As we have noted, the IRS targets supporters of limited government, calls it “horrible customer service,” and resists inquiry. The IRS also does a poor job combatting fraud, and sends out more than $3 billion to identity thieves. The Social Security Administration has paid out more than $30 million to at least 1,546 dead people, with some of the deceased receiving benefits for 20 years. But as this Washington Post report notes, federal government agencies do so much more than that.
The federal government is now confiscating the tax refund checks of hundreds of thousands of Americans nationwide “because of a debt they never knew about – often a debt incurred by their parents.” The Post cited the case of Mary Grice, an African American woman who was four years old in 1960 when her father died leaving her mother to raise five children. The children received survivor benefits until they were 18. “Now, Social Security claims it overpaid someone in the Grice family — it’s not sure who — in 1977.”
Mary Grice told the Post, “They gave me no notice, they can’t prove that I received any overpayment, and they use intimidation tactics, threatening to report this to the credit bureaus.” Hundreds of thousand of other Americans are also being targeted in this manner, and nobody seems to know who is responsible.
The Post traces the grab to a single sentence in the farm bill “lifting the 10-year statue of limitations on old debts to Uncle Sam.” Social Security, Treasury, and Congress all disclaim responsibility for opening the long-closed cases. Regardless of who is directly responsible, this is the federal government in action. As Grice’s attorney Robert Vogel told the Post, “the craziest part of this whole thing is the way the government seizes a child’s money to satisfy a debt that child never even knew about. They’ll say that somebody got paid for that child’s benefit, but the child had no control over the money and there’s no way to know if the parent ever used the money for the benefit of that kid.”
What we have here is a predatory ruling class preying on the most vulnerable. Mary Grice knows what the deal is: “My mom used to say, ‘This country is carried on the backs of the little people,’ and now I see what she meant.”
Over the past half century, federal spending on social programs has risen like a bubbling cauldron. In 1964, it amounted to less than one-quarter of the U.S. budget. Today it accounts for about two-thirds. What effect has the spending trend had on the American psyche? Independent Institute Senior Fellow Robert Higgs offers a brilliant analogy to help us grasp the transformation.
A salmon trap, also called a pound net, is simple but ingenious, Higgs explains in the Spring 2014 issue of The Independent Review. It’s sort of like a one-way funnel. The deeper a fish swims into the trap, the harder it is to escape. It has long been banned in U.S. waters, but its design lives on, figuratively speaking, in various political schemes that direct people toward dependence on the state.
“As a salmon’s ‘mind’ tells it not to turn back, so the human mind, especially when bewitched by government propaganda and statist ideology, tells a typical person not to turn back,” Higgs writes. “Having lost the capacity for assuming individual responsibility, people are fearful of taking on such responsibilities as their forebears did routinely.”
* * *
The Salmon Trap: An Analogy for People’s Entrapment by the State, by Robert Higgs (The Independent Review, Spring 2014)
[This post first appeared in the April 15, 2014, issue of The Lighthouse. For a free subscription to the Independent Institute's weekly newsletter, enter your email address here.]
With the launch of the MyGovCost iPhone app, it’s a good time to consider the trends in government spending that generated the concerns that motivated its creation, by looking at just three numbers:
Over the last 10 years, the total public debt outstanding of the U.S. federal government has increased by ten trillion dollars. As of April 10, 2014, the official national debt of the United States was $17,539,023,466,494.92, up more than $10 trillion from the $7,160,991,855,678.41 recorded ten years earlier on April 9, 2004.
By comparison, it had taken the U.S. federal government over 214 years to rack up 2004′s $7.16 trillion national debt level. Just under $7 trillion of the national debt added since 2004 has been added since President Obama was first sworn into office.
In 20 years, conservative estimates indicate that the expected growth in benefits paid to Social Security recipients will entirely deplete Social Security’s Old Age and Survivor’s Insurance Trust Fund. When that happens, the federal government will no longer have any legal obligation to sustain those benefit payments at their currently promised level.
