Rights 4 Sale

Some people believe in past lives.  Some people are curious about it.  Some people reject it completely.

Whether you believe in reincarnation or not, consider this:  what if you come back and live again.  Would your political decisions be different if you had to come back and live under the effect of what you decided today?

Some political decisions are easy to dodge by just not confronting them on the basis of “It doesn’t affect me; I won’t be around to see what happens”.  The thinking is that we let it slide off our backs onto the backs of the next generation.  They are the ones who will be here to deal with it.

An example would be Social Security.  Most seniors do not want to confront what will happen down the road.  They are happy to accept the benefits today and reluctant to fight for what it might mean to the next generation.  But what if you come back and have to grow up and live under the decisions that are made today.  If it was you (reincarnated) and at the effect of policy made today, you might might not be willing to stand back and spectate.  You might take action.

The massive unfunded liability of Social Security over the next few decades means a reduction in spending or an incresasein taxes – or both.  Unless something is done now, the liabilities will mature and there is no provision is place to fund it.

This is not to say you should believe in “past lives” or reincarnation.  That’s up to you.  But, it doesn’t hurt to think of the future as if you will be there.  You might not be as apathetic or ambivalent if it affects you (a theoretical reincarnated you) directly.  This “what if” is a way of side-checking your decision to support an issue or take action.

On the ouside chance you might come back, you might want to do something about some of the issues that face us today.

 

There is a discussion about whether health care or other benefits provided to individuals by the government are natural human rights or entitlements.  Right or privilege.   It’s a subject that people will probably debate for decades or centuries to come.

Without getting into this part of the discussion, let’s just talk about it from the dollars and cents point of view.

If you look at the federal budget, one thing jumps out.  The combination of mandatory and discretionary spending is more than the revenue causing a deficit.  So, we are already spending more than we make.  If we want to our government to give more, then we have to find a way to get some more money or spend less.

Just borrow the money?  The only problem with that is we pay more interest when the debt goes up.  Interest is part of the mandatory spending.  When interest spending goes up, there is less to spend on other mandatory items, like Social Security or Medicare or less to spend on discretionary items like defense, education, roads or law enforcement.

We could just print the money, but that would cause inflation which would defeat the whole idea of having more.

The only other alternative is raising taxes so there is more revenue.  Every time this approach has been tried, increased taxes lowered productivity or caused inflation.  Current estimates say that personal income taxes would have to be increased to 60% to cover the expected growth in Social Security, Medicare, Medicaid and interest spending.  It is doubtful that most people would put up with a 60% rate of income tax.

So, it’s back to square one.  Whether health care is a right or an entitlement, it is really junior to the question of whether we can afford it or not.  If we are going to pay for heath care, then we need to take something out of the existing budget or raise taxes. 

Proponents of the health care plan that is currently in the House and Senate say that we can pay for the new benefits by cutting existing costs.  Government programs have never been successful at lowering costs.  One might ask, if it’s so easy and so fiscally important, then why haven’t we done it already?

Let’s say that the typical person makes $1,000 per paycheck.  The taxes are approximately 20% or $200.  This leaves you $800 for necessary expenses like rent, utilities and food.  If you are lucky, these necessary expenses are less than $800 and you have some discretionary money to spend, invest, give away or save.

If government adds new benefits without reducing spending then they need more from you.  Suppose your fixed expenses are $800, then raising you taxes to $300 means that you need to make more money or reduce your expenses to $700.

So, let’s take it from the top.  As long as the government is taking in more than it spends, then it can spend the surplus on whatever benefits the people think are OK.   But, whenever the government spends more than it takes in, it needs to reduce services or increase revenue.  Translated, if you want more benefits, then you will pay more in taxes or government will have to spend less on some existing benefit.

The example above represents a typical American except that a typical American spends $850, but only brings home $800.  That means that the typical person has to borrow $50 per pay period through the use of a credit card or some kind of line of credit.

In the past, growing spending was obscured and hidden hidden behind a growing economy.  The same is true for individuals.  Growing credit card limits, growing debt or growing equity in real estate hid the fact that people were spending more than they made.

Now that we have an economy that is in recession, home values are decreasing and credit limits have has been reduced.  Meanwhile, federal spending is increasing while federal revenues have decreased.  The result is that there is less money in the federal coffers just like there is less money in your pocket.

Whether health care is a right or an entitlement may be purely an academic subject because there just isn’t enough money to pay for it no matter what it is.

 

 

When our country was founded, the laws were fairly straight forward.  All you had to do was read the Constitution and you knew where things stood.  In the first few years, the Congress passed a number of laws and the Supreme Court made decisions.  We also had common (British Law) to underpin and supply a background for our legal system.  It was simple in those days.

