Thursday, February 4, 2016

Linkedin Q4 -2015 results

Linkedin is a company worth fairly $5B today, that could one day hope to be worth $7B-10B, if it performs perfectly.  Its market value is near $27B.

Continuation of my chronicling the eventual collapse of LNKD's stock value.  Previous entry

Results  (see also)
  • record low growth rate of 26% excluding sales (not part of last year's quarter). 34% growth with  Only 1% above last quarter's typically conservative guidance.
  • record low growth in marketing and subscriptions business.  Mobile visitation growth hitting a saturated-like 26%.  < 4% quarter over quarter.
  • Estimated sales for for the year (including 1st quarter standalone) was: 43, 41,41,49 = $174M.  Less than 20% growth  over 2014 sales.
  • Significantly missed their begining of year revenue guidance for 2015, after taking out the $114M contributed by that was not part of last year's plan.
  • 4th straight quarterly loss.  $8M (including $24M tax refund).  Q4 is historically a profitable quarter.
  • Sequentially flat monthly visitors, and decline in page views.
  • record low growth for member, visiting members, mobile, corporate customers, hiring revenue, marketing solutions revenue, premium revenue, US marketing revenue, US premium sub revenue.
  • Compared to 34% revenue growth, costs: Depreciation and amortization up 83%.  Sales and marketing up  30%, cost of revenue up 37%, GA up (good job) 24%, headcount up 36%.
  • Free cash flow negative $1M despite no special puchases.  10th straight quarter that free cash flow less stock based compensation is negative.
  • Flat deferred revenue excluding lynda. (confirms structural decline in premium subs)
  • Dodged request/opportunity to discuss China progress.
  • Field to online sales ratio worsened to record 64-36%.
  •  Only $660M more revenue forecast for 2016.  They added $690M in 2014, and $780M in 2015.  This includes with 1 and a half quarters not included in 2015.  So, core business sales increase forecast is $580M (assuming 0 growth from lynda).  This is below 20%.
  • record low 21.7% revenue growth forecast for Q1 2016 (with lynda standalone comparison).  Still record low 28.5% with 0 comparison.
  • Q1 forecast loss of $116M.
  • 2016 forecast loss of $408M.
  • Continued deterioration in the only segment that is working, talent/hiring solutions, to "mid-20s"% growth
  • If "high teens" means 17.5% then capex of $638M will be a 27% increase.  Potentially larger than revenue growth, and ensuring future depreciation growth outpaces revenue.  $630M in stock compensation is a 21.4% growth over 2015, about the same as core revenue growth.
  • There is a good chance that marketing revenue for Q1 will be lower than the cost of (all) revenue expense for the first time.  (both marketing and subscription revenue have each been lower than cost of revenue + depreciation since at least 2013)
  • They will be trashing their bizo acquisition purpose (lead accelerator) and giving up on banner ads starting in Q3.  This is likely to reduce losses, but also growth.
  • single digit growth rate in self serve (online) sales, which is the only part of their business with reasonable margins.  They blame the excellence of 2015 results for this low projection.
  • field sales 20%~ growth for the year.

comscore and engagement
comscore showed a sharp decline in monthly visitors for december in the US.   Comscore data matches linkedin's report in showing flat usage compared to 3rd quarter.  In 2014, December and the quarter had fairly solid increases in visitation rates for the month and the quarter.  These results included new (presumably improved) versions of its mobile apps suite.
2014 results for this company were sales of $153M with 40% loss of $63M, not including an additional $10M in capitalized software and production costs.  Its growth rate was only 25% or $32M (in 2014).  By estimate, less than 20% over that (only $21M) in 2015.

discontinuing corporate solutions customer reporting
LNKD will stop reporting its recruiting customer counts.  The necessary presumption is that it would look bad if they kept reporting.  Throughout the first 3 quarters of the year, their hiring revenue growth was about the same as corporate seat growth.  Meaning, hiring revenue per customer (both field and online) was stable.  In Q4, hiring revenue growth was 200bps lower than corporate seat growth.  Q4 has historically been the renewal annual contract timing for the company.  This shows declining hiring revenues per corporate customer.  Previous years showed increased revenue per customer.

Yahoo and
Both companies did poorly this quarter, and are forecasting sharply down for next quarter and 2016.  Yahoo's issues are mostly that it is paying a lot for traffic acquisition for very little growth. has declining revenue per user.  In an internet world separated between FB/Goog and losers, LNKD is firmly in the loser camp, and it is probably a good move for it to get out of the general advertising market.

LNKD has benefited from 3+ years of tailwinds from growing Apple iphone and ipad unit sales.  That trend stopped this last quarter, and Apple expects a sharp decline in iphone units next quarter.  Not that LNKD ever had any genuine engagement, but we all enjoy a honeymoon period of playing with a new toy and installing many apps and games, before we crawl into the box it came in.  Both any genuine engagement growth, or one time honeymoon engagement inflation, will not have the tailwind from growing device sales.  This in fact becomes a headwind for the future.

Q4 - 2012 Linkedin results
Febuary 2013 was the last time LNKD climbed over $15B in market value.  They had a minor profit and 85% growth rate at the time.  The issues I pointed out at the time  (saturation and shareholder unfriendly corporate structure) still plague its future, and cummulative net losses over 3 years, with a growth rate of 20% on core business next year and increased losses, and discontinuation of traditional advertising services, there can't possibly be the same value now as then.  Their addressable market has only become more saturated since then.  At the time, I did expect they could grow $1B in sales per year.  $580M core growth next year, makes $600M/year thereafter a generous assumption.

2014 results
In my review of 2014 results,  I expected $800M in core revenue growth instead of the $690M they achieved, and thought that could be sustainable through 2016, for a high 20s% growth rate.  If that doesn't continue deteriorating, it will be 2027 before they hit $10B in revenue.  But there is a substantial risk of further deterioration.

20% growth is what google does
To keep 20% growth past 2016, they will need to increase sales $600M, $700M, $800M... per year.  To have any significant value they would need to contain expenses including depreciation and stock compensation.  But none of these metrics are showing improvement, and field to online sales ratio is going the wrong way.

