Thursday, 29 April 2010

Tax Code Favors the Wall Street Gamblers, Not the Race Track Kind

With the Kentucky Derby coming up and with the overpaid and largely unrepentant thieves from Goldman Sachs in the Congressional hot seat, it seems an appropriate time to renew a question that I initially raised some 15 years ago, in an article in that well-known handicapping publication, The Tax Lawyer. Namely, why does the Internal Revenue Code treat the ordinary schlub’s horse racing and casino gambling winnings and losses so much less favorably than it does the much more dubious gains and losses that those Wall Street’s masters of the universe receive from trading in billion dollar derivative bets?

[For those who want to explore the legal arguments, the full text is at 49 Tax Lawyer 1 (1995), available on Lexis and Westlaw or in your favorite law library.]

That tax treatment is hugely different. Just for a start:

● Gambling losses cannot be deducted against any other income, only against gambling winnings. In contrast, net losses from Wall Street trading are deductible against the trader’s other income.

● Any excess gambling losses that are not deductible in one year cannot be carried forward to the next tax year, even to offset gambling winnings in that later year. Non-deductible derivatives trading losses in one year, in contrast, can be carried forward or backward and used to offset income in other years.

● Racing and poker tournament payoffs in excess of $5,000 are subject to withholding, at 28%, when the bet reflected odds of 300-1 or greater. And the Internal Revenue Service considers each combination a separate bet. So a Pick Six ticket that contains, say, 1,500 separate combinations and that returns $5,000 is treated as paying off at 2,500-1 (on a $2 bet), even though the bettor actually put up $3,000 and so got net odds of only 2-3. With 28% withholding, the bettor actually gets back only $3,600 for his $3,000. No such rules apply to bettors in that big casino on Wall Street.

● Even if they hold the contracts for only a day, Wall Street speculators are allowed to treat 60% of their gains from many kinds of derivative contracts as long term capital gains, which qualify for lower tax rates. Racing and casino winnings, in contrast, are all just ordinary income, taxable at higher marginal rates.

● There’s a 2% federal excise tax on gambling transactions, but none at all on financial market transactions. The mere mention of one – even a proposal for a tax as tiny as 0.1% or less -- causes the Wall Street propaganda machine to spew out dire predictions of the end of the world as we know it (not that that would necessarily be a bad thing).

“Gambling” and “wagering” are not defined, for income tax purposes, anywhere in the Internal Revenue Code or the Treasury Regulations. I guess it’s like Justice Stewart’s definition of pornography: we know it when we see it. Merriam-Webster, though, says that gambling is to stake something on a contingency or to bet on an uncertain outcome. Isn’t that just what the hedge funds guys and Wall Street traders were doing when they bought and sold credit default swaps and other opaque instruments of mass destruction?

To my surprise, there’s very little in the tax law literature or in the case law that addresses these definitional problems, except for a couple of recent articles arguing that bets on “prediction exchanges” (“I’ll give you 10-1 that Sarah Palin won’t be the next President of the US”) are more like tax-favored futures contracts than they are like sports bets (“I’ll give you 10-1 that Todd Pletcher’s Derby jinx continues”). A serious search of the law and literature (one has to do something when there are four dark days between Aqueduct and Belmont) shows not a single article or judicial decision in the past 15 years – since my piece way back in 1995 – arguing for better treatment for sports and casino bettors.

Perhaps we could get Mitch McConnell, in his role as the Senator from horse racing, to introduce a few amendments to the pending “financial reform” bill. Oh, I forgot, McConnell, majority leader of the party whose motto is “just say no,” is also the Senator from Wall Street. Guess that little conflict of interest isn’t going to get us very far.

But, seriously, wouldn’t it be some sort of victory for Main Street over Wall Street to amend the tax code so that bets placed on Wall Street get the same (unfavorable) tax treatment that I get for betting the Pick Four at Belmont? Who knows, if they had to think about the tax consequences of their misbegotten bets, perhaps those masters of the universe wouldn’t be risking quite so much of our money.

And on another topic: for the Triple Crown season, I’m also blogging on the New York Times site, The Rail. Here’s a link to my first piece, which was on Zayat Stables and Eskendereya.