To keep Social Security’s Trust Fund from running out of money as expected and keep going over the next 75 years, the federal government would have to adopt any one of these alternative reforms:
Without those actions, by current law, when Social Security’s trust fund runs out of money in 20 years, all benefits will be immediately and permanently slashed by 24% at that time.
Two Hundred Five
The total net present liabilities of the U.S. federal government are far greater than the $17.539 trillion national debt. The best estimates put them at a level about 12 times greater, at approximately $205 trillion. This value is based upon the Congressional Budget Office’s Alternative Fiscal Scenario, and represents the total current day dollar value of the difference between what the federal government is likely to spend in the future and what it is likely to collect in taxes.
Laurence Kotlikoff explains what that fiscal gap means if U.S. politicians acted today to deal with it:
The $205 trillion fiscal gap is enormous. It’s 10 percent of the present value of all future GDP. Equivalently, it corresponds to 10 percent of GDP year in and year out for as far as the eye can see. To raise 10 percent of GDP each year we could (a) raise all federal taxes, immediately and permanently, by 57 percent, (b) cut all federal spending, apart from interest on the debt, by 37 percent, immediately and permanently, or (c) do some combination of (a) and (b).
As you can see, the problems with closing the whole federal fiscal gap go far beyond what it would take to make Social Security solvent.
The federal government maintains an $11.6 billion school lunch program feeding 31 million students daily. In 2010 First Lady Michelle Obama championed the Healthy, Hunger-Free Kids Act, which as this report notes “imposed a dizzying array of requirements on calories, portion sizes, even the color of fruits and vegetables to be served.” The rules, finalized in 2012, also increased the amount of fruits, vegetables and whole grains that must be offered, imposing higher costs on school districts. Students must take at least three items, including one fruit or vegetable, even if they don’t want them, or the federal government refuses to reimburse school districts for the meals. The result is massive waste.
The Los Angeles Unified School District, second largest in the nation, serves 650,000 meals a day. Students throw out at least $100,000 of food a day according to district officials, approximately $18 million a year. The Breakfast in the Classroom program, which requires students to take all items offered, is also wasteful. The federal rules also forbid taking the wasted food off campus.
According to a 2013 study by Brigham Young University based on Utah schools, the extra produce costs school districts $5.4 million a day, with $3.8 million of that being tossed in the trash. Other studies find “significant waste,” including 40 percent of all the lunches served in four Boston schools. Nationally, the annual cost of wasted food is more than $1 billion.
The Los Angeles Times editorialized that the lunch program is “afflicted by rigid, overreaching regulations that defy common sense” and the rules “practically guarantee” enormous waste. But politically correct nutritionists defend the new rules and politicians are reluctant to trim, much less toss, a federal program intended to help children. Politicians are fond of appraising programs on intentions, not results, costs or common sense. So at school nationwide the waste will continue to pile up, with taxpayers picking up the tab.
The National Taxpayer’s Union has summarized each of the major budget proposals for the U.S. federal government’s 2015 fiscal year. We threw together the following chart to make for a quick visual comparison of each:
As you can see, each of the budget proposals increase total spending over FY2014′s baseline level. Each of the proposals cuts discretionary spending below the level recorded for Fiscal Year 2014, while each increases so-called “mandatory” spending, which covers net interest payments on the national debt, Social Security, Medicare, Medicaid and the new Affordable Care Act exchange subsidies, over what is planned to be spend in FY2014.
The federal government’s 2015 fiscal year will begin on October 1, 2014.
Of these major proposals, so far, only the House Republican budget proposal has made it through the House of Representatives. President Obama’s budget proposal for federal spending in Fiscal Year 2015 was much more successful than his previous budget proposals, gaining two votes in favor, compared with the unanimous opposition to the President’s previous budget proposals.
Meanwhile, the U.S. Senate appears once again set to fail in its obligation under the law to produce any budget proposal for the next fiscal year. The U.S. Senate, controlled by President Obama’s political party, last complied with the requirements of the law to produce its own budget resolution in 2009 and in 2013.
Before we go any further, for the sake of avoiding any confusion, let’s define exactly what a deficit is. A deficit is the amount by which cash expenses exceed cash income or revenue. That makes a deficit the exact opposite of the situation that exists when there is a surplus.
