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Teri Bernstein, MBA, CPA has been teaching full time in the Business Department of Santa Monica College since 1985.  Prior to that, she worked in Internal Audit and Special Financial Projects for the 1984 Los Angeles Olympics, CBS, Inc., and Coopers & Lybrand (which is now part of PricewaterhouseCoopers).  She attended the University of Michigan and Wayne State University.

  • Offshore tax havens mean higher taxes for individuals

    The graphic above illustrates how much in additional taxes is paid by each person by state, due to corporate and wealthy individuals' use of offshore tax havens. I live in California...and I'd love to have my state tax bill reduced by $1,783. What is an "offshore tax haven" exactly ? These are banks in other countries, such as Switzerland and several island nations, with low tax rates and laws that provide secrecy regarding financial transactions. Corporations and wealthy individuals--even though they are required under penalty of perjury to report all income on the U.S. tax returns regardless of where it was earned--can sometimes hide illegally obtained income and the earnings on that income in such banks. Jordan Belfort, the " Wolf of Wall Street ," was imprisoned partly due to his illegal use of a Swiss tax haven. Some states, such as Montana and Oregon, have taken steps to close the tax haven loophole by applying the same kind of taxation formula used for companies who do businesses in several states. The report, by the U.S Public Interest Research Group, " Closing the Billion Dollar Loophole " provides a roadmap for how this is done and what it can accomplish. In addition to tax revenues lost by states, the federal government has losses as well. The Congressional Research Service estimates these to be $90 billion to $100 billion annually . This results in more money out of the pockets of tax-paying individuals. Perhaps a tax overhaul is needed so that the tax system is perceived as "fair." The businesses would not have to waste creative energy pursuing tax avoidance, and could focus more on positively improving their products and their bottom lines. Sources: " How Much Do Offshore Tax Havens Affect You ," by the U.S. Public Interest Research Group, via Upworthy, April 15, 2014. " How states can reclaim $1 billion from offshore tax havens ," by Niraj Chokshi, The Washington Post , January 31, 2014. F ollow up: What do you think? What kind of tax rule changes might encourage businesses to "buy-in" to the tax system and increase voluntary compliance with tax law?
  • From 35% to 12.6%: Corporate tax loopholes lower real tax rate

    image from blog OK, April 15th is behind us (Tax Day). Maybe you are pondering what tax planning you might be able to do to better your circumstances with the IRS bill. Maybe you are rationalizing your tax burden by thinking that everyone is in the same boat. But...corporations are not in the same situation as individuals. Many corporate tax loopholes end up reducing corporate tax burdens so that they are considerably lower than the rates that individual "average Americans" are paying. According to the Government Accountability Office (GAO), the average corporate tax rate was 12.6% in 2010. Here are some of the juiciest tax loopholes enjoyed by U.S. corporations: The "carried interest" loophole: Private equity and hedge fund operators pay capital gains tax rates (15% to 20%) on what is really their ordinary income (taxed to the rest of us at the maximum rate of 39.6%). This loophole is also enjoyed by the real estate industry because of partnership accounting. Investment banking partnerships are 41% "real estate related" so they can take advantage of this favorable taxation as well. Individual taxpayers are not allowed to deduct even a parking ticket--or any fine issued by a government agency. Corporations, on the other hand, can deduct the costs of fines and prosecution expenses for crimes from its tax returns. So when a company like JPMorgan Chase admits wrongdoing and pays a fine--it costs the rest of us taxpayers money because the big bank gets to deduct the fine and lower their tax bill. Corporate jets maintained for executive travel can be depreciated over 5 or 7 years (faster than airlines are allowed to deduct the planes they use for their main business). These deductions reduce corporate tax bills. Ironically, small businesses using luxury cars are not able to fully deduct those expenses...but the planes are not subject to these "luxury vehicle" limitations. Corporations can deduct as compensation costs the executive stock options given to executives--even though they don't cost the companies any money. According to Citizens for Tax Justice, Amazon used this tax break to reduce their effective tax rate between 2010 and 2012 to 9.4% for federal and state taxes combined. If they had not taken advantage of this loophole, their effective tax rate would have been 40.4% for the combined federal and state taxes. Source: " Looking at Some Corporate Tax Loopholes Ordinary Citizens May Envy ," by Andrew Ross Sorkin, New York Times Dealbook , April 14, 2014. F ollow up: What tax loopholes do YOU take advantage of? Do you think these are fair? What are your thoughts about corporate tax loopholes? Discuss the pros and cons.
  • Toyota criminal penalties: Are fines a real punishment? Why isn't Toyota in jail?

