MyGovCost News & Blog

Now that we’re well into tax season, we thought this would be a good time for a tax cheat edition of our ongoing “Bureaucrats Behaving Badly” series!

Today’s episode features the unfortunate situation where both current and retired employees of the U.S. federal government aren’t paying the taxes they owe to the U.S. government. Stephen Ohlemacher of the Associated Press reports:

WASHINGTON (AP) — Federal workers and retirees owed more than $3.5 billion in unpaid taxes last year, a $200 million increase over the previous year, the IRS said Tuesday.

Almost 305,000 federal workers and retirees owed back taxes as of Sept. 30. That’s down from 318,000 the year before.

Doing some quick math, the average amount of federal taxes owed per delinquent bureaucrat has risen from $10,377.36 to $11,475.41 in the last year. So while there are about 13,000 fewer deadbeat bureaucrats than last year, the ones who aren’t paying their taxes this year are worse.

Ohlemacher identifies the best and worst federal government departments and branches for tax deadbeats:

Among executive departments, workers at the Department of Housing and Urban Development had the highest delinquency rate, at 4.7 percent. Workers at the Treasury Department, which includes the IRS, had the lowest delinquency rate, at 1.2 percent….

In Congress, House employees had a higher delinquency rate than Senate workers. About 5 percent of House employees owed back taxes, compared to just 3.5 percent of Senate workers.

Among active duty military, just 1.4 percent owed back taxes, the IRS said.

Ohlemacher explains why the Internal Revenue Service (IRS), whose serial misconduct in its operations has become well known in recent years, has managed to achieve such a low delinquency rate for tax payments among its own employees, while at the same time contributing to the higher delinquency rates seen at other government departments through its practices:

Tax compliance at the IRS is generally better than at other federal agencies in part because the IRS cannot share information about tax delinquents with other departments. A 1998 law calls for removing IRS employees who are found to have intentionally committed certain acts of misconduct, including willful failure to pay federal taxes.

As an institution, the IRS does not provide the same level of tax law policing to other government agencies as it is compelled to maintain by law for itself. Even so, the IRS has serious problems with its self-policing, where the agency has established the practice of awarding generous bonuses to its own delinquent-on-their-income-taxes employees.

After a nation’s government has racked up far more debt than it can ever hope to pay back, what options does it have to climb out of the hole it dug for itself?

After reviewing a new academic paper by Carmen Reinhart and M. Belen Sbrancia, The Liquidation of Debt, former Drexel University finance professor Wesley Gray summarizes those options:

To tackle this macroeconomic question, the authors outline the methods that governments have historically used to monetize debt (we are focusing on domestically-held debt here):

1. Grow out of the problem–Economic growth
2. Tough love–fiscal adjustment/austerity
3. Give up–default or restructuring
4. Inflate away–sudden surprise burst of inflation
5. Stealth liquidation–steady financial repression (impose regulations and incentives that make debt artificially attractive) and steady inflation

It has long been assumed that the United States and Western European nations simply grew their way out of the massive debt problems they faced in the aftermath of WWII. What Reinhart and Sbrancia show is that, between the 1940s and the start of the 1980s, these governments made a concerted use of option 5: stealth liquidation. And, in fact, debt levels dropped dramatically over the course of three decades. Debt levels began to rise again during the period of liberalization marked by the 1980s and 1990s, as governments abandoned “financial repression.”

Here’s how the fantastic financial education resource Investopedia defines financial repression:

A term that describes measures by which governments channel funds to themselves as a form of debt reduction. This concept was introduced in 1973 by Stanford economists Edward S. Shaw and Ronald I. McKinnon. Financial repression can include such measures as directed lending to the government, caps on interest rates, regulation of capital movement between countries and a tighter association between government and banks.

The way that has historically worked in the United States, from the 1940s through the 1970s, was for the U.S. Federal Reserve to artificially lower short term interest rates, whereby U.S. banks and other financial institutions supported the mammoth growth in the debt the U.S. government took on during the Second World War, by facilitating the federal government’s solvency. Six years after the war ended, the Federal Reserve reached an accord with the U.S. Treasury to continue providing that support in return for being allowed to increase interest rates above the rock-bottom levels they had previously agreed to support back in 1942. In doing so, the Fed implicitly agreed to tolerate higher levels of inflation, the forces of which slowly built up over the next two decades until it ultimately resulted in the hyperinflation of the 1970s, which is really what led to the end of that period of financial repression.

