MyGovCost News & Blog

How to Chip Away at the U.S. Government’s Debt to Apple

Thursday September 21st, 2017   •   Posted by Craig Eyermann at 6:40am PDT   •  

13403664 - broken apple three dimension style and high quality image According to CNBC, Apple Computer has loaned the U.S. government over $52.6 billion, where if the company were a foreign country, it would rank 22nd among the major foreign holders of the publicly-held portion of the U.S. government’s total public debt outstanding.

That amount is just 0.2% of the entire public debt outstanding as of September 14, 2017, so it’s not like Apple can use that leverage to manipulate the U.S. government to its advantage, the way that Russia can do with Venezuela, but you would think that a profitable company like Apple would have better things to invest their money in than piles of U.S. government-issued Treasury securities.

Writing in the New York Times Magazine, Adam Davidson wonders the same thing:

There is an economic mystery I’ve been struggling to understand for quite some time, and I’m not the only one who’s confused: Among financial experts, it is often referred to as a conundrum, a paradox, a puzzle. The mystery is as follows: Collectively, American businesses currently have $1.9 trillion in cash, just sitting around. Not only is this state of affairs unparalleled in economic history, but we don’t even have much data to compare it with, because corporations have traditionally been borrowers, not savers. The notion that a corporation would hold on to so much of its profit seems economically absurd, especially now, when it is probably earning only about 2 percent interest by parking that money in United States Treasury bonds. These companies would be better off investing in anything — a product, a service, a corporate acquisition — that would make them more than 2 cents of profit on the dollar, a razor-thin margin by corporate standards. And yet they choose to keep the cash.

When companies do things that seem strange from a business sense, you can almost always correctly bet that the government is involved. Especially when you find out that Apple isn’t the only company engaging in this practice. Money‘s Andrew Sheridan reported on the phenomenon back in 2014:

Taxpayers are making millions of dollars in interest payments on U.S. Treasuries to an unlikely source — tech giants Apple, Microsoft, Google and Cisco.

Those tech companies have more than $100 billion in U.S. bonds, according to a report released Thursday by The Bureau of Investigative Journalism, a not-for-profit, privately funded reporting outfit in London. Due to U.S. tax laws, much of that cash is held in overseas subsidiaries — and it is likely that some of that cash is being used to purchase U.S. bonds.

The group used data from annual filings that companies are required to send the Securities and Exchange Commission. All told, Apple (AAPL), Microsoft (MSFT), Google (GOOG) and Cisco (CSCO) have $250 billion in cash abroad.

If these firms are buying U.S. debt with that money, then U.S. taxpayers are on the hook for hundreds of millions in debt payments to the same U.S. companies they already buy billions of dollars from in iPads, software and routers.

“It means American taxpayers are effectively rewarding U.S.-based technology firms for avoiding taxes,” said Nick Mathiason, the author of The Bureau of Investigative Journalism report.

The most important reason that any corporate CFO worth his salt would do such a thing is because unnecessarily paying excessive amounts of corporate income tax to the U.S. government would harm their company’s competitive position in their markets, especially against non-U.S. competitors who are not subject to the same excessive tax burden. Then, as part of lawfully keeping the incomes that they earn overseas from being subjected to corporate tax rates that exceed much of those in the rest of the world, U.S. businesses with global reach are parking billions of their business revenues in one of the safest and least productive investments they can to avoid the U.S. government’s greedy tax collectors: U.S. Treasuries.

There is a way out of that kind of perverse, nonproductive investment for these businesses. Bloomberg‘s Claire Boston describes how the U.S.’ longstanding corporate income tax barrier might be chipped away:

Apple and other cash-rich companies are holding out, hoping that they may soon be able to bring their cash home at a lower tax rate. President Donald Trump’s tax plan includes a repatriation provision, though it didn’t specify a rate. He proposed a 10 percent levy when campaigning, and Treasury Secretary Steve Mnuchin has said the rate would be “very competitive.”…

Preparing for repatriation may mean cash-rich companies want to hold more of their funds in more liquid securities like U.S. Treasuries, said Benjamin Campbell, chief executive officer of Capital Advisors Group, which advises companies on cash and risk management.