    image (of a Prius that had accelerated to 90 mph on a mountain road) from the Colorado State Patrol, published in the Los Angeles Times Toyota recently entered into an agreement to pay a multi-billion dollar settlement as a result of a known problem that caused deaths. The documented problem was that of sudden, unexplained acceleration. Last week, Toyota settled a criminal case brought against it by the Justice Department. Various lawsuits remain, but costs to this point include: $1.6 billion settlement of civil claims in a class-action lawsuit on this issue a $1.2 billion payment to the Justice Department, a criminal penalty, relating to wire fraud issues National Highway Traffic Safety Administration fine, which is capped by law at $35 million an agreement that Toyota will not be allowed to deduct its criminal penalty on its tax returns, which means that the American taxpayer will not lose out because of this settlement Part of the Justice Department agreement also stated that no individual executives will be prosecuted for these injuries and deaths related to the sudden acceleration problem. “The rules of evidence sometimes do not allow you to use certain kinds of evidence and certain documents against individuals, although they might be admissible against the company itself. Although there is an admission that they were individuals who engaged in conduct which provides for a basis to bring a case against the company, they are not charged here,” explained Preet Bharara, the U.S. attorney for the southern district of New York. Toyota can afford these penalties, as its current year profits total about $19 billion. If an individual person had committed these crimes, it is unlikely that they would get off without any jail time. Here are some mandatory minimum sentencing guidelines for individuals: Mandatory sentencing guidelines, Federal, from Wikipedia But Toyota is still allowed to operate. Toyota's stockholders continue to make money. According to the doctrine of " Corporate Personhood ," corporations have many of the rights as individuals. But if a corporation has the benefits of a person, should it also not be subject to the same criminal penalties? Source: "T oyota sudden-acceleration suit is ratified ," by Tina Susman and David Hirsch, The Los Angeles Times , March 20, 2014. " Toyota admits deceiving consumers; $1.2-billion penalty is record, " by Jerry Hirsch, The Los Angeles , Times, March 19, 2014. Follow up: What do you think? Is manufacturing a car when you know a defective part will cause deaths a punishable crime? Is it better to charge money penalties or to give the corporation the same penalty a "person" would receive: inability to work for a time period. What are the pros and cons of shutting down a corporation the same way an individual would have his or her business life shut down by incarceration? Should individual executives be prosecuted? Discuss the pros and cons. Comment on the agreement that Toyota cannot deduct its penalties from its taxes. Can individuals deduct fines such as parking tickets on their tax returns? Discuss the reasons for tax deductions and how criminal penalties fit into that logic.
  • "How to Rob A Bank" sung by Willy Porter

    [View: /gew/utility/ :550:0] I was at a concert this past weekend at my local guitar shop. What a surprise it was to hear this song about the benefits of white collar crime over the "driver, a Nixon mask and a gun" version of bank robbery. Some of the song's narrator's suggestions for success: Secure a seat on the Board of Directors Run with the country club set Get a foundation to donate to his schemes Get Congress to subsidize any failing business Blackmail government by threatening layoffs Unchecked greed The benefits: Respect from family, who love receiving gifts Bonuses even when you've been accused of wrongdoing Lawyers to bail you out of trouble Of course the song is done for humor, but there is certainly truth in the message that "white collar crime" often does pay. Source: "How To Rob A Bank" by Willy Porter, YouTube, and live at McCabe's, March 8, 2013. Follow up: What is "white collar crime"? What recent legislation has tried to increase penalties for financial crimes? How successful has it been? What has been the response of the business community to this legislation?
  • Whistleblower gets shafted by agency shift