In fact, if what you spend in cash is greater than the amount you collect in income or revenue, the only way you can possibly get to a surplus is to borrow the difference and then some. That borrowing however doesn’t change the fact that you really have a deficit. And if you keep running a deficit like this, you will eventually experience a fiscal train wreck.
Saying you have a surplus when you’re really running a deficit, as some leading politicians in California are doing right now, doesn’t change that outcome.
Last year, California’s Governor Jerry Brown proclaimed an end to the state’s worrisome and persistent deficit. How did he do it? In the 2012 election he had fed voters the notion that a proposed income tax increase would be spent on education. California voters treat education as a sacred cow, even though the state ranks near the bottom in test outcomes. They passed the ballot issue.
On January 31 last year, the state’s General Fund had a deficit of $15.7 billion. The higher tax rates brought in new money. This, along with internal and external borrowing, made it look as if the deficit had gone with the wind, but it hadn’t. Brown called it a surplus, amid much cheering by the spendthrift legislature.
Fast forward to the end of January this year. The deficit had been whittled down to $12.6 billion. Some surplus!
That’s quite a lot different from the story that Governor Brown was telling just several weeks earlier, as reported by the Wall Street Journal:
On Thursday, Gov. Jerry Brown called the improvement in the state’s fiscal house “good news,” and he proposed spending an additional $10 billion annually for California’s schools. But anticipating calls for further increased spending and preparing for a likely re-election bid, he also urged fiscal restraint as he officially proposed a $154.9 billion budget.
“By no means are we out of the wilderness, we have serious issues before us in terms of long-term liabilities, debts, and we must be very prudent in the way we spend public funds,” Mr. Brown said. However, “after years of drought, and cutbacks and pink slips for the teachers, we are finally able to provide a substantial amount of new money for all the schools of California.”
In the eyes of a politician, a smaller than expected deficit really means that they now have extra money to spend, because they will not consider reducing how much they are planning to borrow.
So how does Governor Brown propose to spend this newfound windfall?
Mr. Brown’s proposed budget increases kindergarten through 12th grade public education spending by $10 billion, sends new money to colleges and universities, and allocates money to expand health-care coverage to millions.
That sounds more impressive than it really is, which becomes clear in the next paragraph:
Mr. Brown also seeks to pay money owed to state schools but deferred during the years of crisis as well as pay back bonds sold to balance the budget 10 years ago, and make some infrastructure improvements. In addition, the budget endorses a plan to strengthen the rainy day fund through constitutional amendment.
In other words, most of the money for K-12 education in California will really be going to partially reset the fiscal shell game that the state government was playing with the state’s public school system in trying to make it appear that the state government was solvent, when it was really running larger deficits. But wait, there’s more!
It also reflects the governor’s commitment to a troubled $68 billion plan to bring high-speed rail to the state by proposing to help finance the project using $250 million in proceeds from selling cap-and-trade pollution credits.
And so, the inevitable fiscal train wreck, when it comes, will be a high speed one!
As we have noted the federal Department of Defense wastes plenty of money and even spends on hardware that the military doesn’t need or want. Likewise, Obamacare has been incredibly wasteful but according to this report, taxpayers should also be looking at the State Department, which can’t seem to find how they spent $6 billion.
A March 20 “management alert” from the Office of the Inspector General says that “Specifically, over the past 6 years, OIG has identified Department of State (Department) contracts with a total value of more than $6 billion in which contract files were incomplete or could not be located at all.” This “creates significant financial risk and demonstrates a lack of internal control over the Department’s contract actions.” Call that a stranglehold on the obvious.
A recent OIG audit of the closeout process for contracts supporting the U.S. Mission in Iraq revealed that contracting officials were unable to provide 33 of 115 contract files requested in an audit. “The value of the contracts in the 33 missing files totaled $2.1 billion.” Similar lapses with the Bureau of International Narcotics and Law Enforcement Affairs involved “in excess of $1 billion.”
