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Could the U.S. Tax Its Way Out of Debt and Inequality?

Thursday August 21st, 2014   •   Posted by Craig Eyermann at 6:11am PDT   •  

6330049_S What would happen if prominent income-inequality theorists, such as economists Thomas Piketty, Emmanuel Saez and Peter Diamond, could get their way and hike the topmost marginal income tax rate in the United States to 80%? Would the nation enter into an enlightened state of economic nirvana as they claim? Or would things perhaps turn out badly? Or would anybody even notice a difference?

To find out, the nonpartisan Tax Foundation applied its integrated model of the U.S. tax system and the U.S. economy to analyze the impact of hiking the top U.S. income tax rates to approximately 55% on annual household incomes above $200,000 and to 80% for households with incomes above $500,000, as these leading income-inequality theorists have advocated. Here are the key findings of what the impact would be for the federal government’s tax collections and the U.S. economy:

  • If ordinary income were taxed at the top rates of 80 and 55 percent, our model estimates that after the economy adjusts, total output (GDP) would be 3.5 percent lower, wage rates would drop 1.6 percent, the capital stock would be 7.4 percent less, and there would be 2.1 million fewer jobs.
  • If capital gains and dividends were taxed at the new tax rates along with ordinary income, the economic damage would be much worse. GDP would plunge 18.1 percent (a loss of $3 trillion dollars annually in terms of today’s GDP), the capital stock would be 42.3 percent smaller than otherwise, wages would be 14.6 percent lower, 4.9 million jobs would be lost, and despite the higher tax rates, government revenue would actually fall.
  • Although Piketty’s proposed income tax increase may appear to target only upper-income taxpayers, all income groups would suffer from the economic fallout.
  • Our model estimates that the after-tax incomes of the poor and middle class would drop about 3 percent if the higher rates do not apply to capital gains and dividends and about 17 percent if they do.

In running their analysis, the Tax Foundation tried out two different scenarios, which differ in how income from investments such as the dividends and capital gains might be taxed. The first chart below shows what their Tax and Growth model indicates would be the result if there are no changes in the tax rates for dividends and capital gains, which are currently capped at a maximum rate of 23.4% to minimize the extent of double taxation with the corporate income tax.


In this chart, the capital stock indicates how much the private sector of the U.S. economy could be expected to shrink in response to just these large tax hikes: 7.4%. Meanwhile, the number of employed Americans could be expected to drop by 2.2% and GDP overall would decline by 3.5% below what it would otherwise be in without the income tax increases.

Since income-inequality theorists often cite the income earned through risky investments in the stock or real estate markets as being the primary source of income inequality, the Tax Foundation also considered the scenario where household income earned through dividends and capital gains would be taxed at the same rates as for ordinary income, elevating their top tax rate to the same 80% level even though the corporate income tax would still apply. The following chart reveals the likely outcome for the U.S. economy:


Here, we see that the private sector of the U.S. economy could reasonably be expected to contract by 42.3%, while the number of employed Americans would decline by 5% as the nation’s overall economy would shrink to be permanently 18.1% smaller than it would be without the massive tax hikes advocated by income-inequality theorists.

These negative impacts for the U.S. economy would also have negative impacts for the national debt. The Tax Foundation describes how the tax hikes that were going to be counted upon to rectify inequality would instead aggravate it because government spending would not be able to be sustained without entering into a national debt death spiral:

Because of the dramatic economic decline caused by the higher taxes, government revenue would be lower than otherwise. To avoid going farther into debt, the government would have to cut its spending. Many of the cuts would unavoidably fall on transfer programs for the poor and middle class because those programs are such a large share of the budget.

One estimate indicates that in 2004, the U.S. government’s transfer programs were responsible for elevating 15.5% of the U.S. population out of poverty, dropping the poverty rate from what would otherwise have been 29% to just 13.5% instead. The combination of a shrinking economy with such spending cuts would greatly increase the number of Americans at the bottom of the income-inequality spectrum, which would counteract any decrease in the level of income inequality meant to be achieved in such draconian tax schemes.

