Category Archives: Federal budget

If It Ain’t Broke What Are We Fixing? There is a spending problem, just not the GOP version

Labor paintingWe know the YOY reduction in filings for unemployment insurance benefit claims dropped by 13.5% from last year to this, [DETR]and we now know this bit of happier news from DETR (pdf) about the current employment situation in Nevada:

“Annual adjustments to Nevada’s labor market show the state’s unemployment rate for 2012 dropped from a preliminary estimate of 11.6 percent to 11.1 percent and that Nevada gained 18,100 in employment over the year, up from the previous estimate of 9,300.”

We can combine this with the following national report this morning from the Bureau of Labor Statistics:

“Total nonfarm payroll employment increased by 236,000 in February, and the unemployment rate edged down to 7.7 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in professional and business services, construction, and health care.”

More people with more money to spend should spell a less bumpy recovery for Main Street, but wait — the Bureau of Economic Analysis is less enthusiastic about the Q4 2012 reports:

“The decrease in real GDP in the fourth quarter primarily reflected negative contributions from private inventory investment, federal government spending, and exports that were partly offset by positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment.  Imports, which are a subtraction in the calculation of GDP, decreased.”  (emphasis added)

Yes, personal consumption increased, non-residential fixed investments were up, as were residential fixed investments — what wasn’t moving up? Private inventory investments and federal government spending.  Two quick points should be made here.

First, little wonder the U.S. GDP [C+I+G + (X-M)] isn’t moving up as positively as we’d like when one factor in the equation drops — federal spending.  Secondly, there is a spending problem during this recovery period, but it’s NOT the “Spending Is The Problem” of recent Republican banners.  Here’s why:

The hoary Supply Side economics hoax only emphasizes one element of the GDP formula, assuming that all reductions in government (public sector) spending will have a positive effect on the others (consumer and business spending).   Harken back to those days in Algebra I — the days when both sides of an equation had to balance — in order to see why the Supply Side Hoax is little more than an excuse for lowing corporate taxes and minimizing the taxes on the upper 0.1% of American income earners.

Since both sides of the equation must balance,  if we reduce one element, such as government spending on the right side of the equal sign, then we have to decrease the value on the left side of the equation.  Most 8th graders have a reasonably good grip on this concept, which makes it all the more alarming that some presumably mature business advocates do not.

If we understand this premise, then the next statement from the Bureau of Economic Analysis makes perfect sense:

“The downturn in real GDP in the fourth quarter primarily reflected downturns in private inventory investment, in federal government spending, in exports, and in state and local government spending that were partly offset by an upturn in nonresidential fixed investment, a larger decrease in imports, and an acceleration in PCE.”  (emphasis added)

Now we come to another formula, Private Inventory Investment, or “The difference between goods produced (production) and goods sold (sales) in a given year is called inventory investment.”   More simply stated as: PII = Production – Sales.   In other words, in a given period of time if the company has produced more than it has sold then the inventory is “positive.” If the firm has produced less, then it’s negative.  Those who wish to get down in the weeds about how private inventory investments are computed by the BEA should click on this link to their (pdf) explanation.

Inventory to sales ratios

Note that during the Recession (shaded gray) inventories were high, sales were down, and the ratio of inventory to sales moved up alarmingly.

Another element discussed by the Bureau of Economic Analysis, was the down turn in federal government expenditures.  But, Gee if we look at another FRED graph this certainly doesn’t seem to be the problem?