There is actually no way for LNKD to stay a 20% growth company, and there is no way that they will have $500M profit while doing so, which would justify a $15B "Google-like" (based on PE) valuation.  LNKD is too sales (winning and dinning) intensive, and dropping the parts of its business that aren't.

Long term optimistic forecast for Linkedin
Grow $600M in sales for 12 years, and profit to $350M in 2027 ($30M per year excluding screw ups).  That would leave it with a 6% growth rate in 2027, and 8% profit growth, so perhaps an 18-20 PE.  That is a $7B company in 2027.  Not worth more than $5B today due to time and uncertainty.
$5B/135M shares = $37/share today target.  $51.85/share optimistic 2027 share target value.

Comparison to twitter
Based on Q3 projections and performance, twitter is worth more than linkedin.  I may amend this after their results though, as they have had much drama since Q3.  Though twitter shares linkedin's shareholder abusive corporate structure, and is therefore never investable, it may be appropriate as a long/short pair.

Twitter is worth more than LNKD because it has higher growth, lower saturation level, improvement potential, decreasing losses, and most importantly is not as sales intensive.

Likely fraudulent analyst activity after Q3-2015
Linkedin reported poorer results than Twitter in Q3.  The reporting though blatantly ignored that the results included that were not in previous comparable.  The company announced that its results would be similar to what they turned out to be.  While twitter price during the quarter went to a reasonable $12B, several linkedin research reports put a $45B price target on the company, and justified it with drool.  If they are capable of tieing their shoelaces, then assuming there are agencies charged with being interested in such behaviour, investigation into alternate reasons for both the analyst and stock pump are worthwhile.  There is a long term trend in the manipulation of reaction to the company's results.

Monday, February 1, 2016

Unconditional Loan Income (UBI pilot programs)

Many jurisdictions around the world are proposing basic income pilots, and there is an interesting private study initiative from Ycombinator as well.

UBI pilots may be a waste of time
UBI has obvious benefits and pilot studies may just confirm these:
  • Obviously, as social assistance recipients, we would prefer cash to in-kind conditional services including "judicial care" (police and other authority harassment)
  • Obviously funders (taxpayers) would prefer giving less expensive cash social assistance to more expensive oppressive bureaucratic hierarchies.
  • Obviously we would all prefer to not be threatened with starvation or ghettoization, and prefer that the economic contracts we enter are not forced due to relief from starvation threats.
  • Obviously we would all prefer a social dividend and the choice/vote/power to use that dividend to fund (give back to) government programs rather than the programs without the choice.
  • Obviously UBI permits or facilitates higher education or entrepreneurship initiatives.  Both are pursuits that incur survival costs while forgoing present income opportunities.
  • Obviously we would all prefer a UBI cushion to counteract income variability, allowing us the option of work that may have initially few or uncertain paid hours.
  • We obviously all would prefer less financial stress in our lives, and would all appreciate fewer violent and criminal consequences from the financial stress experienced by others.
  • If 90% of us pay lower net taxes with a UBI program than with our current system, then 90% of us have an obvious economic preference for UBI.

The only basis for opposing UBI comes when you replace the word "we" above with "they", and keeping them oppressed and desperate is seen as a way to maximize your income, authority, and happiness.

The good argument that we do need pilots is that not everyone shares my certainty about the benefits of UBI.

Uncertainties around UBI programs 
  • Will the stars enabled by UBI sufficiently compensate for the perpetual loafers?
  • Do the 10% affected by higher taxes receive sufficient social and personal compensation to be enthusiastic members of society?
  • Uncertain costs despite modeling.
  • How much economic growth will UBI create?

Its the 2 last points that benefits from UBI study, but  models should be close, and the point that some economic growth results is all that is needed to know to adopt UBI, considering other benefits.

Stars vs loafers
Lets assume pessimistically that 50% of those people at risk of perpetual unproductivity (the young and others without employment) would choose to refuse all productive opportunities if given $15k UBI.  The $750k paid to them (50 out of 100) annually, will still get 100% recirculation in the economy (not saved).  Most of it on shelter and food, and very little imports as well.  Meaning that the $750k that flowed from taxpayers, flows right back to private sector taxpayers.

The only arguable drain on this UBI flowback to taxpayers is potential imports.  Spending from UBI-only lower income individuals would be concentrated on shelter, utilities, local travel, local entertainment, and food.  Of this, food is the only significant import.  Presuming 10% as a likely upper bound on import spending for the poorest UBI recipients feels safe.

This means that the other 50 out of 100 young and unemployed people need only contribute $75k ($1500 each on average) (increased slightly by their savings and import rates) in social contributions (represented arbitrarily by earnings) in order for the flow from UBI-enabled-people to taxpayers surpasses the flow from taxpayers, and a bar certain to be surpassed.  Contribution includes, for example, providing childcare so someone else can earn income as a direct measure, but happier healthy children does not harm society either.

The 10% - why they should love loafers
All of your work exists entirely because others are too lazy to do it or too lazy or stupid to learn how to do it, or too afraid to fall off that roof or get shot at during the performance of your duties.  The more people there are, the more work there is for you to do.  The more loafers there are, the fewer people compete with you for that work, and so the better bargaining position it puts you in (for higher pay/profits) to provide that work.

UBI will create more economy-wide spending, and it is all shared by those who choose to work.  The fewer the number of workers the greater the average share of that each worker.

For the 10%, (those earning over $100k-$120k) their share of consumer spending flowing to their income is likely to continue to be healthy (has been disproportionately growing), and so they will have the opportunity to increase after tax income (even with a tax increase) without working harder.

UBI is also a solution to creating the shorter work week that was once anticipated.  If those earning over $100k cut back work hours due to tax increases, then that creates more $100k jobs.  Every $100k+ job has more applicants than hires, and has no need to protect these.  The only irreplaceable people in our economy will forever be those who are currently developing an idea or skill without being paid for it right now.  Every other position has people being deprived of the opportunity to replace the incumbent.

