re talking about general trends. We’re not necessarily talking about people who make no contribution to society. In fact, we’re talking about people in jobs that don’t get much respect. If you don’t believe me, then think about how Caesar Chavez became so famous for organizing California farm workers in the 1960s. Or why so many workplaces and corporations in the service industry take major steps to keep their low wage workers from unionizing.

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This is a graph from the Economic Policy Institute illustrating how a minimum wage increase would affect American families. After all, low wage workers are usually responsible for half of their family’s earnings. Not to mention, 1 out of 5 kids has a parent who’d be helped.

6. Raising the Minimum Wage Will Benefit Workers and Their Families– Even if you work full-time at $7.25 an hour, you’re lucky to retain $225 a week or $12,000 a year after taxes and deductions. This is precisely threshold of poverty for a single person. Not enough to pay rent or take care of dependent children. In fact, it’s barely surviving. In no state can a minimum wage worker afford a 2 bedroom unit at a fair market rent, working a standard 40 hour work week. Or at least without paying more than 30% of their income. But a lot of minimum wage workers are trying to pay rent and have dependent children to support sometimes by themselves, which is why many are on welfare and food stamps. In addition to the 1.3 million people working at minimum wage, raising it to $10 per hour would help 1.7 million working below it, and 21 million working above the minimum but below that amount. So you’re talking about a third of the workforce. 17.5 million children will also benefit since at least one of their parents will get a raise. Raising the minimum wage to $12 or $15 an hour could benefit even more. Not to mention since women and minorities are disproportionately represented in low wage jobs, raising the minimum wage could help close significant gender and racial pay gaps.

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Here’s a snapshot on how many hours a person would have to work a week on $7.25 an hour to afford rent in the country. As you see, all the values are above 40 hours.

7. Raising the Minimum Wage Benefits the Economy– When workers are paid more, they’re more likely to spend more, especially when it comes to their own companies or hometowns. This explains why Henry Ford decided to pay his workers high wages to make and later buy his cars. Now Ford wasn’t a nice guy. But even he knew that workers are customers and the better a worker’s ability to participate in the economy as a consumer, the better off businesses and the economy will be as a whole. Though businesses might experience a dip in their profits, they’re able to pay higher wages without reducing employment because the savings can be substantial even if greater productivity and lower turnover may not fully pay for the minimum wage increase. Workers earning low wages are less committed to their jobs and less likely to stay for long. Employee turnover forces businesses to constantly find and train new workers, costing them significant money and time. Most of the time the new recruits may not be as optimally efficient during their training period as the experienced and productive workers they replaced. This can incur indirect costs to businesses from lost sales and imperfect customer service as new workers learn on the job. Add to that the fact a lot large retail companies like QuikTrip, Mercadona, Trader Joe’s, and Costco not only invest heavily in their employees, but also have the lowest prices in their industries, solid financial performance, and better customer service than their competitors. They also have better reputations, more work satisfaction, and less employee theft. 89% of small businesses in the country also pay their employees more than the federal minimum wage. Many small business owners believe higher wages level the playing field by preventing larger and less scrupulous firms from gaining a competitive advantage through very low labor costs. A strategy adopted by large corporations such as retail giants like T.J. Maxx, Walmart, Gap, and Ikea which have enjoyed record profits for years as well as employ 2/3 of all low wage workers. It’s no surprise why most small businesses support increasing the minimum wage to at least $12 an hour, some to even $15. In many ways, this makes a lot of sense since these large retail giants see workers as expendable while small businesses need to hold onto their best employees for as long as they can. Small businesses and large companies have proven that the key to their success is a combination of investment in the workforce and operational practices benefiting employees, customers, and the company.

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This map show the lot of tipped workers many of whom can earn below minimum wage at a rate as low as $2.13 an hour + tips. But the system in paying tipped workers is so complex that these workers are subject to manipulation and abuse. Many have had their tips stolen by their bosses. And many live in poverty.

8. Current Tipped Minimum Wage Laws Are Terrible– According to the National Employment Law Project, an estimated 4.3 million people work in predominantly tipped occupations in the US. Employees classified as tipped workers if they receive at least $30 per month in tips and the current federal tipped worker minimum wage is $2.13 an hour, which is less than a third of the current federal minimum wage and has remained unchanged since the 1990s. While most tipped workers are in the restaurant industry, these include car wash workers, nail salon workers, valets, and airport attendants among others. Two thirds of tipped workers are women which makes the subminimum tipped wage a form of legislated pay inequity. Many tipped workers use these tips to support their families and to pay for higher education like student loans. Labor movements have called to eliminate the tipped minimum wage. 7 states already have and their tipped workers earn full minimum wage + tips which I strongly think is how tipped workers should be paid anyway. New York’s tipped minimum wage is $7.50 which is more than 83% its full minimum wage. And in Hawaii, tipped workers only earn less than half minimum wage if they receive more than generous tips. Other states and D.C. have also increased their tipped minimum wage above $2.13 an hour. But these rates aren’t equal and aren’t always fair. And personally, I find the idea of a subminimum tipped wage as absolutely unfair and ridiculous. Add to that the fact employers are required to make up the difference if a tipped worker’s base wage and tips doesn’t add to the full minimum wage. But this is a complex system that’s both difficult to comply with and largely unenforceable for these reasons:

  1. It requires extensive tracking and accounting tip flows which even law-abiding employers find burdensome and difficult. This also allows less ethical employers to take advantage of this notorious complex system to illegally keep a portion of tips for themselves. Thus, this results in many tipped employees failing to receive the tips which they’re entitled to as well as have their income prone to manipulation and abuse.
  2. Employers are allowed to average tips over the course of the work week and required to “top up” only if an employee’s average hourly earnings are less than the full minimum wage. They’re also allowed to estimate their workers’ tips in order to determine how much tax to withhold. Though this estimation approach isn’t sufficient for federal minimum wage compliance, many employers use this anyway though they don’t actually verify that their workers really do receive enough tips to bring them up to the full minimum wage. One southern New Jersey waitress told NELP, “They just take our total sales for the day—say it’s [a couple] hundred dollars—and they just [estimate] 15% of that.” Under the federal minimum wage law, this is illegal as well as overstates tips since many customers tip less than 15% and “a few times a week” a customer leaves no tip at all.
  3. Tips are allowed to be pooled among various types of restaurant employees, giving a portion of those tips a server receives to legitimately be reallocated to other workers. This is a frequent and sometimes legally dubious practice at many businesses across the country as well as creates other opportunities for unethical employers to illegally skin off a portion of these tips for themselves or use to pay other employees whether they’re tipped or not.
  4. Tipped workers who’ve experienced tip-stealing or other forms of wage theft are often reluctant to demand what they’re owed in fear of reprisal. Many of rely on their supervisors to schedule their shifts and make more or less in tips depending on what shifts they’re given. So complaining about being ripped off might lead to being scheduled on a less profitable shift or simply fired.
  5. Tip stealing is rampant in industries that employ tipped workers who are often victims. Tip violations can take various forms but ultimately, they all result in tipped workers losing some of their tips to improve the employer’s bottom line. Some employers simply pocket a portion for tip pools while others can be less direct such as including non-tipped workers in the tip pool so they can be paid the lower minimum wage for tipped workers. Sometimes restaurants can take advantage of communication barriers among workers. The National Employment Law Project mentioned a waitress setting aside 15% of her tips for bussers but was expected to pay upfront and didn’t know whether they got it. They also discuss how waiters and waitresses in an upstate New York town exposed that managers had simply pocketed a portion of their tips they deducted, supposedly to share with the bussers. Additionally, they also talked about a Maryland waitress who already shared her tips with a captain, bussers, and host who finally contacted a union for help when the restaurant’s managers tried to take a portion of her tips for themselves as well. Several high profile lawsuits have recently been filed in response to these practices.
  6. According to a 2014 report by the White House Economic Council and the Department of Labor, 1 in 10 surveyed tipped workers reported hourly wages below the federal minimum wage, tips included. This compared to 4% of all workers reporting earnings below minimum wage.
  7. Compliance and enforcement challenges aside, despite requiring employers to make up the difference between tips and statutory minimum wage, it remains the case that customers are directly responsible for paying a portion of workers’ wages under this system. Thus, instead of being a gratuity for good service, having a subminimum tipped wage renders tips a customer-funded wage replacement and lowers labor costs for employers in a few select industries.
  8. Work for tipped employees is inherently uneven and often unpredictable with most making substantial amounts on Friday and Saturday nights and much less other days of the week. In addition, bad weather, a bad economy, seasonal change, and a host of other factors can cause sudden drops in tipped income and economic insecurity. Also, tips can fluctuate widely and are often paid in cash.
  9. Nationwide, the median tipped wage for servers is $10.11 per hour and $9.89 for waitresses. This despite claims from the restaurant industry that servers make a median between $16 and $22 per hour. The median wage for all workers nationwide is $16.48 per hour. Median wages for tipped workers in general are nearly 40% lower than overall median hourly wages.
  10. 46% of tipped workers depend on public assistance from the federal government which is well over the rate of 35.9% for all workers. 12.8% of tipped workers in the US live in poverty, including 15% of restaurant servers. In fact, servers experience poverty at well over twice the rate of the overall US workforce. They’re also only a quarter as likely as the workforce as a whole to receive employer-provided health insurance and are twice as likely to be uninsured. In states the federal tipped minimum of $2.13 per hour is implemented, 14% of tipped workers and 18% of servers live in poverty. In states where tipped workers are paid full minimum wage + tips, the poverty rate for them is 10.8% and 10.2% for servers.
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Despite fierce contention in the media and in Congress, raising minimum wage has wide support among Americans. This NELP graph illustrates this.

