Double Blind

I have updated to WordPress 3.0, and surprisingly the upgrade went very smoothly – one click and it is done. I have no idea how those guys make money, but they have done an incredible job since the first versions where you had to get into ssh and manually unpack and replace files and such.

I know there are some new features in version 3.0 that I would like to implement on some of my other websites. I haven’t substantially changed the interface on Double Blind since its inception 7 years ago, and I plan to keep things that way. In particular, the black background and white font can only be pried away from my cold dead hands!

(Cross-posted with BC2013)

There has been so much spin about the HST. My post comes from both an accounting background and a physics background (two professions that might seem quite distant have a lot in common). I am also very well versed with income tax legislation and government policy concerning finance in general.

Both sides of the HST debate have spun the facts so hard that it is difficult to get legitimate analysis on it. The following is an attempt at clarifying the HST, as I see it.

Q: Who wins with the HST?
A: Businesses that have high amounts of inputs that they previously would have paid PST for – they can claim these as input credits with HST. Generally, this applies for businesses that deal with products as opposed to services. So industrial companies, or manufacturing companies would be a significant winner with the HST.

Q: Who loses with the HST?
A: On the business side, any businesses that have their costs dominated by labour and/or non-PSTable items. Examples include restaurants and consultants. Individually, almost everybody is going to end up paying more in consumption taxes than before the HST implementation. It is impossible to conceive of a scenario where ordinary middle-aged working individuals will pay less tax with the HST, even when factoring in the increase in the basic exemption (the amount of income you can earn without paying provincial income taxes).

Q: Will prices drop as a result of HST?
A: Only in those industries that have significant amounts of PST on their business inputs. It is also unlikely these price increases will be seen immediately – it will be subtle and impossible to measure, although in theory competitive industries should realize some price decreases in the medium and long term had HST not been implemented. The real strategic issue is that the HST benefits manufacturing, and manufacturing has been consistently been outsourced across the Pacific (to countries like China, India, Thailand, etc.) – HST will clearly enable us to be more competitive with manufacturing, but since labour costs are also a significant cost input, I haven’t seen any clear analysis to establish that we will be able to draw in more manufacturing capital. A lot of the theory behind the positive aspects of HST depends on capital asset purchases being a detriment to manufacturing, as opposed to high labour costs (which the HST does not address at all).

Q: Will HST increase my wages?
A: Very, very, very indirectly. The theory is that with increased investment, you will have demand for labour, and with labour demand, this will result in increased expectations for wages. The answer to this question is much closer to “no” than it is to “yes” and to claim that HST will result in increased wages is simply not true – doubly so if you work in a service industry.

Q: What products will cost less after HST?
A: Children’s disposable diapers. Before, they were subject to 12% (GST+PST), but they will receive a provincial exclusion on HST. The tax on a hotel room was 13% (8% provincial, 5% GST), which will be 12% after HST. Other than that, I don’t know of anything that will become cheaper. A side note is that liquor (beer, wine, spirits) should, in theory, have been cheaper (10% liquor tax plus 5% GST applied, 12% HST after), but the BC Liquor distribution branch is pocketing the extra 3% differential after July 1. (Update: A voice out there pointed out that if you drank the liquor from a restaurant it would be subject to 12%, while previously it would be subject to 15%; it should also be said, liquor is probably one of the only input credits available on non-capital expenditures in a restaurant, and the liquor would have to go through the LDB anyway, so presumably the 3% price increase is being passed on – the net result is that liquor will cost less for restaurants to purchase because they get an input tax credit on the entire tax amount, but patrons should experience the same price.)

Q: What services will cost the same after HST, and what will change?
A: Legal bills, auto mechanic bills, cell phone, “special” cable service, long distance calls, and internet are the significant services that were subject to PST and thus will not change after HST. All other services that were not subject to PST will now have the full 12% HST applied and will cost more.

Q: Explain the impact on my condominium/townhouse strata fees.
A: Although the fees themselves will not be subject to any consumption taxes, embedded within the strata fees are services (e.g. maintenance contracts, gardening, alarm security, etc.) that will likely be subject to HST when they were not subject to PST previously. Since GST/HST is not refundable to a strata, it is very likely that residents will pay more upon the implementation of HST – given the strata statements I’ve analyzed, I would guess you would see roughly a 4-5% increase in your strata fee.