“Companies have been looking at the repatriation issue and a portion of them are prepping for it,” Campbell said. “I think Treasuries would end up absorbing some of the supply.”

The latest rumors floating around Capitol Hill suggest that something between a 15% and a 25% maximum corporate income tax rate might become reality under a larger U.S. tax reform package, which would reduce the top corporate income tax rate from its excessive 39.6% level.

Part of what’s making this kind of consideration possible is the slowing of the rate of growth of the U.S. national debt, which in 2017, is growing at a rate that is about half of what it did during most of 2016. Since most U.S. politicians found that rate to be acceptable, corporate tax reform may become part of a deal that would increase the rate of growth of the U.S. national debt.

For the corporate income tax portion of such a deal, where corporate income parked overseas is concerned, it might be a net plus for the national debt. Right now, we have the situation where with a top corporate income tax rate of 39.6%, the U.S. government is actually collecting 0% of the billions of dollars earned by U.S. corporations overseas that it otherwise might. Worse, it is really in the hole because it is paying out interest to the firms that have bought up U.S. government-issued Treasury securities with a significant portion of the incomes they have kept outside of the United States to avoid excessive taxation.

But if the U.S. Congress permanently reduces the maximum corporate tax rate to a more internationally competitive level, they would no longer have such an extreme incentive to park their money so unproductively, where the U.S. government would benefit by seeing its corporate tax revenues from income earned outside of the U.S. rise above $0 from firms like Apple.

California’s BOE Nepotistas Get a Promotion

Tuesday September 19th, 2017   •   Posted by K. Lloyd Billingsley at 1:40am PDT   •  

California’s Board of Equalization does not equalize anything, so even its name is misleading. It’s a tax agency, with a budget of more than $650 million, so no surprise that the BOE has misallocated $50 million in tax revenue and members use BOE events to promote their own careers, at taxpayer expense. State government has wasted countless millions on BOE’s ramshackle headquarters in Sacramento, known as the “bottomless money pit,” appropriately enough. More recently, the BOE confirms that in government things are usually worse than they seem.

The BOE has 4,200 employees and, count ‘em, more than 800 have relatives on BOE staff. This is according to the BOE’s own personnel audit, which launched back in April and relies on self-reporting. So doubtless more than one in five BOE staffers have family connections. They were hired not because of merit or competence but because some relative pulled the strings to get them on board. The BOE’s incredibly shabby record suggests that most if not all were unqualified and incompetent. Nepotism is a form of parasitism, and therefore not a victimless problem. Conveniently enough, the BOE’s in-house audit provided taxpayers with no names of the nepotistas.

In recent months, legislators have been mounting a charge against the BOE, but headlines announcing plans to “blow up” the tax agency turn out to be fake news. Most BOE employees will be transferred to a new revenue department that reports to the office of governor Jerry Brown, a born-again tax hiker who has made California’s income and sales taxes the highest in the nation. In effect, the BOE nepotistas get a promotion and Brown has good reason to keep them in place. His father was governor and that was son Jerry’s main qualification to run for the same post.

“Of the various forms of government which have prevailed in the world,” wrote historian Edward Gibbon, “a hereditary monarchy seems to present the fairest scope for ridicule.” That is also proving true of a hereditary, recurring governor.

National Debt Passes Grim Milestone, but Growth Slows

Monday September 18th, 2017   •   Posted by Craig Eyermann at 6:42am PDT   •  

The U.S. government’s total public debt outstanding finally surpassed the grim milestone of $20 trillion on September 8, 2017, following President Trump’s surprising deal with Congressional Democrats to suspend the statutory debt ceiling through December 15, 2017. On that Friday, the national debt jumped by $317.6 billion to reach $20.16 trillion.

The total public debt outstanding increased as the U.S. Treasury Department exchanged new borrowing from the public with I.O.U.s that it had been accumulating through the extraordinary measures it had taken to maintain the national debt at the statutory ceiling of $19.85 trillion set on March 15, 2017. Those I.O.U.s primarily consisted of deferred payments to the pension funds operated by the U.S. government for the benefit of its civilian and military employees.

Once the U.S. government’s statutory debt ceiling was suspended on September 8, 2017, the U.S. national debt almost immediately snapped to the level to which it would have risen if the nation’s borrowing limit had not been in force.

