During a hearing on Tuesday in front of the Financial Services and General Government Subcommittee, Acting IRS Commissioner Steven Miller explained that the budget cuts that the IRS must make on account of sequestration will reduce IRS enforcement levels. In the short-term, revenue will drop because the number of audits will drop and collection activity will decline. In the long-term, the diminishing presence of the IRS will cause the voluntary compliance rate to drop, further reducing revenue.
It seems to me that revenue decreases will bring more cries for spending cuts, those spending cuts will decrease revenue, the decreased revenue will bring even more spending cuts, and the downward spiral will take the government, and thus the nation, into a black hole of fiscal oblivion. Why? To prove that greed and selfishness, in the long run, benefits no one?
After one member of panel finished interrogating Miller about the impact of sequestration, another member of the panel tried to make the point that cutting IRS funding doesn’t necessarily mean revenue will decrease. He tried to make his argument by claiming that increasing IRS funding does not increase revenue. He asserted that funding for the IRS increased from 2001 to 2009 and yet revenue decreased during that period. No kidding. The revenue decreased because in 2001 and again in 2003, the geniuses behind tax cuts succeeded in persuading the nation to accept a cut in its tax revenues at the same time it was pumping trillions of dollars into war expenditures. It was encouraging to hear another member of the party point out that the economic downturn also was a reason for the decrease in revenue collection. Yet it remains deeply disturbing that Americans have elected to Congress someone who thinks that sequestration of IRS funding won’t have an adverse impact on revenue. It is worth pondering whether there is some hope on the part of those thinking in that manner that revenue will, in fact, shrink. That’s their dream, isn’t it?
The attempts to shrink the IRS is part of a larger, pervasive, foundational aspect of the anti-tax crowd’s plans to unchain themselves from any attempt on the part of anyone to get in their way as they exalt themselves at the expense of the society on which they are, no matter their denial, very dependent. I have explored the short-term foolishness of cutting IRS funding in posts such as Another Way to Cut Taxes: Hamstring the IRS. At a time when the Congress has piled dozens of new credits, deductions, and exclusions onto already complex tax law, has turned the IRS into the health care enforcer, and has required the IRS to serve as a collection agency for unpaid child support and other debts, it is absurd to cut IRS revenue collection efforts. When people defending the anti-government agenda claim to take their inspiration from the private sector, they conveniently ignore the fact that if a business wanted to eliminate its operating loss, the prognosis for success would be zero if the business ceased all advertising and left its cash registers and online payments systems unattended and unfunded.
Showing posts sorted by date for query greed and financial foolishness. Sort by relevance Show all posts
Showing posts sorted by date for query greed and financial foolishness. Sort by relevance Show all posts
Friday, April 12, 2013
Wednesday, November 17, 2010
Job Creation and Tax Reductions
The rhetoric surrounding the debate over extending the Bush tax cuts is moving from absurd to ridiculous. Advocates of extending the tax cuts for the wealthy are trying to convince the 99 percent of the population that is NOT wealthy that it is in THEIR best interest to support tax cuts for the wealthy. Apparently having decided that the “you middle-class people don’t get an tax cut extension unless the wealthy also get theirs” threat wasn’t working, the supporters of lower taxes for the wealthy are now taking a slightly different approach. They’re trying to link employment prospects for middle-class and lower-income workers to more tax cuts for the wealthy.
Over the weekend, John Boehner, the representative who most likely will become Speaker of the House in January, uttered this bit of reasoning (see, e.g., this report): “I think that extending all of the current tax rates and making them permanent will reduce the uncertainty in America and help small businesses to create jobs again. You can’t invest when you don’t know what the rules are.”
There are at least four major flaws in Boehner’s reasoning. What he said sounds good, at least to those who don’t understand the deeper issues. But sounding good isn’t good enough.
First, though Boehner is correct that uncertainty can generate indecision and stagnation in all sorts of economic activity, including investment, hiring, project initiation, and similar efforts, as I explained in Tax Politics and Economic Uncertainty, uncertainty can be resolved no less definitively by letting the tax cuts for the wealthy expire as it can by letting all of the tax cuts expire or by letting none of the tax cuts expire. Eliminating uncertainty is not something that occurs ONLY if tax cuts for the wealthy are extended. Certainty is more likely no matter what is done, so long as something is done.
Second, there is no certainty in the true sense of the word. No matter what Congress does, the same or a future Congress can change tax rates. One Congress cannot bind a future Congress. Even if advocates of low and lower taxes for the wealthy managed somehow to get their silly idea adopted as an amendment to the Constitution, there’s no guarantee that it would not be removed at a later time. One need to think only of the foolishness surrounding the Prohibition Amendment to understand the elusiveness of certainty.
Third, the financial cost of extending the tax cuts is enormous. Recall, as noted on Monday in The Grand Delusion: Balancing the Federal Budget Without Tax Increases, it would require cutting almost all federal expenditures, assuming Social Security, Medicare, Medicaid, military operations, and interest on the national debt are not cut, just to eliminate the existing deficit. Extending tax cuts makes the deficit even larger. What gets cut to fund tax cut extensions for the wealthy? There's not much left to cut, is there? The answer, of course, which the advocates of those tax cut extensions won’t state publicly, is to cut social security and Medicare benefits for the middle class. In the long-term, the effects of cutting Social Security and Medicare to compensate for tax cut extensions favoring the wealthy will be further economic erosion, and a loss of jobs making the current unemployment rate look like “the good old days.”