    from Chris Slane's cartoon portfolio In 2010, the Dodd-Frank law created 10% to 30% rewards for whistleblowers who filed complaints with the Securities and Exchange Commission (SEC). Under this law, a former mortgage underwriter filed a complaint against SunTrust, alleging that SunTrust did not disclose that "tens of billions" worth of loans sold to Fannie Mae and Freddie Mac "had fallen outside of the buyers’ quality guidelines." The complaint was filed in 2012, and the SEC did not take direct action on it. Instead, it passed the complaint on to the Justice Department. Under Dodd-Frank, the whistleblower can't collect if the complaint is not resolved within the SEC. Congress probably did not anticipate this loophole when they passed the law. The attorney for the whistleblower is arguing that the Justice Department action is based on the evidence in the original complaint filed with the SEC, but it remains to be seen whether the substance of the whistleblower's actions will be rewarded at all. The intent of the Dodd-Frank legislation was to uncover and prevent events that led up to the financial collapse triggered by over-valued mortgage instruments in 2008, and it seems as though the government got the benefit of the inside knowledge, but has proceeded in a way that will probably side-step the anticipated compensation. Source: " A Whistle That's Lost in the Crowd " by Gretchen Morgenson, New York Times, March 8, 2014. Follow up: Have you ever been in a situation where you witnessed wrongdoing by those who ranked above you at work? Describe the situation and the courses of action you considered. What are the risks associated with being a whistleblower? Are there any rewards other than monetary rewards? Would you bring a complaint to the SEC, knowing what happened in this case? Should Congress take action to amend the law?
  • GM auto defects ignored for years; deaths mounted

    Kelly Ruddy's Chevy Cobalt from the NYT article linked below Here is the problem with several low-to-mid-priced General Motors (GM) cars: suddenly--even at freeway speeds--the car stalls out, totally losing power to the engine, steering, power-assisted brakes, and air bags. When did GM first become aware of these problems? Since 2003 an average of two complaints per month have been filed with the National Highway Traffic Safety Agency (NHTSA) about these random "shut-downs." Who knows how many complaints were lodged with GM, but didn't make it as far as the NHTSA? What was done? Even when former Congressman Barney Frank intervened on consumers' behalf in 2010, the NHSA responded: “ At this time, there is insufficient evidence to warrant opening a safety defect investigation .” By this time, there had been at least 78 deaths and over 1500 injuries due to the sudden ignition failure problem. The NYT analysis shows that the NHTSA as well as General Motors seemed to ignore data relating to this problem. The vehicle recall now in place involves 1.6 million vehicles. Source: " Auto Regulators Dismissed defect tied to 13 Deaths " by Hilary Stout, Danielle Ivory and Matthew L Wald, New York Times, March 8, 2014. Follow up: With whom does the responsibility for car defects lie? The manufacturer? Government regulators? The consumer who buys the less-than-top-of-the-line car? Who should "pay" for damages and why? Do you think that government regulation takes the responsibility off the shoulders of the manufacturer? When a manufacturer becomes aware of a defect, what communication, financial, production, and legal procedures should kick into place? Are the issues only "civil" or are they possibly "criminal"?
  • Drugs made in India found to be substandard...and a lot of our Rx are imported from India