The bottom line: there is no real-world way that the U.S. government could tax its way out of debt and inequality.

USPS Springs Back With More Losses

Wednesday August 20th, 2014   •   Posted by K. Lloyd Billingsley at 9:31am PDT   •  

In January the United States Postal Service hiked the price of stamps and its package shipping increased, but as Reuters reports, “The U.S. Postal Service continued to bleed money during its second quarter.” From April to June, the USPS lost $2 billion, compared with $1.9 billion in the first quarter and $740 million in the second quarter last year. So the USPS is a bigger loser than ever, and still resists reform.

usps-logo-200Some USPS bosses want to cut back on door-to-door mail delivery and end delivery on Saturday. Trouble is, government employee unions oppose those moves. A statement from National Association of Letter Carriers boss Frederic Rolando said, “Given the positive mail trends, it would be irresponsible to degrade services to Americans and their businesses, which would drive away mail—and revenue—and stop the postal turnaround in its tracks.” What positive trends and turnaround Rolando has in mind remains unclear. In the second quarter, first-class mail dropped 1.4 percent, part of a long-term trend toward electronic communication.

As we noted in May, Roland also wants to eliminate the congressional mandate to prefund health benefits, which some blame for USPS financial troubles. USPS chief financial officer Joseph Corbett, however, went on record that such a move would not balance the books, noting that USPS liabilities exceed assets by $42 billion. Based on current trends, the losses are likely to get worse.

If legislators ever get serious about reform they should lift the USPS monopoly on first-class mail and let the “service” compete with UPS, FedEx and other companies on that front, just as it now does in package shipping. Only competition in an open market can spur the reforms the USPS needs. Otherwise the federal government will continue to abuse embattled taxpayers, and common sense, by keeping this born loser afloat.

Just Say No to Government Sexual Intrusion

Monday August 18th, 2014   •   Posted by K. Lloyd Billingsley at 6:34am PDT   •  

CampusWalk_200If taxpayers have any doubt that government is becoming ever more intrusive, they might check out how California is attempting to redefine consensual sex. This legislative attempt is based on the notion that there is some part of the word “No!” that college students, allegedly the best and brightest, fail to understand. Driving the attempt is a recent study, from the White House Task Force to Protect Students from Sexual Assault, which contends that one in five women is sexually assaulted while in college, usually by somebody she knows, and most often she does not report what happened.

If the White Houses Task Force’s one-in-five number is a stretch, it would not be the first time. For 16 years, a woman named Jennifer Beeman ran the UC Davis Campus Violence Prevention Program, and in a 2001 federal grant application she claimed that as many as 700 UC Davis students were victims of rape or attempted rape every year. University officials eventually conceded that Beeman “significantly over-reported” the figures, but her fakery drew down four federal grants totaling more than $3 million. In 2011 Beeman got 180 days in state prison and five years’ probation for embezzlement and falsification of records pertaining to campus violence.

Even if the White House Task Force’s numbers are right, the plan still has problems, according to an editorial in the Los Angeles Times. Consent is appropriate, “but is there a role for the government in mandating affirmative consent?” The Times finds the policy vague, “unnecessarily intrusive,” and questions whether such intrusion is “either reasonable or enforceable.”

The proposed legislation applies to colleges that receive public funds, confirming that government funds invite more government control. The involvement of the White House Task Force confirms that, even in the college dorm room, Big Brother is watching you. And taxpayers foot the bill, even though the Constitution gives the federal government no role in education.

Powered Wheelchair Medicare Fraud

Monday August 18th, 2014   •   Posted by Craig Eyermann at 6:06am PDT   •  

10341566_S The single most expensive item for which the Medicare welfare program will pay claims is a power wheelchair. In 2008, Medicare “paid” for 158,185 power wheelchairs at a cost of over $490.4 million, or an average cost of $3,100.37 per power wheelchair. By contrast, the second most expensive medical line item that Medicare will pay toward is for a total knee arthroplasty, which costs $1,207 per procedure.