Fourth, reducing tax rates or extending low taxes for the wealthy, which is what Boehner advocates, does not create jobs. Extending tax cuts for individuals with incomes exceeding $250,000 (for purposes of simplicity, without getting into the slightly different numbers for individuals in different filing status categories) in addition to extending tax cuts for individuals with incomes under that amount would have no effect on small business owners who do not generate that much income from their business. And that's most truly small business. What about individuals with incomes exceeding $250,000? Will they create jobs if their taxes are reduced or if their tax cuts are extended? Not necessarily. A person does not “create a job,” that is, hire a person for a position that previously did not exist, simply because the person’s tax cuts are extended. People do not hire other people for the sake of doing so. They hire other people if they have work that needs to be done. Extending tax cuts does not cause an increase in the amount of work that needs to be done. Even if it did, would the extension of a tax cut that means roughly $35,000 to someone with income of $1,000,000 generate a new job of any significance? Considering that it costs roughly $1.40 to pay $1 in salary, even if the person with $1,000,000 of income needed work to be done, at best they could “create” a job that pays roughly $25,000. One job. One job paying very little. On the other hand, if the person really needed to hire someone, the tax law provides a zero tax rate on the income used to pay a new employee. Thus, no matter the tax rate, if the person with $1,000,000 of income needed to hire someone to do work for $25,000, by doing so at a rough cost of $35,000, the person’s taxes would be reduced under current law by roughly $12,000, and under a tax-cut-expiration situation, by roughly $14,000. In other words, the “we aren’t creating jobs because our taxes might go up” is utter nonsense. If the person has work that needs to be done, $2,000 isn’t going to make or break the decision. Better yet, the wealthy person can hire enough people so that their taxable income sinks below $250,000 and they won't need to bother themselves with what the tax rates for the wealthy are, and in the process they can learn what it's like to live like most people do. What will create jobs is an increase in demand, 90 percent of which comes from the 99 percent who are not in the economic top one percent, and the best way to stimulate demand among the 99 percent is to extend their tax cuts. Ironically, where work needs to be done, such as highway and bridge repair and maintenance, refurbishment of public infrastructure such as storm sewer systems, firehouses, schools, sanitary sewage systems and plants, dams, national cybersecurity, and similar public improvements, the advocates of tax cuts for the wealthy hold a position that guarantees the lack of funding for most, if not all, of what needs to be done to keep the nation vibrant in a changing world economy.
It should be obvious what this debate is all about. It’s about greed. Hiding the role of greed as the motivating factor for misrepresentations and half-truths becomes difficult when people can see the true agenda. If the wealthy wanted to create jobs, they could be creating jobs as I write while getting tax benefits in the form of deductions and even, in some instances, credits. Instead, they hold the nation hostage while claiming, falsely, that jobs will be created only if tax cuts on the wealthy are extended. They don’t mention what economic life would have been like had taxes for the wealthy not been cut when the nation went to war.
Over the weekend, John Boehner, the representative who most likely will become Speaker of the House in January, uttered this bit of reasoning (see, e.g., this report): “I think that extending all of the current tax rates and making them permanent will reduce the uncertainty in America and help small businesses to create jobs again. You can’t invest when you don’t know what the rules are.”
There are at least four major flaws in Boehner’s reasoning. What he said sounds good, at least to those who don’t understand the deeper issues. But sounding good isn’t good enough.
First, though Boehner is correct that uncertainty can generate indecision and stagnation in all sorts of economic activity, including investment, hiring, project initiation, and similar efforts, as I explained in Tax Politics and Economic Uncertainty, uncertainty can be resolved no less definitively by letting the tax cuts for the wealthy expire as it can by letting all of the tax cuts expire or by letting none of the tax cuts expire. Eliminating uncertainty is not something that occurs ONLY if tax cuts for the wealthy are extended. Certainty is more likely no matter what is done, so long as something is done.
Second, there is no certainty in the true sense of the word. No matter what Congress does, the same or a future Congress can change tax rates. One Congress cannot bind a future Congress. Even if advocates of low and lower taxes for the wealthy managed somehow to get their silly idea adopted as an amendment to the Constitution, there’s no guarantee that it would not be removed at a later time. One need to think only of the foolishness surrounding the Prohibition Amendment to understand the elusiveness of certainty.
Third, the financial cost of extending the tax cuts is enormous. Recall, as noted on Monday in The Grand Delusion: Balancing the Federal Budget Without Tax Increases, it would require cutting almost all federal expenditures, assuming Social Security, Medicare, Medicaid, military operations, and interest on the national debt are not cut, just to eliminate the existing deficit. Extending tax cuts makes the deficit even larger. What gets cut to fund tax cut extensions for the wealthy? There's not much left to cut, is there? The answer, of course, which the advocates of those tax cut extensions won’t state publicly, is to cut social security and Medicare benefits for the middle class. In the long-term, the effects of cutting Social Security and Medicare to compensate for tax cut extensions favoring the wealthy will be further economic erosion, and a loss of jobs making the current unemployment rate look like “the good old days.”
