Wednesday, January 23, 2013

Tax Ignorance and Its Siblings 

There’s just something about ignorance that disturbs me. It always has. Even as a very young child, it bothered me more than just a little bit when someone spouted nonsense or shared misinformation. It did not matter whether it was an adult, such as several of my elementary school teachers whose cluelessness bewilders me even to this day, or a child. The harm that is generated by ignorance can be devastating. Unquestionably my exposure to ignorance from every direction was a significant factor in my decision to become a teacher.

My reaction to ignorance has remained the same over the years, but something has changed. Either I’ve become more adept at spotting ignorance or the extent of ignorance has increased significantly in the past few years. I understand that modern communications technology and social media give ignorance a wider audience, but I would also expect a wider dissemination of factually accurate information that left ignorance with its traditional percentage share of the information pool. Instead, it seems as though ignorance has been claiming an ever-increasing share of the attention and is crowding out good information.

Because my major area of professional interest is tax, I’ve focused on what I call tax ignorance. I’ve returned time and again to the problems caused by tax ignorance, looking at this issue in posts such as Tax Ignorance, Is Tax Ignorance Contagious?, Fighting Tax Ignorance, Why the Nation Needs Tax Education, Tax Ignorance: Legislators and Lobbyists, Tax Education is Not Just For Tax Professionals, The Consequences of Tax Education Deficiency, The Value of Tax Education, More Tax Ignorance, With a Gift, Tax Ignorance of the Historical Kind, A Peek at the Production of Tax Ignorance, and When Tax Ignorance Meets Political Ignorance.

Tax ignorance, of course, is but one part of political ignorance, as I explored in When Tax Ignorance Meets Political Ignorance. But political ignorance, it seems to me, is just one aspect of an even wider affliction, namely, the predisposition of humans to wallow in ignorance of every kind. It seems as though tax ignorance is just one child of this phenomenon and that it has many brothers and sisters, including historical ignorance, political ignorance, medical ignorance, nutrition ignorance, and so on. The problem is more than just the complexity of tax law, and the solution is more than just the tax education that I advocate.

Two commentaries recently brought to my attention highlight the ignorance epidemic. Both illustrate why those interested in a specific area of study can benefit from exploring research in other areas.

In Why Think By Numbers?, Mike P. Sinn explains why ignorance is so prevalent. When I read the article, my first thought was that he was saying what I’ve said for years, though I don’t take credit for what had been explained to me years ago. Though I cannot condense Sinn’s article into several sentences and urge everyone to read it, the short version is that the limbic system refuses to yield gently to the brain’s reasoning system. That’s why people tend to vote for candidates based on things like looks, why people repost goofy things such as the “reverse ATM pin brings police” and “five Mondays/Tuesdays/Wednesdays in one month happens only every 823 years” nonsense, why people cling to ineffective strategies, and why people have all sorts of absurd ideas about the details of federal spending and how the tax law works.

In Clive Thompson on How More Info Leads to Less Knowledge, Clive Thompson explores how, despite gains in scientific understanding and growth in the accumulation of facts, ignorance is increasing. Thompson cites Robert Proctor, a historian of science, who focuses on “the study of culturally constructed ignorance.” Proctor even has a word for the study of this phenomenon. It is agnotology. Proctor has concluded that the cause of this ignorance increase is the effort by special interests “to create confusion.” He contends that the information revolution has met the disinformation revolution. His examples include efforts by the oil and automobile industries to “carefully seed doubt about the causes of global warming” and by the tobacco industry to “link lung cancer to baldness, viruses – anything but their product.” Put another way, there are people who want humans to be ignorant. Thompson notes that the recent economic collapse was attributable to the marketing of financial instruments designed to hide their underlying components, blinding investors and crippling financial institutions.

Thompson notes that the journalist Farhad Manjoo distinguishes between arguing about the meaning of facts, which constitutes a debate, and arguing about what the facts are, which is an “agnotological Armageddon.” To me, it seems that those who don’t stand a chance of prevailing when the facts are accepted try to win by twisting, distorting, or hiding the facts, using misinformation as one of their tools. Though the person who started the “five Mondays/Tuesdays/Wednesdays in a month only once every 823 years” or “reverse ATM pin calls police” silliness may have been seeking no more than a practical joke, the folks who deal with serious issues by spreading out-of-context quotations and outright lies, or circulating doctored photographs and altered audio recordings, are dedicated to one thing and one thing only, and that is success through deceit. They belong to a tradition that reaches back a very long time. It started with the words, “You will not die; for God knows that when you eat of it your eyes will be opened, and you will be like God, knowing good and evil.” How did that work out?