According to news broken by the Washington Post this past weekend, the people who run the Department of Health and Human Services and the Medicare program have absolutely no idea how many of the claims filed for power wheelchairs that they pay each year are completely bogus.

The wheelchair scam was designed to exploit blind spots in Medicare, which often pays insurance claims without checking them first. Criminals disguised themselves as medical-supply companies. They ginned up bogus bills, saying they’d provided expensive wheelchairs to Medicare patients—who, in reality, didn’t need wheelchairs at all. Then the scammers asked Medicare to pay them back, so they could pocket the huge markup that the government paid on each chair.

A lot of the time, Medicare was fooled. The government paid.

Since 1999, Medicare has spent $8.2 billion to procure power wheelchairs and “scooters” for 2.7 million people. Today, the government cannot even guess at how much of that money was paid out to scammers.

Now, the golden age of the wheelchair scam is probably over.

But, while it lasted, the scam illuminated a critical failure point in the federal bureaucracy: Medicare’s weak defenses against fraud. The government knew how the wheelchair scheme worked in 1998. But it wasn’t until 15 years later that officials finally did enough to significantly curb the practice.

As part of its reporting, the Washington Post provides a helpful video describing how to scam Medicare in four easy steps.

While the scam’s easy days seem to be over, Medicare’s administrators and bureaucrats still aren’t able to quantify how much fraud it tolerated during the 15 years they knew they had the problem:

When officials review old wheelchair bills, they discover that at least 80 percent of them were “improper”: They contain major errors and shouldn’t have been paid as is. Perhaps the patient’s diagnosis didn’t actually qualify for a power wheelchair. Perhaps the paperwork was incomplete.

How many of those bills were sent in by fraudsters, trying to squeeze through the system’s blind spots?

Medicare can’t say.

“You’d have to talk to the patient. You’d have to talk to the providers” and ask if the wheelchair was really needed, said Shantanu Agarwal, a doctor who is Medicare’s top fraud fighter. “And then, at the end of it, you could make a reasonable, fact-based, experienced-based determination about whether this is probably fraud,” Agarwal said. Medicare doesn’t have the time or money to do that for power wheelchairs now.

Why doesn’t Medicare take the time to prevent such fraud? Because, in the bureaucratic mind, doing that kind of work is more costly and demanding of government employees than is just sitting back and enabling the fraud. Because that’s Uncle Sam’s money. If he runs low, he can just go borrow more.

Social Security Benefits To Be Slashed

Thursday August 14th, 2014   •   Posted by Craig Eyermann at 8:08am PDT   •  

The Social Security Trustees have just released their 2014 report, which updates their actuarial estimates of when the program’s Disability Insurance (DI) trust fund and the Old Age and Survivor’s Insurance (OASI) trust fund will run out of money, forcing both disability and pension benefits to be cut.

Let’s get to the worst news first. Social Security’s Disability Insurance trust fund will be the first to be depleted, which the trustees now forecast will occur in less than two years. Under current law, when the DI trust fund is depleted in 2016, Supplemental Security Income (SSI) payments made to Americans with disabilities will be permanently cut by nearly one-fifth.

B1_2That change will negatively impact over 8.4 million Americans, who can expect to see their monthly income payments slashed by 19% according to the Trustee’s latest estimate, just seven years after the DI trust fund last ran a surplus from the portion of Social Security’s payroll taxes dedicated to it.