Federal General Expenditures 2000-2014

#1. Note, however that the graph is structured such that there are two year intervals between major points — and we’ve been talking about quarterly reports of GDP levels.   #2. The second problem with looking at the graph and believing that “federal spending” has skyrocketed since 2000, is that we have to factor in the costs of two wars between October 7, 2001 when the U.S. invaded Afghanistan, and March 3, 2003 when the U.S. invaded Iraq.  We had a major presence in Iraq for nine years and toted up an approximately $4 trillion bill for it. [MarketWatch] That would be about $80 B for the next fifty years.  There’s another big tab looming for our military operations in Afghanistan:

“The fact remains, however, that if the CRS and OMB figures for FY2001-FY2013 that follow are totaled for all direct spending on the war, they reach $641.7 billion, of which $198.2 billion – or over 30% – will be spent in FY2012 and FY2013.” [CSIS]

Add to this the unfunded changes made to the Medicare Program when Part D was added in the Medicare Modernization Act of 2003.  While nothing like the costs of military operations in Iraq and Afghanistan, the MMAct added a $9.4 trillion unfunded liability to the Medicare program [CMS report] over the next 75 years. [NYT]  And, then our banks fell apart in 2008…

To paraphrase the late Illinois Senator Everett Dirksen, “A trillion here, a trillion there, and pretty soon we’re talking about major money.”   As we wind down military assistance to Iraq, and bring troops home from Afghanistan, the spending trends should slacken.  This brings us to the third problem with taking the graph at face value.

#3.  It is misleading to show a federal spending graph, speak of “out of control Federal spending,” while NOT mentioning that non-defense discretionary spending — the kind of spending the GOP wants to cut has barely moved, if at all since 1991.   If we look at all discretionary spending as a percentage of our GDP, it looks like this [CBO pdf]:

Fed Exp Discretionary percent

What portion of federal discretionary spending is for Defense?  The CBO illustrates that too:

Defense Spending Discretionary

If we drill down into the numbers even further, we find that in 2011, we allocated $699 billion of our discretionary spending on the U.S. military, and $647 billion on everything else. [CBO] The bar graph illustrates the point: (click on the graph for the original size)

Discretionary Spending Fed

What has been happening to the lower bar on the graph?  Non-Defense discretionary spending has been trending downward:

Non defense discretionary spending trends

All the information on the graphs and charts leaves more questions than answers about the Congressional GOP insistence on screeching “The Debt Is Coming, The Debt Is Coming…”  They wish to maintain current level of discretionary military spending, even in light of the fact that it makes up a bit more than 50% of ALL our discretionary spending.  They wish to imply that “Federal Spending Is Out Of Control,” in spite of the fact that federal discretionary non-defense  spending is trending downward, and has been since 2011.

There is a formula for addressing the “spending problem” — just not the GOP incited version in which legions of the Great Unwashed are pocketing the bounty of hard working Americans — (1) Wind down military expenses in Iraq and Afghanistan; (2) Cut discretionary programs the Department of Defense has already said it doesn’t want; (3) Allow the savings accrued under the terms of the Affordable Care Act to take effect — as the most recent incarnation of the Ryan Budget proposal already does; and  (4) Make adjustments to Medicare Part D, such as allowing the Department of Health and Human Services to negotiate for prescription drug prices.

On the other hand, there are federal expenditures which will actually assist in increasing our national wealth — such an investments in infrastructure, research,  and education.  In the mean time we could look seriously at our revenue structure and perhaps even address former FDIC Chairwoman Bair’s question: Why should the manager of a hedge fund pay a low tax rate than the manager of a shoe store?

Why don’t we fix what’s broken and not break what’s working?

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Filed under Economy, Federal budget

Leverage?

ArchimedesSome members of the chatterati may have taken Archimedes a bit too literally: “Give me a place to stand and with a lever I will move the whole world.”  Often too much emphasis is placed on the fulcrum and not quite enough on the part about the ancient mathematician needing a place to stand.  The word of the week sounds like “leverage” in Washington, D.C. Who has it? Who doesn’t? And, so what? The So What part isn’t all that interesting.

Although the pundit class is thoroughly fascinated at the moment with how much leverage the President and the Republicans may each possess after the self inflicted Fiscal Cliff fiasco, most of their comments can be categorized as post game “analysis” of the variety which is more commonly associated with post game “analysis” of a sporting event.  It’s never quite enough to declare one team or another victorious based on the scoreboard numbers — “we” have to “know” why one team won and the other lost.  In reality, we really don’t.