To put that $317 billion increase in the national debt into better perspective, that amount of increase was reached on President Trump’s 231st day in office. By contrast, by President Obama’s 231st day in office, the national debt had risen by $1.16 trillion, over 3.6 times faster than the rate at which the national debt was increasing some eight years later.

Much of the increase in that period can be attributed to the economic “stimulus” package that President Obama sought after assuming power.

Meanwhile, during President Obama’s last 231 days in office from June 3, 2016 through January 20, 2017, the U.S. national debt increased by $732 billion, which is 2.3 times as fast as has the national debt has increased during President Trump’s total of 231 days in office.

So the good news, if you can call it that with the national debt having exceeded $20 trillion, is that the rate at which the U.S. national debt is increasing is well below the pace that U.S. politicians found acceptable during the Obama administration.

The bad news is that too many of those same politicians are looking at the rate of national debt growth and are now salivating at the prospect of being able to spend taxpayer dollars at a faster rate, which is the surest path to having a more serious national debt problem.

Government Nearing Default on Debt to Russia

Thursday September 14th, 2017   •   Posted by Craig Eyermann at 6:15am PDT   •  

17733945 - front view of punching fist on gray background, flag of russia The government in question is that of Venezuela, which is nearing default as it is running out of resources to pay back the money it owes to its Russian creditors according to the terms it accepted when it chose to borrow money from them.

MOSCOW, Sept 8 (Reuters) – Russian Finance Minister Anton Siluanov told reporters on Friday that Venezuela is having problems with fulfilling its obligations on its debt to Russia.

“We have a request from our colleagues in Venezuela to do a restructuring,” Siluanov said.

Venezuela owed Russia $2.84 billion as of September last year.

The Venezuelan government is now scrambling to restructure its foreign-held liabilities following sanctions put on the country’s President Nicolas Maduro and 20 other individuals, and also the Venezuelan government-owned oil company by the U.S. Treasury Department after Maduro rigged an election to select representatives to rewrite the country’s constitution in his favor.

Venezuelan President Nicolas Maduro has invited bondholders to unspecified “negotiations” over the country’s foreign debt in coming days, in response to recent U.S. financial sanctions.

With Venezuela deep in recession and its currency reserves at their lowest in more than two decades, the Maduro government and state oil company PDVSA have to pay about $4 billion in debt and interest during the rest of 2017.

“All bondholders are invited to various rounds of negotiations over the next few weeks,” the president said in a speech late on Thursday to the new Constituent Assembly.

He reiterated Venezuela would keep honoring debt, but said he wanted to talk with bondholders affected by sanctions recently imposed by U.S. President Donald Trump.

In addition to adjusting the amount and scheduled timing of payments owed to the foreign creditors that own its sovereign debt, the Venezuelan government is also likely to seek to have its debt redenominated into other foreign currencies so that it would not have to pay the money it owes back in U.S. dollars, which the government has less access to following the U.S. government’s new economic sanctions.

For their part, the Russian government has been using the leverage it has acquired over Venezuela as one of its major creditors as a means to acquire Venezuela’s oil assets at a discount. Depending upon how the Venezuelan government has its debt restructured, those assets may potentially include a number of refineries and pipelines in the United States that are owned by the Venezuelan government’s oil company through its Citgo subsidiary, the control of which could soon fall within Russia’s grasp.

As debtor countries go, Venezuela is very far down its national debt death spiral as that government enters its liquidation phase.

Government Money Grab Is Institutionalized Abuse

Tuesday September 12th, 2017   •   Posted by K. Lloyd Billingsley at 1:29pm PDT   •  

As hurricanes assail the nation, President Trump is tweeting up a storm on a “once-in-a-generation” opportunity to cut taxes and simplify the tax code. So far, the president is short on details, but he did say, “It’s your money, not the government’s money,” and tax reform should start with that reality.

The money that workers earn belongs to them and is “proper” to them, their property, and nobody else has a prior claim to what any worker earns. Yet government policy is geared otherwise. In fact, government gets workers’ money before the workers do, through withholding from their paychecks, but it was not always so. Withholding dates from World War II, and it was supposed to be a temporary measure. Politicians chose to keep it in place. As Charlotte Twight explained in her 2002 book Dependent on D.C., “Withholding is the paramount administrative mechanism that since 1943 has enabled the federal government to collect, without significant protest, sufficient private resources to fund a vastly expanded welfare state.”