Meanwhile, things are not as immediately dire for Social Security’s OASI trust fund, which is expected to last another nineteen years before it is fully depleted after years of paying out more in benefits than it collects through Social Security’s payroll taxes. When that happens, the monthly income benefits paid to retired Americans, or to the surviving spouses of working Americans who paid Social Security’s payroll taxes, will be slashed by nearly one-fourth.

b3Beginning in 2033, under current law, Social Security estimates that the monthly income benefits for each of an estimated 75 million Americans (or more) will be permanently reduced by 23%.

For more information, Charles Blahous, one of Social Security’s Public Trustees, provides a good overview of what’s in the 2014 Trustees’ report at e21.

Cap and Raid

Wednesday August 13th, 2014   •   Posted by K. Lloyd Billingsley at 6:27am PDT   •  

carb_logo_200The ruling class likes to portray its predations as targeting the rich, the one percent, and those at the top. In reality, the Pillage People target everybody, particularly working people. For example, in January, government regulations will cause California’s already high gasoline prices to jump 13 to 20 cents a gallon.

This is the result of AB 32, the Global Warming Solutions Act of 2006, authored by state senator Fran Pavley, an Agoura Hills Democrat, and signed by Republican governor Arnold Schwarzenegger. The legislation seeks to reduce greenhouse gas emissions to 1990 levels by 2020. On January 1, 2015, motor vehicle fuels will be included in the scheme, operated by the California Air Resources Board (CARB). As that date looms, legislators and business owners alike have been pushing for relief.

In June, 16 Democratic legislators wrote to CARB boss Mary Nichols. The group’s leader, Fresno assemblyman Henry Perea, said the gasoline price hike would hurt “the most vulnerable members of our communities who must commute to work and drive long distances for necessary services like medical care.” So motor vehicle fuels should be left out, and Perea went on record saying that “the cap-and-trade system should not be used to raise billions in state funds at the expense of low-income motorists.”

More recently, florist Jim Relles wrote in the Sacramento Bee that “just as our economy is recovering from the recession, extending cap and trade to fuel will strike a blow to those who can least afford it because for many, even a slight increase in gas prices takes a gouge out of the shrinking family budget.” And small businesses like Relles’ will take a hit.

Such pleas are not likely to cut any slack with California governor Jerry Brown. He wants one-third of the cap-and-trade funds for his high-speed rail program, including $250 million this fiscal year. Likewise, workers and small business owners can expect little sympathy from Brown’s CARB boss Mary Nichols, a longtime advocate of high gasoline prices. With Nichols, climate change superstition trumps the facts. Hien Tran, lead author of a CARB study on diesel emissions, claimed to have a PhD from UC Davis. He actually bought his PhD from a diploma mill in New York. His study was also faulty, but Nichols did not fire him.

This enabler of fraud is not likely to provide relief, and neither is Jerry Brown, who sees gold in those regulations. As in Washington, politicians and unelected regulators are number one. Workers and taxpayers aren’t even number two.

Laying Track for More Spending

Monday August 11th, 2014   •   Posted by K. Lloyd Billingsley at 7:18am PDT   •  

BayBridgeDemo_200We have been tracking the new eastern span of the San Francisco-Oakland Bay Bridge, which came in 10 years late and $5 billion over budget but still bristled with safety concerns. Those worries were serious enough to prompt state senator Mark DeSaulnier to hold hearings and threaten a criminal investigation. Calls for a criminal investigation actually originated with Caltrans geologist Michael Morgan, but the senator followed up with an “administrative review” by the California Highway Patrol. The CHP was to see if Caltrans had retaliated against whistleblowers and violated rules on public disclosure. But after six months of investigation, nothing emerged from the CHP in an August 5 hearing in Sacramento.

Caltrans bosses and their apologists defended the bridge as safe and denigrated whistleblowers as “disgruntled” employees. In the public comment section, the only speaker was Patrick Lowry of Alta Vista Solutions, which handled oversight on the bridge. Lowry said “the bridge is safe,” there was “no debate about quality” and “no intent to silence critics.” Therefore, “Let’s not denigrate the team that gave the people of California something extraordinary they will enjoy for generations.”