Monday, 19 April 2010


Media executives around the globe are clamoring for new and alternative business models and industry associations everywhere are holding seminars and conferences on how to create and discover them. There is just one problem: They don’t know what business models are.

When you cut through the rhetoric, you find that most executives are merely interested in finding new revenue streams. Even when you consider firms touted as having best practices in that regard, none have been very successful in establishing them. The reason is simple: The dominant thought about business models is highly limited and far too narrow to solve the contemporary challenges of media industries.

Business models are not merely about the revenue streams. Instead, they establish the underlying business logic and elements. They involve the foundations upon which businesses built, such as companies’ competences, value created, products/services provided, customers served, relationships established with customers and partner firms, and the operational requirements. If you get those elements right, the revenue issues take care of themselves.

The biggest problem of media business models today is not that the revenue model is diminishing in effectiveness, but that most media companies are still trying to sell nineteenth and twentieth century products in the twenty-first century. And they are trying to do so without changing the value they provide and the relationships within which they are provided.

Because of the enormous changes in technology, economics, and lifestyle in recent decades, the needs of customers have changed, they kinds of content they want, and the ways they obtain news, information, and entertainment have been dramatically altered. If media firms do not address these changes in consumer needs and behavior, no amount of worry about revenue streams will stem the fundamental challenge that audiences are leaving traditional print and broadcast media behind for content providers and distribution platforms that better serve their needs.

The content of traditional media products were created in specific technical, economic, and information environments that no longer exist. In order to evolve and prosper media companies must revisit the foundations of their businesses, ensure they are providing the central value that customers want, and provide their products/services in a unique or different way from other media firms.

The range of technologies and distribution and interactive platforms available in the twenty-first century require that firms increasingly see their business activities as cooperative processes requiring coordination and interdependence with external firms and customers themselves. Standing isolated and alone—at arms distance from the customer—is no longer a viable option.

This is not to say that firms must make sudden and dramatic changes in their business models, but they must start revisiting all the aspects to make regular incremental improvements and changes. Questions need to be asked about what is provided, why it is provided, how it is provided, and the entire structures and operations of firms. These need to be addressed first, then the revenue models can be sorted out and improved.

Thursday, 1 April 2010

The Business: Fantasy Basketball League Spectacular

On March 31st, The Business was down three members, with Alex Koll, Chris Garcia, and Bucky Sinister all working elsewhere. To address the lack of manpower, we invited all of the members of the about-to-conclude SF Comedians Fantasy League to perform. We welcomed Jeff Cleary, Joey Devine, Eliot Langford, Julien Rodriguez, Chris Remmers, and the great W. Kamau Bell, along with Businessman and host, Sean Keane.

Some comics discussed basketball extensively, both their fantasy teams' generally woeful performances or the woeful performances of their favorite team, if that team was the Golden State Warriors. Joey Devine told a touching story about receiving the Most Inspirational Player Award at Tim Hardaway's basketball camp, an honor usually given to a kid with a disability or a fatal disease. Joey was neither; he was simply terrible at basketball, and prone to skipping wind sprints in order to sneak upstairs and eat hamburgers.

Eliot Langford mentioned the disappointing Warriors, before closing his set with a cover of Billy Joel's "Movin' Out." Julien Rodriguez told us why white people have no excuse for homelessness, Jeff Cleary told heartwarming stories about abusive Bostonian fathers, and Chris Remmers tried to explain the appeal of the Texas Rodeo. W. Kamau Bell took us home with the set that was as impressive as his last-place fantasy team was dismal.

Adding to the excitement and general basketball theme was comedian Joe Tobin, working as a sideline reporter. After every comic finished their set and left the stage, he would speak with Tobin, who asked hard-hitting questions about their performance. He asked Joey, "I noticed you went to your notes after six minutes. What was going on with that?" Tobin wondered if Langford was trying to rub it in to the other comics on the bill by talking about his successful relationship. Overall, Tobin and the rest of the comics left it all out on the floor that night, giving 110%, and making the first-ever basketball-themed Business show a slam dunk!