Withholding suggests to workers that only their “take home” pay is theirs. In reality, it all belongs to the worker, but much of it has already been lifted by government. If workers received all their money and had to write monthly or quarterly checks to the IRS, protest would be significant. For their part, politicians are locked and loaded on the current system, and it’s hard to think of a single public official who has decried withholding, much less called for its abolition.

Politicians regularly call for the abolition of the IRS but never make any move to do so. The nation’s most powerful and most intrusive agency serves as a convenient strike force against political enemies, particularly those who advocate smaller government and lower taxes. Lois Lerner was the IRS official who led the charge, but now the Justice Department is letting Lerner off the hook. Republicans talked of tossing IRS boss John Koskinen, a prevaricator of unusual prowess, but Koskinen remains at the helm.

The workers, meanwhile, certainly deserve a tax cut. On the other hand, real tax reform will not come about until the workers get their own money before the government does.

Dealing Away the Debt Ceiling

Monday September 11th, 2017   •   Posted by Craig Eyermann at 6:06am PDT   •  

10871552 - increasing credit limit Following up President Trump’s surprising deal with Congressional Democrats to suspend the U.S. government’s statutory debt ceiling through December 15, 2017 as part of providing funding to support hurricane damage relief in Texas, Louisiana and Florida, President Trump also appears to have reached a “gentleman’s agreement” to permanently eliminate the statutory debt ceiling altogether.

Damian Paletta and Ashley Parker of the Washington Post relate the story of how President Trump and congressional Democrats have agreed to a develop a plan to repeal the national debt ceiling:

President Trump and Senate Minority Leader Charles E. Schumer (D-N.Y.) have agreed to pursue a deal that would permanently remove the requirement that Congress repeatedly raise the debt ceiling, three people familiar with the decision said.

Trump and Schumer discussed the idea Wednesday during an Oval Office meeting. The two, along with House Minority Leader Nancy Pelosi (D–Calif.), agreed to work together over the next several months to try to finalize a plan, which would need to be approved by Congress.

As they say, the devil will be in the details, but this action could represent a positive step toward achieving greater fiscal discipline on the federal government if automatic changes in the national debt ceiling would only be permitted if federal spending is approved through annual budget legislation passed by the U.S. Congress as part of regular order.

That process would be very different from the type of spending that the U.S Congress has appropriated in recent years, much of which has come about through the rushed passage of back room deals with minimal oversight and even less serious consideration through continuing resolutions.

If the members of the U.S. Congress want to continue that uncontrolled state of fiscal affairs, then they should expect to have to also have to face a separate vote on raising the national debt ceiling to accommodate it every time they do, with their irregular spending put on hold until they do.

That kind of political unpleasantry could be avoided if they follow regular order in adopting a budget for the U.S. government, which provides for greater transparency and oversight, where the government’s statutory debt ceiling would be automatically adjusted when the U.S. Congress follows its own rules for passing a budget.

President Trump’s Surprising Debt Deal

Thursday September 7th, 2017   •   Posted by Craig Eyermann at 6:59am PDT   •  

56290342 - illustration of politicians making deal for a vote with taxpayer money While it won’t be news to MyGovCost readers, President Trump did indeed tie together aid to fund the recovery to large-scale damage caused in Texas and Louisiana by Hurricane Harvey with an increase in the U.S. government’s statutory debt ceiling.

What may be surprising however is who he reached the deal to do both things with in the U.S. Congress. Reuters has the story:

WASHINGTON/ABOARD AIR FORCE ONE (Reuters) – President Donald Trump forged a surprising deal with Democrats in Congress on Wednesday to extend the U.S. debt limit and provide government funding until Dec. 15, embracing his political adversaries and blindsiding fellow Republicans in a rare bipartisan accord.

Trump, living up to his reputation for unpredictability, met at the White House with congressional leaders from both parties and overruled Republicans and U.S. Treasury Secretary Steven Mnuchin, who wanted a longer-term debt-limit extension rather than the three-month Democratic proposal the president embraced.