The ULI alternative to UBI
UBI is probably a better policy than (Unconditional Loan Income) ULI, but the latter may be more suitable to pilot programs, is likely cheaper, and has most of the core benefits of UBI. 

ULI is similar to another natural finance concept I developed called soft loans.  ULI is (with example figures/specifics in parentheses):

  • A funded (by government taxation, or other means) program.
  • Eligible recipients (citizens) may borrow unconditionally up to a maximum amount ($15000) each year, regardless of previous borrowing or repayment levels.
  •  These are soft loans, meaning that there is no fixed monthly repayment terms.  Instead a royalty (equivalent to tax if by government) is paid on all earned income of the recipient (20% royalty rate) until all ULI taken is repaid.
  • A low (2%) interest rate accrues on the soft loans.  A 100% total interest cap on each year's loan applies (35 years to cap at 2% interest).
  • When total ULI balance exceeds a cap ($100k) then the royalty clawback (20%) applies to new ULI loans (so $3000 would go to repayment of past loans on a $15k new loan, if the recipient's ULI owing balance was $101k)
  • ULI accounts would be managed by financial institutions for convenience.  No user fees for electronic transfers.
  • Royalties on household income may be used to repay individual household member's ULI (optional)
  • May be higher estate taxes/royalties to recoup ULI balance.

Advantages and similarities compared to UBI 

  • Access to $15k/year in cash is enough to fund higher education, business startup, or escape poverty, without any permission bureaucracy.
  • Access to $15k/year can be used to displace other debts or increase consumption.
  • Access to $15k/year ULI can pay down a house mortgage rapidly, and so build up savings, providing further cushions to personal and social economic shocks, and may allow lower income spouses to contribute to family equity.
  • Access to $15k/year eliminates the need for employment insurance (and so eliminates the 7.5% in Canadian payroll taxes for it.) 
  • If a recipient has an outstanding ULI balance, then payroll taxes normally earmarked for CPP (retirement) funding can be used to repay ULI balance (saves another 7.5% in payroll taxes for those with ULI balances to repay).
  • Not being constrained by a monthly UBI amount can facilitate recipients with special projects/expenses such as moving to another area, or car/roof repair.
  • Being a loan with interest costs, means that those who do not need the extra income would not use it.
  • Those who earn $75k in the 12 months after taking out $15k ULI loan will repay $15k, and so the wealthy will tend to have 0 ULI loan balance even if they find it useful.   ULI still serves as effective disemployment insurance/risk mitigation.
  • Central banks use of QE relies on the illusion of accounting responsibility of purchasing assets with the printed money (balance of assets and liabilities).  Any act of irresponsibility comes in the future when the debt is cancelled.  So, central banks could fund ULI within their current mandates.  This is more attractive than negative interest rate policies.
  • The royalty clawback on ULI loans above a $100k cummulative balance provides some "loafer" protection.  It would kick in the 7th year of continuous exclusive ULI income. (with no intermediate repayments)
  • ULI might, with parental permission, be taken by minors.
  • At age 65, in Canada, a higher (40%) royalty clawback on income other than OAS would apply, making ULI equivalent to GIS (which would be eliminated) for those with balances above $100k, and over 65.

Overall one key point form the above is that the 20% royalty/tax rate after elimination of 15% in payroll taxes is just 5% extra tax burden compared to the current system for those with ULI balances.  Those with no ULI balance could continue to pay into the CPP program.

Cost analysis of ULI

The mathematical properties of royalty-backed-soft-loans is that the first loan made is the first loan repaid.  The provision for the royalty clawback application to loans taken over the $100k balance limit, means that the fist year loan will start to be repaid in at least 7 years, and guaranteed to be fully repaid by year 14 on a worst case basis.  Year 2 loan starts to be reapaid in 14 years, and fully repaid in year 22.  Year 3, 22 start 31 end.  The relevance of these facts will be explored in a later section.

The cost of ULI is the cummulative losses in the loan portfolio less the program savings from their elimination.  It is likely to have some losses.  But those who average income of $75k over the same number of years as they used ULI pay for their own ULI + 2% per year for the fund.  Those making less than $75k over a longer period can also pay for their own ULI. (also +2%/year used)

Compared to UBI, with the same eligibility requirement (resident citizens), necessarily fewer people will use ULI than UBI.  Those under 65 making more than $75k, and those over 65 making more than $38k, pay down more than they can take out per year, and those who would use it for savings may not due to interest cost.  So its necessarily cheaper than UBI.  Plus some of it is repaid.

There's reason to hope the net cost is less than (or at least comparable to) the cost of the eliminated programs it replaces.

Relevance to UBI/ULI pilot programs

Its easier to make a ULI program local.  There can be public/private partnerships for ULI.  And its possible to treat a temporary test as though it is a permanent institution (the major challenge of interpreting pilot program results).  A Pilot program is detailed in the last sections of this paper.

One core benefit for pilot programs is that ULI has a clear maximum cost (similar but lower than UBI), but also can be costed with pessimistic and optimistic models, and provide a complete program cost over say 5 or 10 years.  Because ULI is a loan program, even if the program is discontinued at the end of the pilot period, the program can still expect repayments of past loans by royalties, and so a significant total cost reduction compared to UBI pilot.

A private/public program
ULI can be privately funded with the following public guarantee:  Any loan balance outstanding at the time of the recipient's estate resolution (death) shall be supplemented by the guarantor up to the principal amount.

This means that for the private side all individual ULI loans return between 2% and 0%.  Pessimistically 1%, as even the loans that are guaranteed would likely have had some repayment over their lifetime, and so return above 0%.

Even if this does not qualify under charity tax legislation, it would still be cause-investment from the private side.  Investors/funders obtain an asset that can be resellable.

ULI is a mutual loan portfolio that charges all borrowers the same interest rate, and investor funds are not matched with any single (or other chosen) loan.  The asset "tranches" would apply to one month's or year's society-wide loan portfolio, allowing for continuous investing and fund additions.