A lot has happened in 230 years and the laws and regulations have grown voluminous and complex.  This is no more evident than the Federal Tax Code.  With thousands and thousands of pages (60,000 pages), there are very few people who have a complete understanding of the Tax Code.  CPAs, attorneys and Enrolled Agents are expected to be experts, but it is doubtful that any of them could operate without access to extensive reference libraries.

Two states (California and Oregon) require tax preparers to be certified by the state.  These professionals probably understand simple tax returns, but utilize software and reference materials to handle the more complex returns.

Politicians and government bureaucrats don’t understand the Tax Code.  They have to consult with CPAs or attorneys or the IRS to get information.

Further evidence exists.  In tests, tax data was given to an assortment of CPAs, tax attorneys, enrolled agents and tax preparers.  Virtually none of them came up with the same results.  While many were close to each other, the bottom line varied drastically in some cases.  Can that be good – when experts all come up with different answers to the same problem.  Seem very subjective.

Without addressing whether we should have a flat tax or consumption tax, one thing is clear; the current system does not work.

The Tax Code provides guidelines for completing a simple tax return.  Add one complexity and you have to consult an expert or read pages and pages of instruction packed with “if/then” statements and complex calculations.  The bulk of the laws are there to provide loopholes for companies and people with above average incomes.

With a flat tax or consumption tax, we could do away with the IRS saving approximately $12 billion directly.  We would save additional billions (estimated at $300 billion) in tax preparation, planning and compliance.  We would also give executives more time to concentrate on business objectives rather than tax avoidance (not evasion).  The advantages are hard to ignore.

Some people argue that the tax rate should be progressive to give underprivileged families relief and to shift some of the burden to more affluent tax payers.  That seems OK, as long as nearly everyone makes some contribution.

There are other areas that have gotten too complex and it is worth some contemplation regarding how to reset the clock to simplify things so that the average person can understand it.  An idiot’s guide to laws, tax codes and regulations limited to 50 pages or so.

People can have different opinions about whether we should have a flat tax or a consumption tax, but the senior issue is that the Tax Code has become too complex to survive.  If it so complex that no one can follow it, then how fair or useful can it be?

Look at the budget for a while.

If one saw a train wreck coming, one would probably feel a strong urge to warn the engineers of either or both trains.  It’s a part of our human nature to want to help others avoid danger, injury or catastrophe.

It is somewhat baffling that politicians refuse to see the coming entitlement problem.  Or, if they do see it, they refuse to act.  Some talk about it and acknowledge that it is unavoidable, but it is always described as something that we should really get serious about in the near future.

Let’s take it down to the basics.

A series of laws, passed in the last 70 years created the Social Security, Medicare and Medicaid entitlement programs.  Social Security and Medicare taxes have been collected for decades and have generally had a surplus – more taxes collected than benefits paid out.  Recently though, Medicare and Medicaid have paid out more than the revenue taken in, so they are operating in a deficit mode.  Social Security is about to go negative cash flow in the near future.

Traditional accounting rules say that you recognize bad news now, but you don’t recognize good news until it actually happens.  This is known as accounting conservatism and is designed to keep companies or entities from financial crisis.  When it comes to our national finances, we don’t practice what we preach.

The federal budget is calculated largely on a cash basis. That is, revenues and outlays are recognized when transactions are made. Things that happen in the future are ignored, at least in a budget sense.  The long-term costs of entitlement programs such as Medicare, Social Security, and the federal portion of Medicaid, are not reflected in the federal budget. By contrast, many business and some foreign governments have adopted forms of accrual accounting, which recognizes obligations and revenues when they are incurred. To exacerbate the problem, the costs of some federal credit and loan programs, according to provisions of the Federal Credit Reform Act of 1990, are calculated on a net present value basis which reduces the value of future dollars to account for the effects of interest and inflation.  This understates futures obligation.  In plain English, using cash basis accounting means that future obligations are not shown as budget items because they have not yet occurred.  While we have an enormous obligation to Social Security and Medicare/Medicaid, but we do not show them as a future liability.

Administrations play other budget tricks.  Some don’t show the cost of wars financed though special of supplemental appropriations.  Other administrations omit the cost of running the Legislative or Judicial branches of government, avoiding having to include the cost on the same piece of paper as administrative branch expenses.

Said another way, expenditures for Social Security and Medicare are growing at a faster rate than the economy.  In the past, potential problems in the budget were able to hide behind growth in the economy.  If congress passed a spending bill that was not currently supported by revenue, increasing income due to growth in future years was enough to hide the cost of the program.  Most spending is covered this way.  However, with the economy in the tank these days, there is not enough current income to cover the new expenses and increases from growth won’t be enough to cover it next year.