Monday, January 21, 2013

Transportation Infrastructure Funding: Tax and Spending Policy Hypocrisy? 

On Friday, in How Not To Pay for Transportation Infrastructure, I criticized the proposal made by the Governor of Virginia to shift the cost of transportation infrastructure construction, maintenance, and repair from users to the general public. It turns out that the idea of shifting transportation costs from users to others is not just an idea, but a practice that is rampant across the nation.

Late last week, the Tax Foundation released a report, whose title, “Gasoline Taxes and Tolls Pay for Only a Third of State & Local Road Spending,” pretty much says it all. The report makes the point that “funding transportation out of general revenue makes roads ‘free,’ and consequently, overused or congested – often the precise problem transportation spending programs are meant to solve.”

It is puzzling that the same folks who object to free riders in so-called entitlement programs, even when the beneficiary is not a free rider, object vociferously to doing anything to increase the ever-diminishing share of transportation infrastructure costs borne by the users. Why is it acceptable for transportation infrastructure users to free ride on the highways? Could it be that most anti-entitlement-program and anti-tax people are transportation infrastructure users who delight in letting someone else bear the burden for them? What is so horrible about requiring users of a resource to pay for that use? Considering that doing so would permit reduction of taxes that put revenue into general funds, because transportation infrastructure needs would no longer be pulling money out of those general funds, is it really all that unacceptable to follow the same principles that underlie the objections made to so-called free-riding entitlement program beneficiaries? Is there some hypocrisy at work when it comes to who pays and who benefits?

Friday, January 18, 2013

How Not To Pay for Transportation Infrastructure 

The governor of Virginia has presented a plan for funding transportation infrastructure in his state. For those who think that infrastructure users should pay in proportion to their use of transportation facilities, the plan appears to advance the opposite approach.

According to this report, Virginia’s governor wants to eliminate the gasoline tax, increase the general sales tax, and impose a fee on alternative fuel vehicles. He would leave in place the tax on “diesel gas,” which I assume refers to “diesel fuel.”

The message I take from this plan is as follows. If you drive a pollution-reducing, energy-efficient alternative fuel vehicle, you will pay. If you drive a diesel vehicle, you will pay. If you drive a gasoline vehicle, you are off the hook. Then, all residents, whether or not they are drivers, along with people visiting from out-of-state even if they arrive by air or rail, will pay additional taxes on their taxable purchases to fund transportation infrastructure in the state. Though a person who purchases a television has had the benefit of transportation infrastructure because the television was delivered to the store by truck, it is more efficient to impose transportation costs on the users of the infrastructure, who can then pass the cost onto the consumer. In this manner, the person using transportation infrastructure for personal purposes, having no customer onto whom the cost can be shifted, bears the burden of using the roads and bridges. Why should that person’s cost be shifted to someone who is not using those transportation facilities? Why should drivers of diesel-fueled vehicles, which are in many ways more efficient than gasoline-fueled vehicles, bear the burden of both a fuel tax and an increased sales tax? Why should the drivers of alternative-fueled vehicles be hit with a fee and an increase in the sales taxes that they pay? The plan advanced by the governor of Virginia fails from almost every sensible perspective.

The governor’s rationale for subjecting alternative-fueled vehicles to a fee is that they don’t pay gasoline taxes. But if the gasoline tax is repealed, then no one in Virginia would be paying the gasoline tax. So why not impose the fee on all vehicles? Could the fee on alternative-fueled vehicles be intended to squelch the purchase of these vehicles? Surely purchasers of these vehicles are not being exempted from the proposed increase in the general sales tax rate.

The governor’s statement, “But we cannot let another session be lost as each member holds out for their perfect plan,” presumes that all imperfect plans are the same because they all share the quality of not being perfect. Yet there are degrees of imperfection, and the plan with the least amount of imperfection is, of course, the mileage-based road fee. I have been explaining, analyzing, and advocating that fee for more than eight years, in posts such as Tax Meets Technology on the Road, Mileage-Based Road Fees, Again, Mileage-Based Road Fees, Yet Again, Change, Tax, Mileage-Based Road Fees, and Secrecy, Pennsylvania State Gasoline Tax Increase: The Last Hurrah?, Making Progress with Mileage-Based Road Fees, Mileage-Based Road Fees Gain More Traction, Looking More Closely at Mileage-Based Road Fees, The Mileage-Based Road Fee Lives On, Is the Mileage-Based Road Fee So Terrible?, Defending the Mileage-Based Road Fee, and Liquid Fuels Tax Increases on the Table.