A UBI program for Edmonton or Calgary
Several cities have expressed interest in a UBI pilot program, among them, the above 2.  I use them for example due to familiarity with...

The minimum requirement of federal assistance for ULI pilot:
  1. Revenue Canada is the only cooperating department required.
  2. They must direct EI contributions to either the payer's CPP account as an extra contribution, or to repay ULI fund (if balance outstanding).
  3. They direct CPP contributions to either normal CPP or ULI fund repayment.
  4. They levy 5%-20% income surtax (depending on whether income was already taken from EI or CPP, or whether it is investment/other income) earmarked for ULI fund repayment.
  5. For pilot, GIS program would still apply and 20% from RSP/pensions/other/normal income would apply to seniors, but GIS calculated on income after clawbacks.
  6. Once setup for one city/region/postal code, would allow any others to sign up.
That's it.  An extra tax form for the region, tax line on 4th page, and some accounting changes over where payroll deductions get forwarded to.

Minimum requirement from provincial government:
  1. Determine the city's share of federal transfer payments that apply to city.
  2. Determine provincial budget costs associated with programs to be eliminated in city.
  3. Use that money as base ELI funding with province holding the ELI assets.
  4. Pledge profits from the ELI assets held by province will be used for guarantee portion.
  5. Pledge some more money for the guarantee portion. (optional)

The private sector participation needed is to get some banks on board.  They'd participate both for PR value, and providing service that leads to more business.  They can also provide or facilitate (city, province, Ottawa) short term bridge financing for the program.

Most of the funding comes from provincial and city budget diversions.  But an appeal for private benefactors campaign will also be useful.  A property tax increase would be appropriate as any city that grants residents access to unconditional loans up to $15k per year would lead the world in desirability, prestige, and property demand.  Foreigners ineligible for ULI, could still own property in the city and enjoy the city's desirability benefits in rent and property appreciation.

Note that pilots can be as small as a postal code level.  If resources are limited, some postal codes selected could be based on benefactor campain signups.

Note also that any payments on loan guarantees are delayed on average 30 years, and such payments are staggered by death rate.  Earnings from the program can be reinvested into government bonds to reduce its effective debt outstanding and fund the reserves needed to meet the guarantees.  An estate tax can also be tailored to mitigate this need.  The amount of money that needs to be set aside today to meet an obligation 30 years from now at 3% compound yield is 40% of the amount.  With the pessimistic assumption that 10% of eligible UBI would not be taken out as ULI, and that 60% of ULI returns 2% (excluding compound benefits for simplicity), 15% breaks even, and 25% is a complete loss with 0 lifetime repayments, then for every $1T in eligible UBI, $675B of $900B is repaid + $11.8B interest profit to cover $225B in potential losses per year.  40% of that is $90B, and if the average repayment time of the 60% who do repay is 4 years, then that cost is less the 4 * $11.8B/year interest profit: a $33B cost today for each $1T in UBI equivalent ULI program funding.

One way to ensure supplemental funding from private sources would be to allow the interest rate charged to be variable.  The lifetime interest rate of the loan is set at the time it is withdrawn.  If private funding contributes to the ULI program, then a variable interest rate bid by lenders would ensure the program is fully funded.  Gimmicks could incentivize matching a 2% bid with an equal amount variable bid.  Governments could backstop the funding requirements with a supplemental funding commitment equal to 30 year bond interest rate. (with primary "savings-based" commitment still at 2%)

A voluntary opt-in ULI pilot program
Though more complex and more costly due to having to keep parallel social services available.  In exchange for the privilege of taking out $15k/year in new loans unconditionally, the recipient would agree to forgo social assistance services, and potentially accept new tax rates on high income, and/or estate surtaxes.

While more expensive, the benefit of opt-in ULI would signal the effects of social pressure on public support, and there is a potential of offering different tax packages by postal code to note the effects of offers on opt-in rates.

Results for ULI pilot program
Even if the pilot is ultimately cancelled after 5 or 10 years, data will still be collected past the time.  Results will provide individual ULI amounts withdrawn and repaid (with Revenue Canada's cooperation) and provide data by age, income, family type, previous social assistance consumption, and postal code.  Including continued repayments after the pilot ends (new loans no longer possible).

The key questions answered will be the total cost of the program, and the social benefits of investing in people.  There may be groups that perform worse than others, but compared to the cost of direct conditional assistance, the program should show success.  Individual success stories should also be highlighted.

The key result will be identifying the funding gaps for UBI/ULI (though a pilot isn't really needed: Just adjust if initial funding is imbalanced).  The main criticism of the Dauphin experiments are that they were known to be temporary and used GMI (guaranteed income). GMI is a disingenuous option.  The ULI pilot proposal does not exactly let everyone make permanent life decisions, but we'll be able to track the decisions made by groups.  There's some consequence to taking ULI loans.

Turning pilot ULI into permanent ULI or UBI
In transition to a permanent program, all that is needed is tax code reform to address funding gaps.  The measures are detailed in my recent article.  I'll emphasize the most important one as normalizing the taxation of investment income with employment income.

In Ontario, earning $22000 in capital gains has $0 taxes oweing, and a marginal tax and payroll deductions rate of 11% all the way up to $88k in capital gains.  $22000 in employment income results in 27% of that as government revenue, with marginal income+payroll tax rate on income above that of 38%.  Employment income tax rate increases further at $44k.  $22000 capital gains income is the expected earnings from $500k in liquid assets.  The type of income also allows reductions through carry back/forward one year's losses, and easily provides much higher wealth levels to pay no or low taxes by balancing large portfolio sales to defer taxes payable indefinitely.

There is no valid reason for providing this tax gift to the wealthy, and the lower their taxes are, the higher yours have to be.

Why prefer UBI to ULI
My preferred philosophical justification for UBI is that of social dividends.  We deserve our share of tax revenue with default preference to spend it privately, but with communal democratic option to allocate it socially through centrally managed programs.  This means that UBI is adjusted up or down as a function of government program spending, and tax revenue affected by both tax policy and social economic performance.  UBI, to me, is social dividends that just happen to also eliminate poverty.