9. Raising the Minimum Wage Has Wide Support– Most Americans feel the minimum wage is too low and are concerned about rising inequality. A 2014 Public Policy Polling shows that 80% of respondents don’t believe they could support themselves or their families on minimum wage. Other polls show that 7 in 10 Americans believe that income inequality is getting worse and nearly as many believe the government has a role to play in reducing the gap between rich and poor. A 2013 Washington Post/ABC News poll found that 57% of Americans want lawmakers to address income inequality. The Hart Research Associates shows that 75% of Americans support raising the minimum wage to $12.50 or more by 2020, including 92% of Democrats, 53% of Republicans, 73% of Independents, 80% of women, and 72% of non-college whites. On the small business front, support for increasing the minimum wage is 61% or 3 in 5. 63% of Americans support a $15.00 minimum wage. 71% of Americans favor eliminating the subminimum tipped waged to ensure tipped employees the same minimum wage as other workers. 82% support automatic annual minimum wage increases to ensure it keeps up with the annual costs of living. There is no reason why Congress should be unable to pass The Raise the Wage law right now, even with a Republican majority. At least as far as the American people are concerned.

10. Minimum Wage Laws Unfairly Exempt Disabled People– Under the current federal law, the Secretary of Labor can issue special wage certificates to employers allowing them to pay disabled workers a subminimum wage, sometimes just a few cents per hour and in segregated work environments where they often perform mundane tasks that don’t use their existing skills, interests, and talents. Yet, this exemption is based on an antiquated notion that encourages disabled workers to rely on Social Security Income, Medicaid, food stamps, or other government programs in order to get by. There are also current training and employment strategies to assist those with even the most significant disabilities to obtain integrated and meaningful work. And when paired with the right rehabilitative tools, training, and expectations, employees with disabilities can be as productive as their nondisabled peers. It’s also discriminatory since nobody should be paid below the minimum wage, disabled or not. And I say that even if the minimum wage is too low.

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During the Gilded Age, those in blue collar professions worked in terrible working conditions with long hours and shitty pay. Many of these workers were children, some of them as old as kindergartners, mostly because their parents worked in the same place and didn’t earn enough to support a family. Still, we should also acknowledge that once workplace regulations and protections were in place, these large companies still earned money and lost nothing.

11. Blue Collar Jobs Used to Have Shitty Pay– Yes, I’m well aware that a lot of jobs in the service industry pay minimum wage or even less than that. And yes, I know many argue low wages are a cost-driven necessity for these jobs. On the other hand, you have a lot of blue collar jobs in mining and manufacturing which many people see as good paying jobs that many working class people lament leaving their hometowns or being outsourced. However, we should also acknowledge that blue collar jobs were the shit jobs of 19th and early 20th century industrialization with dangerous conditions, long hours, and very low pay. And I mean like working in the mine for 14 hour days on a wage that can’t support your family. So now your eight year old has to drop out of school and go to work with you. It wasn’t unusual for whole families to work in a factory, including the kids who could be as young as four years old. Now we’re talking about a time when there were no workplace safety protections, no minimum wage, no workers’ rights, and institutionalized child labor. So what changed? Well, these workers organized into unions and went on strike for their rights, not just risking getting fired but also getting killed. And they faced staunch opposition from their robber baron bosses. Yet, once they got what they wanted, these blue-collar jobs were no longer seen as shit jobs by later generations. In fact, they were seen as jobs that could support a family and local economies benefitted just the same. But this shows us that the existence of shit jobs has more to do with an employer’s desire for cheap and expendable labor than what the job entails. Also, keeping workers dependent on them that they’ll put up with any abuse they give them. Not to mention, it supports the argument that low wages are a choice and not a cost-driven necessity. This is why a lot of corporations don’t want to raise the minimum wage or have their workers unionize. Not only that, but also that the shit jobs of today don’t have to be the shit jobs of tomorrow if we invest more in our workers. Raising the minimum wage is a good place to start.

12. Raising the Minimum Wage Saves Taxpayer Money– With wages being what they are, many low income workers have relied on public assistance because their paycheck can’t cover basic expenses. Even if they work for companies that could certainly afford to pay them a raise and benefits. American taxpayers spend an annual $153 billion in taxpayer money helping low wage earning families get by. This includes food stamps, Medicaid, CHIP, TANF as well as childcare subsidies and reduced-free school lunch programs. These programs help Americans meet a basic standard of living despite being targets for cuts and reductions. But having workers rely on public assistance has more to do with their employers paying them nothing more than poverty wages. Therefore, the government is indirectly subsidizing these companies that refuse to pay more. In fact, some companies like McDonald’s doesn’t even hide that half their workforce is on welfare and even encourage their employees to seek public assistance. Higher wages at work save taxpayer money since they lift more people out of poverty and produce more tax revenue. Sorry, libertarians, but cheap labor doesn’t come cheap.

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This is a graph from the Economic Policy Institute that shows what the average minimum wage worker. Despite the stereotype of a teenage working after school, most minimum wage earners are adults who work full time as well as earn more than half of their family’s total income.

13. Low Wages Don’t Relieve Poverty– Contrary to what conservatives said about minimum wage jobs being for teens trying to earn extra money and experience, 89% of minimum wage workers are 20 years old or over while many are women and people of color. 37% of them have at least some college education. A third of them are over 30. Not to mention, 57% of minimum wage jobs are full-time and are unlikely filled by teens anyway. Some low wage industries don’t hire teens at all. That being said, statistics show a lot of low wage workers make nearly to over half their family’s income and 28% of them are parents. Sometimes they could be the family’s chief breadwinner, especially in single parent households. In every state working the minimum wage leaves a full-time worker with two kids below the poverty line. Not to mention, low-income wage earners may work multiple jobs which gives them even less time to spend with their kids as well as take care of themselves. At worst this could lead to a case like Maria Fernandes who worked so hard to make ends meet that she died from gas fumes in her car while napping between shifts. Fernandes was said to work 4 jobs and sometimes didn’t sleep for nearly a week. There were a couple occasions when single mothers were busted for leaving their kids unsupervised due to working 3 jobs and lack of available childcare options. Many low income workers have also experienced a considerable toll on their health while their children suffer in school and in life. No one who works for a living should have to live in or near poverty, especially full-time.

14. Raising the Minimum Wage Has Expert Support– In January 2014, over 600 economists across the country sent a letter to President Obama and congressional leaders arguing for a minimum wage raise to $10.10 by 2016 and then indexed to protect it against inflation. 7 of these were Nobel Prize winners. Even the Department of Labor supports this measure and think it’s a better idea than the current minimum wage laws we have now.

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Here’s a map from the Wall Street Journal showing the minimum wage increases within each state. Of course, some pay below or have no minimum wage laws at all.

15. The Minimum Wage Has Been Raised in Localities and States– As of 2016, 29 states, D. C., as well as countless localities have raised the minimum wage, many in recent years. Some have even enacted measures to increase the minimum wage automatically with inflation and the costs of living. Not only that, but despite congressional Republican opposition, raising the wage in these states, D.C., and other jurisdictions weren’t just mere liberals pushing for it. Sure Washington State, Oregon, California, New York, Illinois, and Massachusetts voted for minimum wage increases. But so have red states like West Virginia, Arkansas, South Dakota, Nebraska, Alaska, Missouri, and Montana. Swing states like Florida, Michigan, Arizona, and Ohio have also raised their minimum wage. The fact minimum wage increases have passed in states of various political leanings should emphasize its widespread support among party lines.

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Despite that many opponents of minimum wage increases argue that raising it would kill jobs or raise prices, keep in mind that none of them bring up this argument when it comes to skyrocketing CEO pay while regular wages remain stagnant. Seriously if your company can afford to give a CEO a generous severance package of a few million bucks, they can raise wages on their lowest paying workers. It’s not hard to see.

16. Opposition to Minimum Wage Increases Has More to Do with Self-Interest and Ideology– I know there are people who argue that raising the minimum wage would hurt the economy as well as kill jobs and raise prices. However, we need to understand that despite bipartisan and expert support, raising the minimum wage is still seen as a mainly liberal issue in the halls of Congress. Why? Because a lot of Republican politicians are bankrolled by big corporate lobbies who would rather use cheap labor, many of whom boast record profits and very much can afford to pay their workers more. There are a lot of libertarian and conservative economists and think tanks to back them up, some of whom want to abolish minimum wage which just makes workers even more prone to further exploitation. Believers in free market and trickle down economics usually see low wage jobs as a cost-driven necessity for economic prosperity. But employers often use this argument to justify not giving their impoverished employees a raise for decades, including your Gilded Age robber barons. Besides, no Fortune 500 CEO uses this argument when it comes to their own pay, which has skyrocketed dramatically. I mean the median CEO to worker pay ratio has risen from 20-to-1 in 1965 to 204-to-1 in 2015. Some of the highest paid CEOs make 300 times more than their typical employees. There are plenty of CEOs with million dollar salaries as well as stock options/grants, bonuses, benefits, and other perks. Hell, even bad CEOs receive generous severance packages whenever they left their companies in worse shape than when they took over. Yet, no libertarian or conservative argues that raising their pay will contribute to higher prices, job loss, or worse economies. Or why people end up paying higher prices and lose their jobs while worker wages remain stagnant. Yes, I know that a CEO’s job may require more skills, education, and talent than a lot of minimum wage occupations and that we’ve been through a recession. But it doesn’t convince me why conservatives and libertarians think raising the minimum wage will lead to economic ruin while raising CEO compensation won’t. Surely a company that can generously compensate its own CEO can pay its lowest earning workers $15 an hour, which is just small potatoes. So I think it’s more of a matter of corporate greed and self-interest.