Gray outlines the methods that governments have used in the past to execute their policies of financial repression:

• Explicit or indirect caps or ceilings on interest rates
  • Regulated rates (e.g., government-mandated caps on savings deposits), interest rate targets (e.g., through central bank open market operations — buying/selling government bonds), etc.
• Creation and maintenance of a captive domestic audience
  • Force domestic investment through regulation (e.g., through exchange controls, high reserve requirements for banks, gov’t bond holding requirements for banks, taxes on alternative investments (equity, corp bonds, etc)
• Control banking sector
  • Eliminate entry, direct ownership of and/or management of banks, direct credit to certain industries.

Since 2008, we’ve seen each of these methods come back into play in the United States, primarily through two different vehicles: the Federal Reserve’s various Quantitative Easing programs, by which the Federal Reserve has filled the role of the “captive domestic audience,” and the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is the means by which the U.S. government has both imposed controls over the banking industry and which a major study has revealed to have significantly impaired the ability of smaller community banks to compete with politically favored institutions.

Combined, the effects of the Fed’s interest rate lowering policies and the Dodd-Frank Act’s regulatory schemes are such that they are succeeding in eliminating the entry of new banks into the market, where the rate of new entrants has fallen from an average rate of 100 per year in the period before the passage of Dodd-Frank to fewer than 2 per year. The following chart, from Motley Fool, shows the FDIC’s recorded number of newly chartered banking institutions in each year from 1990 through 2014:

It could be worse, which is to say that it could still get worse. There are proposals that would force investors who have 401(k) and IRA retirement savings plans to “invest” in government-issued bonds, which could become the next major “captive” domestic audience for financial repression.

At present, President Obama’s “myRA” retirement account program represents an early step in that direction, which is currently being targeted at exploiting the most financially illiterate Americans, who likely don’t appreciate that when more money floods into Treasury auctions to buy government bonds, the yield (or interest rate) that the government will pay to borrow the money falls, which in turn means a worse rate of return for them in their myRA retirement account, which in turn would make it harder to accumulate a decent amount of money to even be able to afford to retire.

That President Obama’s myRA program is a bad deal for regular Americans can be confirmed by what some of the same people backing the President’s initiative are doing to advance the financial interests of the federal government’s employees in their default investment options for their Thrift Savings Plan retirement accounts, where currently, the default option for federal employees is to invest in the exact same government bond funds as for the myRA accounts. Because federal employees want better returns and bigger retirement savings, they’re pushing for legislation to have the default investment option changed to one that has a much higher rate of return.

Which perhaps indicates that they don’t believe they should have to face the same consequences as those upon whom they impose such policies of financial repression.

Last week, we suggested that the U.S. government could “rather painlessly” pay down the national debt if it adopted a policy where it restrained the growth rate of government spending to be less than the growth rate of the nation’s GDP.

Let’s take a closer look at how that might work in practice. Let’s start by looking at what would have happened to the growth of the U.S. government’s spending and national debt in all the years after World War 2 if it had restrained its spending to grow at an average annual rate of 5% per year, just slightly faster than the average combined rate of the nation’s population growth (1.2% per year) and inflation (3.6% per year) during that time.

Coincidentally, that combined rate is consistent with the growth rate of the nation’s economy during all those years!

Let’s throw an extra wrinkle in that approach as well – let’s connect the amount of money that the U.S. government would be allowed to spend to the actual amount of revenue it collects. And the way we’ll do that is to directly link the amount it spends to how much it actually collected two years earlier.

The reason why we would do that is a practical one – when the U.S. Congress is busy working on a budget for the next year, it doesn’t know exactly how much revenue the government is going to collect during the current year. But they most certainly do know how much was collected during the preceding fiscal year, two years earlier than the year for which it is working on the budget. And all we have to do to set the amount of money the U.S. government would be allowed to spend is to take that number and multiply it by 110% (100% for the amount of revenues from 2 years earlier than the year being budgeted, plus 5% to account for the current year, plus another 5% to get to the year being budgeted.)

Let’s see how that would work in terms of the actual performance of the U.S. economy and the growth of government revenues from 1946 to the present, and then on to the year 2020 with the amount of spending proposed by President Obama. Our first chart below shows those actual tax collections and the amount that would be spent following our simple system and compares it with the amount of money that the U.S. government actually spent over that time.

What we find is that over most these years, the U.S. government would actually have run a small budget surplus each year. And interestingly, we see that there would a countercyclical benefit to the approach during periods of recession, where the U.S. government would be allowed to spend more money than it takes in when tax revenues fall during these periods, which it could apply to pay for the increased cost of things like unemployment benefits during the period of recession without requiring a special act of Congress to authorize more spending.