ULI clearly has all of the other benefit features of UBI.  It allows anyone the option of refusing all work in perpetuity.  The only material difference as it relates to poverty is that eventually, someone relying only on ULI income, has the maximum net withdrawal amount reduced to $12k.  I consider it an advantage that each recipient has a personal accountability for the amounts they use.

If UBI can be adjusted up and down based on program cuts and economic performance, then so can ULI, and therefore it serves as a social dividend equivalent as well.  Furthermore, the accruing interest rate on ULI loans is also adjustable to economic conditions, though the feedback for such adjustments is less obvious.  But the higher the interest rate, the lower the expected cost of the guarantee program, and so its a useful (but dangerous) parameter to juggle the affordability of ULI/UBI.  Higher interest rates would also lower ULI use.  Many people who do not need ULI, would still use the maximum amount in hopes of investing it at higher returns, but this can be mitigated by making the interest costs of ULI non tax deductible even if used for investment.

Overall, since ULI has all of the benefits of UBI, and is less expensive, I prefer it because I understand it.  However, there are some BS and some real reasons to oppose ULI.

Poor but common arguments against ULI
ULI involves debt, and debt is evil.  Most are financially uninformed, and many are passionate about remaining financially uninformed while maintaining strong opinions on such topics.   The words "indebted servitude" would be thrown around.

False controversy is still a problem, but a 5% surtax on income when you earn it is not servitude.  Unconditional annual new credit withdrawals sufficient to eliminate poverty with no fixed repayment obligation is not servitude.  ULI can be structured such that it is at least equivalently good to UBI.  A 2% loan interest is not predatory.

Another controversial proposal not addressed in detail here is associated bankruptcy reform.  This could benefit lenders and responsible creditors, but disadvantage those who rely on the option of strategic bankruptcy.  Rely on being willfully misinformed on the consequences of credit.  It would require universal healthcare coverage to be fair.  But its all the more controversial if the process will result in corrupt reforms.

Its controversial to allow annual ULI limits rather than monthly (such as UBI).  The equivalent UBI system allows people to borrow from the free market against future UBI income, and so meet large sum payments through that process.  Forbidding people from borrowing won't happen.  ULI allows a system where people borrowing against future UBI can get a cheaper rate than they would from the private sector.  The controversy is that financial sophistication is lacking in many, and explicit permission to allow irresponsible-with-hindsight behaviour will have concrete objection, even though the alternative of predatory loan sharks, payday stores, and subprime auto and other financiers would fill in any void on income flexibility provided by UBI.  Annual ULI can also let you defer taking ULI while you are confident in your job security.

Its controversial to allow royalty/tax clawbacks to apply to household members ULI outstanding.  But the controversy is only that it will allow cohabitation without household formation to escape the repayment burden.  The feature is meant to reduce costs compared to UBI, but only works if recipients avoid household formation.  Some, perhaps many, will avoid the gaming opportunities of non-household cohabitation.  It will seem fair that if one spouse is earning well above $75k while another spouse is earning nothing, that the high earning spouse should use some of their income to pay down the lower earning spouse's ULI balance.  Compared to UBI, there's no controversy if there is no penalty for household-escaping cohabitation.

Its controversial to consider estate surtaxes designed for ULI recovery.  Though its not controversial to enable a stronger funding foundation for ULI such that it is permitted.  Taking out ULI is optional and voluntary.  If an estate had a huge outstanding ULI balance while simultaneously having significant assets, it would seem fair that at least some of those assets should go towards the estate's ULI balance.  Don't use ULI.  Don't pay estate surtaxes, and so any new ULI-related estate surtaxes would not affect anyone not voluntarily accepting that condition on ULI.

Its controversial that ULI creates innequality in tax burdens.  Those with ULI balances pay a surtax compared to the wealthy with no ULI balance.  Those with high ULI balances pay that surtax on new ULI loans.  In exchange for this though, ULI recipients that withdraw the maximum over 60 years, can choose to never earn any voluntary income, and have the privilege of dying with over $1M in debt.  This privilege is not possible in the private sector without deluding lenders.  The way the wealthy avoid ULI related surtaxes is by not using ULI.  Compared to EI insurance, ULI is more useful because it allows a greater amount of "supplemental income", is not paid for unless used, retains the mutualization of costs (uniform interest rate), while not penalizing those lucky or industrious enough to quickly find re-employment.  ULI creates opportunities to lower default taxes on low and middle income brackets and raising them on high incomes who escape the ULI repayment burdens, and so any innequality controversy can be redressed.

Its controversial to increase retirees ULI clawback rates while simultaneously diverting taxes to retirement pension (CPP) contributions.  The latter ensures that larger repayments of ULI balances will be made later in life for those who say piled up significant pensions in their youth, but "retired" early.  Even with the higher clawback rate though, a high pension allows more comfortable retirement lifestyle, and retirees retain the privilege of taking out a full $15k per year in ULI loans.  The policy is there to help mitigate runnaway ULI balances, and to normalize after tax income to the current retirement system.  Just as ULI replaces Employment insurance with access to a recourse loan, preloading an individual's retirement pension preloads a repayment capacity for ULI, and reduces ultimate guarantee costs.

The ultimate concern with ULI
Even if all the controversies are addressable, the extra tweak parameters that ULI permits over UBI are extra vectors for corruption.  Ultimately ULI must be implemented with parameters that use UBI as a reference, and where all of the parameters result in at least an improvement.

NIT (negative income tax) is an alternative to UBI that can be equally good or better.  It is equally good with a flat tax, and better when the tax rates above the NIT clawback threshold are progressively higher than the negative income tax.  But the main political motivation of proposing NIT is to corrupt UBI such that the poor and working class pay for most of its costs.  NIT can be a corruption of UBI by tweaking just one extra parameter.

The US has a flourished history of corrupting reforms for minimal social gains with maximum lobbyist-carved benefits.  Most recent healthcare reform had minimal cost reductions.  Bankruptcy reforms enabled predatory student loans for overpriced education.