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This quote by Chris Rock perfectly explains why we need the federal government should raise the minimum wage. Most companies will not give their employees a raise by themselves. They need to be mandated to do it.

17. Large Employers Are Unlikely to Increase Wages on Their Own– While many conservatives and libertarians might tell us that workers would be better paid if it weren’t for all those pesky taxes regulations, it is not the case. The robber barons during the Gilded Age didn’t pay federal income taxes until the 16th Amendment passed in 1916 and none of their tax dollars went to benefit their impoverished, overworked, and underpaid employees. Not to mention, their workplace policies are the reason why we have so many regulations and agencies to protect workers today. Besides, there are plenty of large corporations exploit federal tax loopholes so they don’t have to pay at all. And yet, conservatives and libertarians claim that if we get rid of the tax burden with social welfare programs and regulations, the “free market” will provide and take care of workers. Uh, excuse me but during the Gilded Age, those tax supported social programs didn’t exist and I’m pretty sure the free market didn’t take care of those low wage workers. Unions and the government policies they lobbied for while facing staunch opposition from these large companies. Besides, corporations lobby at all levels of government like crazy for direct and indirect public assistance like bailouts, subsidies, special tax breaks, deductions, tax and policy loopholes specifically designed for them, so-called “right to work” laws, and more. Say what you want about welfare, but I’d rather have my tax dollars go to assisting poor people than to a $3 billion a year corporate jet subsidy, a $200 billion Wall Street bailout, special tax breaks to hedge fund managers allowing them to pay a 15% tax rate, or a $70 billion a year home mortgage deduction with 77% going to people earning over $100,000. Sure corporations may like lower taxes and less regulations but even if they get what they want from their political lackeys, they will not give workers a raise unless they’re pressured to either by unions, government policy, or both. But wait, what about companies that pay workers better wages like Costco? Yes, there are big businesses that treat their workers generously like Costco but the Costcos in this world are the exception to the rule, especially in sectors that hire low wage workers. Therefore, federal government action to raise the minimum wage is necessary.

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By raising the federal minimum wage to at least $10.10 an hour, corporations will only have to spend just 1/3 cent of every dollar spent on wages, according the the Congressional Budget office. So I’m confident these large companies with minimum wage labor can totally afford it.

18. Raising the Minimum Wage Is the Right Thing to Do– Economics aside, we should consider the fact that as earnings from corporations and the top 1% increased to dramatic new high, wages have stagnated or lost value even as productivity also rose. This could never be more true for low income workers. Raising the minimum wage will protect the most powerless in our workforce. Now could anyone say whether it’s fair for businesses to boast big profits while paying their employees poverty wages? Of course not. Is it fair for someone to live in poverty despite working a full-time job? Hell no. And if raising the minimum wage hurts their profits, why should I care? I mean a big company like McDonald’s is unlikely to lose business if they pay their workers $15 an hour since they’ll usually make a big profit anyway. Besides, most small businesses pay their staff more than minimum wage anyway since they can’t afford replacing them while retaining a competitive edge against their larger counterparts. As for price increases, well, they usually rise whether wages increase or not. And studies show that the increases won’t be much. What about jobs? If raising the wage results in reduced hiring and hours and more job loss by big companies, it won’t be due to economics. It would be more or less because of greedy executives who’d use just about any excuse to cut their workforces. Small businesses, on the other hand, are more worried about poor sales than being trounced by their big business counterparts than anything. Even if raising the minimum wage does hurt the economy like its critics have predicted, what about the concept of economic justice? I think that should matter. After all, labor is critical to a business’s success and workers who dedicate their time and effort into that company should get a bigger cut in that. Look, from how I see it, there’s no good reason to not raise the minimum wage. And above all, no one working a full time job should live in poverty. Even though I know that raising the wage won’t cure poverty any time soon, at least it can show a good example by making businesses invest more in their workforce. It’s about time.

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As FDR said himself, nobody should work a full time job and still live in poverty. Workers have a right for a decent living wage which has been denied to many in the name of profit. So raising the minimum wage is the right thing to do. Besides, what’s wrong with economic justice for God’s sake?

Stolen Pay: Why We Need to Know About Wage Theft

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Republican presidential candidate Donald Trump often likes to cast himself as a protector of workers and jobs as well as a great businessman. However, recently he’s come under considerable scrutiny as it’s been recently revealed that he’s been involved in more than 3,500 lawsuits over the past 3 decades. A large number of these pertain to ordinary Americans who say that Trump and his companies have refused to pay them for their work. According to USA Today, these include a Florida dishwasher, a New Jersey glass company, a plumber, a carpet company, painters, 48 waiters, dozens of bartenders and other hourly workers at his resorts and clubs all over the country, real estate brokers who sold his properties, and even several law firms that once represented him in these suits and others. Trump and co. have also been cited for 24 violations under the Fair Labor Standards Act since 2005 for failing to pay overtime or minimum wage, according to the US Department of Labor data. In addition to the lawsuits, there were more than 200 mechanic’s liens filed by contractors and employees against Trump, claiming that they were owed money for their work since the 1980s. These range from a $75,000 from a Plainview, NY, heating and air conditioning company to a $1 million claim from a New York City real estate banking firm. On his Taj Mahal casino in Atlantic City, the New Jersey Casino Commission in 1990 show that at least 253 subcontractors weren’t paid in full or on time, included workers who installed chandeliers, walls, and plumbing.

All of these actions described above paint Trump and his sprawling organization frequently failing to pay small businesses and individuals, then sometimes tying them up in court and other negotiations for years. In some cases, Trump’s team financially overpowers and outlasts much smaller opponents, sometimes draining their resources. Some just give up the fight, settle for less, end up in bankruptcy, or out of business altogether. Such actions described above are well-known cases of wage theft. Donald Trump has been a long practitioner of this but he’s hardly the only one. In recent years, workers ranging from NFL cheerleaders, Senate cafeteria workers, fast food workers, retail workers, high tech engineers, nail salon workers, and computer animators have found themselves victimized by this very real and very heinous act by their employers. Often, employees find themselves powerless to do anything about it. And if they do, they often have to act through the court system and risk losing almost everything. But since people rely on their job so much to make a living, this is a very important issue with it becoming the fastest growing crime wave in the United States. But it’s not often reported and it’s tough to see how widespread this problem is. However, at any rate, wage theft is a problem we need to discuss and need to demand action on because it affects so many people’s lives. And here I have this handy FAQ guide to show you.

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Yes, this is what wage theft actually is. Unfortunately, Mr. Orange Nuclear Meltdown doesn’t understand this. Because he’s been a constant violator according to the lawsuits former employees subject him to.

What Is Wage Theft?

Wage theft is when an employer denies pay and/or benefits that are rightfully owed to an employee. Wage theft can be conducted through various means such as failure to pay overtime, minimum wage violations, employee misclassification, illegal deductions in pay, working off the clock, having tips stolen, or not being paid at all. In short, the boss is not paying workers for all of their work. Or not paying for the work at the rate they said they would or what the employees are entitled to by law.

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If you experience any of these at work, you might be a victim of wage theft. Because these are common signs like being paid under the table, kept working despite clocking out early, having tips stolen, and not receiving meal or rest breaks.

Types of Wage Theft:

Overtime– This is the most common form of wage theft. The US Fair Labor Standards Act dictates that employees are entitled to receive overtime pay calculated at least 1.5 the regular rate for all time worked past 40 hours a week. Some exemptions only apply to public service agencies or employees who meet certain requirements in accordance to their job duties along with no less than a $455 weekly salary (or $23,660 a year). So unless employees meet the exemption criteria, they’re usually entitled to overtime if they work over 40 hours a week period. Employers can’t change overtime laws and can’t avoid paying overtime by enacting a no-overtime policy or getting employees to agree on special deals. Unfortunately, it’s common for employers to treat overtime as a personal choice when it’s not. And despite regulations, many employees aren’t being paid overtime due to them. Common overtime violations include:

  • Improperly Calculated Overtime Pay– Employers must calculate overtime on the actual 40-hour workweek regardless of pay period whether it be weekly, bi-weekly, or monthly. Many employers are said to average hours over 2 or more weeks, not including all payments in calculating overtime pay rate, not paying employees for all hours worked over a 40 hour work week, not including time spent preparing for work (donning and doffing), and requiring employees to wort through unpaid meal breaks. Such errors may not always be accidental.
  • Comp Time Instead of Overtime Pay– Compensatory time is paid time off for extra hours worked that’s generally granted to hourly employees instead of overtime wages. It can sometimes be legal (though it’s often not due to fear of employer abuse) but employers must pay it at 150%, the same rate as overtime wages. To give employees to take compensatory time or extra paid time off in lieu of overtime pay is illegal under federal law. Furthermore, those who do take the compensatory time option aren’t always guaranteed time off whether they want it or need it.
  • Employees Not Allowed to Report Work over 40 Hours Per Week– Many employers have rules that no overtime work will be permitted or paid for unless authorized in advance. Some employers choose to ignore when hourly employees work overtime or don’t allow employees to work overtime hours. This violates overtime rules.
  • Misclassification of Employees as Exempt Workers– Exempt employees are by law workers not entitled to receive overtime pay. Whether an employee is exempt or not can be confusing. However, it has nothing to do with one’s job or job description or whether one is paid a salary or hourly. It depends on what an employee actually does on their job on a daily basis that determines whether or not they’re legally entitled to overtime pay.