In Liquid Fuels Tax Increases on the Table, I concluded that “If governors and legislators cannot bring themselves to step into the twenty-first century when it comes to maintaining the common weal, then they at least need to summon the courage required to raise the gasoline tax and prevent an ever-increasing parade of catastrophes.” It’s as though Virginia’s governor read that sentence and decided to do the opposite.

Wednesday, January 16, 2013

Still More Joys of IRC Section 86 

More than eight years ago, in The Joys of IRC Section 86, I explained the convoluted manner in which Congress has specified that taxpayers determine how much, if any, of their social security benefits are subject to federal income taxation. A little more than four years ago, in More Joys of IRC Section 86, I explored the impact of state income tax refunds on the section 86 computation, and the additional complexity it layered on an already unnecessarily complicated process.

Now a case decided earlier this month, Brady v. Comr., T.C. Memo 2013-1, provides a glimpse into yet another complicating factor in the computation of social security gross income. The taxpayer developed hip and knee problems and was unable to continue working. He had a disability policy, and in 2005 the insurance company began making payments to the taxpayer under the policy. The payments were properly excluded from gross income. The taxpayer’s contract with the insurance company required the taxpayer to seek Social Security benefits in the event of disability. To the extent the taxpayer received Social Security disability payments, the insurance company would correspondingly reduce the payments it was making to the taxpayer. The taxpayer applied for Social Security benefits, but was denied. He appealed, and again was unsuccessful. By 2008, the taxpayer managed to obtain an administrative hearing, and the judge determined that the taxpayer was disabled. The judge awarded the taxpayer Social Security benefits determined as of the time of his original 2005 appplication. Accordingly, in 2008, the taxpayer received a lump-sum payment of $76,350 for social security disability benefits from June 2005 through June 2008, plus $10,742 in disability payments for the remainder of 2008, for a total of $87,092. In compliance with the insurance company contract, the taxpayer reimbursed the company $73,042 in September 2008.

On the taxpayer’s 2008 federal income tax return, prepared by a professional who was both a lawyer and a CPA, social security benefits of $14,050 were reported. This amount was computed by subtracting the $73,042 reimbursement made to the insurance company from the $87,092 paid to the taxpayer by the Social Security Administration in 2008. The IRS audited the taxpayer’s return and issued a notice of deficiency.

The taxpayer argued that the reimbursement paid to the insurance company in 2008 should reduce the social security benefits received in 2008. However, section 86(d)(2)(A) provides that “[T]he amount of social security benefits received during any taxable year shall be reduced by any repayment made by the taxpayer during the taxable year of a social security benefit previously received by the taxpayer (whether or not such benefit was received during the taxable year).” Repayment made by the taxpayer of a benefit received from a private insurer does not qualify as “repayment made by the taxpayer during the taxable year of a social security benefit previously received by the taxpayer.” In an earlier case, Seaver v. Comr., T.C. Memo 2009-270, the Tax Court had held that a taxpayer required to reimburse an insurance company for tax-free benefits previously received from that company is not allowed to deduct the reimbursement.

The Tax Court in Brady also considered the section 86(e) election. A taxpayer who receives a lump-sum social security payment on account of amounts not received in prior years is permitted to make an election to compute social security gross income by determining the amount by which gross income would have increased in each applicable prior year and adding those increases together. If those increases are less than the amount otherwise includible in the current year’s gross income, the election permits the taxpayer, in effect, to avoid the impact of “bunching” multiple year social security payments into one year. Two obstacles prevented the taxpayer from taking advantage of the election. First, the election must be made when the return is filed, and the taxpayers had not made the election. The Tax Court found not authority for permitting the taxpayers to make the election “so long after filing” the return. Second, the IRS informed the court that it had made the computation that would be made under the election and determined that it would not reduce the amount of social security benefits that must be included in the taxpayer’s 2008 gross income. Although the taxpayer’s tax returns for the prior years had not been introduced into evidence, the taxpayer did not dispute the IRS assertion.

The only good news for the taxpayer was the Tax Court holding that the accuracy-related penalty did not apply because the taxpayer relied on the professional preparer to compute the amount included in gross income. The taxpayer had provided the preparer with the amount of the lump-sum social security payment and the amount of the reimbursement paid to the insurance company. Accordingly, the Tax Court concluded that the taxpayer “made a reasonable and good-faith attempt to comply with the tax laws relating to the Social Security benefits.”