Q: What about me going to McDonalds/Tim Hortons/Starbucks?
A: Other than relatively minor recoveries on capital equipment, it is unlikely the restaurant industry will decrease prices simply because they don’t stand to gain much with HST – in fact, because the bottom-line price is higher due to HST, they will witness some degree of demand destruction – take the example of a $1.30 coffee at McDonalds, your $20 bill could buy 14 coffees. With HST, that goes down to 13 coffees – although this is a very subtle change, the fact remains that you will be able to buy 7% less coffee with the same amount of money. Subconsciously, since it is unlikely you will change your coffee habits, something else in your budget will have to change as a result – or if nothing else changes, it will eat into your net savings. One thing that can be promised, however, is that the price of coffee will not go down by 7% after the HST is implemented.

Q: What about the tax credit for lower income earners for HST?
A: This affects single people making less than $20,000 a year and couples earning $25,000 or less a year. This is a political payoff mainly to retired seniors. It will not affect most ordinary middle-aged working British Columbians. In particular, this spin by Colin Hansen was particularly reprehensible since not only was he re-hashing previously revealed facts about the HST implementation, but he’s expounding on a federal benefit (the GST/HST credit) that the provincial government has nothing to do with. Whoever wrote this press release should be given a 10/10 for spin, but a 0/10 for ethics.

Q: What is the best case you can make that the HST is good for individuals?
A: HST will reduce costs for “product-heavy” industries, making BC more cost competitive. In theory this should increase investment and with investment comes tax revenues for government, and in some cases, employment. The HST will also promote specialization and horizontally-integrated (as opposed to vertically integrated) companies in various industries (as there is no longer a PST penalty to pay for inventory transfers). The benefits of HST are very indirect to measure, and very uncertain to measure as it is not entirely clear that these benefits will be realized.

Q: Aren’t consumption taxes “better” than income taxes?
A: Not necessarily. The argument is that consumption taxes represent a choice – you can choose to avoid consuming in order to avoid paying a higher tax. However, this argument falls flat when you consider that many necessary items in life require the payment of HST, such as toiletries (e.g. toothpaste). In theory, this model could work if the government purely taxed consumption instead of income, but no government will ever do this since income taxes represent such an ‘easy’ source of income.

Q: Who is this economist Jack Mintz the government always quotes, what was his research?
A: The government has always been quoting this study by Jack Mintz. Unfortunately for Mr. Mintz, the government focused on a single paragraph in the report, when Mintz was comparing the effects of both corporate tax decreases and the harmonized sales tax on capital investment – the only issue is that capital investment is not operational cost savings. Previous experience in the Atlantic provinces would suggest that the positive effects of harmonization are significantly less than advertised. It should be noted that other economists have been quite silent about this issue, probably both for political reasons and policy reasons.

Q: What about the $1.6 billion the provincial government received?
A: This reflects about $350 per British Columbian, but the government is going to eventually spend it. The government’s primary budget issue is not one of revenue, rather it is one of trying to figure out how to cap spending on healthcare and education without killing themselves politically. The money is a nice bonus for the government, but should have factored little into the decision to get into the HST.

Q: Didn’t they say the HST revenues goes directly into healthcare?
A: About half of the province’s expenditures go into health services. So yes, you could say half the revenues do go into healthcare. To say the HST is ‘dedicated’ to healthcare, however, is not true.

Q: What should have the provincial government done instead, politically speaking, if they had to do implementing something like the HST?
A: The best interim measure the government should (and could!) have taken is to introduce the concept of input tax credits on the provincial sales tax. This would have likely caused much less uproar than harmonizing the sales tax. The disadvantage of this is that you still have to retain government staff on the revenue collection side (especially for compliance since abusing input tax credits is the most common fraud for GST/HST processing), and not obtain the $1.6 billion offer from the federal government. Another option would have been to have a significant increase in the basic exemption while implementing the HST – basically a shift from income to consumption taxes. However, the government failed to do either. There are also other minor issues I have with various HST exemptions.