Not Paying for Meals and Rest Period Pay – Meals need not be counted as work time if they are at least 30 minutes long and the employee is relieved from active duty during the meal period even if they must remain available. An employee who works through lunch is working and that time must be counted. An employee who eats a sandwich at the desk or is required to monitor a machine is working through lunch. However, many employers who have their employees work through lunch are guilty of this.

Not Paying for Off the Clock Work– Many FLSA lawsuits involve employers failing to include time spent by employees performing work activities outside their normal shifts. Some may come early and start working before the official start time of their shifts. Such time is work time and must be included in FLSA pay computations, provided only that the employer knew or should’ve known that the employee was beginning work early (and to the extent that the employee spent pre-shift time performing work activities). Pre-shift roll calls are work time. Time spent setting up equipment before the official start of a shift is work time. Some employees may similarly stay late after shifts performing works which should be counted as work time as well. Travel time and on-call time is work time. Time spent by an employee cleaning equipment after the close of a shift is work time. Post shift work time can also include time spent by an employee performing job related activities on the way home like a secretary dropping off the day’s mail at the post office or delivering some paperwork to a customer or supplier. Some employees take work home. That time may well be work time. Similarly if an employee is contacted at home by phone for work related reasons, the time spent is work time (as well as when an employee is called back to work, the time counts as work time). This is a very common wage violation by employers.

Minimum Wage– The federal minimum wage is $7.25 an hour. It’s a poverty wage that’s not able to support a family but that’s beside the point. For tipped workers, it’s $2.13 an hour as long as it’s fixed and the tips add up to be at the federal or above the federal minimum wage which I think is stupid. Some states also have legislation that sets a state minimum wage as well. Depending on the state, the employee is always entitled to the higher standard of compensation. A common form of wage theft for tipped employees is to receive no standard pay and stealing tips. The Wage and Hour Division is said to be generally contacted by 25,000 people a year in regards to concerns and violations of minimum wage pay. Paying employees less than minimum wage is a very common wage theft practice.

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Missclassification is a common method of wage theft in which employers try to pass their workers off as independent contractors. The difference between employee and independent contractor is in this infographic.

Misclassification– One of the more extensive and insidious forms of wage theft which leaves workers especially vulnerable. Under the FLSA, independent contractors aren’t covered by tax and wage laws that apply to regular employees. Nor do they receive the same protection as employees for certain benefits. Thus, independent contractors aren’t entitled to a minimum wage, overtime, insurance, protection, or other employee rights. Nor do employers pay Social Security, Medicare, payroll taxes, or federal unemployment insurance on contract employees. Independent contractors also have to pay payroll taxes to the IRS. The difference between the two classifications depends on the permanency of employment, opportunity for profit and loss, as well as the worker’s level of self-employment along with their degree of control. Nevertheless, employers are strongly motivated to classify regular employees as contract workers to save costs, a practice known as pay roll fraud. A 2007 study in New York state found that 704,785 workers or 10.3% of the state’s private sector workforce was misclassified each year. For industries covered in this study, average unemployment insurance taxable wages underreported due to misclassification was on average $4.3 billion for the year while the unemployment insurance tax underreported in these industries was $176 million.

Illegal Deductions– Employees are subject to forms of wage theft through this method. Trivial to sometimes fabricated workplace violations are used to validate deductions. Any deduction that brings an employee to a level of compensation less than the minimum wage is also illegal. In many states, employers are required to issue employees documentation of deductions along with earnings. Failure to issue such documentation is generally prevalent in workplaces subject to wage theft.

Full Wage Theft– Employers are legally obligated to pay employees. However, this doesn’t always happen and is the most blatant and extreme form of wage theft.

Other– These may include putting pressure on injured workers not to file for workers’ compensation, being denied time off or vacation time they have required, being denied pay for sick leave or vacation time, not paying final paycheck to workers who’ve left, delaying payments (not paying on scheduled paydays or on a timely basis), bounced paychecks, stealing and pooling tips, unpaid internships, not reimbursing expenses, not keeping or fabricating records of hours worked, not paying for training, and under staffing. These could depend on state and local jurisdictions.

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According to the FBI, more money is lost to wage theft than in any other property crimes including robbery, auto theft, burglary, and larceny. And money number is only from the reported cases.

How Common Is Wage Theft?

Wage theft is widespread in the United States existing in all professions and affecting all workers regardless of race, gender, or legal status. When it comes to ripping employees off, employers don’t discriminate. But low-income workers and immigrants tend to be the most vulnerable. Yet, this could happen to higher income employees as well such as in high tech companies. So don’t think you can’t become a victim of wage theft because you can. While no one knows exactly how big this problem is, federal and state agencies have recovered $933 million for wage theft victims in 2012 while property taken in all thefts and robberies amounted to under $341 million. Research suggests that American workers are getting screwed out of $20 billion to $50 billion annually. The odds of you becoming a victim of wage theft are likely but some workers are more vulnerable than others.

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Undocumented immigrants are the most vulnerable to wage theft due to their precarious legal status that leaves them unable to speak up without risking deportation. Many employers take full advantage of this by paying them under the table and threatening to call immigration on them if they get out of line.

Who Are Most Vulnerable to Wage Theft?

Low income workers are the most vulnerable to wage theft, particularly in fields that employ women, people of color, and foreign born populations. Foreign-born women are at a much greater risk for wage violations than their male counterparts. Undocumented immigrants stood at the highest risk levels. Education, longer tenured employment, union membership, and English proficiency proved to be influential factors in reducing wage theft for the aforementioned demographics. Wage theft is more common in small businesses with less than 100 employees than larger companies. Workplaces with flat rate compensation or cash under the table payments also reported a higher instance in wage theft. We should also take into account that while low income workers are most vulnerable to wage theft, they’re the least likely to report it as well as suffer the most devastating consequences. When a worker only earns a minimum wage ($290 for a 40 hour workweek), shaving a mere half hour of the day from the paycheck could mean a loss of more than $1,400 a year, including overtime premiums. That could be nearly 10% of a minimum wage employee’s earnings which could be the difference between paying the rent and utilities or risking eviction and the loss of gas, water, or electric service.

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This infographic illustrates the real costs of wage theft which consist of less income, time poverty, and a poor workplace environment. Wage theft is wrong, it hurts families, it hurts people’s well being, and leads to further worker abuse.

Why Is Wage Theft Bad?

Think of it this way, if you spend several hours working your ass off and your boss doesn’t pay you the money or benefits you should be receiving, you would surely feel very upset about it. After all, you worked for it, you earned it. Therefore, your employer is required to pay you for all the work you did for them. This is how the employer-employee relationship is supposed to work. If your boss doesn’t pay what you deserve, then it’s obviously unfair. Your boss is ripping you off. Wage theft costs workers billions of dollars a year, a transfer from low income employees to business owners that worsens income inequality, hurts workers and their families, and damages the sense of fairness and justice that a democracy needs to survive. And when low wage workers are underpaid, taxpayers face the burden of supporting workers whose employers haven’t paid into Social Security taxes and other funds. Plus the millions of dollars lost in tax revenue. Not only that, but the money your average low income worker loses in unpaid wages is not reinvested in the economy. Meanwhile businesses who do pay their employees without resorting to wage theft find it hard to compete in a market with their additional employee-related expenses.

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Employers resort to wage theft because it keeps their costs down, saves them money, and easily get away with it. In other words, when it comes to profit margins, wage theft is good business despite being illegal.

Why Would Employers Commit Wage Theft?

Many businesses violate wage and hour laws for 3 reasons. First, paying employees less gives them a competitive advantage or higher profit and have little fear of getting caught or punished. If a business can get away with illegally paying its employees a below minimum wage with no overtime, it will be able to sell its products more cheaply than one who complies with the laws and pays their workers time-and-a-half for overtime work. If a business pays its “interns” nothing while its competitors all pay interns the minimum wage, it will be able to charge clients less and steal business away from its competitors. Second, even if a business doesn’t lower prices to undercut competitors, it still pockets the difference between the wage owed and the wage paid. Thus, the employee’s loss is the owner’s extra point. Third, there’s a very low chance the employer will be caught cheating on wages so most don’t usually think twice about the consequences. After all, employers usually can afford the better legal defense and the fact wage theft laws are typically weak and insufficiently enforced. As of 2014, there are only 1,000 to 1,100 federal Wage and Hour Division investigators for the whole country who are responsible for investigating over 7 million businesses and protecting over 100-135 million employees. In 2012, they only conducted fewer than 35,000 investigations and recovered about $280 million in unpaid wages to 308,000 workers. State labor departments and attorneys general combined recovered even less. Not to mention, many federal wage theft cases are thrown out because the Department of Labor couldn’t resolve them within two years. At the state and local level, it’s often even worse since few local governments have the resources to combat wage theft and several states have cut their labor department’s. Even if businesses do get caught, they’re rarely punished. Consequences for violations found are often no more than an order to pay back the wages owed or even a fraction of the total amount. This despite that the FLSA makes the employer liable for the full amount as well as additional equal amount for liquidated damages. But at any rate, the FLSA’s civil penalties for willful and repeat violations are too small to deter offenders from engaging in similar violations in the future. For instance the maximum penalty for failure to pay overtime and minimum wage being $1,100 whether the culprit be some local ice cream shop or a giant multinational corporation like Walmart. Yet, Wage and Hour failed even to seek a penalty in most of its cases for many years. And despite that the FLSA makes repeated willful pay violations a misdemeanor punishable by up to 6 months in jail, criminal penalties are rarely if ever used. At state and local levels, wage theft laws can be even weaker while enforcement is even more insufficient.