    image from " Bad Medicine" American Enterprise Institute From the New York Times: " India, the second-largest exporter of over-the-counter and prescription drugs to the United States, is coming under increased scrutiny by American regulators for safety lapses, falsified drug test results and selling fake medicines ." The FDA has recently increased its inspection schedule of Indian drug producers, and has banned the export of several generic version of medicines including Accutane and Cipro, which had been found to be adulterated. Worries about drugs produced in India reached a high point last week, when the Indian drug producer Ranbaxy (which had been found in violation of safety violations "too numerous to count") asked the FDA to please let them continue to ship drugs while they are trying to fix the problems. The FDA said no. I would say that Ranbaxy is "unclear on the concept" of the importance of drugs being produced to a high standard of safety. But the problem is not just with that one firm in India. G. N. Singh, India's Drug Controller General, said in an interview with The Business Standard : “ If I have to follow U.S. standards in inspecting facilities supplying to the Indian market, we will have to shut almost all of those .” Some of the problems that have occurred include: over 100,000 orders were knowingly shipped of antibiotics with no medicine in them the World Health Organization study estimated that 1 in 5 drugs made in India are fakes counterfeit medicines in a hospital in Kashmir resulted in hundreds of infant deaths drugs shipped to Uganda had counterfeit labels from Cipla, a company which tries to maintain high standards. I have started looking at the labels that are on the medicines provided through my health plan. Sure enough--almost all of them are made in India. Hmmm... Source: " Medicines Made in India Set Off Safety Worries ," by Gardiner Harris, New York Times, February 14, 2014. Follow up: What are the possible remedies for this situation? What might you do to protect yourself? Would you pay more for drugs manufactured in the United States? Would a private auditing company's seal of approval be better? Who should be in charge of regulation of drugs taken by Americans? The U. S. government? The Health care provider that contracts with the drug companies? Explain your thoughts on this matter.
  • Target tells a different story now: PINS were stolen

    image from It could happen almost anywhere these days: Target had a security breach. Its public relations announcement in reaction to the incident reassured customers that their PINS had not been stolen. Molly Snyder, a Target spokesperson said: “ We remain confident that PIN numbers are safe and secure. The PIN information was fully encrypted at the keypad, remained encrypted within our system, and remained encrypted when it was removed from our systems. ” However, that turned out not to be true. Crooks were already selling the data on the black market when Target had to make a second announcement that was more accurate: the PINS had been stolen as well. Major banks had already reacted as though this might have been the case--placing caps on withdrawals, for example. Was it a public relations mistake to give false reassurance at the outset? Possibly. It may have been more reassuring to customers if Target had over-compensated for the breach. But it is also possible that customers are becoming jaded about breaches and do not expect honest information from corporate public relations announcements. Forty million customers were affected. Source: " Target’s Nightmare Goes On: Encrypted PIN Data Stolen " by Nicole Perlroth, New York Times, December 27, 2013. Follow up: What do you think? Would you rather have the whole story of a possible breach in an announcement, or would you rather be reassured about your data, even if the reassurance was false? Explain. Describe an situation that is parallel (or that could occur) in your personal life, where a third party either gives accurate or falsely reassuring information after an unfortunate event.
  • Clawbacks: should individuals have to pay for financial wrongdoing?

    image from The SEC filed a case again Cincinnati's Fifth Third Bank and its former CFO, Daniel T. Poston early in December 2013. The SEC asserted that Poston delayed the write-off of $1.5 billion in bad loans in 2008, violating generally accepted accounting principles (GAAP). Both the bank and Poston settled the case straightaway (without admitting guilt). The bank paid $6.5 million and Poston paid $100,000 out of his own pocket. The fact that the SEC got Poston to pay out of his own pocket is significant in terms of enforcement options. However...the fine was far short of the "executive pay clawback" provisions of the Sarbanes-Oxley Act (SOX). The SEC's unwillingness to pursue the additional penalty is indicative of the difficulties of that level of prosecution and punishment. SOX section 304 delineated a reasonable penalty: if there were earnings misrepresentations that resulted in stock, bonus and other compensation to a responsible executive, then the executive should have to pay that compensation back. Easier said than done. In the Fifth Third Bank case, there was a misstatement that led to about $350,000 in extra compensation to Poston. But there was a technicality--the timing of the compensation determination vis-a-vis the write-off. In fact, there are three requirements that must be met to bring forward a successful suit under SOX: there must be a restatement of earnings due to accounting errors the errors must have been reckless or intentional there must be "recoverable executive compensation" earned within the next year Management can claim that the inflated values were appropriate, delaying or avoiding an official write-down, and making clawback prosecution impossible. However, the SEC received 557 whistle-blower complaints in 2013...and some of these might force more timely write-offs, which then might lead to clawback prosecutions. Source: " Clawbacks? They’re Still a Rare Breed ," by Gretchen Morgenson, New York Times, December 28, 2013. Follow up: What was the purpose of SOX (the Sarbanes-Oxley Act)? Do you think the clawback provision of SOX is fair? Why or why not?
  • What to ask before starting your own business