Q: What was the biggest flaw of the Fight HST campaign?
A: Their attached legislation to the initiative petition, the HST Extingushment Act, is very poorly written. It is so poorly written that the people that drafted and reviewed it should be embarrassed – it is like reading a grade 7 essay when it should be graduate level caliber piece of legislation. They also were very over-zealous on the spin (not nearly as bad as the government side) concerning issues such as the government’s list of “before and after HST” price changes, and overplaying their hands concerning use of the media.

Would you like some more questions answered? If so, comment below.

Summer is always short in this country, and I have been on a break. Posting will continue to be light until around mid-July, or whenever I feel like posting something. In the meantime, here are some trivial notes of the day:

1. Although it may seem like a stereotype, I am always impressed whenever I go to Richmond I can witness some flagrant act of bad driving.

2. HST comes in two days. The only item that I can think of that you can buy after July 1st that will become cheaper are kids’ diapers. Previously they are subject to GST and PST, while after the HST implementation, they receive an exemption for the provincial component of HST. Almost everything else that was GST-eligible will now have an extra 7% tacked on and this will cost a significant amount of money based on my spending habits. Included in this is the cost of restaurant meals, which will piss off every British Columbian every time they stop off at Tim Hortons for a coffee.

3. A (large) bag of pine nuts now costs $40 at Superstore. Normally it is around $15. Apparently there was some sort of large crop failure in China which has caused a massive price spike until the next harvest season, which will be this autumn. You can also see some other food prices edge up in general; I memorize the prices for an array of staple goods (e.g. pastas, cereals, canned goods, beverages, fruits/veggies, etc.), and a lot of the grain-type products are definitely higher priced.

4. Getting away from the computer and not checking email or the news for a couple days is something I should do a lot more often. The only problem is that it causes some mental atrophy for no apparent benefit other than enjoying the time off.

5. The June 25th Lotto Max was finally won by two parties. Despite having a $105 million prize pool instead of $95 million in the previous draw, the number of tickets sold was still around 24.7 million – on June 18th the number was roughly 24.5 million. This shows that there is a saturation point concerning this particular lottery – it was likely that it was reached on June 18th. Future lottery studiers should note this for future designs – does a higher prize (at ever-increasingly low probabilities) cause more tickets to be sold? By comparison, a typical Lotto 6/49 draw for a non-special prize has about 10 million tickets sold, twice a week. The Lotto Max, on a glance, cannibalized about 20% of the 6/49′s player base.

6. G8/G20: What a seemingly useless conference. Does any policy of any real substance ever get created from these things? They do release a statement on how they plan on solving the world’s problems, but a week after the fact, it’s in one ear and out the other.

Prime Minister Stephen Harper had an interview with Reuters.

The political calculus in Canada is quite interesting for the second half.

The Conservatives only want an election if they have a reasonable chance of a majority government; otherwise status quo is good enough. Polling would indicate that a majority government is unlikely.

The Bloc Quebecois are always ready to fight, and don’t stand to gain or lose much in a federal election. They will be seen as opposing the Conservatives no matter what, so they are the most predictable force in the House of Commons.

The NDP are gearing up for an autumn campaign. Despite supporting the government in 2009′s summer debacle where the Liberals proclaimed “Harper, your time is up”, the NDP saved the country from another election – this was even despite the fact that their own messaging before this event was roughly “We are the real opposition and the only party to vote against the Conservatives”. NDP polling numbers have edged up slightly, but seemingly not enough to make a “breakthrough” into serious opposition territory – roughly 60 seats needed from their 37 present before they can even consider getting into official opposition. The NDP’s only issue is that a good chunk of these seats are in Conservative territory, except in Montreal, which makes the NDP’s only real viable expansion in Montreal.

The Liberals are in the grey zone. Their polling is quite weak except in the usual territories (Toronto, Montreal) although they seemed to have bottomed out in their core Central Canada urban constituencies. Ignatieff knows that if he doesn’t “win” the election (i.e. forming government) he is likely on his way out as party leader. So in the meantime, it is in his best interests to stall, although the rest of the party is negotiating behind his back various scenarios, including a coalition with the NDP.