Fourth, reducing tax rates or extending low taxes for the wealthy, which is what Boehner advocates, does not create jobs. Extending tax cuts for individuals with incomes exceeding $250,000 (for purposes of simplicity, without getting into the slightly different numbers for individuals in different filing status categories) in addition to extending tax cuts for individuals with incomes under that amount would have no effect on small business owners who do not generate that much income from their business. And that's most truly small business. What about individuals with incomes exceeding $250,000? Will they create jobs if their taxes are reduced or if their tax cuts are extended? Not necessarily. A person does not “create a job,” that is, hire a person for a position that previously did not exist, simply because the person’s tax cuts are extended. People do not hire other people for the sake of doing so. They hire other people if they have work that needs to be done. Extending tax cuts does not cause an increase in the amount of work that needs to be done. Even if it did, would the extension of a tax cut that means roughly $35,000 to someone with income of $1,000,000 generate a new job of any significance? Considering that it costs roughly $1.40 to pay $1 in salary, even if the person with $1,000,000 of income needed work to be done, at best they could “create” a job that pays roughly $25,000. One job. One job paying very little. On the other hand, if the person really needed to hire someone, the tax law provides a zero tax rate on the income used to pay a new employee. Thus, no matter the tax rate, if the person with $1,000,000 of income needed to hire someone to do work for $25,000, by doing so at a rough cost of $35,000, the person’s taxes would be reduced under current law by roughly $12,000, and under a tax-cut-expiration situation, by roughly $14,000. In other words, the “we aren’t creating jobs because our taxes might go up” is utter nonsense. If the person has work that needs to be done, $2,000 isn’t going to make or break the decision. Better yet, the wealthy person can hire enough people so that their taxable income sinks below $250,000 and they won't need to bother themselves with what the tax rates for the wealthy are, and in the process they can learn what it's like to live like most people do. What will create jobs is an increase in demand, 90 percent of which comes from the 99 percent who are not in the economic top one percent, and the best way to stimulate demand among the 99 percent is to extend their tax cuts. Ironically, where work needs to be done, such as highway and bridge repair and maintenance, refurbishment of public infrastructure such as storm sewer systems, firehouses, schools, sanitary sewage systems and plants, dams, national cybersecurity, and similar public improvements, the advocates of tax cuts for the wealthy hold a position that guarantees the lack of funding for most, if not all, of what needs to be done to keep the nation vibrant in a changing world economy.
It should be obvious what this debate is all about. It’s about greed. Hiding the role of greed as the motivating factor for misrepresentations and half-truths becomes difficult when people can see the true agenda. If the wealthy wanted to create jobs, they could be creating jobs as I write while getting tax benefits in the form of deductions and even, in some instances, credits. Instead, they hold the nation hostage while claiming, falsely, that jobs will be created only if tax cuts on the wealthy are extended. They don’t mention what economic life would have been like had taxes for the wealthy not been cut when the nation went to war.
Monday, December 28, 2009
A Tax Lesson to be Learned
Imagine. A fund designed to make payments to those in need. A tax levied to put money into that fund. In good years the fund balance grows. In bad years the fund balance decreases as payments are made to those whom the fund assists. The level of taxation is set to keep the fund solvent. That's how it should work.
Imagine. When the fund, in good years, has a high balance, politicians seeking to increase spending in other areas of government without raising taxes, see the fund, flush with cash, and dip into it. Whether they intend to "repay" what they pilfer isn't known. But if they don't, the taxes levied to put money into the fund will need to go up when the fund balance dissipates.
Imagine. Times turn tough. Legitimate claims against the fund increase. The fund balance disappears. The fund then tries to borrow, but from whom and at what cost? Ultimately, the fund faces the prospect of showing its empty pockets to those with legitimate claims.
Is this some sort of end-of-the-year parable? Is it a re-hashing of the warnings periodically issued about the sorry financial state of the Medicare and Social Security trust funds? No.
Stop imagining. It's not fiction. It's a real story, with tax lessons for all.
According to this Philadelphia Inquirer story, this is what happened to the New Jersey unemployment compensation insurance fund. When the economy was going well, the taxes levied on employers and employees caused the fund to grow, even as it took care of the unemployment compensation claims made by those who lost their jobs. Unemployment was low, so the funds outlays were less than the taxes being collected on employers and employees. The tax rate on employers fell, as the legislation setting up the fund was designed to let the employer tax rate "float" depending on the fund balance. The arithmetic was done in a manner that let the fund hold reserves so that if unemployment increased, which would cause both an increase in unemployment compensation claims and a decrease in tax collections, the fund would be in a position to meet its obligations.
Unfortunately, New Jersey politicians eager to spend money without raising taxes looked at the fund balance and decided it was theirs to use for purposes other than unemployment compensation. So they took $4.7 billion from the fund. Their short-sightedness, a terrible lack of ability or willingness to look ahead, backfired.