In terms of solutions, there are only three. 

The first is to increase tax revenues.  This is hard to do in a recession when business and individual profits are squeezed and unemployment and lower wages reduced the income form Social Security and Medicare taxes paid.  Those who favor tax rate reductions point out that tax cuts have a positive effect on business and actually increase tax revenues.  The political party that is in power now is philosophically opposed to tax cuts.

The second solution is to change the obligation.   This means redesigning Social Security and/or Medicare.  The main problem with this is that no politician wants to be associated with or responsible for a reduction in entitlements, especially when people paid it over the years with money out of their own wallets.  Said another way, people feel that they have paid for and have been guaranteed certain benefits and are entitled to receive them.  That’s why they’re called entitlements.

Third, and the most straight forward way to bring revenues and expenses in line with each other, is to cut expenses.  Discretionary spending is a mixture of very important budget items, like National Defense, and truly discretionary items, like providing Broadband Internet Services to rural America.  One is “need to have” and the other is “like to have”.  To give perspective to the size of the problem over the next 50 years, consider this:

• To solve the budget problem with more revenue, production of goods and services in the US would have to increase three times.  Under the current economic conditions, this is difficult to imagine.
• To solve the budget problem with tax rates increases, we would have to increase the personal tax rate to 60% to cover increases.  Currently, revenues run about 20% of production.
• To solve the budget problem with cuts in spending, discretionary expenses would have to be cut by 30% or so.

The practical solution to the problem is probably a combination of two or three of the above.  Any of the above is probably not palatable by itself mainly because people would consider it too harsh or unreasonable.  A 300% is production is not reasonable.  High tax rates are too harsh.   Cutting expenses 30% affects too many people’s pet projects or vested interest.

Another point that people often miss is that letting private enterprise produce some of these goods and services puts people to work, lowers government spending  and typically delivers these goods and services more efficiently (at a better price).  We should privatize a number of functions and services that are now a part of the bureaucracy.

But still, a train wreck is coming and action is required!  We need to ensure continued growth in the economy.  At the same time, we will probably need some increase in tax rates unless decreased tax rates increase productivity enough to bring revenues up significantly.  Probably, the most practicable action will be the significant reduction of discretionary expenses by a hefty percentage, even if only for a few years.

Many people have the viewpoint that congressional spending is out of control.  Many of the “expenses” are for superfluous things that are “social spending” or “pork” projects intended to reward supporters or gain reelection support.

Using the personal budget example, we can see to options available to our government.  If you make $1,000 and have taxes of $300, then you have $700 to cover expenses.  If your expenses are $600, then you have $100 of discretionary income to spend, give away, save or invest.  If your expenses are $800, then you need to find another $100.  You can work longer, get a raise in pay, get someone to give it to you or borrow it form the bank.  If you borrow the money without paying down the balance, then you have a new (and growing) expense called interest. 

It’s no more complicated than that.  The economics of the federal government are just the same.

A major problem with the federal budget is the deficit spending we are doing.  It is analogous to the example above where we spend increasingly more than we bring in, so we keep borrowing money and racking up interest expenses without ever bringing the balance (debt) down.  If the US continues to spend as planned, annual interest on the debt will grow dramatically and soon become the largest single (mandatory) expense in the budget.  Interest on the debt and required payments to Social Security, Medicare and Medicaid make up 83% of our spending and cause the problems described above.  Sometime between 2030 and 2040, mandatory spending will exceed government revenues as shown above.

So, to summarize:

• It is obvious that there is a train wreck coming.
• Congress and administrations have buried their heads in the sand for years.
• The solutions are to:
  • Increase productivity which increases profits and then taxes.
  • Change tax rates to increase tax revenues.
  • Change programs to reduce benefits
  • Reduce discretionary expenses so there is money left to pay for entitlement benefits.
  • Some combination of all these actions.

The most practical solution is to reduce discretionary spending by 30% (an estimate) until the problem is behind us.  Raising tax rates to 60% or reducing entitlements are not popular remedies.  Cutting discretionary spending is not more popular, but (with pain) is the most practical path to follow.

It is possible that a runaway great economy would provide a suddenly convenient solution to the budget problem.  The more likely scenario is that, without changes, revenues will be around 20% of goods and services produced and that mandatory spending will exceed 20% sometime after 2030.  

A train wreck.  Time to do something about it!

 

 

 

The federal budget is easy to understand. 