So, in the parlance of political reporters emulating the post game questions of their sports writer colleagues — can the President win the next game? A game of Debt Ceiling already scheduled by the Republicans and given official status by the post game analysts.

It depends on where you stand.

There are two major elements of the federal debt that deserve serious scrutiny.  First, during the Bush Administration’s policy of credit card conservatism we racked up two wars (off the budget and supported by supplemental appropriations), a major addition to the Medicare program (Medicare Part D, also unpaid for) and one major Recession.  All were guaranteed to increase the national debt.  The first two increased spending and the latter cut into the tax base.

Secondly, we do need to reduce the national debt, but how we do it is important.  This is one of those occasions which calls for a scalpel, not a meat axe.

It is also important to stand on firm ground.

A few facts are in order.  The first part of standing on terra firma before attempting to leverage anything is to dismiss some media mythology about trends in the national budget deficits.  The following chart should provide an illustration of the inaccuracy of the Now That A Democrat Is In The White House The Deficit Is Out Of Control Myth:

Bush Obama Deficit trends

The chart illustrates what happens when two wars, one major Medicare addition, and a nasty Recession contribute to national spending. It also shows the effect of Obama Administration policies mentioned earlier, a point at which we should note that the Bush Administration toted up about $5.1 trillion in expenses, while as of last June the Obama Administration’s policies resulted in about $983 billion in spending.

Bush Obama Spending ComparisonIn short, if we are really serious about deficit reduction then we need to eschew the policies that got us into this mess in the first instance, i.e. unnecessary tax cuts, and two very expensive wars.

OK, so if we don’t get involved in more military operations, we resist the myth that tax cuts somehow cause economic growth (which they never have), and we regulate our financial markets more effectively in order to mitigate the excessive enthusiasm of traders who created the last great mess, then where do we cut?

It’s time for another reality check.

Here’s where the money goes:

Budget Categories

Since Social Security is a self-funding program, which as President Reagan famously cautioned in 1984 doesn’t add to the federal deficit (video), we can take that 20% out of the equation right now.  Anyone who is truly serious about the single issue of Social Security solvency should be clamoring to increase the cap on earnings liable to the payroll tax, currently set at a measly $110,000. We also need to remove the mandatory spending from the discussion because what we cut will have to be from discretionary spending.

The FY 2013 budget calls for spending $666.2 billion by the Department of Defense.  Another $80.6 billion is allocated to the Department of Health and Human Services (Medicare, Medicaid), and the Department of Education (Pell Grants, Title I, student loan guarantees, etc.) is scheduled to spend or entail $67.7 billion while the 4th largest chunk of the budget goes to the Veterans Administration which has $60.4 billion in scheduled spending.

In short, we’ve budgeted for $1,510 billion in discretionary spending in FY 2013.  The Department of Defense is on track to receive 44.12% of ALL the discretionary spending in the national budget.   Yet calls to cut military spending brings on the wailing of voices, the gnashing of teeth, and the rending of garments about “making us less safe” in an uncertain world.  In spite of all the wailing, gnashing, and rending — that one single department consumes 44.12% of the entire pot of discretionary spending is something we ought to be discussing.

Medicare is another matter.  IF we are truly serious about deficit reduction then we need to have more than the simplistic discourse already in evidence.  There is a false choice being presented, as though the only options are to privatize the Medicare program (give Granny a coupon and let her go out and find her own insurance) or to create a Single Payer national health care system.  While I wouldn’t be sorry to see a Single Payer system, this is an argument for another day.  The point is that there are options between these two proposals.

The central focus point should be that nothing which doesn’t have a bearing on health care cost containment is going to make much difference in the spending levels.   Privatization doesn’t address the cost containment issue, and a single payer system without cost containment elements is merely a recipe for increased expenses.