The economy took a tumble. Unemployment skyrocketed. So, too, did legitimate unemployment compensation claims. The fund dried up. It dried up much sooner than it would have had the $4.7 billion not been pilfered. If the fund were a private trust, the trustees would be nailed for breach of fiduciary obligation. Unfortunately, there's no such fiduciary obligation imposed on politicians. In the meantime, the fund borrowed almost $1 billion from the federal government so that it could continue to pay claims.
Consequently, the "floating" tax rate mechanism is set to trigger an increase in the employer portion of the unemployment compensation insurance tax. Set to occur on July 1, it's a whopping increase. The rate would move to the highest permissible rate. Employers who at the moment are collectively paying $1.7 billion into the fund each year would pay $2.7 billion. Some employers are facing a tax increase of $270 per employee and others as much as $700 per employee, with rates varying depending on the particular employer's employment hiring and firing history. It will take several years of increased taxes and presumable declining unemployment compensation claims, to restore the fund to financial health. As early as April 2009, the state's labor commissioner disclosed the fund's condition and the looming tax increase.
New Jersey Republicans, however, consider tax increases to be evil upon evil, and want to block the automatic tax hike. So they are considering other options. One option is to have the state put money into the fund. The fund needs $2 billion in order to prevent a tax hike this July, but that would not prevent the tax hike trigger from kicking in on July 1, 2011. The difficulty with this option is that the state's general fund faces an $8 billion deficit, so there's no reasonable expectation that the state can come up with money that, in effect, would repay some of what the politicians "borrowed" -- or should we say "stole" -- from the fund in years past. Another option is to amend the tax rate trigger legislation so that the tax increase is reduced or eliminated. The foolishness of this idea is that the fund deficit would continue to grow, and the situation would compound itself in upcoming years. For example, if $2 billion is not made up during the next fiscal year, the following year would bring a $4 billion shortfall. Yet another option put forth by the Republicans is to ask the federal government to forgive the almost $1 billion that the fund has borrowed from it. This approach is doubly flawed. First, eliminating the fund deficit does not generate cash that can be used to pay pending and forthcoming claims, unless the unspoken aspect of this option is to borrow even more from the federal government with the intention of having that amount also forgiven as a debt. Second, shifting the burden onto the federal government shifts the burden onto taxpayers throughout the country, which is problematic in and of itself but worse, impractical because at least half of the states are in the same position of owing money to the federal government to repay loans undertaken to fund unemployment compensation insurance fund deficits. Still another option is to cut unemployment compensation benefits, but as the article puts it, this "could created a fierce backlash." Indeed.
Looking ahead, two politicians have proposed an amendment to the New Jersey Constitution prohibiting the sort of "borrowing" from the fund that caused this crisis. Voters will make a decision on that proposal in November. For the moment, though, the only viable choice is to let the automatic tax increase kick in. This will drive the newly elected governor crazy, considering he got himself elected on a campaign promise that benefits of all sorts from the state could be increased while taxes were not just being held steady, but cut. Cut! Welcome to reality, Mr. Christie.
Among the lessons to be learned from this mess, aside from the stupidity of eating next year's seed corn, is the prospects that lie ahead for the Social Security and Medicare Trust Funds. For years, federal politicians have used these funds to finance the deficits arising from cutting taxes for the wealthy while simultaneously increasing federal spending, chiefly to finance a war. When claims against those funds begin to increase and the funds begin to call back the loans made to the Treasury general fund, a crisis orders of magnitude bigger than the one facing New Jersey -- and several dozen other states -- will paralyze the nation. Consider the options. Unlike the New Jersey unemployment compensation insurance legislation, there is no automatic tax hike trigger that would increase social security and Medicare taxes on employers or even employees. So one option is to have the federal government put money into the fund, that is, to pay back the money borrowed from the funds. Where does the federal government, already wallowing in astronomical deficits, get that money? Increase taxes? Consider the hue and cry over that one. Perhaps the federal government could print money. That would cause inflation, devalue the dollar internationally, and probably trigger another economic collapse. Another option is to ask the trust funds to forgive the debt. Wait. That won't work. Perhaps the federal government should ask China, Japan, Saudi Arabia, and the other nations that financed the "raised military spending while cutting taxes for the wealthy" stupidity of the past decade to forgive the debt. Ha ha ha. One can imagine what would be asked in return. Think about an IRS with its headquarters in Beijing, Riyadh, or Tokyo. Yet another option is to cut Medicare and social security benefits. Expect yet another "fierce backlash."
As many predicted, beginning almost ten years ago, the ultimate price to be paid for the "we want it all and we want it now" screech of the wealthy who didn't want to pay taxes, joined by those who did not benefit from the tax cuts but imagined themselves someday being among the lowly-taxed economic elite, is soon to be paid. Now that the promised economic paradise offered by the tax-cuts-for-the-wealthy advocates has not materialized, a surprise and disappointment to some but a totally expected outcome to those who understand economic reality, the pain of foolish choices is going to afflict the entire nation and, quite possibly, most of the planet. It's time to set aside the false promises, the deceptive arguments, and the selfish motives of those who put individual greed above collective good, and to take the difficult and agonizing steps that need to be taken if unemployment, social security, and Medicare trust funds, let alone the nation, are going to survive and prosper.