    image from momstownblog Toward the end of the year, many people resolve to do in the upcoming year what they have put off before. For the entrepreneurial person, that might mean deciding to start a new business. Forbes Magazine's Entrepreneurs Group recently published an article listing seven questions any would-be entrepreneur should ask themselves before starting up: Why am I doing this? It is important to know what is motivating matter what the motivation is. The need to be your own boss? To do what you are doing better than its being done at your current job? Because you have a new idea? Is this a good time? Timing is very important with respect to outside economic forces. Is a competitor going out of business, creating an opportunity, for example? What about the time constraints of your personal life? The best business idea launched at the wrong time will have difficulty succeeding. How much money will I need? Under-capitalization (not enough money) is a big factor in business failures. You need to make projections of cash inflows and outflows under a range of scenarios--especially "worst-case." Where will I get the money? Most entrepreneurs need to tap various sources to fund their new business. Make sure you have firm commitments and solid money sources. What other people do I need? Even if you intend to be a one-person operation, you will still need contacts and consultants--for legal help, marketing and website help, and accounting and financial advice. Cover all the bases in your business plan. How do I handle setbacks? Know your own personality--can you handle setbacks? Entrepreneurs need to have tenacity and resilience. If these aren't part of your personality profile, how will you weather any problems? What's my endgame? Know your exit strategy...What would make you leave the business? Do you intend to run it for your lifetime? Are you starting it up with the intention of being bought out? Many of the decisions you make on a day-to-day basis will be influenced by whether you are intending to be part of the business for the short term or the long term. Read the linked article for more details on these topics. Source: " 7 Questions To Ask Before Starting Your Own Business ," by Entrepreneurs group, Forbes, December 9, 2013. Follow up: Have you every tried something (whether it was a business or another activity) that was attempted at the wrong time? (Even a visit to an amusement park is influenced by weather and who is available to go with you.)...Did you attempt your activity again, when the timing was "right"? Describe your experiences. How can you apply these questions to your own career goals? Do you have a business plan for yourself?
  • NSA spying hurts businesses

    image from The global scandal resulting from the National Security Agency 's (NSA) indiscriminate surveillance of individual and corporate communications and data could be a major factor in declining business performance. In particular, Cisco Systems, IBM, Microsoft, and Hewlett-Packard have seen their business decline in China and other Asian countries. Cisco Systems saw Sales in its top five emerging markets decline between 18% and 30% from last year to this year, as of the end of September. Cisco had been rolling out new routing and switching platforms when the NSA spying scandal struck. Cisco's decline occurred just as there was an 8% increase in China's economy for the third quarter. And IBM has seen a 22% decline in its China sales. Trust is an essential component in business relationships. It remains to be seen whether the U.S. can rebuild business relationships moving forward. Source: " NSA spying hurts business of large U.S. hardware makers ," by John Shinai, USA Today, December 9, 2013. Follow up: If you are interested in this subject, read this linked paper, on U.S.-Asian business relationships and trust . What do you think the U.S. should do to rebuild its reputation regarding surveillance? Is it possible? On a person-to-person basis, or thinking about relationships you have individually with businesses--is trust an issue that would affect your future purchases?
  • Is preferential hiring a form of Bribery?