So the concern with ULI is the many parametric variables that can be changed to make it worse rather than better than UBI.  The political process of most countries is practically assured to minimize social benefits of legislation, and the strongest benefit of UBI is that it is difficult to corrupt.

The accounting strength/gimmickry of ULI
A more important health metric than a nation's debt is a nation's net debt (debt less assets).  ULI loans provided by the government are a liquid asset that offsets the ULI debt.  The budgetary cost/expense of ULI (the guarantee of 0% return (or losses on individual ULI balances)) is thus 3%-9% of the total loan sizes, while the program reductions are 30%-50% of the loan program size.  ULI should cost less than 10% of what the same UBI level costs, and the expense outlays kick in 30 years later (the 3%-9% cost is based on setting aside 30 year later costs today which is fair because it is savings in today's program costs).

lower tax burden
In 2012, Canada and its provinces collected $173B in income taxes, and $63.5B in payroll taxes.  $30B of which was related to EI   WIth a further 20%~ (of 173B) budget cut (fed and provincial) for social programs of $35B, this would require 20% less in total income tax collections.

In 2012, there was 17.7M taxable (income above 11k) returns filed.  9M non taxable returns.  Of that 2.5M nontaxable (income below 15k)  returns included OAS amount (those under 65), and 2.7M over 65 did have taxable income.   4.3M had incomes over $70k (those earning over $75k would have clawbacks higher than their annual ULI)

with a simple model that assumes low income seniors programs (OAS/GIS) are unchanged, while higher income seniors are grouped with other income earners.  I assume that everyone takes the full ULI amount they are allowed each year, and 20% of income up to  $75k is taken as clawbacks, and 10% of income above $75k (when ULI balance is 0) is taxed as a CPP contribution.  Then for each group:
  • 7.5M with income belw $12k, expected to earn 0, and take out $112.5B in annual ULI.  Repay $3000 per year when over $100k ULI balance, so up to $22.5B repayment.  Net $90B ULI loans.
  • 13.4M with income from $12k to $75k, expected to earn $35k average, take out $201B in annual ULI, but repay $93.8B in clawbacks.  Plus an additional $3000 if high ULI outstanding (assume an average $2000): $26.8B additional repayments. Net $81.2B in ULI loans.
  • 4.3M with income above $75k, expected to earn $190k average, take out 0 in annual ULI, but pay $81.7B in CPP contributions.  This group is expected to take and repay $15k in ULI loans:  A total of $65B in ULI loans. Net 0.
Note that these $81.7B in CPP contributions assumed just from income above $75k, is much higher than the $31B CPP collections as the current 7.5% on income up to $50k.  There's room to use some of the 10% surtax for those with no ULI owing on other than topping up their CPP.  Say 2% or $16.3B.

To fund $171B in net annual ULI loans, with 9.5% reserve fund creates an expense cost of only $16.3B.  Funded by $16.3B in diverted (2% of 10%) CPP surtaxes.  With $35B in program savings, allows 20% less taxes to be collected.  2012, total provincial and federal income taxes were 15% of income.  This means a flat tax of 12% (including provincial tax), and the elimination of payroll deductions.  Alternatively 13% flat tax on "taxable income" (excludes RSPs and childcare and investment expenses).  Replacing payroll taxes, would be a 10% surtax to fund CPP for taxpayers who have a 0 ULI balance, or a 20% tax to repay ULI for taxpayers that do have a ULI balance.  All employment income (up to $50k) can have a 7.5% wage increase if employers pass along payroll tax savings as expected.  Reducing flat tax rate to 12.8% on taxable income.

The 34% maximum tax rate on those with a ULI balance is lower than the current federal+provincial taxes + payroll taxes on employment income over $11k.  To encourage work incentives as much as possible, low end taxes can be reduced for diversion of some of the 10% surtax from CPP account to general revenue.  Small surtaxes on higher income are also possible.

Those with ULI balance pay 10% more tax than those without.  In return for the 10% surtax for (mostly) their own CPP fund, those without ULI still have access to the ULI safety net.

Revisiting the assumption of high enough payback rates
The 3.3% guarantee cost is based on 22.5% of ULI loans defaulting, and a 4 year average outstanding period for ULI loans that are repaid.  What is being proposed is a 9.5% guarantee buffer.  With a 50% default rate, 12.5% would need to be set aside to cover default expectations in 30 years.  The other loans would repay net 1% per year, and so a 4 year average outstanding period requires only 8.5% of annual ULI as an expensed guarantee buffer. (3 year average outstanding period = 9.5% guarantee buffer)

As an individual example, for someone earning an average  $35k over 40 years (unemployed 7 years), and receiving ULI from 18 to 85, he would receive 1.08M in lifetime ULI, but with 270k clawed back from ULI withdrawals (max net withdrawal of $12k at age 25, and $9k at age 65).  The clawbacks technically go to repaying previous loans (matters if private funding participates).  20% of 35k over 40 years is another $280k in repayments.  $550k in repayments for $1080 in loans is a 51% repayment rate.  The worst possible outcome for someone who lives through 67 years of ULI benefits is a repayment rate of $270k or 25%.  The best possible outcome is 200%.  At $55k average over 40 years, the total repayment rate is 75%

As long as Canadian median income is $35k (with media 7 years ifetime unemployment), then even if the first quartile is 0, if the 3rd quartile is $55k, the the top 25% can average $55.01k, and the scheme is still overfunded.

If the top quartile averaged 120% repayment (with interest), the 3rd quartile 30%, and the first quartile 25% (0 repayments from income), then the 2nd quartile can also have 0 lifetime income, and the scheme is properly funded.  For the 3rd quartile to have 30% repayment rate, the 2nd top income bracket would need to average $6k/year in income.

It is possible to allow banking of unused ULI without significant effect on affordability.  Allowing 80% to 90% of unused ULI to be banked for future years might reduce usage of ULI.  If it does then it would enhance affordability further.

private sector and Ycombinator
While the previous sections showed that ULI is affordable on a national scale, the private sector may be useful in a national context, very likely needed for a local or pilot program, and useful in transnational, or newly independent society, programs.