Imagine. When the fund, in good years, has a high balance, politicians seeking to increase spending in other areas of government without raising taxes, see the fund, flush with cash, and dip into it. Whether they intend to "repay" what they pilfer isn't known. But if they don't, the taxes levied to put money into the fund will need to go up when the fund balance dissipates.
Imagine. Times turn tough. Legitimate claims against the fund increase. The fund balance disappears. The fund then tries to borrow, but from whom and at what cost? Ultimately, the fund faces the prospect of showing its empty pockets to those with legitimate claims.
Is this some sort of end-of-the-year parable? Is it a re-hashing of the warnings periodically issued about the sorry financial state of the Medicare and Social Security trust funds? No.
Stop imagining. It's not fiction. It's a real story, with tax lessons for all.
According to this Philadelphia Inquirer story, this is what happened to the New Jersey unemployment compensation insurance fund. When the economy was going well, the taxes levied on employers and employees caused the fund to grow, even as it took care of the unemployment compensation claims made by those who lost their jobs. Unemployment was low, so the funds outlays were less than the taxes being collected on employers and employees. The tax rate on employers fell, as the legislation setting up the fund was designed to let the employer tax rate "float" depending on the fund balance. The arithmetic was done in a manner that let the fund hold reserves so that if unemployment increased, which would cause both an increase in unemployment compensation claims and a decrease in tax collections, the fund would be in a position to meet its obligations.
Unfortunately, New Jersey politicians eager to spend money without raising taxes looked at the fund balance and decided it was theirs to use for purposes other than unemployment compensation. So they took $4.7 billion from the fund. Their short-sightedness, a terrible lack of ability or willingness to look ahead, backfired.
The economy took a tumble. Unemployment skyrocketed. So, too, did legitimate unemployment compensation claims. The fund dried up. It dried up much sooner than it would have had the $4.7 billion not been pilfered. If the fund were a private trust, the trustees would be nailed for breach of fiduciary obligation. Unfortunately, there's no such fiduciary obligation imposed on politicians. In the meantime, the fund borrowed almost $1 billion from the federal government so that it could continue to pay claims.
Consequently, the "floating" tax rate mechanism is set to trigger an increase in the employer portion of the unemployment compensation insurance tax. Set to occur on July 1, it's a whopping increase. The rate would move to the highest permissible rate. Employers who at the moment are collectively paying $1.7 billion into the fund each year would pay $2.7 billion. Some employers are facing a tax increase of $270 per employee and others as much as $700 per employee, with rates varying depending on the particular employer's employment hiring and firing history. It will take several years of increased taxes and presumable declining unemployment compensation claims, to restore the fund to financial health. As early as April 2009, the state's labor commissioner disclosed the fund's condition and the looming tax increase.
New Jersey Republicans, however, consider tax increases to be evil upon evil, and want to block the automatic tax hike. So they are considering other options. One option is to have the state put money into the fund. The fund needs $2 billion in order to prevent a tax hike this July, but that would not prevent the tax hike trigger from kicking in on July 1, 2011. The difficulty with this option is that the state's general fund faces an $8 billion deficit, so there's no reasonable expectation that the state can come up with money that, in effect, would repay some of what the politicians "borrowed" -- or should we say "stole" -- from the fund in years past. Another option is to amend the tax rate trigger legislation so that the tax increase is reduced or eliminated. The foolishness of this idea is that the fund deficit would continue to grow, and the situation would compound itself in upcoming years. For example, if $2 billion is not made up during the next fiscal year, the following year would bring a $4 billion shortfall. Yet another option put forth by the Republicans is to ask the federal government to forgive the almost $1 billion that the fund has borrowed from it. This approach is doubly flawed. First, eliminating the fund deficit does not generate cash that can be used to pay pending and forthcoming claims, unless the unspoken aspect of this option is to borrow even more from the federal government with the intention of having that amount also forgiven as a debt. Second, shifting the burden onto the federal government shifts the burden onto taxpayers throughout the country, which is problematic in and of itself but worse, impractical because at least half of the states are in the same position of owing money to the federal government to repay loans undertaken to fund unemployment compensation insurance fund deficits. Still another option is to cut unemployment compensation benefits, but as the article puts it, this "could created a fierce backlash." Indeed.
Looking ahead, two politicians have proposed an amendment to the New Jersey Constitution prohibiting the sort of "borrowing" from the fund that caused this crisis. Voters will make a decision on that proposal in November. For the moment, though, the only viable choice is to let the automatic tax increase kick in. This will drive the newly elected governor crazy, considering he got himself elected on a campaign promise that benefits of all sorts from the state could be increased while taxes were not just being held steady, but cut. Cut! Welcome to reality, Mr. Christie.