    image from JPMorgan Chase is in trouble again...this time involving the preferential hiring of relatives of Chinese officials. image from The Securities and Exchange Commission (SEC) is investigating these JPMorgan Chase actions: Hiring the son of the former #2 Chinese bank regulator (and currently the chief of a financial conglomerate controlled by the government); and Hiring the daughter of the Chine Railway Group (also government-controlled) Were these relatives the most qualified applicants for a posted job? Or did JPMorgan Chase hire these young adults to gain access to business connections and the public offering of the China Railway Group stock? The U.S. business community in China has been surprised by this investigation. Many think this type of preferential hiring is "business as usual"--an expected practice if U.S. businesses expect to gain access to Chinese business markets. Perhaps the person's "qualification" for the job would be political connections (ethically iffy, but not illegal). But if the salary amounts to de facto payments to officials by way of the offspring's paycheck, there would be a difficult-to-prove legal issue. More demonstrably illegal would be verbal or written " quid pro quo " agreements. We will see what this SEC investigation turns up. Hiring relatives in exchange for business favors would amount to bribery under the Foreign Corrupt Practices Act (FCPA). And it appears that, recently, the federal government is pursuing these cases more vigorously. According to Jack Massey, a partner at Sutherland, Asbill & Brennan : “ The biggest FCPA prosecutions have involved energy, defense and engineering firms, because they operate globally, they put a lot of people on the ground in the developing world, and they have to deal with corrupt sovereigns. In the new era, however, as more firms do business abroad, the government is turning its sights to the likes of Wal-Mart, JPMorgan and Hollywood studios, demonstrating its increased commitment to enforcement.” Source: " Did JPMorgan commit bribery by hiring the kids of Chinese politicians? ", by Neil Irwin, The Washington Post, August 19, 2013. Follow up: Do you think preferential hiring is "bribery"? Why or why not? Why is bribery a business ethics issue anyway? Should the FCPA involve itself in U.S. business practices in other countries? Why or why not? Look up the Latin legal terms used above. How do they translate and what do they mean?
  • "The Wolf of Wall Street": riveting or risky?

    image from Leonardo DiCaprio as Jordan Belfort Here's a movie that might be of interest to business majors: " The Wolf of Wall Street " directed by Martin Scorcese. It is a story of the real-life Jordan Belfort , who did prison time for defrauding investors in a 1990's Wall Street and corporate banking scam. Not only is the subject matter of the movie finance-related, the circumstances under which it is being released are also interesting in terms of risk and marketing. The movie, produced by Paramount Pictures , was finished last Wednesday, but they still plan to release it on Christmas Day, which would make it eligible for the 2013 Oscar season. In some years, big studios go for the big dollars, and let the independent films soak up most of the Oscar honors. But it looks as if the end-of-the-year-release-in-time-for-awards-competition is producing a crowded movie marketplace this holiday season. There are some other issues with this movie that make it a risky release for the holidays: The film is rated R for “strong sexual content, graphic nudity, drug use and language throughout, and for some violence.” Not exactly in the spirit of the season... There are no moralistic lessons, such as those offered in other movies about high finance--"Margin Call" or "Too Big to Fail" for example. According to the NYT article, "This is a New York-based story about scammers scamming scammers." The movie is 2 hours and 59 minutes long! The writers of the article pose a question which is probably in the minds of Paramount studio executives as well, " Will the for crooked stock traders what Mr. Scorsese’s 'Goodfellas' did for the mob?" We'll see... Source: " A Scorsese Film Gets In Under the Oscar Wire ," by Michael Cieply and Brooks Barnes, The New York Times, December 1, 2013. Follow up: Does this movie appeal to you? Why or why not? What do you see as the marketing challenges for this film? How would you overcome them? Think globally...
  • The new healthcare environment for small businesses: conclusions based on experience