Our next chart compares how our simple approach for restraining the growth of government spending to be less than the average growth rate of the U.S. economy would have have affected the growth of the national debt, as measured by the accumulation of annual budget deficits or surpluses from 1946 to the present.

Here, we see that the actual level of spending the U.S. government had from 1946 to the present, and then on to the year 2020 would be responsible for adding at least $14.4 trillion to the U.S. national debt. By contrast, if spending had been restrained to an average growth rate of 5% per year, by 2020, the U.S. would instead have an accumulated surplus of $1 trillion. What’s more, we see that only in the four years following the recession of December 2007 to June 2009 would the U.S. have even added to its national debt at all before being able to pay it down and return to a net surplus.

Finally, just out of curiousity, we wondered what growth rate we would have to use with our approach to match the actual accumulated deficits recorded by the U.S. government since 1946. After a little bit of trial and error, we determined that spending would have to be increased at an average annual rate of 15.5% per year to accumulate the equivalent amount of deficits and debt.

What that result means is that the U.S. government has been consistently spending money at over three times the rate it can actually afford to spend since the end of World War 2.

Politicians promoted the California high-speed rail project as a rapid route between Los Angeles and the San Francisco Bay Area. But as we noted, the “bullet train” broke ground near Fresno. Now Dan Walters of the Sacramento Bee finds a gap between other bullet-train claims and reality.

The California High-Speed Rail Authority claims that by 2040, “the system will reduce vehicles miles of travel in the state by almost 10 million miles of travel every day.” The rail authority further claims that “Over a 58-year period (from the start of operations in 2022 through 2080), the system will reduce auto travel on the state’s highways and roads by over 400 billion miles of travel.” As Walters notes, Californians travel about 330 billion miles in cars every year, nearly a billion miles each day. Therefore, “the bullet train’s projected reduction in driving would be scarcely 1 percent.” And the claimed reduction of 400 billion vehicle-miles over 58 years works out to “just over one year of driving.” This assumes a “very high train ridership” that can hardly be assumed, and it would come “at a very high cost.”

The bullet train is supposed to cost of $68 billion but with more federal financing in doubt, high-speed rail bosses may seek loans. Walters projects a debt of $100 billion with interest, a lot of money for “an unnoticeable tiny dent in automotive travel.” And how will the debt be repaid? Probably through the use of cap-and-trade funds, which were supposed to be for emission goals. California’s Legislative Analyst pointed that out, but legislators ignored him and gave 25 percent of cap-and-trade funds to the bullet train. The grounds for this money grab was that the train would reduce carbon emissions through reduction in automobile travel. But it doesn’t do much of that, and doesn’t go where politicians said it would. So what is this all about?

California’s four-term governor Jerry Brown, Walters says, “sees the bullet train as a legacy.” That’s why he “pushed hard for the cap-and-trade funds.” As we noted, the bullet train also provides a soft landing spot for washed-up politicians like High Speed Rail Authority board member Lynn Schenk, a former congresswoman who served as chief of staff for California governor Gray Davis. And of course the project gives politicians a new place to spend money. That’s why the ruling class is “all aboard” the bullet train.

We’ve answered the following question that was recently asked at Quora:

How did the USA end up with $18,000,000,000,000 of debt? More importantly, can the US government pay back the debt?

The United States federal government has ended up with a total public debt outstanding of more than $18 trillion (at this writing) because it has chronically run annual budget deficits for decades, as indicated in the following chart that was put together by the Heritage Foundation:

But these chronic deficits only explains a little over $17 trillion of the national debt. In addition, there is also a hidden budget deficit, where since 2009, the U.S. government has borrowed well over $700 billion for the purpose of issuing direct student loans:

This additional borrowing adds to the national debt, but is not reflected in the U.S. government’s annual budget deficit figures.

The U.S. could pay down its national debt rather painlessly if it adopted a policy where it restrained the growth rate of government spending to be less than the growth rate of the nation’s Gross Domestic Product. This kind of policy has been extremely successful in places like Switzerland, to name one international example, and also individual U.S. states like Colorado.

The U.S. government would also improve its fiscal situation with respect to the growth of the national debt by getting out of the student loan business, which the Obama administration primarily did as a backdoor way to increase the amount of money the federal government collects from low and middle income earners without appearing to directly increase their income tax rates. Selling its portfolio of student loans back to the private lenders would go a long way toward moving that portion of the national debt off the government’s books.