Among the lessons to be learned from this mess, aside from the stupidity of eating next year's seed corn, is the prospects that lie ahead for the Social Security and Medicare Trust Funds. For years, federal politicians have used these funds to finance the deficits arising from cutting taxes for the wealthy while simultaneously increasing federal spending, chiefly to finance a war. When claims against those funds begin to increase and the funds begin to call back the loans made to the Treasury general fund, a crisis orders of magnitude bigger than the one facing New Jersey -- and several dozen other states -- will paralyze the nation. Consider the options. Unlike the New Jersey unemployment compensation insurance legislation, there is no automatic tax hike trigger that would increase social security and Medicare taxes on employers or even employees. So one option is to have the federal government put money into the fund, that is, to pay back the money borrowed from the funds. Where does the federal government, already wallowing in astronomical deficits, get that money? Increase taxes? Consider the hue and cry over that one. Perhaps the federal government could print money. That would cause inflation, devalue the dollar internationally, and probably trigger another economic collapse. Another option is to ask the trust funds to forgive the debt. Wait. That won't work. Perhaps the federal government should ask China, Japan, Saudi Arabia, and the other nations that financed the "raised military spending while cutting taxes for the wealthy" stupidity of the past decade to forgive the debt. Ha ha ha. One can imagine what would be asked in return. Think about an IRS with its headquarters in Beijing, Riyadh, or Tokyo. Yet another option is to cut Medicare and social security benefits. Expect yet another "fierce backlash."
As many predicted, beginning almost ten years ago, the ultimate price to be paid for the "we want it all and we want it now" screech of the wealthy who didn't want to pay taxes, joined by those who did not benefit from the tax cuts but imagined themselves someday being among the lowly-taxed economic elite, is soon to be paid. Now that the promised economic paradise offered by the tax-cuts-for-the-wealthy advocates has not materialized, a surprise and disappointment to some but a totally expected outcome to those who understand economic reality, the pain of foolish choices is going to afflict the entire nation and, quite possibly, most of the planet. It's time to set aside the false promises, the deceptive arguments, and the selfish motives of those who put individual greed above collective good, and to take the difficult and agonizing steps that need to be taken if unemployment, social security, and Medicare trust funds, let alone the nation, are going to survive and prosper.
Wednesday, December 17, 2008
Is Tax the Best Way to Deal with Greed and Financial Foolishness?
Three months ago, in Risk Premiums with a Greed Tax?, I suggested that perhaps there should be a tax on greed. I proposed that "The tax would apply when a person's or entity's attempt to accumulate wealth, rather than 'trickling down' benefits to society generally, harms society." Recent news compels me to think about how such a tax would have affected the most recent fraudulent scheme presented by Wall Street.
In news that broke last week, an investment broker was arrested for defrauding customers with a $50 billion Ponzi scheme. Bernard Madoff was charged with securities fraud, for allegedly providing the guaranteed returns he promised his customers by obtaining money from other investors to pay off the earlier entrants into the arrangement. Even a 1 percent fee would have generated $500 million for Madoff. According to the complaint filed by the SEC, Madoff told his employees that his advising business was a fraud, that nothing was left, that it was "one big lie," and that it was a "giant Ponzi scheme." Yet Madoff did have about $200 million remaining which he tried to distributed to employees, family members, and friends of his choosing. Madoff served as president of NASDAQ during the early 1990s. Now he faces up to 20 years in jail and a $5 million fine. According to a CNN story, several European banks were victims of Madoff's machinations.
Madoff's attorney was quoted as saying, "Bernie Madoff is a longstanding leader in the financial services industry. He intends to fight to get through this unfortunate set of events." One question that crosses my mind is this. If Madoff succeeds in getting through these events, at what place does he arrive? Surely his career as an investment broker, as a financial advisor, as a Wall Street executive, is over. So, too, are the lives of those whose investments he squandered. A related question is whether he will find the opportunity to earn enough money to pay a $5 million fine. Yet another related question is whether anyone seriously thinks Madoff ever will find the means to reimburse his victims.
As a practical matter, it's too late for Madoff to find ways to restore the financial status of his customers as things were before he embarked on this money grab. The time to build a protective fund, or some sort of insurance, is during the period someone is engaging in risky financial behavior. All financial behavior is risky, but that risk varies from near-zero to astronomical, depending on the activity and the persons involved in the undertaking. Actuaries know how to evaluate risk, and surely they can tag different financial deals with appropriate risk characteristics. If a risk premium is charged on every financial transaction, then a fund exists that can be used to provide relief to those who, like the couple I saw interviewed on the television at the gym on Monday morning, have "lost everything."
The tougher question is whether a risk premium should be augmented with a tax on greed. In Risk Premiums with a Greed Tax?, I had this to say about greed:
If industry and government, and society in general, cannot develop workable answers to these questions, the continuing parade of news stories of this sort will do nothing to restore the trust that needs to exist in order for the economy to resume some semblance of productive operation. In a time when people don't know each other the way they did when they grew up together in the same small town, something is required that creates the assurances once more easily obtained in a less inter-connected world. I doubt that a tax or user fee can renew that trust, but it can build a financial cushion, a financial cushion that might help people scale back their fear of dealing in a crumbling economy.