Inevitably, an election for the second half of this year is up to the Liberals. It is unlikely the NDP will back down from a non-confidence motion in the house, unlike their very hypocritical move in 2009.

Nobody won the June 18 $50 million jackpot.

There were approximately 24.5 million tickets sold, which is approximately $123 million dollars. You can certainly see the dollar signs in provincial lottery corporation executives’ eyes when they see this volume, as well as the respective Ministries of Finance since they get a good cut of the action. It’s probably Canada’s largest legalized pyramid scheme to date.

At 24.5 million tickets, that means there was a 42.5% chance of the $50 million jackpot not being won.

However, the $1 million dollar jackpots (45 of them) were distributed as such:

No winners: 15/45 (33.3%)
1 winner: 16/45 (35.6%)
2 winners: 9/45 (20.0%)
3 winners: 4/45 (8.9%)
4 winners: 1/45 (2.2%)

More $1 million prizes were won than what would have otherwise been statistically predicted (57.5% predicted vs. 66.7% actual).

The next Lotto Max (June 25) is expected to have 55 million-dollar draws, so a ticket will have a 1 in 511,313 chance of getting 7/7 correct on one of the 56 million-dollar+ draws. Again, as far as lotteries go, this is fairly good value for money. However, there are considerably better (casino) alternatives if your primary goal is to compound $5 into $1 million.

I must admit that this consecutive string of non-winners is getting fairly tiresome to write about and it also shows the design of the lottery might be flawed in a sense – because $30 million was extracted out of yesterday’s prize pool, it does not allow increased accumulation of $1 million draws since it will reach a steady-state solution.

Metro Vancouver is well on its way to approving a waste incineration facility, but they need environmental clearance from the provincial government before proceeding.

Also, they are having public hearings for comments, which in the upper Fraser Valley (including Abbotsford and Chilliwack) have been strongly negative for concerns about air pollution.

Without reading any of the background documents (including those both in support and contrary and also the detailed engineering studies on the matter), my conjecture would be it would boil down to the air pollution generated by incinerating garbage, versus the subtraction of air pollution involved in trucking the garbage up to Cache Creek for disposal (which would be lessened if some quantity of waste was incinerated).

Basically it amounts to – can you burn the garbage for less pollution cost than taking 4.5 hours to truck it up to Cache Creek, where you bury it? How do you quantify the different types of pollution (burning garbage would have one type of pollution profile vs. truck driving, which would have another profile) and what is the net cost difference between the two types waste management? Are the studies performed reliable, and backed by agencies that will lose real reputation and/or future business if they really screw up their projections?

These types of questions should be clinically asked, but because this issue has now turned emotional, it is very unlikely that people will take an objective look at the data. I don’t know which plan is better, but it is likely with the political grandstanding going on that it looks like the project will be turned down.

I might try to go through the waste incineration documents to examine the validity of the proposal, but the two hours of concentration and quiet I need to properly go through the documents is simply not going to be available in my near future.

One thing I do know, however, is that we will continue to generate waste, and it needs to be dealt with somehow. With increases of people to the region, the volume of waste will increase. Recycling can only be effective to a certain point before it becomes really uneconomical to perform – already recycling paper and glass is not economical even though we do it anyway.

A good 10-minute coffee break video on the perspectives people have on time, the impact it has on our education system and youth, and family structure.

I believe it’s good to be future oriented, but it is also good to know when to shift to a present orientation and enjoy life for a few hours/days/weeks before getting back to the grind of future orientation.

I also generally agree with the view that the “digital re-writing of minds” is happening, but it won’t characterize itself in society the way that most people think it will.

I always thought what would happen if everybody was given an “encyclopedia chip” in their brains that contained a continuously up-to-date version of Wikipedia, and anybody with this chip can also “update” it by just thinking mentally. I still think society will be committing gross errors based on things they think are “facts” but are really not. One example would be the mistaken impression that a pedophile lurks around every elementary school playground, but when enough people think (or mention) something, it slowly evolves to become “fact” even when it is not.

A fellow that runs Bronte Capital remarks on how he is forced to use his Amazon Kindle in order to access his Amazon-purchased library. If he decides to get rid of his (fragile) Kindle, the library goes with it.