Ycombinator plans to fund a research pilot for basic income.  One of the early sections in this paper is titled "Stars vs. loafers".  Ycombinator (A venture/Angel capital fund/group) has disclosed the following about its business:
  1. They are profitable.
  2. The entirety of their profit is provided by just a few stars.
  3. They have no idea what they are doing.  That is, they have not figured out a formula for funding stars, and have been surprised by who their winners turned out to be.
 UBI, and specifically its ULI reinvention, offer this same shotgun investment in people.  It can seek much lower direct returns than a VC firm because the benefits individuals create are also societal.

Estonia, an ex soviet republic, is a small country surrounded by not particularly noteworthy neighbours.  It developed superstar tech company Skype, and is also home to other recognizable star tech companies. Its national GDP chart can be annotated with tech news headlines to mark jumps.  The way I like to make up the story is that some tech promotion and internet adoption policies were implemented despite some fox-news-facist calling them donkey-brained programs that will only lead to population looking at cat videos.  It doesn't really matter if there was any cat video watching.

 Useful private sector involvement includes bank facilitators and cause-investor-funders as previously mentioned.  Other private opportunities include retailers who allow electronic purchases from the buyer's ULI account in exchange for contributing the sales amount to ULI funding.  This is not a direct loan by retailer to consumer.  But rather an equal sized transaction that assures the consumer's ULI withdrawal is funded.  The benefit to retailer is higher sales compared to retailers that don't facilitate ULI.

In a private system spread accross nations, bitcoin, paypal or competing service can take on the bank role.

In a private led ULI effort, it is also allowed for a city/province/state to assist funding that effort with the goal of attracting participation in their region, and contributing their budget savings to the program.

A purely private ULI pilot (Ycombinator)
The power to tax is definitely helpful in managing a ULI program, but a purely private (with no tax department help) program is possible with the understanding that it will very likely lose money.  2 "audititing" options available:

  1. Purely voluntary repayment from income percentage "guidelines"/signup pledges.
  2. Require national revenue service (IRS/Revenue Canada) confirmation of declared income, along with optional other explanatory documentation justifying income timing, as a condition of receiving next year's ULI allotment, and potentially reduced by any assessed repayment of previous ULI balance owing.
The first option is not as stupid as it sounds.  One key to maximizing voluntary repayments, would be to concentrate the ULI program to specific postal code clusters, have public ledgers for amount of ULI withdrawn and repaid, and potentially have volunteers inquiring if they have forgotten to make repayments, or requesting explanation for any opulent purchase behaviours. -- social pressure.

A combination of the 2 approaches is possible, offering  gold, silver, and bronze stars to participants who contribute ULI repayments, and/or provide documentation of meeting the repayment pledges for ULI.  This approach is recommended.  Sending in documentation and a reporting form affects the next year's ULI withdrawal limit, with any calculated repayments owed applied as new ULI loans.

The "ULI contract" (actually non-legally binding pledge) asks recipients that in exchange for up to $15000 annual ULI eligibility, they promise the following: (mentions of gold silver bronze refer to star system elaborated on later)
  1. 10% (silver or 20% gold) of earnings up to $30k will be pledged to ULI repayment.
  2. 20% of earnings between $30k and $75k will be pledged to current year ULI repayment.
  3. Full repayment of current year's ULI withdrawal if earnings are $75k or higher, and 10% (silver or 20% gold) of earnings above $75k will repay previous year's ULI balance.
  4. 50% (gold, or 20% silver) of social cash (possibly including foodstamp) assistance received should be applied to the most recent ULI withdrawal.
  5. When recipients turn 65 (eligible age for retirement benefits) or obtain dissability benefits, they cannot accept new ULI withdrawals, and should repay past ULI at 5% (silver)-10%(gold) of income. 
  6. 5% (bronze), 10% (silver), and 20% (gold) of income from spouse (in household) is committed to repayments.
  7. The total repayment owed is equal to the amount borrowed compounded at 2% (gold, 0% silver) up to a maximum of double the borrowed amount.
  8. see stars section for optional elections(references to silver/gold)
Note that for recipients ULI income is not taxable as it is a loan.  Repayments are not tax-dedutible either though.

The 3 benefactor classes required are:
  1. Administrative cost payer.  Should qualify under charitable donation rules, as there are no financial benefits to the burden, and only costs.   EULA to users promises not to share or profit from personal information.
  2. ULI loan guarantor.  This class contributes funding that is certain to be a loss.  If the pilot continues until the guarantee funding is depleted, then this should also qualify as charitable donation.  The guarantor places cash into 30 year government bonds, and the guarantee is dependent upon the solvency of such bonds.
  3. ULI loan funders.  This class contributes funding for the actual loans issued to recipients.  They expect 2% interest on full repayment, but the principal (0% return) is guaranteed by the previous class.  This class does not enjoy a charitable tax deduction for their funding, assuming strict reading of charity legislation.  They may claim the interest as capital gains since it is terminal, and they may claim capital losses if they resell their loan assets at a loss (based on time value of money rather than capital at risk).

Note that guarantors and funders should have the right to nominate ULI eligible recipients, up to the funding they are committing.

The star system:
  • diamond - contribute signficantly more than owed back.  including funding and guarantees.
  • platinum - repaid all previous ULI loans including interest.
  • gold - have met pledged repayment commitments and fulfilled documentation requirements.  Possible to have gold with no repayments if no income.
  • silver - have made elections on the terms considered argumentable such as refusing to pay interest or repay government benefits.  Silver star elections result in lower eligible ULI.
  • bronze - provides incomplete documentation but somewhat credible repayments.  Applicable to those who refuse to share tax return information.
  • participation - provides some repayments.
The star system mostly reflects reporting compliance by users, and affects future year maximum ULI withdrawals, and implied repayments (setting aside ULI to repay previous ULI balance).  Recommendations for limits are $15k for gold, $12k for silver, 10k for bronze (out of 15k, meaning ULI borrowing limit is still 15k, but 5k is used to repay previous balance, in addition to voluntary payment), $6k (+ repayments) for participation level, who maybe cutoff after 1 year notice (if program is funding constrained, and they don't meet bronze compliance level).