 It could be summarized as follows:

Revenue                                                          $2,666 Billion

Mandatory Spending                                      $1,778 Billion

Remainder for Discretionary Spending            $878 Billion

Discretionary Spending                                  $1,114 Billion

Surplus (Deficit)                                             ($236) Billion

That means we spend $236 billion more than we take in.

Not only do we spend more that we take in, the most frightening aspect of the future budget is that Social Security and Medicare increase rapidly in the next few decades.  This poses the unavoidable question of fiscal stability for the “out” years (“out” means years that are about ten or more years away).  Unless revenues go up significantly or expenses are curtailed dramatically, we are headed for a financial train wreck.

But, let’s keep it simple.  The federal budget is just like your home budget.  If you make $1,000 and they take out $300 for taxes, then you have $700 left over to pay for expenses.  If your expenses are less than $700, then your have disposable (discretionary) income which you can give away, spend, invest or save.

If you repeatedly have expenses more that $700, you have to lower expenses, work more hours, make more per hour, get the money gifted to you or borrow it from somewhere.  Borrowing creates a new expense called interest (sometimes also called a service fee or an annual fee).

If you found yourself in a deficit position where your expenses were more than your income, you would try to increase your income, but you would probably also prioritize your expenses and cut out or delay those least important to your survival.  This may be a traumatic process.

It is the same with the federal government – we have a deficit situation which means that we are bringing in less that we spend, so we need to increase revenue while we prioritize expenses and cut out or delay those expenses that are (discretionary) not necessary to our survival.  It may be a traumatic process.

Here is the breakdown:

Using 2008 numbers, the US Federal revenue looks like this:

 

	(Billions)	% of Revenue
Revenue:
Individual income tax	$                   1,250.0	46.9%
Social Security and other payroll tax	$                      927.2	34.8%
Corporate income tax	$                      314.9	11.8%
Excise tax	$                        68.1	2.6%
Customs duties	$                        29.2	1.1%
Estate and gift taxes	$                        25.7	1.0%
Other	$                        50.7	1.9%
Total Revenue	$                  2,665.8	100.0%

 

In normal economic times, the revenue increases from year to year.  In fact, government depends on this “growth” and usually spends it in advance of actually collecting it.  This becomes a problem when the economy slows down or changes in laws or regulations dampen productivity.  Solutions to larger “budget-busting” entitlement programs like Social Security and Medicare have been postponed to future years or future budgets by every recent Congress.  As a side note, we are running out of years to which we can postpone the Social Security and Medicare problems.

The mandatory (by law) expenses for 2008 are:

 

	(Billions)	% of Revenue
Mandatory spending:
Social Security	$                      608.0	22.8%
Medicare	$                      386.0	14.5%
Medicaid and Children’s Health (SCHIP)	$                      209.0	7.8%
Unemployment/Welfare/Other mandatory spending	$                      324.0	12.2%
Interest on National Debt	$                      261.0	9.8%
Total Mandatory Spending	$                  1,788.0	67.1%

 

Like your home budget, there are some things that are mandatory expenses.  In your personal budget, rent, taxes, and food are probably the most important followed by utilities and insurance.  Cable TV and entertainment are probably not mandatory and you use discretionary money to pay it.

The size of the National Debt determines how much interest we pay, so it is preferable to most people that we reduce the National Debt and have a corresponding reduction in interest expense. 

When we calculate how much federal revenue is available to pay for discretionary expenses, we find:

	(Billions)	% of Revenue
Balance Left for Discretionary	$                     877.8	32.9%

When you subtract $1.7 trillion in mandatory spending from $2.6 trillion in revenue, you get $0.9 trillion ($877.8 billion to be exact).  About two thirds of the revenue is needed to pay mandatory expenses.  About one third of the revenue is left over for discretionary spending.  Covering the same point as before, Social Security and Medicare will rise significantly as the population ages and could easily outstrip revenues.

Other significant budget items exist that were not present in the 2008 budget – TARP, TALF, Economic Recovery Act, Iraq War, Afghanistan War,  2010 Budget – and significantly impact the budget.