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Wage theft often goes underreported mostly because the party with the power and resources is often the perpetrator or the employer. Victims who decide to take action often face uphill battles, lost savings, lost careers, and possibly very little back pay and justice if they win. It’s a very sad situation.

Why Does No One Talk About Wage Theft?

Because unlike your typical property crimes, wage theft usually happens behind closed doors and is not easily detectable. It’s also conducted by more powerful people typically stealing from those with few resources to do anything about it. In fact, many workers may not realize their employers are stealing from them for years into their job. Or may not know that their boss may be doing anything illegal or violating their rights under the law. But if they do, they may not report the incident anyway if calling out their employer means losing their job or other forms of retaliation like shorter hours, less pay, or increased workloads. Many immigrants are often confronted with threats of calls to immigration services if they complain or seek to redress, especially if they’re undocumented. Some employees in white collar professions are even threatened with criminal prosecution or possibly blackmail to keep them from leaving. Even if they do sue and win, they often end up losing their careers and possibly their life savings to litigation fees. As for settlement, most workers who win their wage theft case usually don’t see a dime. Not to mention, it rarely makes front page news unless the case pertains to a class action lawsuit against a large corporation. So wage theft remains vastly under reported though cases filed in federal court have been on the rise.

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In 2009-2011, warehouse workers sued Walmart for paying them less than minimum wage as well as denying the paid vacations they were promised. Walmart denied this because wage theft is one of the ways the retail giant does to ensure you save more, live better, and contribute to their profits.

What Are Effective Measures to Deter Wage Theft?

The US FSLA requires employers to keep detailed records regarding workers’ identities and hours worked for all who are protected under the minimum wage law. Most states require that employers also provide each worker with documentation every paid period detailing that worker’s hours, wages, and deductions. As of 2011, Arkansas, Florida, Louisiana, Mississippi, Nebraska, South Dakota, Tennessee and Virginia didn’t require such documentation. A 2008 survey of wage theft from workers in Illinois, New York, and California found that 57% of low wage workers didn’t receive this required documentation and that workers who were paid in cash or on a weekly rate were more likely to experience wage theft. So making employer documentation legally mandatory is an effective measure though not so much when it comes to tip theft. As for other enforcement measures, while willful violators can fines up to $10,000 upon their first conviction to jail time resulting from repeat offenses. However, since the WHD is so underfunded and so understaffed (which isn’t an accident), very few wage theft cases are investigated and fewer employers are brought to justice.

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Most of the wage theft awareness campaigns usually tend to be localized and statewide. But wage theft is so widespread that Americans need to have a nationwide conversation about this. Wage theft is a very insidious crime that’s happening everywhere. We need to demand action to deter this behavior. We need to show that wage theft is an unacceptable way of doing business.

What Steps Can Be Done to Prevent and Stop Wage Theft?

First, wage theft needs to be addressed as a national issue in the national spotlight because there are stories that are barely heard on TV unless they pertain to Trump’s business shenanigans or NFL cheerleaders. Second, raise funding for the WHD so they could hire more staff to investigate (which should be doubled) as well as better laws that put stiffer penalties on employers. Third, protect victims filing complaints with government agencies from retaliation and allow them to access the back pay they’ve been so long denied if they decide to sue.There must be ways for wage theft victims to complain and stick up to their employers so they won’t have to worry about losing their jobs or their life savings. Fourth, fix the statute of limitations on wage claims for more than two years. Fifth, mandate that employers give workers pay stubs so they could accurately calculate their hours and have a record to prove they were cheated, which most states do anyway as well has been a proven deterrent. Sixth, have the DOL engage in targeted investigations of industries and employers where wage theft is rampant in partnership with community organizations workers trust and know who the criminal employers are. Seventh, instill stiffer penalties on wage theft violators which includes creating mandatory minimums for employers repeatedly breaking the law as well as make sure that wage theft judgments are enforced so workers could collect what they’ve been denied for years. And finally, provide resources to community organizations with the Department of Labor to eliminate wage theft and win back wages.

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Remember, wage theft can be prevented and stopped. The time is now to make unscrupulous employers pay. And I hope the Burger King goes directly to jail and isn’t allowed to collect $200.

Money Is Not Speech: Why We Must Get Rid of Citizens United

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As it’s become apparent that the 2016 US presidential election campaigns are in full swing, I would like to devote a post to the issue of campaign finance. As 2016 draws upon us, we should expect to see more political ads in the media featuring candidates asking us to cast their votes. Now discussing campaign campaign finance may not be as interesting as other issues the media and the populace like to talk about. But in our day in age, it’s apparent that money has a profound influence in political policy in the United States. Wait a minute, money has a profound influence in pretty much everything. It’s just money has a higher influence in politics than most walks of life. While political candidates may act like prima donnas now and then, we need to note that it’s through elections that we choose our government leaders. Whoever’s in government usually shapes social policy. And social policies affect our lives in more ways that we’d like to admit. So yes, money does play a crucial role in politics, especially when it pertains to who’s giving it.

Yes, elections are decided by voters. But if you want to run for office, you will need to promote yourself and convince voters to go for you. That costs money. So this is where campaign financing comes in.

Yes, elections are decided by voters. But if you want to run for office, you will need to promote yourself and convince voters to go for you. That costs money. So this is where campaign financing, fundraising, and donations come in.

But aren’t elections decided by votes? Absolutely. And doesn’t everyone have only one vote? Sure. However, if you want to run for elected office, you need to promote yourself as a candidate in your constituency. To do that, you need to tell voters who you are and why they should choose you some time before the election actually takes place. In our mass media culture, it’s best you start early. Now candidates promote themselves in a variety of different ways like personal appearances, endorsements, and advertising through signs, mailings, social media, newspapers, radio, television, the works. All that costs money. So how will get it? From anyone willing to give it to you which is the reason why candidates hold fundraisers as well as have mass mailings to solicit donations.

This chart shows who received the most campaign funds in the 2010 midterm elections. Since donors tend to have some relationship with elected officials, it's no surprise that most donations go to incumbents. And it's no wonder that incumbents usually win. Even in Congress which has a 90% reelection rate.

This chart shows who received the most campaign funds in the 2010 midterm elections. Since donors tend to have some relationship with elected officials, it’s no surprise that most donations go to incumbents. And it’s no wonder that incumbents usually win. Even in Congress which has a 90% reelection rate.

However, although every US voter is equal in electoral value, they are not all equal financially nor as willing to give money to a political candidate. In fact, more than 90% voters don’t since well, they either can’t afford to or don’t have much interest to. Giving money to a political candidate isn’t like giving to a church, charity, PBS station, non-profit, college, or cultural establishment. You aren’t giving money because you have an affinity for it or want to do something good. No, people give money to political candidates because they want them to win so they can put forth social policy that they want. Still, even among those who contribute to political campaigns, most will contribute no more than $200, while some will donate hundreds or thousands. If you’re a political candidate, chances are you’re going to actively seek political donations from the entities who contribute the most campaign cash. In 2010, small donors only contributed to 13% to congressional candidate funds (which doesn’t include PACs that make up 23%). Large donors contributed to 48% of campaign donations. But here’s the thing, most big money donors won’t just hand you a large chunk of cash right off the bat. No, for before they give you the money, they want to know where you stand on the issues and what you’d be willing to do for their interests. And you’ll have to curry to their good graces by promising them that you will do everything you can to please them once elected. If you think it’s a form of bribery, you’re probably right. Yet, as far as I know it’s perfectly legal. Nevertheless, the more big money donations you have, the more you can spend on campaign advertising. And the more you can spend on advertising, the more likely people will vote for you. So everything’s fine, right?

Here's an infographic on the 2012 presidential election between Barack Obama and Mitt Romney showing where the money came from in their campaigns. However, while Romney managed to raise more money, Obama still won reelection.

Here’s an infographic on the 2012 presidential election between Barack Obama and Mitt Romney showing where the money came from in their campaigns. However, while Romney managed to raise more money, Obama still won reelection.