Advocates of tax simplification claim that a “flat tax” would eliminate tax law complexity. Reducing multiple tax rates to one rate would do nothing to make tax compliance easier for recipients of social security benefits. Making the sort of simplification to section 86 that I advocated in in More Joys of IRC Section 86 would ease the complexity but would not eliminate it. The situation presented in the Brady case highlights the significance of timing questions and the time value of money. Simplifying this aspect of the problem poses a complicated challenge. Does anyone think the Congress is up to meeting that challenge? I don’t.

Monday, January 14, 2013

Taxes and Spending: Theory Meets Reality and Questions Go Unanswered 

A reader forwarded to me a commentary that showed up on the Tea Party Christian Issues Explained for You web site. Carrying the title Its [sic] Simple to Balance The Budget Without Higher Taxes, it does not identify its author. Confusion arises because Dan Mitchell wrote some commentary with the same title, and although it deals with the same general topic, it is unlikely Mitchell authored the one that was forwarded to me.

The author of the commentary makes several claims. The nation should be concerned that claims of this sort circulate and find believers. The only silver lining in this nonsense is that it proves that the lack of a quality educational system fertilizes ignorance.

The author claims that “Deficits are caused by too much spending.” Though this is the mindset of the hacksaw CEOs who see job cuts as the pathway to higher corporate profits, the wise entrepreneur knows that putting a business in the black requires revenue. Deficits are also caused by foolish, non-productive tax cuts. They are also caused by unfunded war spending, but the author of the commentary makes no reference to that budget busting decision.

The author refers to the current deficit of $1.34 trillion, and then sets forth the so-called solution. According to the author:
we could limit the federal government to the activities authorized by the Constitution. Article 1, Section 8 provides a list, such as national defense, post offices, etc. Nowhere on the list is the Department of Education, Small Business Administration, National Endowment for the Arts, etc. Getting rid of these departments would immediately balance the budget.
Curious, I did a bit of research and determined that in 2011, $136 billion was allotted to the Department of Education. In 2011, the grand total of $19.6 billion was slated for the Small Business Administration. And for the National Endowment for the Arts, the whopping deficit-creating huge total of $155 million. A little arithmetic, and the author has identified $156 billion of spending cuts. The author needs another $1.184 TRILLION of cuts. Perhaps he thinks that “etc.” will cover it.

But what is the “etc.” that supposedly would cut $1.184 trillion from the deficit? Perhaps the author would bless us with the details, but, as usually happens with these wild claims, details aren’t forthcoming. The reason is simple. A little more research would demonstrate that cutting all of the programs so detested by the anti-tax, anti-government crowd would barely make a dent in the deficit.

Three years ago, in Some Insights into the Tax Policy Mess, I warned:
The deficit cannot be eliminated merely by cutting spending, unless Congress wants to strip the military down to pretty much nothing, eliminate Social Security and Medicare, and put an end to a variety of other programs. The nation faces huge deficits not only because tax rates on the wealthy are lower than they need to be, but also because the deficit reflects eight years of taxes that should have been collected but that were forgiven by a Congress anxious to reward the economic elite and ballooning interest payments on the debt undertaken to finance the deficits generated by trying to finance a war while cutting taxes.
Five months later, in June of 2010, I challenged politicians and commentators from every spot on the spending-taxation spectrum to nominate their candidates for program reduction and elimination. In FICA, Medicare, and Payroll Taxes, I wrote:
Advocates of continued and increased spending need to identify the tax increases that will permit that to happen in the absence of a deficit, and it will take more than the return to the pre-2001 rates and the elimination of capital gains preferences that I support. Advocates of tax cutting need to identify the cuts they would make to balance the budget, and if they don’t touch defense, Medicare, Social Security – and they’re stuck with the interest payment on the debt – there’s not enough to cut.
In November of 2010, in The Grand Delusion: Balancing the Federal Budget Without Tax Increases, I shared some arithmetic to show why the “spending cuts are sufficient” fails as a deficit-elimination tool, and to debunk the myth that cutting foreign aid would balance the budget. I questioned how the nation would react to the sort of spending cuts that would be needed to preserve unwise tax cuts:
Social security, Medicare, Medicaid, military operations, and interest on the national debt alone constitute 62 percent of the expenditures. Unless those are cut, then 89 percent of all other expenditures, including veterans’ benefits and health care, the CIA and other intelligence activities, NIH, military retirement, border security, immigration, the FBI, the courts, FEMA, the Coast Guard, federal prisons, and a long list of services that the country surely needs, would need to be axed.