Now that the campaign season is over we can dismiss the Republican rhetoric about “Obama cut $716 out of Medicare,” and consign to the dust bin the notion that the Affordable Care Act somehow impinges on Medicare benefitsBusiness Week explains:

From 2010 to 2019, Obamacare trims payments to providers by $196 billion. They agreed to take a cut because they will get so many new patients, thanks to the individual mandate. Another $210 billion will be generated by raising Medicare taxes on the wealthy (that’s households earning more than $250,000). Another $145 billion comes from phasing out overpayments to Medicare Advantage. About 25 percent of seniors use the program—in which private plans compete for Medicare dollars—instead of traditional fee-for-service Medicare. Under Obamacare, the government has to keep Medicare Advantage costs in line with those of traditional Medicare. More savings come from streamlining administrative costs.

Thus, if we trim payments to providers, phase out over-payments for profitable private health care policies, and put some reins on administrative costs we’ll find about $716 billion in savings for the Medicare program.  Other cost savings may also be the result of more efficient record keeping, especially in the pharmaceutical segment.  Anyone who’s dealt with the medical issues of an elderly parent knows of multiple prescriptions written from several physicians who may or may not consult with one another.  The result can be as minimal as two (or three) prescriptions for the same medication at different dosages; or, as detrimental as two prescription medications which should not be taken together.

However, the bottom line is still the bottom line — unless and until we are ready to discuss health care cost containment we’ll be immersed in the rhetoric of low bludgeon and high dudgeon without much result.

When we discuss funding for the Department of Education it’s important to note that the FY 2013 discretionary requests yield an official number, $69.8 billion — if we include Pell Grants.  Pell Grants constitute about $22.8 billion of the total, a decrease from $23.8 billion in the FY 2011 budget.  Without the Pell Grants the total discretionary spending in the FY 2013 budget is $47 billion.   There are two constituencies with major stakes in arguing about these funds.

Parents.  Unless one is amenable to the elitist argument that kids should have access to only the level of education their parents can afford (which makes social mobility a moot point) parents are going to need assistance paying for their children’s education.  Whether we like it or no, education is a labor intensive business.  We can trim educational spending by continuing what the Obama Administration has started — saving approximately $61 billion by cutting the banks out of their role as middlemen in the student loan program [NYT]– but it really doesn’t do to cut efforts to educate our young people.  It also doesn’t make economic sense since a college degree is worth money in the marketplace.

Educations Pays Local school districts.  Cash strapped and semi-starved local school districts rely on funds for Special Education programs, Title I services, School Lunch programs, to make up budget shortfalls.  While the level of federal involvement at the local level isn’t all that much it does cover expenses local districts would be hard pressed to meet were the monies cut.

Hostage Taking

How we fund, or de-fund, these major activities depends on who is being held hostage and by whom.   Did the President allow the Republicans to gain “leverage” by taking the tax rates off the table in the next Congressionally manufactured debt ceiling debacle. Or, are we going to change hostages?

Will the Republican stance be that all other programs must be cut in order to spare the 44.12% consumed by the Department of Defense?

Will the GOP position be that Medicare must be privatized in order to practice “sound fiscal responsibility?”

Will the GOP position be that Social Security must be “reformed” (read cut) in the interest of “fiscal accountability and deficit reduction” even though it adds not a nickel to the federal debt?

Will the Administration simply say — You manufactured this debt ceiling “crisis” live with it?  Remembering that if the national credit rating is downgraded this will likely mean that the cost of borrowing (yields paid to those who invest in Treasuries) will go up, exacerbating the problem rather than addressing it.

Will the point be made to the American people that while the credit card analogy is handy, the United States of America doesn’t have creditors it has investors.  Our federal government accesses funds by issuing bonds.   And WE own most of those bonds.

Here’s the little chart again:

Who owns US debt

42.2% of the money “borrowed” by the U.S. government is an asset for U.S. individuals and financial institutions.   Today’s yield curve doesn’t indicate a government which is having to pay all that much to get people and institutions to invest in it:

Daily Yield CurveEven 30 year bonds are paying only 3.0% interest.

The amount of leverage always depends on where one stands and places the fulcrum.

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Filed under Congress, Economy, education, Federal budget, Health Care, Medicaid, Medicare, national debt, Obama, privatization, recession

And now we can speak of debt reduction?