Well, not really. While government officials are elected to represent the people and fulfill campaign promises, we all know all too well that it’s not exactly the case. Yes, candidates make promises on the trail to get them to vote for you. But that doesn’t mean all will be fulfilled, given the realities of the political landscape. But since these rich donors give money to these candidates, then they believe in the issues they stand for, right? Actually it depends on the contributor. Sure there are donors who do contribute money to those who share their views or party affiliation. But there are plenty of other donors who just want to gain political influence and will contribute to any candidates regardless of party or issue stance (even in the same race). All they care about is having friendly access the candidate so they could support measures they want, even if their wishes contradict the campaign promises and party platform. They may even contribute money because you oppose their interests and just want you to keep quiet. Hell, they don’t care if their wishes works against the candidate’s conscience or their constituents. And sometimes not even the laws. Of course, while this may put some politicians in a dilemma, many tend to follow the wishes of these big contributors to keep their cash flowing. After all, they need the money for reelection and don’t want the other guy to have more influence and capital than them. But do these political money deals benefit the American people?

During the 2010 elections, the biggest sources of campaign funds came from large individual donations consisting of 48%. Small donations from individuals only consisted of 13% of funds. PACs contributed 23%.

During the 2010 elections, the biggest sources of campaign funds came from large individual donations consisting of 48%. Small donations from individuals only consisted of 13% of funds. PACs contributed 23%.

Actually no. The fact that politicians are more likely to listen to large donors than their constituents suggests that there’s something very wrong in our political system. Yes, people elect their government officials but since they depend on campaign contributions to promote themselves, they usually tend to side with their backers who tend to have their very own lobbyists. After all, most incumbents usually get reelected so those voters aren’t going anywhere. Besides, the biggest incumbent supporters are usually long term donors they’ve had a relationship with every election year. To them, giving is a way of life and a cost of doing business all for the sake of having access to a politician, which leads to more power and influence on policy. But some of these donors can be fickle and might shift their money to the politicians in the majority party whenever the balance of power changes. And it doesn’t help that the fundraising never stops since an successful US Congressional campaign costs $1.4 million on average. But US Congressmen are elected every 2 years so it’s a rather short time window. And US Senate campaigns cost more than 6 times as much. But as money becomes more important in politics, the politicians seem more like a lackey to their rich overlords than the constituents who they’re supposed to represent. This leads to most of the American people having a considerable less political influence in politics, less access to lawmakers, and less of a chance of having their interests heard. More often than not, they become nothing but mere pawns who tend to cast their vote against candidates who may not represent their best interests for various reasons. But it’s mostly because they either know the guy, party line, or that they have no other choice. Thus, as big donors tend to have more access to politicians, American citizens lose out.

While the Federal Election Commission is supposed to oversee campaign regulations, it was designed as an ineffective organization from day one. The fact our system can't create agencies without congressional approval kind of explains why. Because  Congressman have to be elected.

While the Federal Election Commission is supposed to oversee campaign regulations, it was designed as an ineffective organization from day one. The fact our system can’t create agencies without congressional approval kind of explains why. Because Congressman have to be elected.

But don’t they have rules and regulations on campaign finance? We have a Federal Election Commission (FEC) that’s supposed to enforce and oversee campaign finance laws, it’s notoriously ineffective. However, as an organization that’s supposed to monitor lawmaker behavior, it’s no surprise that it was designed this way even if it was created in response to Watergate. And being the elected politicians they were, lawmakers made sure that the campaign watchdog would have a very tight leash and interfere as little in their campaigns as possible. I mean they set the FEC up as a 6 member body so no ruling can go into effect without a 4 vote majority. This is often impossible since the FEC is evenly split with 3 Republican as well as 3 Democratic commissioners, each nominated by their respective parties. Tie votes are often commonplace on some of the most important campaign finance issues which make the system riddled with loopholes. Because of this, the agency often takes years to resolve complaints and political operatives have learned that they can live on the edge of the law with little fear or interference from the FEC. And judging by the political culture these days, I’m sure the people behind the FEC knew what they were doing.

In 2010, the Supreme Court ruled in favor of Citizens United which stated since money is speech, then corporations and unions should contribute as much as they want to political campaigns. Unfortunately, not everyone has money and such notions basically keep many Americans from having a political voice. And it's apparent that most Americans don't like it.

In 2010, the Supreme Court ruled in favor of Citizens United which stated since money is speech, then corporations and unions should contribute as much as they want to political campaigns. Unfortunately, not everyone has money and such notions basically keep many Americans from having a political voice. And it’s apparent that most Americans don’t like it.

Still, despite it’s reputation, the FEC is quite effective with improving disclosure for campaign contributions for the most part. But even this has its limitations. And then there’s the matter with the Citizens United Supreme Court case in 2010, which did away with many campaign finance laws already on the books as well as opened up unlimited spending by corporations, unions, and other independent groups. This led to the 2010 elections seeing an unprecedented flood of outside money flowing into congressional races all over the country. Tens of millions of dollars came from secret donors whose identities will never be known. Much of this campaign spending goes to funding political advertisements to elect (or defeat) candidates running for office. However, the money in question can only be used for independent expenditures (not direct contributions to the candidates’ campaigns). And whatever ads are produced can’t be coordinated with the candidates. Of course, it’s no small stretch to say that such measures aren’t always enforced. Thus, rich donors didn’t particularly give a shit since they want to contribute as much money as they want with little or no consequence. However, they didn’t win when it came to disclosing political contributions on account that their right to privacy isn’t as important as the public’s right to know who’s funding who if amount is over $200. The Supreme Court has also said that disclosing campaign contributions is the best way to guard against political corruption. Of course, this brings me to the outside political organizations created to raise campaign funds for elections:

This is the logo for a realtors' political action committee or PAC. It's supposed to pool contributions from members to contribute to political purposes. According to federal law, an organization becomes a PAC when it receives or spends more than $2,600.

This is the logo for a realtors’ political action committee or PAC. It’s supposed to pool contributions from members to contribute to political purposes. According to federal law, an organization becomes a PAC when it receives or spends more than $2,600.

PAC (political action committee)- an organization designed to specifically pool campaign contributions from members to donate for political purposes whether it’s to campaigns for or against a candidates, ballot initiatives, or legislation. According to the Federal Election Campaign Act (FECA), at the US federal level, an organization becomes a PAC when it receives or spends more than $2,600 for the purpose of influencing a federal election. As for state level, the money pertaining to state elections in PAC designation varies. There are many types depending on political purposes and how each one spends their money. Still, you’d see at least one in almost every type of political advocacy organization you could think of. However, PACs have to follow certain criteria which includes:

  1. Though corporations and labor unions may sponsor a PAC as well as provide financial support through administration and fundraising, they can’t contribute through their own treasuries.
  2. Union-affiliated PACs may only solicit contributions from members.
  3. Independent PACs may solicit contributions from the general public and must pay their own costs from those funds.
  4. Federal multi-candidate PACs may contribute to candidates as follows:
  • $5,000 to a candidate committee for each election (primary and general elections count as separate elections)
  • $15,000 to a political party per year
  • $5,000 to another PAC per year
  • PACs may makes unlimited expenditures independently of a candidate or political party

The types of PACs consist of the following:

This is the United Steelworkers PAC which is an example of a connected PAC. These are sponsored by corporations and unions. These can only raise money from a

This is the United Steelworkers PAC which is an example of a connected PAC. These are sponsored by corporations and unions. These can only raise money from a “restricted class” of donors though the entities can pay for the administrative costs and fundraisers. For instance since the United Steelworkers is a union, it can only receive money from its own members.

Connected PACs- designated as “separate segregated fund” (SSF), these are sponsored by labor unions and corporations. These PACs may only raise money from a “restricted class” generally consisting of managers and shareholders for corporations and members for unions and other interest groups. Sponsor may not contribute to the PAC directly but can absorb costs of administrative operations and soliciting contributions. As of 2009, there were 1,598 registered corporate PACs, 272 related to labor unions, and 995 to trade organizations.

This Free Enterprise PAC from Idaho is an example of a non-connected PAC, used by politicians, parties, and ideology groups. Unlike connected PACs, they must pay their administrative expenses through donations but may accept funds by anybody. It's one of the fastest growing categories in campaign finance.

This Free Enterprise PAC from Idaho is an example of a non-connected PAC, used by politicians, parties, and ideology groups. Unlike connected PACs, they must pay their administrative expenses through donations but may accept funds by anybody. It’s one of the fastest growing categories in campaign finance.

Non-Connected PACs- basically financially independent PACs that must pay for its own administrative expenses with contributions it raises. May be financially supported by an organization but such expenditures are considered PAC money which are subject to the dollar limits and other requirements of FECA. May accept funds from any individual, connected PAC, or organization. Used by members of Congress, political leaders, ideology, and single-issue groups. As of 2009, there were 1,594 registered, the fastest growing category.

Now this is CAPAC which is a PAC for Asian and Pacific Islander Americans in Congress. This is an example of a leadership PAC sponsored by political parties and elected officials. Now these can't be used to fund an official's own campaign but they can fund other expenses.

Now this is CAPAC which is a PAC for Asian and Pacific Islander Americans in Congress. This is an example of a leadership PAC sponsored by political parties and elected officials. Now these can’t be used to fund an official’s own campaign but they can fund other expenses.

Leadership PACs- non-connected PACs sponsored by elected officials and political parties with independent expenditures, which isn’t limited (as long as it isn’t coordinated with the other candidate). Nor can they be used to support the official’s own campaign. Set up since elected officials and political parties can’t give more than the federal limit directly to candidates. Can fund travel, administrative expenses, consultants, polling, and other non-campaign expenses. Used by dominant parties to capture seats from other parties. Between 2008 to 2009, these have raised more than $47 million.