That takeaway line raised no objection from DeSaulnier, who is running for Congress. He agreed that the bridge is safe and gave clear indication that accountability and safety are not his only concerns. He lamented “disaffected citizens who don’t believe in government,” an echo of his earlier complaint that problems with the bridge had eroded public confidence and made Californians “adverse to taxes” needed for other infrastructure projects.

The senator mentioned high-speed rail, which he supports “if it’s done right.” With the same ratio of cost overruns as the Bay Bridge, California’s $68 billion high-speed rail could cost upwards of $272 billion. DeSaulnier also touted a “water project,” doubtless a reference to Governor Jerry Brown’s $25 billion Delta tunnels. With cost overruns in proportion to the Bay Bridge, the tunnels could exceed $100 billion.

So while posing as an advocate of accountability the senator was simply laying track for billions in spending on dubious projects. The ruling class always has a bridge to sell you.

Inflating Away the National Debt

Monday August 11th, 2014   •   Posted by Craig Eyermann at 5:58am PDT   •  

8419071_S Can governments simply use inflation to make their national debts disappear?

That’s the subject of a new working paper by Jens Hilscher, Alon Raviv, and Ricardo Reis, who used real-world data to see how effective that inflation might be in reducing the real value of a government’s outstanding liabilities. Here’s the abstract of the paper:

We propose and implement a method that provides quantitative estimates of the extent to which higher- than-expected inflation can lower the real value of outstanding government debt. Looking forward, we derive a formula for the debt burden that relies on detailed information about debt maturity and claimholders, and that uses option prices to construct risk-adjusted probability distributions for inflation at different horizons. The estimates suggest that it is unlikely that inflation will lower the US fiscal burden significantly, and that the effect of higher inflation is modest for plausible counterfactuals. If instead inflation is combined with financial repression that ex post extends the maturity of the debt, then the reduction in value can be significant.

Their principal finding is that, by itself, boosting the rate of inflation in a nation would have only a modest effect in lowering the real level of its national debt.

But that changes if a policy of higher inflation is combined with financial repression, wherein governments force private citizens and firms to lend money to the government, often at capped interest rates, while restricting their ability to take or invest their funds outside of the country. Investopedia describes some of the features that financial repression would likely include:

  1. Caps or ceilings on interest rates
  2. Government ownership or control of domestic banks and financial institutions
  3. Creation or maintenance of a captive domestic market for government debt
  4. Restrictions on entry to the financial industry
  5. Directing credit to certain industries

So what would be the reward for a government to implement these kinds of policies? Hilscher, Raiv, and Reis quantify the potential results for the United States in an earlier, ungated version of their working paper:

Applying it to the United States in 2012, we estimate that the effects of higher inflation on the fiscal burden are modest. A more promising route to inflate away the public debt is to use financial repression, and we estimate that a decade of repression combined with inflation could wipe out almost half of the debt.

Through August 1, 2014, the total public debt outstanding for the United States was nearly $17.7 trillion. By combining higher inflation with financial repression to extend the effective maturity dates for money being loaned to the federal government, U.S. elected officials could cut the inflation-adjusted value of the national debt by 50 percent in just 10 years by fully adopting the policies outlined in Hilscher, Raviv, and Reis’s working paper.

In fact, if you look just at U.S. history since the financial crisis of 2008, you can find that most of these elements have already been put into place, from legislation like Dodd-Frank that restricts entry into the financial industry and like FATCA, which imposes new capital controls on the financial accounts of American citizens who live or do business outside of the United States, the direction of credit to the politically favored green energy and education industries, the government’s takeover of the student loan industry, and even the newly created MyRA “savings” program, which is little more than a channel for boosting the sales of long-term, low-yielding U.S. Treasuries by targeting low-income earners.