Budget Deficit Charts

See the full article here.   And, yes, it can truly be argued that in this instance the Republicans can be rightly credited with “building the federal debt.”  And, no, the Chinese don’t own most of it.   Here’s a picture as of 2011 —

Who owns US debt

Remember the Economic Rule: One man’s debt is another man’s asset.  It looks like the majority of the asset holders are U.S. individuals and institutions, the Civil Service Retirement Fund, the U.S. military retirement fund, and the Social Security Trust Funds.  China and Hong Kong only hold about 7.5% of our total public debt.

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Filed under Federal budget

Things that could get me to toss confetti in 2013

ConfettiThere are things that could get me to toss confetti for 2013.   Not many, mind you, which would justify the consequent vacuuming, but a goodly handful.

#1. The Senate of the United States of America does something constructive with the FILIBUSTER rule.   The original rule was intended to prevent the willful trampling of minority points of view, but the abuse of the rule is now part of the clichéd “Washington Gridlock.”  There is a delicate balance between Majority Rule and Minority Rights, but Obstruction for its own sake is not a laudable occupation.

#2. The Republicans in the House of Representatives eschew the  Hastert Rule , under which a majority of the majority party caucus must agree to the passage of a bill before a vote can be taken on the House floor.  This might have been a lovely idea if the current majority party caucus weren’t the replication of that other cliché– a wheelbarrow load of frogs.  Governance requires compromise, and compromise demands the admission that we don’t always get everything we want.  Ideological posturing is not a substitute for principled discourse.

#3.  Someone in a position to do something about it finally figures out that arguments over raising the debt ceiling are academic at best and consummately silly at worst — rather like announcing that because I overspent my budget for this holiday season I’m going to chop up my credit cards and not pay the bills.  Aside from being the most fiscally irresponsible action imaginable, it’s also a manifestation of the idea that the full faith and credit of the United States is some kind of bargaining chip in ideological squabbling.

#4. The National Rifle Association (aka No Rational Argument) stops pretending to care about the right of our citizens to keep and bear arms, and honestly announces that its ultimate intention is to promote the sale of as many firearms as its manufacturing donors can create.  After that, it should be far easier to discuss comprehensive background checks, closing the gun show loophole, and banning military style assault weapons.

#5. More people, perhaps even more people in the national media, stop referring to “The” government and start calling it what it is — OUR government.   “The” government calls to mind the institution which cracks down on Moonshiners, or enforces school integration, or ignores calls to make Jefferson Davis’s birthday a national holiday.  “The” government didn’t decide to integrate public schools — “our” government did. “The” government didn’t decide to enact regulations to prevent air and water pollution — “our” government did.  And, “The” government didn’t create the Food Stamp (SNAP) program — “our” government did that.  And so it goes.  Continual references to “The” government is an unfortunate holdover from the Reaganesque caricature of government designed to promote the financial health of the economic elite by appealing to the discontent with those laws “our” government enacted to promote OUR general welfare.

#6. Our representatives on Capitol Hill learn to say “____ isn’t the end of the world as we know it.”  I could do with a great deal less hysterical hyperbole.  “This is the Largest Tax Increase In The History of the Universe!”  Probably not.  “This is the worst violation of human rights ever!” Probably not that either.  “This will create the worst calamity known to man.” Probably not.  “This will destroy our ____.”  Again, probably not.  Excuse me while I chuckle at the pomposity of this meaningless prognostication.

#7.  Journalists who seek to inform me via the television set prove to be (1) knowledgeable about the subject under discussion, and (2) include fact checking as part of the “context” of which they speak so often.  If a statement made by a politician is factually inaccurate, they will tell me; and I hope they’ll be able to offer a correction.  I really don’t care if they are correcting the record in the wake of Left Wing Larry or Right Wing Richard’s pontification.  The object of the exercise should be to impart accurate information so far as it can be known — I can get my “entertainment” elsewhere.  Bluntly, the “he said, she said, and then he said” reactions from professional chatterati or elected representatives is less entertaining than a good professional wrestling match, which at least has the grace to admit it’s a scripted farce.