It wasn’t all bungling.In another investigation, OIG found “falsified” technical review information in a contract “valued at $100 million.” As the alert says, “corrupt individuals may attempt to conceal evidence of illicit behavior by omitting key documents from the contract file.” But no word on who, exactly, falsified the information or what happened to any corrupt individuals. So this is all aftersight not oversight.
State Department spokeswoman Marie Harf said “this is an issue of which the department is aware and is taking steps to remedy.” She didn’t say which steps, exactly, they were taking. “It’s not an accounting issue,” she said, “I think it’s more like a bureaucratic issue. But it’s not that we’ve lost $6 billion, basically.”
Basically they have lost $6 billion and no surprise that they are trying to play it down. Marie Harf, by the way, is the person who announced that president Obama’s ambassadorial nominees were all highly qualified. As it turned out they couldn’t answer basic questions about countries such as Norway and Argentina where they have been tapped to serve.
If the product is health insurance, where new regulatory burdens have been imposed by the Affordable Care Act (a.k.a. “Obamacare”), the answer is that the cost to consumers rises substantially. Brianna Ehley of the Fiscal Times reports:
The price of health insurance premiums on plans purchased outside of the federal and state exchanges are much higher than expected, a survey of brokers found.
A proprietary survey of 148 brokers conducted by Morgan Stanley analysts revealed the largest acceleration in small and individual group rates in the survey’s history, Forbes contributor Scott Gottlieb of the conservative American Enterprise Institute first noted.
The survey found that the prices for off-exchange plans in the small group market increased by an average of 11 percent, while off-exchange plans on the individual market increased by an average of 12 percent. Analysts noted that the prices tended to vary by state, with some states showing increases 10 to 50 times that amount, Gottlieb wrote.
According to the latest Census data, about 14.5 million—or 5 percent of the U.S. population gets health insurance on the private exchange.
The Morgan Stanley report attributed the increases to “changes under the ACA” including the new excise taxes being levied on insurance plans, and the new requirements that plans provide more robust coverage.
Looking to see how the price of health insurance has changed for policies purchased outside of the federal and state-government run “marketplaces” provides one of the best apples-to-apples measure of the effects of the law that is available to us.
The reason for that is very straightforward—regardless of where health insurance policies are purchased by consumers, they are combined into the same risk pools by the insurers, which are governed by the same regulations. We should note that the only reason consumers have to shop for policies on the federal and state-government run exchanges is because that is the only way they might obtain subsidies against their premiums to purchase them.
The difference is that for the policies that are available to be purchased outside of the Affordable Care Act’s government-run marketplaces, the costs of the policies for consumers is fully reflected in the reported premiums, with the differences in the before-and-after cost of insurance policies largely being able to be attributed to the changes imposed upon insurance providers by Obamacare.
Scott Gottlieb provides more numbers:
The average increases are in excess of 11% in the small group market and 12% in the individual market. Some state show increases 10 to 50 times that amount. The analysts conclude that the “increases are largely due to changes under the ACA.”
The analysts conducting the survey attribute the rate increases largely to a combination of four factors set in motion by Obamacare: Commercial underwriting restrictions, the age bands that don’t allow insurers to vary premiums between young and old beneficiaries based on the actual costs of providing the coverage, the new excise taxes being levied on insurance plans, and new benefit designs....
For the individual insurance market (plans sold directly to consumers); among the ten states seeing some of the sharpest average increases are: Delaware at 100%, New Hampshire 90%, Indiana 54%, California 53%, Connecticut 45%, Michigan 36%, Florida 37%, Georgia 29%, Kentucky 29%, and Pennsylvania 28%.
For the small group market, among the ten states seeing the biggest increases are: Washington 588%, Pennsylvania 66%, California 37%, Indiana 34%, Kentucky 30%, Colorado 29%, Michigan 27%, Maryland 25%, Missouri 25%, and Nevada 23%.
Regulations, just like taxes, cost real people real money.