Some might propose cutting Social Security, Medicare, and Medicaid, but that proposal would bring howls of opposition from across the spectrum, with people of all ages and political stripes objecting. There are those who would cut military operations, but again, objections would pour in from those concerned about the consequences. Who would rejoice at cutting almost 90 percent of national intelligence activities, border security, federal highways, and the Coast Guard? How about NASA? Having already had its budget cut, it has cancelled the program to replace the shuttle, which means China, or perhaps Japan or Russia, will put people on the moon, plant their flag, and leave the United States gasping in the wake of these other nations’ successes. Cutting interest on the national debt would destroy the country’s credit, and accelerate the deep spiral into which it already is heading. Note that to reduce interest on the federal debt, the debt must be cut, which means chopping even more expenditures in order to generate a budget surplus that can be used to pay down the debt.
I concluded with this warning:
I find it interesting to consider what would have happened had taxes not been cut, let alone raised, when the nation went to war nine years ago. Imagine the trillions of dollars that would have been collected during that period. Imagine the impact on credit markets. Imagine an economy not bloated with tax cut money and thus not sucked into bubbles that eventually burst. It’s too late to go back and do the right thing that should have been done. It’s politically impossible to collect “back taxes” with interest to compensate for the error in judgment. And until Americans understand the reality, it’s politically impossible to put an end to one of the principal causes of the economic mess in which the country is mired. With 40 percent of the nation’s citizens thinking foreign aid is one of the top two federal expenditures, we have a very long way to go before Americans are cleansed of the lies and misleading sound bites of the extremists and ready to tackle the problem. By then, it will be too late. Unless taxes are raised – and that’s not saying there should be no cutting of expenditures – but, I repeat, unless taxes are raised, America will be a second-order, or perhaps even third-order, nation by the end of this century.
I returned to the spending cut dilemma two years ago in Cutting Taxes + Failing to Identify and Enact Spending Cuts = Default?, warning that the failure to reduce the theoretical “cut spending” cry into practical reality highlighted by specific proposals would prevent the nation from getting out of its death spiral. A month later, when a list of proposed cuts did emerge, I pointed out, in Spending Cuts, Full Disclosures, Hearts, and Voices, that the cuts fell short of making much of a dent in the budget deficit, and pretty much gutted every program designed to preserve the environment, bolster education, improve health care coverage, feed children, and otherwise preserve the common weal. General theories often spawn unrealistic details. That’s because general theories manifested in “cut spending” sound bites reflect something less than thorough and careful research.

So, anonymous author of the the spending-cuts-can-eliminate-the-deficit commentary, what’s in your “etc.”? The nation is eager to learn what’s in that $1.184 trillion of unidentified cuts.

Friday, January 11, 2013

Biting the Taxpayer Hand That Feeds You 

When I was a child, I remember asking someone to explain the expression, “Never look a gift horse in the mouth.” I also learned to say “Thank you” when receiving a gift, even if it was, as has happened a few times, a gift that I had already received earlier in the day, or, as has happened more than a few times, a gift of something I probably would not use. The point, I was told, was the thought and the gesture. The value of the gift was not the measure of the generosity. There was probably some reference made to the parable of the widow’s mite.

So it did not surprise me that I was more than annoyed to read the recent news that A.I.G. has been considering joining its shareholders in a lawsuit against the federal government. The lawsuit claims that the federal bailout of the almost-bankrupt A.I.G. was too harsh on the company. The shareholders claim that the bailout “deprived” them of money and violated the Fifth Amendment because it allegedly took private property for “public use, without just compensation.” Nor did it surprise me to read a report that A.I.G. decided not to join the lawsuit.

The shareholder lawsuit was filed, not by shareholders, but by A.I.G.’s former chief executive officer, Maurice Greenberg. He also is a shareholder, and he had been encouraging A.I.G. to join the litigation because he thinks it will compel the federal government to settle the case in favor of the shareholders. Greenberg is a major shareholder, and so he would have done well if he had prevailed.

The litigation demonstrates how pervasive greed has become in our nation, and how terribly it has infected the legal and financial systems. The foolish and perhaps illegal activities of a group of people at A.I.G. caused the company’s finances to fall into disarray. What should have happened was action against those individuals for the damage that they caused. Instead, because they hid behind the corporate veil, the clients of A.I.G. and the nation generally bore the brunt of the risky decisions. Taxpayer money was used to prevent A.I.G. from falling into bankruptcy. Had that happened, it is almost certain that the shareholders would have ended up much worse off than they are now. According to Greenberg, by making payments to A.I.G.’s clients on behalf of A.I.G., the federal government stole A.I.G.’s money and cheated its shareholders. Yet the shareholders, who own A.I.G., ought to be the ones who bear the burden of its bad decisions.