#8. Somebody finally declares the Culture Wars over and done with.  Our contemporary version appears to incorporate a toxic dose of good old fashioned misogyny.  Women make up about 51% of our population and telling them they cannot have an abortion (even in the cases of an ectopic pregnancy or as the result of a rape) is paternalistic to the core.  Worse still would be telling them that their employer can decide if their health insurance plan covers contraceptive medication.

#9.  On a related note, it really doesn’t do to blame God for everything.  I’d cheer the week that some blowhards weren’t showcased in the media for pronouncing God’s Wrath for … whatever.  Hurricane Katrina — God’s wrath for a Gay Pride gathering? Really?  God’s wrath because we don’t pray hard enough?  That certainly doesn’t explain the attack on congregants in the Knoxville Unitarian church.  God’s Wrath because we don’t have organized  prayer in schools? Huh?  No one at Columbine High School, Platte County High School, Northern Illinois University, Virginia Tech University, or Sandy Hook Elementary knew how to pray and practiced it regularly? Spare me the Westboro Wannabes who “know” the mind of God better than a six year old child.

#10.  The confetti will fly when we begin to have a serious discussion about global climate change without having to incorporate the phony “science” offered up by the fossil fuel industry.  No, there isn’t a “controversy” here. And, no reputable science deflects our responsibility as human beings for the contamination of which we are clearly capable.

Speaking of the Almighty, there’s an old story about the man caught in a flood which seems appropriate at the moment.  “Why, he cried out to God, am a trapped in these flood waters?”  The Almighty, sorely tired of listening to the wailing, said, “I sent you warnings.” “When?”  “When?” responded the Deity. “When indeed.” “I sent you warnings on the radio. You ignored me. I sent you warnings in television broadcasts, and you ignored me. I even sent a deputy sheriff to personally advise you to evacuate. And, you ignored him too.”  ….

We’ve been visited with major named storms, watched ice caps diminish, seen glaciers disappear… and all together too many people are ignoring the warnings.

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Filed under abortion, conservatism, ecology, energy policy, family issues, Federal budget, filibuster, Filibusters, Global warming, Gun Issues, Health Care, national debt, pollution, public health, racism, religion, VA Tech, Women's Issues, Womens' Rights

A Quick Lesson In Chart Reading: Boehner’s Graph

What is Wrong Boehner Chart

Read the original article here.

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Filed under Boehner, Congress, conservatism, Economy, Federal budget

To Heck With It? Rep. Heck Tries To Explain The Inexplicable

As if Nevada Representative Heck (R-NV3) didn’t make sense on the Benghazi Bluff, he’s released a little video of some 2.07 minutes to offer up his explanation of his “position” on the Fiscal Cliff/Austerity Bomb/Bunny Slope GOP poutrage du jour.

Representative Heck seems to have missed the part of the election in which the President won.  He does appear to cling to the message that the electorate wants the Congress to cooperate and negotiate with the Administration on how to address deficit reduction.   Let’s go back to the beginning.

There would be NO Fiscal Cliff, Austerity Bomb, or Bunny Slope had the Congressional Republicans not decided to make the debt ceiling such a humongous BFD, as the Vice President might say, in 2011.   Here’s the core of the problem:

“* 2010. Obama signs healthcare overhaul into law. Obama creates Simpson-Bowles deficit reduction panel. Its plan for drastic fiscal reform is largely ignored. Led by Tea Party conservatives, Republicans win control of House of Representatives in midterm elections. Obama agrees to extend Bush tax cuts for two years. Deficit shrinks to $1.3 trillion. (emphasis added)

* 2011. Treasury Department request for increase in U.S. debt ceiling becomes focus of fight in Congress. Republicans, Democrats settle dispute by forming “super committee” to examine fiscal reform. Debt ceiling raised. U.S. credit rating downgraded. Super committee collapses in discord. Deep, mandatory budget cuts triggered for 2013. Stock market makes choppy advance. Deficit estimated at $1.6 trillion.” [Reuters/Yahoo]

One might think a shrinking deficit, followed by economic recovery weak enough to create a bulge in 2011, would be sufficient to take some of the wind from the Free Marketeer Frigate sails, but since “Tax and Spend Democrats” have been the target of choice for Republicans since the New Deal, the GOP/Tea Party can’t quite manage to free itself from the bonds of its traditional narrative long enough to make sense in a reality based universe.