Stars are awarded on an annual basis.

ULI mechanics:
  • A ULI loan incurs compound interest of 2%, but has maximum total interest of 100%.
  • A loan asset is created for each month's loans.  lenders own the full portfolio.  Borrowers repay into the portfolio fund.  The first loan made is the first loan repaid.
  • The principal guarantee is due for the longer of 1) 30 years after loan creation, 2) 3 years after the last loan, payment, or compliance filing of a member (recipient).  This latter condition simulates death of a member without a documentation requirement.
  • Loans are guaranteed individually.  Limiting the total guarantee responsibility to the total principal of the asset is an option, though this would lessen the guarantor burden, it would assure that later loans can only expect 0% return.
  • When loan repayments exceed the original principal, the remaining balance (accumulated interest) stops accruing.
  • Proceeds from loan repayments are distributed to lenders on a quarterly basis.
  • The annual ULI limit matches the taxation year.
  • At the beginning of a new year, ULI withdrawal limits are initially set at $6000 + previous year's repayments up to a maximum of $15000.
  • When income documentation is sent (tax assessments usually available in may or june), ULI limit for the year is raised to $15000 with any missing assessed due loan repayments from previous year's income taken from ULI.
Simplified user proposition
 You may choose to receive a $15000 loan with no strict legal obligation to repay it.  We ask that you do, following a calculation based on the income that you earn each year.  If you submit income tax verification of that income each year, then you can withdraw $15000 again each year.  A lesser amount is available in following years if insufficient compliance documents are sent in.  An identification step may be needed if program is very large. The compliance documents would include questionaires related to plans/contentment with ULI

Cost of pilot
Providing ULI of $15k to 1000 people for 5 years is $75M in outlays, but those outlays will be returned.  40% of the outlays is the cost to guarantee the $75M: $30M.  The absolute maximum possible loss, if 0 repayments are made with full compliance reporting.  A $10k ULI reduces the cost to $20M.

A suggested program and funding size is to set a committed cost to lose/expend, and then run the program as long as possible on that commitment.  After 5 years, (or when the funding level per participant over the next 5 years drops below $75k) the ULI program drops from $15k/year to $10k/year (for gold level).  Administrative costs can be taken from the guarantee bond under the assumption that all participants will not earn 0 income with gold compliance level (or may be a supplemental commitment).

If the fund has piggyback private participation, it can significantly extend the size and duration of the program.  A signficant key feature that will lead to significant participation is the ability of a funder to nominate a new member.  A contribution of $105k (75k for loans over 5 years, 30k for guarantee) allows a donor to risk at most $30k, which drops to $15k expected risk if average members earn $37.5k per year or stop compliance, and then refuse to make any repayment contributions after new ULI opportunities are discontinued, and ULI opportunities are discontinued 5 years after the private contribution.  For that $15k (or $30k) risk, benefits of up to $75k will go to nominee, and there are many opportunities to share this upto $45k-$60k "profit".

Obvious nominees include adult family members.  Its so obvious that a special condition of putting up an additional $105k to go towards funding an adminitrator/lottery selected recipient should be a requirement.  This still creates a $15k profit opportunity by nominating a non working spouse or higher education pursuing adult child.  Similarly, nominating employees of a business would warrant some additional contributions.

Cities/regions would nominate the homeless for certain, as $50k typical annual costs (shelter, policing, healthcare) can be replaced with $6k annual risked cost (much less if the ULI allows them to get on their feet).  Next, are at risk youths where the current strategic policy of beatings, shootings, and harrassment until their morale improves is expensive and ineffective compared to risking $6k/year in a way likely to improve outcomes.  The $6k/year cost makes a very compelling case to nominate anyone who qualifies for welfare/housing/disability/social assistance to this 5 year unconditional plan.  It just takes 1 member of government to shout down anyone else who opposes this obvious cost and benefit improvement.  The sponsor can have a private contract with nominee that includes relieving the sponsor city/region from social assistance obligations to the nominee, while ULI programs exist.  Public pressure on cities to provide a fair share of their savings toward extending the fund's sustainability (past 5 years) would help.

Businesses could see big gains.  If they nominate someone they think will earn $37..5k or more, the risk is $15k.  If a retail consortium ( say WMT, MCD, SBUX etc...)  offers a ULI in the form of prepaid "giftcard" of say $50k, then by qualifying nominees income, they might comeout ahead in terms of profit vs. expected ULI guarantee costs.  Autos, housing, universities, bank credit lines could try to have customers sign over portions of future ULI withdrawals to the business.  Such arrangements would require (fee) assistance (paid by group seeking assignment) from the ULI administrator, and so either offset administration costs or increase funding sustainability.

A private mutual lottery business model exists to take advantage of the better than 0 sum profit to cost ratio.  With a maximum risk of $30k, a well capitalized, say, insurance company can offer a lottery winner a $75 ULI benefit by collecting say $37.5k in lottery tickets, and promise to make half the repayments.  The expected guarantee cost with 50% lottery winner repayment is 22.5k.  $15k expected total profit.  20% return on loan capital.

Benefits of pilot format
It would promote UBI through experience.  If initial group is chosen by lottery/drawing (free) it will show demand for the social program while still providing (close enough to) random sample testing (with the exception that participants expect it to be worth applying to the program).  With cities piggy backing onto the program, there would be a flood of members who are identified as high risk.  Several groupings of ULI program initial references will be available to study.

It is my hypothesis that 5 years is a sufficient time for someone to "get their life together", and a good time frame for this reason.  I expect that for the initial participants the pilot will last 7-10 years with a drop to $10k/year gold ULI level around year 6.  I expect that after new ULI funds are discontinued compliance with reporting will drop significantly.  But any repayments past that time will be interpreted as signs of gratitude for the program.

Business partipation in ULI will let them report on the benefits it provided them, and the obviousness of how a more general adoption would benefit all businesses and society.