As we recently noted, California’s Department of Consumer Affairs was implementing a computer system pegged at $27 million. Problems with the system boosted the cost to $77 million, but that still didn’t get it done. Consumer Affairs bosses want another $17.5 million, bring the cost to $96 million, more than three times the original estimate. Now Jon Ortiz of the Sacramento Bee shows how this is merely a drop in the waste bucket.

“The state has spent about $900 million on three stalled or terminated IT projects in the last few years,” Ortiz writes. These include: a failed overhaul of the state payroll system, a DMV project for licensed and registration, and “a statewide court system that burned through a half-billion dollars before it was shut down.” Adds Ortiz, “future failures could be even more costly,” noting a combined budget of $3.5 billion for the “dozen most expensive projects” in the pipeline, according to the state’s Department of Technology. Will these projects cost three times that estimate, bringing the tab to some $10 billion? It is certainly possible to guess.

The problem is not with technology itself but government. As Consumer Affairs boss Awet Kidate told Jon Ortiz, his department “failed miserably at change management.” But they get the money anyway. So did the bosses at Caltrans, who managed construction of the new eastern span of the San Francisco-Oakland Bay Bridge. It cost $5 billion more than the original estimate, came in ten years late, and remains riddled with safety issues. Besides defective welds, cracked rods and such, as the San Francisco Chronicle noted, “access to the top and midlevel sections of the tower are next to impossible for maintenance work after the elevator failed after just a few uses.” In similar style, the Golden State fails miserably at management of technology projects.

At the end of its 2014 fiscal year, the total public debt outstanding of the U.S. government stood at $17.860 trillion.

That amount, however, consists of two parts: “Debt Held by the Public” and “Intragovernmental Holdings”. The Intragovernmental Holdings portion of the debt is really made up of a number of trust funds that are operated by the U.S. government, which includes Social Security, and both civilian and military retirement pension funds.

Debt Held by the Public, however, is the kind of debt that anyone willing to loan money to the U.S. government can acquire through auctions operated by the U.S. Treasury, its TreasuryDirect website, or through the open market.

At the end of its 2014 fiscal year, the amount of the U.S. Government’s Debt Held by the Public stood at $12.785 trillion — about 71.2% of the nation’s Total Public Debt Outstanding. As for who owns it, about 52.5% is owned by U.S. individuals and institutions (banks, insurance companies, pension funds, etc.). The remaining 47.5% is owned to foreign entities:

Of those foreign entities, China is the largest single holder of U.S. government-issued debt, owning 11.1% of the publicly held portion of it. Meanwhile, Japan is the second-largest holder at 9.6%, while all the other foreign nations and entities in the world own just over a quarter of the publicly held portion of the U.S. government’s debt, or 26.8%.

That state of affairs hopefully helps explain why the U.S. Treasury set up special accommodations for China to loan the U.S. money, and also why the U.S. is now so apparently upset that a number of European nations have likewise sought their own special accommodations with the world’s second largest national economy. Not to mention President Obama’s unique deference to both Chinese and Japanese customs.

It’s simply not wise to irritate those upon whom one depends so much.

California’s Franchise Tax Board (FTB) says inventor Gilbert Hyatt owes $55 million in taxes. Hyatt says he’s the target of a vendetta, and as Dale Kasler shows in the Sacramento Bee, Hyatt has a strong case. In 1990 Hyatt was awarded the patent for the first single-chip microprocessor and earned $350 million in royalties. Hyatt said he moved to Nevada, which has no state income tax. The FTB claimed Hyatt lied about his residency, and owed $7.4 million, which has ballooned to $55 million over more than 20 years. Hyatt sued the FTB for harassment and violation of privacy and in 2008 a Las Vegas jury awarded him $388 million, including $250 million in punitive damages. That has since been reduced and a new trial ordered on the money Hyatt, now 76, deserves for emotional distress. Despite the reduction, that was a victory for Hyatt but California continues to pursue the case, with recent encouragement from a federal judge.

“It is an overreach,” former Board of Equalization member Bill Leonard told Newsmax. “In my experience, no other case has gone on this long.” Leonard, who also served in the state Senate and Assembly, said the FTB action “does amount to a persecution at this point.” The FTB, “just pick on anyone successful and extract their due.”

Analyst Paul Hatfield wonders if any FTB employees were ever disciplined over the case. The answer appears to be no. And despite losses, the FTB is willing to keep spending taxpayer dollars in pursuit of Hyatt, without any attempt to justify the growing expense for the public.