Here’s the reality:

Slowest Spending in Decades

Yes, that’s right — St. Ronald de Reagan’s terms showed annualized federal spending growth of 8.7% and 4.9%.  George W. Bush’s administrations saw annualized federal spending growth of 7.3% and 8.1%.  Even if we attach the 2009 stimulus package to the Obama Administration, his first term only saw annualized spending growth of 1.4%.  [HuffPo] [WSJ/Marketwatch]

So, terms like “out of control spending” and similar hyperbole from the right wing of the right wing party, become a fictional narrative rather than an accurate description of our current federal fiscal issues.   Representative Heck seems to prefer the comforting fiction of campaign rhetoric to current economic realities.

But wait, there’s more!  Representative Heck is worried about our fragile economic recovery… “We should not be raising anyone’s tax rates.”  This is boilerplate.  If the economy is booming, by GOP lights we can’t raise taxes because this would impinge on our prosperity; and, if the economy is fragile we can’t raise any taxes then either.  In short, we can never ever never raise anyone’s taxes even if we have to pay for two wars and keep the basic government services afloat during a recession.

Thirty seconds into Rep. Heck’s presentation he notes the House has passed a bill that would continue the Bush Tax Cuts of 2001 and 2003 for another year so we can “work on a permanent solution.”   Yes, that would certainly make the top 1% happy little campers.  This is also known as kicking the can down the road.  Anyone notice the conflict here?  On one hand Representative Heck is telling us that the federal deficit is a horrible no good thing which MUST be addressed — while telling all who will click on his little video that it’s perfectly all right to take yet another year to deal with it.

There’s more boilerplate to come, “the tax increases,” by which he means rate increases will cost 700,000 jobs.  In this instance he’s parroting Speaker Boehner, who in turn is mashing up a study by Ernst & Young:

“Boehner repeatedly cited an Ernst & Young analysis to claim that raising taxes on upper-income earners would “destroy nearly 700,000 jobs in our country.” But that analysis assumes revenue from the taxes would be used “to finance a higher level of government spending,” even though Obama would use the added revenue to reduce the deficit. The analysis also takes an extremely long view: Only “two-third to three-quarters of the long-run effect” is expected to occur within a decade.”  [Politifact]

Thus, even if we take the Ernst & Young study at face value, the effects are far less dramatic than Representative Heck’s intonation.   Those who looked into the Chamber of Commerce sponsored study found the assumptions flawed: “It is telling that when the additional tax revenues are used for across the board tax cuts, then the negative GDP impact is largely washed out and the employment impact is positive,” Zandi says.”  (Moody’s) [TPM]  However, removing the assumptions from the study wouldn’t achieve the Chamber of Commerce’s political interests, nor the interests of the Wall Street traders who are delivering Republican marching orders.

So, no one should be surprised when Rep. Heck parrots another line, this time from the Romney Campaign that we can fix all our troubles with “pro-growth tax reform which eliminates loopholes and deductions…”

OK, which ones?  Let’s look at the deductions first.   The most common tax deduction is on home mortgage interest.  In the reality based portion of the United States of America about 70% of the tax benefit from home mortgage interest deductions goes to taxpayers earning less than $200,000 per year. [NAHB]  Further, “Households with incomes between $40,000 and $75,000 receive, on average, $523 from the mortgage interest deduction. Households with incomes above $250,000 receive $5,459, or more than 10 times as much.”  [AProg] [Original Wharton Study pdf]