A.I.G.’s board, most of whom were not around when the unwise decisions were made to issue mortgages based on credit-default swaps, faced a difficult decision. By voting to keep A.I.G. out of the litigation, A.I.G. probably will be sued by Greenberg. If Greenberg succeeds in his litigation against the federal government, other shareholders probably will sue A.I.G. If the board had decided to join the litigation, it would have risked not only adverse public relations consequences, but negative reaction in the nation’s capital, but it might have ended up receiving damages. Greenberg and A.I.G., in the meantime, have been immersed in separate litigation arising from the allegations of accounting and other misdeeds during his tenure as chief executive officer.

Once upon a time, people took responsibility for the consequences of their decisions. That principle has eroded over the past thirty years. It has been replaced by the idea that someone else is responsible, an outlook that surely has been reinforced by the cultural attitudes that absolve people of responsibility because it is easier to cast blame on some other person. In a non-dysfunctional system, the architects of the credit-swap mortgage nonsense and the owners of the company that employed them would bear the burden, as would those who supervised them and let them run amok making bad decisions with other people’s money. In a sensible system, A.I.G would have been required to carry insurance to protect against the risks that its employees were taking. Instead, the federal government ended up bailing out A.I.G. and other badly managed companies, although at least in several cases, the government was repaid.

I questioned the wisdom of using taxpayer dollars to bail out private companies and their sketchy employees in a series of posts, including Where Is the Money To Be Found?, Greed, Stupidity, and Fraud: Lessons from Tax Law, and Funding the Bailout. Had I known that those being bailed out would in turn come back to bite the hand of the taxpayers who were lending a hand, my objections would have been orders of magnitude more strenuous.

The problem here isn’t the new A.I.G. board. It was, as explained above, in a tough spot. The problem lies with A.I.G.’s shareholders, particularly Greenberg. Rather than offering thanks that he didn’t lose pretty much all of his stock value in a bankruptcy, he chooses to grab more money. Rather than appreciating that the manner in which the federal government handled the bailout, though not what he would have done, was successful, he acts as though he is more skilled at dealing with these sorts of financial issues even though his company crumbled badly because of bad financial management decisions. As for Greenberg’s attempt to extract more money from the federal government, the answer is simple. The nation’s taxpayers saved A.I.G.’s shareholders billions of dollars. They’ve done enough. They should do no more.

Wednesday, January 09, 2013

Government Spending v. Government Investment 

In an opinion piece on Sunday, George Will made an important point. There is a difference between borrowing to finance investment and borrowing to finance consumption. A person or government who borrows $100 to purchase a $100 asset is neither richer nor poorer. The important issue is whether the asset will be used in a manner that generates income that can be used to pay off the debt and enhance the financial position of the investor. In contrast, a person or government who borrows $100 to fund consumption is $100 poorer, because there is no asset to offset the loan.

Where I differ with Will is in his examples of borrowing to finance investment and borrowing to finance consumption. Will gives two examples of borrowing to finance investment. One is infrastructure. On this example, I agree with Will. Borrowing $100 to build a $100 bridge leaves the nation no richer nor poorer. The same can be said of borrowing $100 to repair a bridge so that its value has increased, arguably, by $100. The issue is if and how that bridge will generate income to repay the debt and to maintain the value of the bridge. Will’s other example of borrowing to finance investment is war. I disagree. A government that borrows $100 to build a bomb that destroys something has consumed $100. In some respects, it has burned a $100 bill. I suppose Will would argue that the $100 is an investment in security or peace, but even from that perspective, investment in war has turned out to be pretty much a waste, with uncountable costs in human lives and materiel and no peace at hand. In contrast, borrowing $100 to build a defense system, such as aircraft carrier groups, anti-missile systems, radar warning devices, whatever, that prevents war is an investment not unlike the purchase of a fence, a lock, or a moat. Perhaps that is what Will meant, by using the term war, though I would prefer he used the word defense.

There is a deeper problem, though, with these examples. The examples assume that a $100 outlay for a bridge or an aircraft carrier brings a $100 asset into the hands of the people through government. It very well may be, and often has been shown to be, different. The bridge or aircraft carrier might be worth $80, with the difference being excess funds winding up in the hands of private contractors. The seriousness of this problem can be debated, with estimates of corruption and overpayments ranging from minimal to significant. Unfortunately, it costs money to ferret out the waste, bribes, and other squandering of taxpayer dollars.