Of course, this is Stephen Colbert's Super PAC, which started appearing after the Citizens United ruling. Now these may not contribute or coordinate directly to candidates or campaigns. But there is no legal limit on contributions it can receive. As of August 2012, these have raised over $349 million with 60% from just 100 donors.

Of course, this is Stephen Colbert’s Super PAC, which started appearing after the Citizens United ruling. Now these may not contribute or coordinate directly to candidates or campaigns. But there is no legal limit on contributions it can receive. As of August 2012, these have raised over $349 million with 60% from just 100 donors.

Super PACs- Citizens United gave rise to this new kind of PAC designated as “independent-expenditure only committees,” because they may not make contributions to campaigns or parties directly but can generate any political spending independently of the campaigns. Unlike other PACs, there is no legal limit on funds they can raise from individuals, corporations, unions and other groups, provided they are operated correctly. As of August 2012, 797 of these have raised $349 million, with 60% of that money coming from just 100 donors, according to the Center of Responsive Politics. Also, Stephen Colbert started his own Super PAC for his show to inform his viewers how it’s done (but he donated all the money he raised to charity).

Aside from the PACs, there are some other organizations and entities also known to raise money for political campaigns as I list below:

Crossroads GPS is one of many 501(c)(4)s that have appeared after the Citizens United ruling. Considered

Crossroads GPS is one of many 501(c)(4)s that have appeared after the Citizens United ruling. Considered “social welfare” organizations under the IRS, they can only use 49.9% of their contributions for political purposes. Can accept unlimited contributions as well as aren’t required to disclose their donors. In 2012, Crossroads GPS and Americans for Prosperity raised more money into the presidential campaigns than all of the Super PACs combined.

501(c)(4) Organizations- defined by the IRS as “social welfare” non-profit and tax-exempt organizations but may also participate in political campaigns and elections. That is, as long as its “primary purpose” it promoting social welfare and not political advocacy (50.1% of their spending efforts much go to “social welfare” activities or “promoting in some way the common good and general welfare of the people of the community.”) Like Super PACs they can accept unlimited amounts of money from corporations, unions, or other interest groups. However, they are not required to disclose spending on their political activity or information on their donors unless they give for the express purpose of political advocacy. Traditionally these have been civic leagues promoting social welfare or local associations of employees with limited memberships to a designated company or a municipality or neighborhood. And often these net earnings went exclusively to charitable, educational, or recreational purposes. Groups like Planned Parenthood, the National Rifle Association, the NAACP, the National Organization for Marriage, the Sierra Club, and the League of Conservation Voters have been active in lobbying and have long held 501(c)(4) status before 2010. Citizens United has seen a dramatic rise of these organizations that contributed to a sharp increase in outside campaign spending from undisclosed sources from a bit more than 1% ($700,000) in 2006 to 44% ($1.27 million) in 2010. In 2012, that number was more than $308 million. And as far as we know much of this anonymous donor money went to Republican organizations and candidates since it helped topple the Democrats in Congress that year. And as of August 2012, two of the biggest 501(c)(4) organizations (Crossroads GPS and Americans for Prosperity) put more money into the presidential campaign than all the Super PACs combined, according to Pro Publica. However, these two groups were much less successful in that year’s presidential election (because Obama still won). Along with Super PACs, it’s also said that these organizations tend to coordinate among themselves and each other. Nevertheless, almost every advocacy organization has one. Also, Stephen Colbert talked about these on his show as well.

MoveOn.org is a famous example of a 527 organization. These are tax-exempt and not regulated under federal and state election laws. Mostly because they don't

MoveOn.org is a famous example of a 527 organization. These are tax-exempt and not regulated under federal and state election laws. Mostly because they don’t “expressly advise” whether to elect or defeat a candidate or party (officially). Can receive unlimited donations from anyone and there are no limits. However, they are required to file with the IRS and report independent expenditures.

527 Organizations- tax-exempt organizations which aren’t regulated under state and federal campaign finance laws because they do not “expressly advocate” the election or defeat of a particular candidate or party. When operated within the law, there are no limits on contributions to these groups or restrictions on who may contribute. Nor are they subject to spending limits either. However, they must register with the IRS, disclose their donors, and file periodic reports of contributions and expenditures.

Political Parties- while they may do more than just raise campaign cash, national and state party committees may contribute funds directly to candidates and make additional “coordinated expenditures” for their nominees in general elections. But these are subject to FECA limits. However, national party committees may make unlimited “independent expenditures” to support or oppose federal candidates. Nevertheless, since 2002, national party committees have been prohibited from accepting any funds outside FECA limits.

Here's an infographic on the bundler contributions in the presidential elections. These are individuals who raise money from other contributions and present the sum to the campaign.  However, while disclosing them isn't required, they are likely to be appointed to posts in presidential administrations.

Here’s an infographic on the bundler contributions in the presidential elections. These are individuals who raise money from other contributions and present the sum to the campaign. However, while disclosing them isn’t required, they are likely to be appointed to posts in presidential administrations.

Bundlers- actually these are individuals who can gather contributions from many individuals in an organization or community and present that sum to the campaign. They’re often recognized with honorary titles and sometimes exclusive events featuring the candidate. It has evolved into a more structured form in the 2000s and we know that all high profile candidates use them. However, there’s currently no law requiring disclosure of campaign bundlers as long as they’re not active, federally registered lobbyists. Nevertheless, the amount raised by bundlers has grown significantly with each election year with average contributions to winning presidential candidates reaching $186.5 million in 2012. We should also note that bundlers are more likely to be appointed to administration posts. In the Obama administration, it’s apparent that 80% of those collecting over $500,000 took key administration posts. George W. Bush appointed about 200 bundlers to posts in his administration.

I know writing about this campaign finance stuff might seem boring and meaningless to you in our political process. But it’s not. In fact, knowing about such organizations can explain how campaign donations for elections shapes the political landscape. Besides, noting how campaign finance works tends to explain a lot about what’s going on in this country. The rise in political activity pertaining to 501(c)(4)s was what led to the IRS scandal in 2013 as employees tried to create ways to weed out organizations that applied for 501(c)(4) status for being overly political. Their methods might not have been specifically appropriate but you really couldn’t blame the IRS for suspecting certain applicants of being overly political, particularly if they support conservative or Tea Party policies. This is especially the case if the recent 501(c)(4)s like Karl Rove’s Crossroads GPS and the Koch Brothers’ Americans Prosperity which many people seem to believe as having little to do with promoting the social welfare whatsoever. Following the money in Washington also explains other recent events as well. Powerful healthcare lobbies help explain why it was so difficult for Democrats to pass the Affordable Care Act despite a Democratic presidential administration and significant control of both congressional houses. The significant influence of the Koch Brothers and industry on Washington help explain the pervasive influence of climate change denial among Republican politicians and why so many polluters shift clean up costs to taxpayers during environmental disasters. And the NRA’s influence helps explain why no gun control legislation has ever been passed in either congressional house, despite the prevalence of mass shootings in recent years.

Open Secrets.org has this diagram of how much campaign cash each sector contributes between 1990-2010. The fact the financial sector contributes the most money offers a great explanation why almost no one involved in the Wall Street collapse in 2008 was prosecuted.

Open Secrets.org has this diagram of how much campaign cash each sector contributes between 1990-2010. The fact the financial sector contributes the most money offers a great explanation why almost no one involved in the Wall Street collapse in 2008 was prosecuted.

But what the nature of campaign finance really helps explain is the relationship between Washington and Wall Street. The fact that the financial sector tends to be the largest contributor to federal office candidates and parties explains why the federal government has been so reluctant to prosecute Wall Street after the 2008 recession. It helps explain why many Republicans have vociferously opposed raising taxes and instilling regulation but supported bailouts. Yet, the financial sector also contributes money to Democrats which doesn’t make passing financial reform on Capitol Hill any easier. Just so you know, the financial sector contributed $468.8 million to federal campaigns and candidates in 2008 alone (80% more than in 2006) and has spent more on K Street lobbying than any other sector. As of 2014, the financial sector has spent nearly $500 on lobbying as well reports 855 clients and 2,358 lobbyists. Thus, it’s a very powerful influence in Washington as well as a very corrupting one. Wall Street’s dubious practices basically led to an economic collapse and recession in 2008 as well as put so many people in financial ruin, possibly for the rest of their lives. But because of the financial sector’s hold on Washington, the federal government walks a fine line between its obligation to the general public and the desires of powerful backers many of them committed actions that should’ve put them in jail.

This is an infographic from the Center for Media and Democracy explaining how ALEC works. Now it calls itself a nonprofit and nonpartisan organization. However, it's really a business friendly conservative bill mill. Let's just say, even if you disagree with my politics, this is a very powerful lobby whose activities should concern you.

This is an infographic from the Center for Media and Democracy explaining how ALEC works. Now it calls itself a nonprofit and nonpartisan organization. However, it’s really a business friendly conservative bill mill. Let’s just say, even if you disagree with my politics, this is a very powerful lobby whose activities should concern you.