The case confirms that government greed is truly fathomless, and that California’s Pillage People are out of control and not accountable to the people. Nobody in Sacramento seems intent on doing anything about it.

Earlier this week, both the U.S. House of Representatives’ and the U.S. Senate’s budget committees released their own respective budget proposals for the federal government’s 2016 fiscal year, which when combined with President Obama’s spending proposal from February, means that we now have three different proposals of what the future trajectory of the federal government’s spending will look like. The chart below presents those future trajectories in the context of how much the federal government has spent in each year since 1980, which you can use as your basic scorecard for evaluating the impact of each proposal:

In the chart, we can see that all the budget proposals greatly increase the federal government’s spending over the next 10 years. The difference however is that President Obama proposes that the U.S. government spend money at an exponential growth rate with respect to its historic trajectory, where by 2025, the U.S. government would be spending $1 trillion more than either the U.S. House of Representatives or the U.S. Senate propose.

Besides this difference in spending, President Obama also proposes higher taxes to offset the negative impact of his higher spending on the fiscal condition of the U.S. government. Even with those projected higher tax collections, the CBO’s analysis of the President’s budget proposal confirms that the U.S. government will run progressively higher deficits year after year, adding trillions of dollars to the nation’s total public debt outstanding.

By contrast, the House of Representatives’ and Senate’s budget proposals would not impose higher taxes, but their slower rate of spending increases would lead to progressively lower deficits over time that would minimize or potentially eliminate the U.S. government’s annual budget deficits, where the growth of the U.S.’ national debt would at first be greatly slowed and potentially reversed.

There are some differences in how the House’s and Senate’s respective budget proposals each achieve that goal, which will be resolved as the U.S. Congress’ budgeting process moves forward before the federal government’s overall blueprint for future spending will be sent to the White House.

Data Sources

White House Office of Management and Budget. Budget of the United States Government. Fiscal Year 2016. Historical Tables. Table 1.1 – Summary of Receipts, Outlays, and Surpluses or Deficits (-): 1789-2020. [Excel Spreadsheet]. February 2, 2015.

Congressional Budget Office. An Analysis of the President’s 2016 Budget. [PDF Document]. March 12, 2015.

U.S. House of Representatives Committee on the Budget. Fiscal Year 2016 Budget Summary Tables. [PDF Document]. March 18, 2015.

U.S. Senate. A Balanced Budget That Supports Economic Growth and Expands Opportunity for Hardworking Families. Summary of FY2016 Budget Resolution Chairman’s Mark. [PDF Document]. March 17, 2015.

As we have noted several times, the new eastern span of the San Francisco-Oakland Bay Bridge was $5 billion over budget and ten years late. Despite all that time and money, safety issues with the bridge seem to be getting worse, as Jaxon Van Derbeken of the San Francisco Chronicle explains. For example, the high-strength steel rods that secure the base of the tower “show more widespread cracking than Caltrans officials had previously acknowledged.” Further, “rust and microscopic cracking were found after one of 424 fasteners intended to keep the tower from being damaged in an earthquake was removed for testing last year.” A “botched grouting and caulking job” left “many of the 25-foot-long fasteners stewing in water for several years.” And as Van Derbeken notes, cracks were also found at the top, a troubling development “because such cracks can get worse over time, leading to total failure, possibly during a quake.”

Caltrans bosses Will Kempton and Malcolm Dougherty told the reporter they had no record of overseeing the manufacturing process or testing the tower rods before they were installed. Chief engineer Brian Maroney lamented that Caltrans can’t even conduct ultrasonic tests that could reveal whether one of the tower rods has already snapped. And for Steve Heminger of the Metropolitan Transportation Commission it was the construction budget that was “under severe stress.”

Charles McMahon, professor emeritus at the University of Pennsylvania and an expert on steel embrittlement, told Van Derbeken that those in charge of the bridge were “clueless” on the selection of materials and “had no idea what they were doing. The whole thing is a disaster.” Such concerns emerged last year in Sacramento hearings, where whistleblowers called for a criminal investigation. None took place. Sen. Mark DeSaulnier, who conducted the hearings, has moved on to Congress. And as we observed, Tony Anziano, the lawyer who managed the bridge construction for Caltrans, has conveniently retired.

So here’s how it all adds up: $5 billion in excess costs, plus 10 years, equals an increasingly troubled bridge. And as Rep. DeSaulnier told reporters, “it’s frustrating that there’s never been anyone in the management of the bridge who has been held accountable.”