“We could have done a one-year deal today,” Mnuchin told reporters aboard Air Force One later in the day en route back to Washington from an event in North Dakota where Trump spoke about taxes.

Mnuchin said Trump chose a short-term deal to keep his options open on possibly raising military funding later this year, suggesting a longer-term government funding deal might have blocked that.

The increase in military spending that Trump will be seeking later in the year is primarily related to addressing rising geopolitical tensions with North Korea, which has launched a series of ballistic missile tests with increasing frequency and conducted an underground explosion of a new nuclear weapon in recent weeks.

Given the nature of the deal, where the $7.9 billion package of aid for disaster relief and the increase in the debt ceiling was tied to the READ Act, Americans can now expect that federal government spending will be allowed to increase at a faster rate than what President Trump has previously proposed in the absence of effective, unified political opposition by advocates of greater fiscal responsibility in Washington D.C.

Not to mention more capable leadership on the parts of those who suddenly found themselves sidelined by President Trump’s move.

Update: After this article was written, the amount of hurricane relief funds provided by the bill was increased to $15 billion in the Senate and the debt ceiling suspended through December 15, 2017. President Trump signed the bill on Friday, September 8, 2017.

Given the path that Hurricane Irma took along the west coast of Florida over the weekend, President Trump’s decision to sign off on the Congress’ larger package of hurricane relief aid appears to be prudent.

High School Administrators Incented to VA-Style Fraud

Monday September 4th, 2017   •   Posted by Craig Eyermann at 10:56am PDT   •  

79584846 - diploma holder employment problem and workplace issues In 2001, the U.S. Congress passed the “No Child Left Behind” Act, which promised to improve the academic performance of the nation’s K-12 schools in part by holding elementary and secondary school administrators to a higher level of accountability while also pouring up to $23 billion of federal spending annually into poorly performing local school districts. In 2015, the U.S. Congress updated that earlier law by passing the “Every Student Succeeds” Act, which purportedly raised the bar on academic rigor for elementary and secondary schools while providing administrators with more flexibility and rewards for achieving higher academic performance and increasing federal spending on local school districts up to $25-$26 billion per year.

Writing in Education Week, former New York City public schools teacher, principal and superintendent Bernard Gassaway describes how the combination of federal academic performance requirements and money are incentivizing local school administrators to adopt fraudulent practices that are inflating their school’s graduation rates while also falsely appearing to meet higher academic standards.

In the age of accountability ushered in by the No Child Left Behind law in 2002 and continued under 2015’s Every Student Succeeds Act, many school officials are using fraudulent methods to inflate graduation rates.

As a direct result of a public thirst for schools to show progress, boards of education pressure superintendents, superintendents squeeze principals, principals ride teachers, and teachers stress students. The ultimate measure of progress for schools nationwide is high school graduation rates.

Public school officials use a variety of schemes to give the appearance of progress.

Gassaway goes on to describe several different schemes that local school administrators have used to juice their graduation rates. For example, one of these schemes involves a policy called credit recovery, where students can make up the failing grades they received during regular classes by completing handout assignments for extra credit, but without ever receiving any additional instruction or taking any additional tests to demonstrate that they have genuinely improved their understanding of the subject they failed.

Another dishonest practice involves falsely reclassifying students as having a disability, where the students are then allowed to receive additional time and assistance in completing assignments and exams. These same students may also have their overall graduation requirements relaxed, where they are allowed to get a high school diploma despite completing far fewer assessments of their academic performance than their general education peers.

Gassaway describes a third outrageous practice that involves getting failing students off the administrators’ books.

Lastly, when education officials cannot use any of the aforementioned tactics to get struggling students through high school, they transfer or push out students who are off-track for graduation—dropping the dead weight that is dragging down graduation statistics. Pushing students out is the most efficient way to increase a school’s graduation rate. Principals transfer overage and undercredited students to alternative schools.

That, too, is an abusive practice I’ve observed firsthand. Here’s how it works: Principals and guidance counselors tell students they must leave the school if they want to graduate. Students are persuaded to transfer to alternative schools under the guise that it is easier for them to earn credits and graduate. In some cases, those same school personnel even inform students that they are not allowed to return, thus rendering these schools no longer accountable for the students’ performance indicators.