    Paul Downs knows first-hand about dealing with health care as a small manufacturing business owner near Philadelphia. He offers up seven timely pieces of advice about the new health care environment in a recent NYT article. The state in which he operates, Pennsylvania, is a state that does not have its own health care exchange, so he has been forced to deal with the national (and infamous) website. The other parameters that have influenced his experience include: He has used an insurance agent in this process. Health care in his area is an oligopoly that includes Independence Blue Cross, Aetna, and United Healthcare The requirement (this year) to offer a single plan to all employees means that to allow flexibility to employees you have to locate a plan with options within it. Here is a summary of what he has learned: The Affordable Care Act (ACA, nicknamed Obamacare) has changed the insurance market in significant ways by offering a better way to shop for coverage, with uniform standards for comparison. Nevertheless, certain information is less than transparent. Still needed?: Comprehensive information about prices for specific services and well-structured flowcharts for decision making. "If it ain't broke, don't fix it." If your current plan is working and meets the standards of the ACA, then just re-adopt it and change it next year if you need to. If you aren't currently covering your employees, let them get their own insurance on the exchange and advise them to get an account or they will not get good data on pricing for their age and needs using the "quick quotes" available anonymously. The SHOP exchange on the federal government site is currently not functioning adequately. The only reason to attempt to use it is to enable employees to apply for tax credits if they qualify. Online requests are not being processed, and paperwork requests are not being attended to on a timely basis If insurance is currently offered to employees, but few employees buy it, it is better to stop offering insurance, so that lower-income employees can get insurance through the exchanges and might qualify for the subsidies. Offering insurance to part-time employees also no longer makes sense because the exchanges offer more cost-benefit, but employers must be careful to have clear, uniform guidelines--for example, making those who work less than 30 hours per week ineligible. Probably everyone who has had to buy health insurance for themselves or others has more advice to offer, and Paul Downs anticipates having more to say as the health care plan continues to be implemented. Sources: " Seven Conclusions About Small-Business Health Insurance ," by Paul Downs, New York Times Small Business, November 25, 2013. Follow up: Have you shopped for health insurance? Will you need to buy it or are you still covered under your parent's plan? What do you think of the process? What will it cost and what will you get? What do you think are the advantages and disadvantages of a " single payer " plan?
  • Unpaid internships under broad attack

    image from Partly due to a lawsuit in a second industry famous for its use of unpaid internships, the unpaid internship "rite of passage" is becoming risky business for employers. A few months ago, I wrote about a lawsuit against Fox Searchlight Pictures won by two interns working in the Hollywood film industry. Now it is the publishing industry that is under attack. Lisa Denmark brought suit against Vogue , one of several magazines published by Condé Nast Publications. Some of her complaints included: being "terrorized" for not using sticky tape correctly on bulletin boards being "forced" to load books into an editor's car being "forced" to take items to a resale bookstore being "forced" to pick up dry cleaning being "forced" to buy and serve juice. Hearst Publications has also been sued by interns. Unpaid internships are sought by many students and unemployed college graduates as a way to "get a foot in the door" or to boost a resum é--particularly in hard-to-break-into creative fields, as well as business and finance . But there is a fine line in federal labor law between enforced servitude without compensation, and what constitutes an internship that is educational and beneficial to the person doing the work. Some businesses have routinely crossed that line, but recent litigation seems to make that gamble less cost-effective. Women's Wear Daily and Cond é Nast have recently cancelled their internship programs due to this risk. This doesn't help anyone. One media corporation, Atlantic Media , has taken a different approach. They did away with unpaid internships a few years ago, and has replaced them with 45 highly competitive, paid "fellowships." One major advantage of this approach is that its pool of applicants can be more diverse. (Unpaid internships have been a luxury that only those with wealthy family support could afford.) “ We were looking for ambitious, creative, original journalists, and we did not want income to be a barrier,” said James Bennet, editor in chief of The Atlantic . “Publishing that includes the web means we need to reach a national audience, and that requires a diverse mix of class, region, race and, yes, generations to do our job. ” Is the following a consequence or coincidence?: The Atlantic has grown 34% in the first two quarters of 2013 . What tasks make a great internship? I think the following pie chart was meant as a joke...but, like most humor, probably has a grain of truth: image from [ joke..?.] Sources: " How Washington Abandoned America's Unpaid Interns " by Stephen Lurie, the Atlantic, November 4, 2013. " Overlook the Value of Interns at Great Peril ," by David Carr, New York Times: the Media Equation, November 25, 2013. Follow up: The author of one of these source articles cites his own experience as producing results similar to those experienced by the Atlantic . Describe that experience and why it was significant.
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