In news that broke last week, an investment broker was arrested for defrauding customers with a $50 billion Ponzi scheme. Bernard Madoff was charged with securities fraud, for allegedly providing the guaranteed returns he promised his customers by obtaining money from other investors to pay off the earlier entrants into the arrangement. Even a 1 percent fee would have generated $500 million for Madoff. According to the complaint filed by the SEC, Madoff told his employees that his advising business was a fraud, that nothing was left, that it was "one big lie," and that it was a "giant Ponzi scheme." Yet Madoff did have about $200 million remaining which he tried to distributed to employees, family members, and friends of his choosing. Madoff served as president of NASDAQ during the early 1990s. Now he faces up to 20 years in jail and a $5 million fine. According to a CNN story, several European banks were victims of Madoff's machinations.
Madoff's attorney was quoted as saying, "Bernie Madoff is a longstanding leader in the financial services industry. He intends to fight to get through this unfortunate set of events." One question that crosses my mind is this. If Madoff succeeds in getting through these events, at what place does he arrive? Surely his career as an investment broker, as a financial advisor, as a Wall Street executive, is over. So, too, are the lives of those whose investments he squandered. A related question is whether he will find the opportunity to earn enough money to pay a $5 million fine. Yet another related question is whether anyone seriously thinks Madoff ever will find the means to reimburse his victims.
As a practical matter, it's too late for Madoff to find ways to restore the financial status of his customers as things were before he embarked on this money grab. The time to build a protective fund, or some sort of insurance, is during the period someone is engaging in risky financial behavior. All financial behavior is risky, but that risk varies from near-zero to astronomical, depending on the activity and the persons involved in the undertaking. Actuaries know how to evaluate risk, and surely they can tag different financial deals with appropriate risk characteristics. If a risk premium is charged on every financial transaction, then a fund exists that can be used to provide relief to those who, like the couple I saw interviewed on the television at the gym on Monday morning, have "lost everything."
The tougher question is whether a risk premium should be augmented with a tax on greed. In Risk Premiums with a Greed Tax?, I had this to say about greed:
Greed is not the desire to increase one's economic status, particularly because most people on the planet who have that desire pursue their dreams because they are trying to accumulate enough economic assets in order to survive. Greed is the desire to hold far more economic wealth than is necessary for survival, comfort, and even luxurious lifestyles. It is the desire to hold so much wealth that the wealth becomes an instrument of power more effective than the decisions of elected officials, and thus becomes a threat to democracy. Greed is exacerbated when it is coupled with impatience, much like the demand, "I want it all, and I want it now."How does one know whether greed is tainting a financial transaction? Was Madoff greedy? Or was Madoff someone who feared failure, and having put himself into a corner by making outlandish promises that he could not keep, proceed to act in desperation? Should those who deal with large amounts of money be subject to a different, more exacting, set of standards and treated as more likely to be caught up in greed? Should motive matter? Should the tax be expanded from one imposed on greed to one imposed on greed, carelessness, stupidity, and over-reaching? Or should the risk premium, whether or not in the form of a tax, be determined by actuaries who take greed, carelessness, stupidity, and other factors into account? Are actuaries capable of doing that? Simply because the broker or investment banker can point to degrees earned from prestigious educational institutions does not mean that he or she is free of carelessness or even greed? Is there a track record that can be considered? What sort of risk factor would an actuary have pegged on Bernie Madoff before this news broke?
If industry and government, and society in general, cannot develop workable answers to these questions, the continuing parade of news stories of this sort will do nothing to restore the trust that needs to exist in order for the economy to resume some semblance of productive operation. In a time when people don't know each other the way they did when they grew up together in the same small town, something is required that creates the assurances once more easily obtained in a less inter-connected world. I doubt that a tax or user fee can renew that trust, but it can build a financial cushion, a financial cushion that might help people scale back their fear of dealing in a crumbling economy.
Monday, October 13, 2008
Children, Toys, Greed, Profits, Gambling, and Lessons from History
The Reuters headline says it all: "IMF Warns of Financial Meltdown." Or does it?
Of course, it does not say it all. It doesn't tell us how the problems can be solved. It doesn't identify the practices that need to be changed, the expectations that need to adjusted, and the cultural and social values that need to retuned. It doesn't use the words greed, corruption, secretiveness, collusion, ignorance or foolishness. The story accompanying the headline notes that while United States political and financial leaders ask for patience, the Internatlonal Monetary Fund warned that there isn't much time left to prevent a catastrophe. Some experts not that if the problems are not solved quickly, the world will enter a "dangerously deep recession." Hmm, if we tighten up that phrase, do we get Depression?
When a tool is misused, people tend to become very cautious when dealing with that tool. When a child uses a toy inappropriately, the responsible parent puts the toy out of reach, but also finds a way to instruct the child on the toy's proper use and why it is important to respect the purpose of the toy. Eventually the toy is returned to the child, who has a better appreciation of its purpose and treats it with the appropriate respect. Similarly, when the casino capitalists misuse debt and leverage, banks have become very cautious in making loans, but they, or someone, need to find a way to instruct the greed merchants on the proper use of debt and leverage and why it is important to respect the power of those tools to do generate not only financial benefits but also economic doom. And someone needs to find a way to then restore the use of debt and leverage in national and international business and consumer transactions.