This is always why I have been very conscious of the fact that digital asset locking is very dangerous – once you’ve made the outlay for a particular library (whether it be books, music, etc.) then you are locked into that one vendor. This is the case with the Kindle, and also the case for people that buy stuff in the iTunes store.

But, as the author writes, a lot of people buy into it, which is probably why Amazon and Apple are two very rich companies at the moment.

I am not sure why people take the perspective that Parliament is unproductive as being a bad thing.

It appears that Parliament is functioning as designed by not working.

If Parliament were only to pass a supply bill (to grant government funds for the fiscal year) and shut down for the rest of the year, the country would function nearly as well as it does today. In fact, usually when governments tinker around with legislation they are doing more damage than good, so I view a dysfunctional parliament as a feature of the minority government, rather than an adverse side effect.

It is to the advantage of opposition that Parliament does not pass legislation – if they are dead-set against the government passing legislation, they would want Parliament to not sit. So complaining that Parliament is not functioning is contrary to the (theoretical) goals of the opposition. Of course, in practice, the opposition’s (and governing party’s) goal is to win the next election, where “winning” is now defined as being able to form the next government and this mentality has corrupted any real focus of the government, which should be to drafting and passing legislation, regulation and policy that is for the well-being of the general Canadian population.

It’s a pretty sad statement on the stock market that my list of investment candidates is so dry that I have to keep writing about the lottery. I did an expected value analysis on June 3rd.

On June 11th, the Lotto MAX draw came up blank for the main $50 million prize three times in a row. Subsequently the jackpot has grown extraordinarily large – there will be a $50 million prize plus 45 estimated 1 million dollar draws on June 18th.

Analyzing the June 11th results, nobody won the main prize, but out of the 27 $1 million prizes:
12/27 were not won;
9/27 prizes were won by a single individual;
3/27 prizes were won by two individuals;
2/27 prizes were won by three individuals;
1/27 prizes were won by four individuals.

By looking at all the results, you can do some statistical reverse engineering and infer that approximately 18.2 million lottery tickets were purchased for this lottery. At $5 a piece, this is $91 million dollars, or another way of thinking about this is that about 53% of every man, woman and child in Canada bought a lottery ticket.

18.2 million lottery tickets, assuming a random distribution of numbers, coincidentally means that there was a 53.0% chance that the main prize would not be won, slightly better than a coin toss. If we pretended that every Canadian in the country (34 million) bought a lottery ticket (with their numbers drawn being randomly chosen), this would still leave a 30.5% chance of the main prize not being won.

So we move onto the June 18, 2010 Lotto Max and putting this into terms of probabilities, $5 buys you:

- a chance to win $50 million (1 in 28,633,528, with potential for splits). Expected value: $1.75
- 45 chances to win $1 million (1 in 28,633,528, with potential for splits). Expected value: $1.57
- A 1 in 4,090,504 chance to win roughly $580,000. Expected value: $0.142
- A 1 in 99,768 chance to win roughly $5,400. Expected value: $0.0541
- A 1 in 1,584 chance to win roughly $120. Expected value: $0.0758
- A 1 in 71.3 chance to win $20. Expected value: $0.281
- A 1 in 76.7 chance to win $20. Expected value: $0.261
- A 1 in 8.1 chance to win $5. Expected value: $0.617

Add all of this up, and you have a nearly expected-value lottery ticket (about $4.75 in expected value). This still doesn’t account for potential splits (which will happen and thus will make this expected value calculation much lower, especially with a split on the main prize) and still makes the lottery a losing proposition, but the lottery does offer what I consider to be a very good chance of winning a million dollars – again, assuming no splits, a $5 ticket will buy you a 1 in 622,468 chance of winning a million bucks or more. This is an order of magnitude better than the usual 1 in 5.6 million for the Lotto 6/49 (assuming you played $5 worth of Lotto 6/49 tickets, which costs $2 per play).

Coincidentally, 1 in 622,468 is within the bounds of your odds of getting struck by lightening in a single year, while normally your chances of winning a million dollar lottery prize are considerably worse than that.

However, these odds are considerably worse than your 1 in 257,340 chance of winning a million dollars, starting from $5 on a single-zero roulette wheel.