The second most common tax deduction is for charitable contributions.  Needless to say, some eleemosynary institutions are loath to see caps on this kind of expenditure.  However, the deductions nearer and dearer to people’s hearts are the deductions for state, local, and real estate taxes.  “You can deduct state and local income taxes paid during the year with one important exception: You cannot deduct state and local income taxes you pay on income that is exempt from federal income tax, unless the exempt income is interest income.” [Daily Finance]  And, “You can claim a deduction for real estate taxes on any state, local or foreign taxes on real property so long as they are based on the assessed value of the real property.” [Daily Finance]

Finally, the last on the list of most commonly itemized deductions are for medical expenses.  “You can deduct expenses for the diagnosis, cure, mitigation, treatment or prevention of disease. This generally includes the costs of physicians, surgeons, dentists and other medical practitioners as well as medical equipment, supplies and diagnostic devices prescribed by a physician. Deductible medical expenses also include the cost of health care insurance premiums and the costs of getting to and from your appointments.” [Daily Finance]

So, if we cap all itemized deductions at some contrived number like the 2% Solution, what happens?   We get a big middle class tax hike, illustrated below:

Tax Expenditure Cap

If we look specifically at what the Republicans were offering in the last presidential election another reality comes to the fore — the ARITHMETIC doesn’t add up:

“According to the Tax Policy Center, “the Romney plan would lower federal tax liability by about $900 billion in calendar year 2015 compared with current law, roughly a 24 percent cut in total projected revenue.”

So for Romney’s tax plan to be revenue neutral, as he has pledged, he would need to close tax breaks to the tune of $900 billion in 2015. That is not going to happen. Every tax break together costs about $1.1 trillion annually according to the Congressional Research Service — so Congress would need to make a nearly complete sweep to get the math right under Romney’s plan, a politically unrealistic outcome.” [HuffPo]

If we conclude that the deductions aren’t going to make the numbers, then what about those “loopholes?”

No one’s given a precise answer to this question — and we may not get one.  One insightful article may have grasp the key point, “Tax loopholes have become the modern equivalent of wasteful spending–a generic and vastly overestimated pool of money politicians can cite as offsets for their expensive policies.” [USNWR]   When some members of Congress have been pressed for details the minutiae makes its appearance — close the deduction for luxury skyboxes in athletic arenas, close the deductions for rum manufacturers and racetracks, eliminate deductions for second homes… [HuffPo]

While it might be nice to eliminate some of the special interest deductions in an overhaul of the tax code, (1) it shouldn’t take a year to find them — most of them are well known to those who make the tax code their life’s work, and (2) closing them won’t provide nearly enough revenue — unless we start talking about The Big Five Deductions, and the attendant tax hike on the middle class.

We’re only a bit over a minute into Representative Heck’s video when he observes the horrible state of affairs we must face if the Pentagon budget faces the Sequester Monster… but that’s a post for another day.

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Filed under Economy, Federal budget, Heck, tax revenue, Taxation

The Campaign for the Middle Class Isn’t Over

The candidates are no longer running ads, the campaigns have been shut down, BUT the campaign for the American Middle Class continues.  The next phase comes as the Congress debates how to reduce the national debt — brought to us by two wars fought “off the books,” ill considered tax rate reductions, and a nasty recession.  If the American Middle Class is to avoid the detonation of the Austerity Bomb (aka the Fiscal Cliff) then we need to:

(1) Let our Senators and Representatives know that without an increase in the tax rates for millionaires and billionaires the ARITHMETIC necessary to reduce the national debt doesn’t add up.

(2) Remind our Senators and Representatives that federal discretionary spending has already been cut by $840 billion to $916 billion over the next ten years [QS] in the Budget Control Act of 2011.

(3) Let our Senators and Representatives know that we understand merely closing a few loopholes in the tax code isn’t nearly enough to make a serious dent in the national debt.  If they are serious about debt reduction then “increasing revenues” can’t be a code phrase for “tinkering with deductions and loopholes.”

If millionaires and billionaires don’t want a national debt passed along to their children and grandchildren — it just might behoove them to help pay off some of it.

 

 

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Filed under Congress, Federal budget, income tax, national debt, Politics, Senate