Still, while this post appears to focus on the nature of campaign finance in Washington, the corrupting influence of the political money culture doesn’t just affect the federal government alone. State governments have their officials supported by the same kind individuals and organizations with the same agendas and in very much the same way. Of course, what’s different at the state level is voters can elect more people to office like high court justices and cabinet positions. However, there’s a special nonprofit organization founded in the 1970s called the American Legislative Exchange Council (ALEC) consisting of state legislators and private sector representatives. Now according to ProPublica, ALEC is said to produce model legislation that is heavily influenced by big business and industry as well as “works to advance the fundamental principles of free-market enterprise, limited government, and federalism at the state level through a nonpartisan public-private partnership of America’s state legislators, members of the private sector and the general public.” Each year almost 1,000 bills based on ALEC’s “model” legislation are introduced in state houses across the country of which about 200 become law. Now these ALEC sponsored bills advocate a wide range of measures like reducing corporate regulation and taxation, combating illegal immigration, loosening environmental regulations, preventing Medicaid expansions and other state-related Obamacare policies, reducing pensions for public employees, retaining the minimum wage, privatizing prisons as well as enacting harsh sentencing laws, deregulating the telecom industry, privatizing public education, tightening voter identification rules, weakening labor unions, and promoting gun rights. It also acts as a networking tool among Republican state legislators, allowing them to research conservative policies implemented in other states. Not to mention, it’s funded almost exclusively by big business.As of 2013, ALEC’s membership consists of 1,810 state legislators representing nearly a quarter of legislative seats in the US as well as 300 corporate, foundation, and private-sector members.

Now this is a rough diagram explaining how ALEC works and its appeal among corporations and politicians. Now ALEC helps give each entity what they want on an expense paid vacations and parties. Corporations get legislation tailored to their interests and access to politicians. And politicians gain access to campaign funds and private sector jobs.

Now this is a rough diagram explaining how ALEC works and its appeal among corporations and politicians. Now ALEC helps give each entity what they want on an expense paid vacations and parties. Corporations get legislation tailored to their interests and access to politicians. And politicians gain access to campaign funds and private sector jobs.

Now it’s very simple to explain why politicians and private entities would want to join this organization if you know a anything about campaign finance. ALEC allows state legislators to be acquainted with potential campaign backers while it helps corporations gain access to and form long term relationships with politicians.They also hold meetings on all expense paid trips in cities across the country that are said to resemble vacations (sometimes funded by taxpayer money by the way). Another way to explain its appeal was how it helps draft model bills through task forces during their meetings. Public and private sector members make up each of their task forces with the later typically being corporate or think tank representatives (who have veto power over drafted model bills). These task forces generate model bills that members can customize an introduce for debate in their own state houses after being approved by their board of directors who comprise of all legislators. In your 2016 Republican lineup, ALEC-related contributions have gone to Marco Rubio, Bobby Jindal, John Kasich, Lindsey Graham, Rick Perry, and Scott Walker as well as held some considerable influence in Chris Christie’s gubernatorial administration in New Jersey. Nevertheless, it’s a hugely influential lobbying organization in the states which it has always denied to keep its tax-exempt status. Yet, what it does can be seen by most Americans as nothing but the very definition of lobbying. But media scrutiny has grown after being publicized by liberal groups and news outlets like The New York Times and Bloomberg Businessweek since 2011 and for a good reason.

As a conservative bill mill, ALEC produces model bills through the collaboration between state legislators, right wing special interests, and corporations. So far, it's apparent that ALEC's model bills have done absolutely nothing to benefit the public. In fact, they've impacted a considerable degree of harm.

As a conservative bill mill, ALEC produces model bills through the collaboration between state legislators, right wing special interests, and corporations. So far, it’s apparent that ALEC’s model bills have done absolutely nothing to benefit the public. In fact, they’ve impacted a considerable degree of harm.

However, while I might pick on ALEC for supporting measures I think hurt this country, I think all Americans should be very concerned about this organization regardless of their politics. Because if their politics doesn’t trouble you, its conduct should since this conservative bill mill is well known for its lack of transparency. Since the 2000s many news organizations have found that ALEC hasn’t been friendly to reporters much and usually doesn’t grant interviews. They may open policy seminars to reporters and other nonmembers but they will receive public conference agendas that don’t include names of presenters, the lists of legislative and private-sector board chairs, or the meetings’ corporate sponsors. Task-force meetings and bill-drafting sessions are held behind closed doors mostly taking place at high end hotels in American cities, which resulted in reporters being turned away. ALEC doesn’t disclose membership lists or the origins of its model bills. Instead lawmakers generally propose ALEC-drafted bills without disclosing authorship as an newspaper found out in 2012 after analyzing 100 bills proposed by the Christie administration in New Jersey.

Besides being a conservative bill mill producing

Besides being a conservative bill mill producing “model legislation” for state lawmakers to pass into law, ALEC’s reputation for lack of transparency should also concern you. Such activities are undemocratic as well as possibly unconstitutional. Sure ALEC may give corporations a voice and a vote, but it also goes to great lengths to deny a say to anyone who potentially disagrees with them. All it cares about is promoting its own agenda.

Now it’s one thing for businesses to lobby for business friendly legislation drafted in the state house committee. But a lobbying organization drafting model bills behind closed doors for lawmakers to introduce and adopt them without disclosure seems like a violation of the democratic process, if not then the US Constitution. In fact, I’m not sure if the idea of a political organization drafting a model bill in secrecy is even legal or ethical, especially if it promotes legislation benefiting big business at the public expense. It also excludes not just Democratic legislators but also the American people from having a say in drafting legislation, which ALEC puts in highly partisan politicians and private sector hands. And in many ways, I see ALEC’s methods of secrecy as as a way for corporations and politicians to put their legislative ideas forward and avoid public scrutiny by opposing forces like liberals, the media, or the American public. But while public scrutiny can be annoying and disruptive, it’s an essential component in our democracy which should never by taken away even by some private and right-wing lobbying organization. While ALEC claims that their organization is supposed to give corporations a voice and a vote, they also want to make sure to deny a voice to anyone who potentially disagrees with them. It also shows that this organization only cares about enacting its own agenda and would do so through any means necessary. It doesn’t care whether its proposed legislation works at the public interest’s expense to enhance corporate profits. Not only that, but this organization has existed for over 40 years and prior to 2011, almost nobody knew it existed outside its membership until investigative reporters blew the whistle on it. And as of 2015, there are still people who’ve never heard of this organization. Now people have talked about certain shadow government organizations as the stuff of conspiracy theories such as the Illuminati. But ALEC is a real organization that functions exactly like one that reflects the relationship between money and politics at its worst. However, thanks to investigative reporting exposing the organization, ALEC has become a toxic brand as well as experienced an exodus of politicians and corporations.

In recent years, the influence of money in politics has made elections much more expensive. This chart shows the increase shows the rising costs of beating an incumbent in Congress. Really disturbing, I know.

In recent years, the influence of money in politics has made elections much more expensive. This chart shows the increase shows the rising costs of beating an incumbent in Congress. Really disturbing, I know.

Now I understand that American campaigns will always be tied to money and special interests to a certain extent even if I may not always like it. However, we need to understand that corporations are not people and money isn’t speech. Nor should political access and influence be a pay to play field. Yes, money buys influence and influence buys votes. But sometimes political money games prevent a substantial number of citizens from having a political voice in their governments all because they don’t contribute thousands of dollars to their representatives. And I mean at the state and federal level. Sure I know that liberals aren’t above these political shenanigans either as I’m well aware of it. But we have to understand that most big money contributors are more likely to support Republican policies, especially since most campaign donations come from big business. And since 2010, those who’ve benefited from Citizens United and its impact have been Republican politicians. Besides, as far as I know, the Democratic Party doesn’t have its own shadow government organization generating model bills for them. Or at least one as powerful or influential as ALEC. Thus, my focus on contributions and lobbies in Republican campaigns is based on more than my liberal political biases here. But the growing influence of money in politics hasn’t been good to our democracy its created a system where incumbents almost always win, the races are not even competitive, politicians are at the mercy of big donors and their lobbyists, and a significant chunk of Americans feeling like they don’t matter in the political system.

Since incumbents usually have more connections to donors and name recognition, this makes it difficult for anyone to challenge them. This chart shows how most 2010 congressional races usually have one candidate outspending their opponents 10 to 1.

Since incumbents usually have more connections to donors and name recognition, this makes it difficult for anyone to challenge them. This chart shows how most 2010 congressional races usually have one candidate outspending their opponents more than 10 to 1.

Now I know politicians don’t want to implement campaign finance reform since it hurts their self-interests. But since money tends to talk, we need regulations to keep those with the big money at bay. Or else such influence might make us wonder whether our political representatives work for the voters who elected them or the donors who bankroll them that consist of a wealthy few. Yes, I know that some people don’t like regulations they think infringes on their rights. But regulations also protect the rights of those who may otherwise be sidelined by the rich and powerful special interests. And powerful special interests care more about themselves and don’t care if the public has to suffer for policies they want passed. Besides, we want our elections to be fair while big money tends to offset the balance, especially in races involving incumbents who have access to considerable financial resources. Our country was founded on freedom of the people, by the people, and for the people with a government to promote the general welfare and secure the blessings of liberty, for ourselves and posterity. And if we want that, we need to acknowledge and do what we can to keep big money from undermining these ideals. Yes, I know that money is necessary for everything, but it doesn’t have to be the bottom line in politics or how representatives conduct their business. We can start with overturning Citizens United so we can set limits on campaign spending by corporations because we need to.

To learn more:

OpenSecrets.org: The Center for Responsive Politics OpenSecrets.org: Money in Politics — See Who’s Giving & Who’s Getting

ALEC Exposed from the Center for Media and Democracy ALEC Exposed