The Psychology Behind Sale Prices and Consumer Behavior

Retailers have long known that consumers are drawn to discounts, but recent lawsuits highlight the darker side of “sales” tactics. In 2023, JC Penney and Justice faced legal battles over their use of misleading discount advertising. Both companies settled for around $50 million after allegations that they falsely advertised discounts of up to 40% on items that had never been sold at the higher price. BuzzFeed News explored how retailers, especially outlet stores, use strategies like “price anchoring” and “high-low pricing” to manipulate consumer behavior.

What’s particularly interesting is that these legal challenges came around the same time that Ron Johnson, the former Apple retail chief, tried to shift JC Penney away from its discount-heavy model to “everyday low prices.” This move failed miserably. JC Penney quickly realized that shoppers aren’t just after the lowest price—they crave the emotional rush of getting a “deal.” When JC Penney eliminated their frequent sales, the result was a 25% drop in sales. In 2011 alone, JC Penney held 590 sales events, often marking down items by 50% or more. How did they afford to offer such deep discounts? By artificially inflating the original price. The company ultimately learned the hard way that while transparency is important, customers are highly motivated by perceived bargains. The lesson for retailers here is clear: 1) Never advertise fake deals, as people don’t like feeling deceived, and 2) Offering discounts is effective because people are naturally drawn to the idea of getting a deal.

Vanguard’s Tax Troubles: The Arm’s Length Standard

Vanguard, a well-known player in the mutual fund world, has recently come under scrutiny regarding its business structure. In 2013, David Danon, former in-house tax attorney for Vanguard, filed a lawsuit claiming that Vanguard’s structure violated the “Arm’s Length Standard” under U.S. tax law (Treas. Reg. 1.482-1(b)(1)). The issue stems from Vanguard’s unique arrangement, where the Vanguard Group Investment (VGI) manager offers services to Vanguard mutual funds “at cost,” unlike most other mutual fund companies that charge a profit margin on their services.

Vanguard’s structure is designed to eliminate conflicts of interest by having the investment manager, a wholly owned subsidiary, serve Vanguard’s mutual funds. However, the problem arises because investment managers are taxable corporations, not taxable at the fund level, assuming they meet certain requirements. By charging at cost, Vanguard may be avoiding taxes that would otherwise be paid by charging a standard fee. The question now is whether Vanguard has actually violated tax law, particularly since these regulations are intended to prevent U.S. companies from shifting income to foreign subsidiaries to reduce domestic taxes.

Should the courts rule against Vanguard’s structure, the next step would involve determining an “appropriate” markup for Vanguard’s services. Vanguard’s competitors charge significantly higher fees, with expense ratios ranging from 0.71% to 0.82% of net asset value (NAV), compared to Vanguard’s much lower average of 0.2%. Even if Vanguard were forced to raise its fees, experts predict it would likely be a modest increase of no more than 0.09%, which would still leave Vanguard’s fees much lower than industry peers. This situation highlights why we avoid mutual funds—Vanguard’s expense ratio is still a fraction of what competitors charge, underscoring the inefficiencies and costs often associated with mutual funds.

President Obama’s Proposed Budget and Potential Tax Changes

Every February, the President submits a new budget request to Congress, often including provisions that could impact tax laws. With less than a year left in office, President Obama’s budget proposal is unlikely to lead to immediate changes, but it does offer a glimpse into potential tax shifts that could affect investors in the future. Several proposed changes are worth noting, including adjustments to how gains are taxed in a 1031 exchange of real estate, the introduction of a lifetime Required Minimum Distribution (RMD) for Roth IRAs after age 70½, the elimination of the stretch IRA, and the elimination of the “backdoor” Roth IRA contribution.

The elimination of the stretch IRA, in particular, could have a significant impact on retirement planning. Under the proposed rule, IRAs would have to be liquidated within five years after the account holder’s death, with a few exceptions. Minors would be able to defer liquidation until they reach the age of majority, and beneficiaries who are no more than 10 years younger than the original owner could continue to “stretch” distributions based on their own life expectancy.

While the likelihood of these changes passing in the current political climate is slim, it’s important for investors to stay informed and be prepared for any future developments. The potential for changes to how retirement accounts are taxed could affect long-term financial planning strategies, especially for those with significant IRA assets.

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