General Motors knew about faulty ignition switches that could cause vehicle engines to turn off, disabling air bags with deadly results. Federal government investigators with the National Highway Traffic Safety Administration knew about this problem but as this report notes the NHTSA “twice passed on investigating” the faulty switches that “led to at least 13 deaths and more than 2.6 million recalled vehicles.” As one independent investigator put it, “the revelation that NHTSA had teed up an investigation and deep-sixed it is very troubling.”
The GM problems were apparent in 2007 but the NHTSA declined to investigate. Then in 2010, after another accident, the NHTSA’s Office of Defects Investigation said the data “did not show a trend” and backed off. The timing is certainly of interest. Recall that in 2009 the federal government bailed out General Motors to the tune of nearly $50 billion, losing at least $10 billion on the deal. With so much “invested” no surprise that government bureaucrats opted to go easy on Government Motors, as GM was accurately called. Contrast that leniency with government treatment of Toyota, a foreign automaker that did not need a bailout and did not take government money.
The government brought a criminal investigation against Toyota for defects such as sticking gas pedals and floor mats that trap the accelerator. The settlement allowed unlimited criminal and civil penalties and Toyota agreed to pay $1.2 billion, the largest penalty ever for an automaker and 35 times the maximum penalty the NHTSA can impose. FBI bosses railed against Toyota for putting sales over safety and profit over principle.
General Motors did the same thing but government bureaucrats twice declined to investigate. At least 13 people have died due to the defective switches and GM only began recalls in February. The NHTSA and the Justice Department are now reportedly looking into the matter but one doubts they will take draconian action as with Toyota. And a key problem should already be apparent to taxpayers and motorists alike. When government investigates Government Motors it lowers the bar on safety standards.
Meanwhile, for the possibilities of fakery involving automobile safety, see this article.
If you have an Individual Retirement Account (IRA), and particularly if you have more than one IRA, you need to be aware that a recent U.S. Tax Court decision has opened the door to allow the IRS to nail you for taxes if you attempt to rollover money from more than one of your IRAs into another in a given year. That is despite the information that the IRS has been providing to people who own IRAs in Publication 590 over the past 20 years that says otherwise.
CBS Marketwatch’s Robert Powell reports on the recent U.S. Tax Court decision that affected Alvan and Elisa Bobrow:
In 2008, Alvan rolled over two distributions from his IRAs and took the position that the rollovers were valid because they were done in a timely manner, and involved different IRAs, Appleby wrote in her analysis of the court case. His position was that he had not broken any rules, as explained by the IRS in their publication for the past 20 years.
The IRS disagreed and determined that only one of the two rollovers was valid. So, Uncle Sam and the Bobrows went off to court. And the Tax Court—much to the surprise of all IRA experts—agreed with the IRS.
The mistake cost the Bobrows an additional $51,298 in income tax and a penalty of $10,260. Maybe they should be thankful; it could have cost them $31,000 more, according to Appleby. You can read the gory details in Bobrow v. Comm’r, T.C. Memo. 2014-21.
So what was the bottom line? In essence, only one of the Bobrow’s distributions was eligible for rollover during the 12-month period. In fact, that Tax Court concluded that the Internal Revenue Code Section 408(d)(3)(B) limitation—the relevant section of the federal tax code—applies to all of a taxpayer’s retirement accounts and that regardless of how many IRAs he or she maintains, a taxpayer may make only one nontaxable rollover contribution within each one-year period.
In other words, we’ve all been operating under the impression that what was written in Publication 590—you know, the IRS’ very own publication—was correct. But it’s not.
This outcome is a new example of how the IRS’ bureaucrats can provide misleading information to U.S. taxpayers. Misleading information that puts ordinary Americans at direct risk of having the federal government punish them with major financial losses if they make the mistake of trusting it.
That situation is made worse because of deliberate decisions by the government agency’s leadership in recent years to dramatically cut back on providing assistance for U.S. taxpayers with tax questions to focus instead on developing a more intrusive role in the lives of ordinary Americans through the implementation of the Affordable Care Act (a.k.a. “Obamacare”), the politically-motivated scrutiny of opponents to President Obama’s policies and lavish expenses for employee conferences.
Providing timely and accurate information to U.S. taxpayers would not appear to rank very highly in their list of priorities.