Discretionary spending for 2008 is summarized below:

 

	(Billions)	% of Revenue
Discretionary spending:
Defense	$                      481.4	18.1%
Global War on Terror	$                      145.2	5.4%
Health and Human Services	$                        69.3	2.6%
Education	$                        56.0	2.1%
Veterans Affairs	$                        39.4	1.5%
Housing and Urban Development	$                        35.2	1.3%
State Department and Other International Programs	$                        35.0	1.3%
Homeland Security	$                        34.3	1.3%
Energy	$                        24.3	0.9%
Justice	$                        20.2	0.8%
Agriculture	$                        20.2	0.8%
NASA	$                        17.3	0.6%
Transportation	$                        12.1	0.5%
Treasury	$                        12.1	0.5%
Interior	$                        10.6	0.4%
Labor	$                        10.6	0.4%
Other On -Budget Discretionary Spending	$                        51.8	1.9%
Other Off-budget Discretionary Spending	$                        39.0	1.5%
Total Discretionary	$                 1,114.0	41.8%

 

While many of the expenses above could be considered essential, they are discretionary in budget terms. 

Returning to the personal budget theme, we have just a few choices.  We can increase revenues by increasing productivity (which is taxable) or raise tax rates, or we could do a combination of both.

On the expense side, it goes without saying that we could or should reduce expenses.  This is probably the most likely scenario.   We need to prioritize expenses and then not spend the money that exceeds revenue.   If we can increase revenues, that’s great, but the spending needs to be brought inline with the revenues, whatever they are.

This could be a traumatic process only topped by living a country like the US while it goes bankrupt.  That would be even more traumatic.

In review:

Revenue                                                          $2,666 Billion

Mandatory Spending                                      $1,778 Billio

Remainder for Discretionary Spending           $878  Billion

Discretionary Spending                                  $1,114 Billion

Surplus (Deficit)                                             ($236) Billion

 

We need to increase revenue and/or reduce expense by a net $236 billion.  Mandatory spending and discretionary spending total 108.9% of revenue, so we need to reduce spending by 8.9% (approximately).  On a larger scale, we need to structure our budget for future years and account for Social Security, Medicare and any other entitlement or spending programs passed into law.  This may mean restructuring Social Security or Medicare or other programs so they don’t bankrupt the country.

This also elicits a discussion about fundamental philosophical beliefs.  In any discussion about economics, we are confronted with the concept that we have more needs and wants than we have resources.  We would all like to drive a Ferrari, but some people would rather buy a house or don’t want to devote all of their disposable income to just one expensive car.  It’s an economic decision.   It’s the same with government provided services.  We may think that the government should do this and the government should do that, but it all costs money and we may not want to give up this to get that.  We may be willing to pay taxes to pay for one thing, but not another.  It’s an economic decision.

The main point is that some expenses and entitlement programs are more discretionary than others and we need to prioritize expenses or raise tax revenue until we don’t have deficit spending that will bankrupt the economy.

Some think irresponsibly that the government has bottomless pockets and should pay for every conceivable entitlement.  The fundamentals are contained above.  We have revenue that is dependent on productivity and tax rates.  We have expenses that are mandated or discretionary.  If revenues exceed expenses, we have a surplus.  If expenses exceed revenues, we have deficits.  There are other factors like government stimulus, international market dynamics and monetary policy, but the fundamentals are still the most important.

 

Self Determinism can be defined as the ability to choose a course of action or decision for one’s self.

Those things that increase or allow self determinism are good for the individual and good for the country.

Things that decrease self determinism bring individuals closer to slavery and bring our country closer to a fascistic state.

One of the accepted concepts of taxation says that there is an optimum rate of taxation where the government collects the most taxes.  Simply stated, if the tax rate is too low, the revenue will be correspondingly low.  There may be a lot of productivity, but the low rate of taxation keeps revenue low.  If the tax rate is too high, it will stifle productivity and reduce tax revenues.  No one willingly works to make a profit if the tax rate is 100%.  The optimum rate of taxation is somewhere in the middle.

 

Laffer Curve

The same principle can be applied to self determinism.  In an anarchistic society, people have unlimited self determinism, but there is probably no organization to collect taxes and no government (if there is a government) to receive revenue.  On the other end of the spectrum, in a fascistic society, there is no self determinism because all activity is completely regulated by a dictatorial government.  There is no capitalism or entrepreneurial spirit and no profits to tax.  The result is no revenue.

Somewhere in the middle is an optimum level of self determinism.  Government that provides for every need, form cradle to grave, takes away any individual motivation and reduces self determination.  The result is a lowering of productivity and tax revenues.  An absence of basic protection, law and order has a similar effect where people withhold self determinism with similar results – no productivity and no tax revenues.

Neither anarchism nor fascism allow people to practice self determinism which are the ingredients that lead to productivity and profits which is the only sustainable method for bringing in revenue for the state.  It’s similar to a game with all barriers or no barriers.  In either case, there is no game (translated – no profits or revenues).

 

Roberto Curve

The Roberto Curve shows that fostering self determinism in an optimally regulated society maximizes profits for individuals, revenues for the state and benefits for the populace.