In too many ways, the fraudulent practices that Gassaway describes on the part of local school district administrators directly mirror practices that were adopted by administrators at all levels of the Department of Veterans Affairs in the phony wait-list health care rationing scandal that cost hundreds of lives. And in far too many ways, for the exact same reason: the need to hit a goal established by the federal government to collect performance bonuses.

Except here, instead of hundreds and hundreds of lives lost through delayed and denied medical care, we have thousands and thousands of lives wasted with deficient public school educations.

Hurricane Harvey and the Debt Ceiling Storm

Friday September 1st, 2017   •   Posted by Craig Eyermann at 6:53am PDT   •  

84917998 - extremely detailed and realistic high resolution 3d illustration of a hurricane approaching texas. shot from space. elements of this image are furnished by nasa. Putting together a package of federal aid to assist the Americans who have been displaced from their homes and jobs in the destructive aftermath of Hurricane Harvey—and increasing the statutory debt ceiling of the U.S. government—would appear to be two entirely separate jobs for the U.S. Congress, but political realities will force the two things to be combined.

The truth is that the U.S. government does not have anywhere near the free cash flow needed to fund the recovery efforts to repair the widespread damage in Texas and Louisiana caused by 2017’s Hurricane Harvey. It will have to borrow money to deliver even the basic support that elected officials have promised those whose lives have been disrupted by the natural disaster.

According to Bloomberg‘s Margaret Talev, President Trump will directly connect the two issues at least in the short term as early as Friday, September 1, 2017.

President Donald Trump is considering attaching an increase in the U.S. debt limit to an initial $5.95 billion disaster aid funding request for Hurricane Harvey, two administration officials said, a move aimed at lowering the risk of an unprecedented default.

The White House request, which could come as soon as Friday, would include $5.5 billion to the Federal Emergency Management Agency and the remainder to the Small Business Administration. The request is being prepared primarily to cover funding demands through the Sept. 30 end of the federal fiscal year, according to the officials, who described the matter on condition of anonymity.

Tying the two things together is being opposed by a number of Republican members of Congress, who object to an unconditional increase of the national debt ceiling without securing any spending reforms in return.

However, the kind of limited increase in the debt ceiling that will likely be proposed by President Trump, as part of the emergency spending package to provide the disaster relief, would not be the blank check for unleashing unlimited and uncontrolled federal spending that fiscally responsible members of Congress might fear. Done right, it will decouple the two political events that are only converging because of the coincidence of the timing of the hurricane and the end of the government’s 2017 fiscal year.

Whether the U.S. Congress can do it right remains to be seen.

Lessons from Pillage People Smackdown

Wednesday August 30th, 2017   •   Posted by K. Lloyd Billingsley at 3:23pm PDT   •  

As we noted, in 1990, Gilbert Hyatt was awarded the patent for the first single-chip microprocessor. This invention earned Hyatt a lot of money and he soon moved to Nevada, which has no state income tax. California’s Franchise Tax Board (FTB) claimed Hyatt lied about his residency, and that he owed millions in state income taxes. Despite a 2008 ruling in his favor by a Nevada court, FTB snoops kept after the inventor. By the time his case arrived at California’s Board of Equalization this week, the FTB was claiming that interest had run up Hyatt’s tab to $55 million. Turns out, they were wrong.

On Wednesday, a 3-2 vote by California’s Board of Equalization determined that Gilbert Hyatt was indeed a Nevada resident when state tax collectors said he lied about his residency. So the BOE waived $5.7 million in fraud penalties and $5.7 million in taxes from 1992. That left Gilbert Hyatt with a 1991 tax bill of $1.9 million, including interest, not a slam dunk but a far cry from $55 million.

Taxpayers might note that the Franchise Tax Board has spent more than $25 million on the case, so the quest to grab Gilbert Hyatt’s money wasted more than $20 million. Somebody should get fired, but massive waste seldom if ever prompts California to hold anybody accountable. On the other hand, the lessons still hold.

Government greed remains truly fathomless, and inventors of useful products such as the single-chip microprocessor will find better conditions in other states. Meanwhile, BOE members Fiona Ma and Betty Yee sided with the FTB pillage people against Gilbert Hyatt. Inventors, taxpayers and voters alike might take note of that.

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