When Will gives examples of borrowing to finance consumption, which he sees as the flaw of the “entitlement state,” he again provides two examples. Again, I differ with his selections. He focuses on Social Security and Medicare. Social Security has not been financed through borrowing. In fact, it has been a source of lending for borrowing to finance other programs. True, without adjustments to reflect increased life expectancies and the resulting lengthening of the average retirement period, Social Security eventually will need to borrow in order to maintain its outlays. But of all federal programs, save a few minor temporary ones, Social Security is the model of how to avoid borrowing. On the other hand, Medicare outlays exceed Medicare premiums, requiring borrowing to “break even.” Is Medicare spending properly classified as consumption? Or is it an investment, an investment in people who, by receiving medical care, live to generate societal benefits?

The same conundrum arise with respect to other spending programs. Is spending on education appropriately tagged as consumption? Or is it an investment in the nation’s future? What about food stamps? Is the borrowing presumably undertaken to finance food stamps borrowing to finance consumption? Or is it borrowing to finance investment in the nation’s future? Put another way, are the people who are saved and nurtured through borrowing to be treated as an asset on society’s balance sheet?

Perhaps the problem is in the measurement of the deficit. Annual deficits are measured by income (tax and other revenue) over expenditures. In typical accounting, only expenses, and thus not the cost of aircraft carriers or bridges, would be included in expenditures. And the result would be called a loss. The cumulative deficit would reflect the excess, if any, of government debt over the value of government assets. If those assets include the value of defense personnel trained by the government, along with physical assets, do not the numbers change?

Ultimately, the worst form of consumption occurs when assets are destroyed. Food is consumed, but is turned into energy that fuels the creativity of the nation’s citizens. When munitions are consumed, they do not create human creativity, nor do they rebuild bridges. This nation has directed a significant amount of borrowed funds into war consumption. To call that a financial investment is, at best, misleading. And if there’s any entitlement in war consumption, perhaps it lies with the defense contractors who have profited mightily from the destruction of assets.

Monday, January 07, 2013

Spinning Taxes and Tax Spinning 

As I pointed out on Friday in Fiscal and Tax Irresponsibility, the recently enacted legislation that postpones the impact of the so-called fiscal cliff can be analyzed in different ways. As I noted, “there are ways of spinning the situation so that it appears to put a slight dent in the deficit.” I concluded, as have many others, that the legislation will generate a $3.9 trillion increase in the federal budget deficit over the next ten years.

The legislation cuts taxes. As I pointed out in Fiscal and Tax Irresponsibility, it does so by restoring most of the Bust tax cuts, adjusting the alternative minimum tax, re-establishing tax breaks for the working poor, and enacting or re-enacting special tax breaks for selected individuals and businesses.

According to this report, it did not take long for the anti-tax crowd to issue not only expressions of disappointment, but also warnings of retaliation, for what it considers to be, in the words of a “tea party favorite,” Ted Cruz, “[A] lousy deal.” Why? According to Cruz, “I think it raised taxes by $620 billion.” Really? Here is what happened. The Bush tax cuts expired. More than a decade of bad tax policy, which brought revenue as a percentage of the economy to its lowest level in decades, came to an end. The Congress then decided to re-enact some of the Bush tax cuts. So why is Cruz complaining? His friends in the top income levels, who for more than a decade have increased their collective share of the economy at the expense of everyone else, didn’t get a tax cut. So Cruz, spinner deluxe, decides that a person who does not get a tax cut has been hit with a tax increase. The fallacy of this logic is no less obvious than the claim of someone who does not get a raise during a time of zero inflation that he or she has been inflicted with a pay cut.

If Cruz is concerned about the federal deficit, he ought to stop campaigning for tax cuts. Tax cuts increase the deficit, and do very little for the economy, despite the propaganda that tax cuts for the wealthy create jobs. It is true, though, that as Cruz and others point out, federal spending needs to be corrected. How that can be accomplished is a challenging puzzle, as I discussed in The Howling Void of Taxes and Spending. What he and others will discover is that there isn’t anywhere near the amount of spending cut savings that he and others seem to think that there is. Despite the floating of theoretical spending cut proposals, the reality is that the only way to balance the budget while conferring the tax cuts Cruz and his friends want is to knock most of the nation into poverty and despair. Imagine a nation dealing with substantial cuts in Social Security, Medicare, Medicaid, education assistance, food assistance, and the loss of progress in energy efficiency, the destruction of the environment in the wake of the elimination of the EPA, and the continued deterioration of the nation’s infrastructure.