For example, someone needs to step up and make it clear that a free market isn't a license to shift the consequences of bad decisions onto the unwitting and the unwilling. Recently I read a comment, and unfortunately I cannot find it, that equated greed with the seeking of profits. It's one thing to seek income and assets in order to meet what one needs to survive, to be comfortable, and to support one's dependents. It's a totally different thing to seek income and assets orders of magnitude beyone what is needed for survival and comfort. In today's economy, no one needs to own billions of dollars of assets or to earn tens of millions of dollars per year. Seeking these sorts of profits and accumulations of wealth is a matter of addiction, of thirst for power, or both. A person can eat only so much, can wear only so much, can drive only one vehicle at a time, and has only one body in need of health care. So what does one do with the excess income and wealth? One buys votes. One controls society through off-shore entities. One tries to arrange for one's children and grandchildren to live lavishly without needing to work. Are these behaviors good for society? I propose that the answer is no, because the efforts made to attain these options have imposed a huge price on society, and we're only beginning to see the extent of the damage that has been done. I can imagine there are those who would point the finger at the homeowners who applied for mortgages they could not afford, and the members of the so-called middle class who tried to "make a killing" in the markets for their retirement plans. No, I don't condone the foolish decisions of seeking debt beyond one's ability to repay or sinking 100 percent of one's assets into risky investments. But it also should be understood that many people in this position were so acting because the tax and economic policies of the past decade widened the chasm between the haves and have-nots, leaving the have-nots and those perceiving themselves to be at risk of becoming have-nots with what they saw as no choice but to gamble for their economic future.
Of course, some parents neglect to discipline their children. Some children fail to get the message. It doesn't always work out the way it ought to work out. Similarly, there's no guarantee that governments, and more specifically, their officials, will discipline those who abused the free market, and there's no guarantee that the casino capitalists will get the message. A similar message was sent in 1929, many people learned, their children and grandchildren viewed them as overly cautious, and the lessons were forgotten. History repeats itself. There's no guarantee that it will not.
Of course, it does not say it all. It doesn't tell us how the problems can be solved. It doesn't identify the practices that need to be changed, the expectations that need to adjusted, and the cultural and social values that need to retuned. It doesn't use the words greed, corruption, secretiveness, collusion, ignorance or foolishness. The story accompanying the headline notes that while United States political and financial leaders ask for patience, the Internatlonal Monetary Fund warned that there isn't much time left to prevent a catastrophe. Some experts not that if the problems are not solved quickly, the world will enter a "dangerously deep recession." Hmm, if we tighten up that phrase, do we get Depression?
When a tool is misused, people tend to become very cautious when dealing with that tool. When a child uses a toy inappropriately, the responsible parent puts the toy out of reach, but also finds a way to instruct the child on the toy's proper use and why it is important to respect the purpose of the toy. Eventually the toy is returned to the child, who has a better appreciation of its purpose and treats it with the appropriate respect. Similarly, when the casino capitalists misuse debt and leverage, banks have become very cautious in making loans, but they, or someone, need to find a way to instruct the greed merchants on the proper use of debt and leverage and why it is important to respect the power of those tools to do generate not only financial benefits but also economic doom. And someone needs to find a way to then restore the use of debt and leverage in national and international business and consumer transactions.
For example, someone needs to step up and make it clear that a free market isn't a license to shift the consequences of bad decisions onto the unwitting and the unwilling. Recently I read a comment, and unfortunately I cannot find it, that equated greed with the seeking of profits. It's one thing to seek income and assets in order to meet what one needs to survive, to be comfortable, and to support one's dependents. It's a totally different thing to seek income and assets orders of magnitude beyone what is needed for survival and comfort. In today's economy, no one needs to own billions of dollars of assets or to earn tens of millions of dollars per year. Seeking these sorts of profits and accumulations of wealth is a matter of addiction, of thirst for power, or both. A person can eat only so much, can wear only so much, can drive only one vehicle at a time, and has only one body in need of health care. So what does one do with the excess income and wealth? One buys votes. One controls society through off-shore entities. One tries to arrange for one's children and grandchildren to live lavishly without needing to work. Are these behaviors good for society? I propose that the answer is no, because the efforts made to attain these options have imposed a huge price on society, and we're only beginning to see the extent of the damage that has been done. I can imagine there are those who would point the finger at the homeowners who applied for mortgages they could not afford, and the members of the so-called middle class who tried to "make a killing" in the markets for their retirement plans. No, I don't condone the foolish decisions of seeking debt beyond one's ability to repay or sinking 100 percent of one's assets into risky investments. But it also should be understood that many people in this position were so acting because the tax and economic policies of the past decade widened the chasm between the haves and have-nots, leaving the have-nots and those perceiving themselves to be at risk of becoming have-nots with what they saw as no choice but to gamble for their economic future.
Of course, some parents neglect to discipline their children. Some children fail to get the message. It doesn't always work out the way it ought to work out. Similarly, there's no guarantee that governments, and more specifically, their officials, will discipline those who abused the free market, and there's no guarantee that the casino capitalists will get the message. A similar message was sent in 1929, many people learned, their children and grandchildren viewed them as overly cautious, and the lessons were forgotten. History repeats itself. There's no guarantee that it will not.
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