In the end, the problem of national debt isn’t the debt so much as it is what governments do to get out of the massive debts they rack up. If that’s not a price are willing to commit yourself or your children and grandchildren to pay, then keeping the national government from racking up so much debt in the first place ought to be a major priority for you.

Somewhat Less Than Transparent

Thursday August 7th, 2014   •   Posted by Craig Eyermann at 6:30am PDT   •  

homelogo In December 2007, the U.S. government launched a new website that it promised would make the spending by federal government agencies transparent to all, the Washington Post recalls: was launched to great fanfare in 2007, the product of the Federal Funding Accountability and Transparency Act. “Technology makes it possible for every American to know what is happening and to hold elected officials accountable,” said one of its congressional sponsors, then-Senator Barack Obama.

So how well is the U.S. federal government living up to that promise? USA Today crunches some numbers:

WASHINGTON—A government website intended to make federal spending more transparent was missing at least $619 billion from 302 federal programs, a government audit has found.

And the data that does exist is wildly inaccurate, according to the Government Accountability Office, which looked at 2012 spending data. Only 2% to 7% of spending data on is “fully consistent with agencies’ records,” according to the report.

Among the data missing from the 6-year-old federal website:

• The Department of Health and Human Services failed to report nearly $544 billion, mostly in direct assistance programs like Medicare. The department admitted that it should have reported aggregate numbers of spending on those programs.

• The Department of the Interior did not report spending for 163 of its 265 assistance programs because, the department said, its accounting systems were not compatible with the data formats required by The result: $5.3 billion in spending missing from the website.

• The White House itself failed to report any of the programs it’s directly responsible for. At the Office of National Drug Control Policy, which is part of the White House, officials said they thought HHS was responsible for reporting their spending.

For more than 22% of federal awards, the spending website literally doesn’t know where the money went. The “place of performance” of federal contracts was most likely to be wrong.

In its 2012 fiscal year, U.S. federal government outlays totaled over 3,517 billion dollars. The $619 billion of that spending that wasn’t made visible on the website in 2012 represents a failure to account for 17.6% of the U.S. government’s total spending that year.

But will any elected official be held accountable for the federal government’s ongoing lack of transparency over its spending, as the Federal Funding Accountability and Transparency Act’s principal sponsor promised they would be?

Border Crisis and Leviathan

Wednesday August 6th, 2014   •   Posted by K. Lloyd Billingsley at 7:04am PDT   •  

LloydBorderSign_200As Robert Higgs demonstrated in Crisis and Leviathan, the state exploits crises to expand its power. The current situation on the U.S.-Mexico border represents an escalation in that government manufactured the crisis.

Young Hondurans, Guatemalans, and Salvadorans are coming because they believe they will get in the country and receive amnesty, based on clear signals they got from the Obama administration. These are not refugees in any meaningful sense. Central American countries are poor and violence is common, but those nations are not at war and do not face insurgencies. When they did, during the 1980s, there was no mass influx to the United States even approaching the current scale, with 57,000 entering since last October.

Those now arriving have no visas or legal basis to enter the United States. Yet the federal Border Patrol, a wholly owned subsidiary of the Department of Homeland Security, not only welcomes the illegals into the USA but transports them around the country at taxpayer expense. This gives additional work to the Federal Emergency Management Agency (FEMA), which performed miserably after Katrina but is apparently qualified to manage a manufactured crisis. Also involved is the federal Department of Health and Human Services (HHS), the same agency that botched the Obamacare rollout.

If anyone in Central America is poor or a victim of violence, it does not follow that they should come to the United States, which has problems of its own. The first resort should be regional nations such as Mexico, Costa Rica, Panama, oil-rich Venezuela, and Cuba, named by Newsweek as one of the best places in the world to live. All are Spanish-speaking countries, and so present no language or cultural problems for the needy new arrivals.

The President of the United States wants the USA alone to be Nanny State for the world and seeks to spend $3.7 billion on the surge. The president thus confirms that manufactured crises increase the cost of government, with no end in sight.

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