What’s alarming about the reaction of the anti-tax crowd is not so much that its ringleaders take the position that they do, for it is understandable that those who benefit from their policies would seek implementation of those policies, but that many of those who stand to suffer on account of those policies root for those policies to be adopted. Considering the nonsense I read on web sites, ranging from mainstream media to social networking outlets, it is not surprising that people are being misled and it is inescapably evident that a significant number of Americans would benefit from some careful study of the facts.

Friday, January 04, 2013

Fiscal and Tax Irresponsibility 

So we’re told that the nation avoided the fiscal cliff. No, the nation did not. The nation backed away from the cliff, by pushing it two months into the future. The Congress made the cliff steeper, because if the nation goes over the cliff it will be a much longer fall.

The absurdity of the last-minute temporary duct-tape and chewing gum solution is evident from two very significant flaws in the failure of the Congress to meet its responsibility. Instead of tackling the problems long before the deadline, Congress waited and put together a patchwork piece of nonsense. First, as reported in this story, the Congress did not address the fact that the nation reached its debt limit on Monday. Second, the legislation adds to the deficit, making the situation worse, even though, as this report explains, there are ways of spinning the situation so that it appears to put a slight dent in the deficit.

The only sensible way of measuring the impact of the legislation is to compare it to what would have happened had the nation gone over the cliff on January 1. Had the nation gone over the cliff, the deficits for 2013 and subsequent years would have been less than what it is under the legislation. The legislation preserves tax rates that would have increased in the absence of the legislation. That adds to the deficit that otherwise would have existed. The cost of this legislation is a $3.9 trillion increase in the accumulated deficit that otherwise would have existed over the next ten years.

Two pieces of the legislation account for most of the $3.9 trillion. By extending the Bush tax cuts for all taxpayers other than those with incomes of more than $400,000 (or $450,000 for married couples filing jointly), the accumulated ten-year deficit is increased by $1.9 trillion. Fixing the alternative minimum tax adds another $1.8 trillion. Of the rest, $134 billion comes from extending tax breaks for the working poor, and $77 billion comes from extending special tax breaks for businesses and certain individuals.

Interestingly, the legislation does not extend the repeal of the itemized deduction and personal and dependency exemption phase-outs. This crafty way of raising rates ought not to have been enacted in the first place, and it ought not to have been revived. Hiding tax rate increases in this manner makes it more difficult for Americans to understand the issues percolating in the tax and fiscal policy debates. However, by not extending the repeal of phase-outs and by not extending the Bush tax cuts for taxpayers with incomes of more than $400,000 (or $450,000 for married couples filing jointly), the Congress demonstrated that it could abandon pieces of the 2001 and subsequent tax legislation. Why, then, extend special tax breaks for businesses? Why continue spending money on the motorsports industry? Why continue lower taxes for some industries and not others? Whatever can be said in favor of special breaks for the motorsports or other favored industries can be said in favor of every other industry. It is this sort of favoritism that makes the entire legislative process tainted, and that creates an atmosphere in which rational and sensible policy decisions cannot be made.

As icing on this cake of irresponsibility is the postponement of any decision with respect to the spending side of the problem. Though the sort of wholesale spending cuts that the anti-tax, anti-government crowd wants are unrealistic, surely there are programs and activities that can be scaled back. It is not unreasonable to expect that the Congress again will do nothing until hours before the new, delayed deadline. Whatever people may think of their own Senators and Representatives – most of whom they continue to send back to Washington – the Congress as an institution has failed miserably. Until Americans insist on a revamping of how Congress does business, the nation is in for an extended period of tax and fiscal irresponsibility.

Wednesday, January 02, 2013

The Howling Void of Taxes and Spending 

The debacle over the so-called “fiscal cliff” should compel Americans to re-examine the various claims that government spending cuts will solve the nations’ economic problems. A recent article, Why Republicans Can’t Propose Spending Cuts, explains the phenomenon of reality knocking theory down. As Jonathan Chait, the author, puts it, “The Republican understanding of government spending is based on hazy, abstract notions that don’t match reality and can’t be translated into a workable program.” That haziness percolates in the assorted internet and social media postings that claim cutting this or that program will solve the problem.

Almost two years ago, in Americans Still Don’t Grasp Federal Budget Realities, I examined the quandary in which the nation has been placed by blind acceptance of mistruths spewed by those who use “cut government” as a pathway to electoral success but who then fail miserably when it’s time to balance the budget. I reacted to the results of a poll revealing that Americans grossly overestimated the portion of the federal budget devoted to the right’s favorite scapegoats, such as foreign aid, the Corporation for Public Broadcasting, pensions for federal workers. Even military spending was overestimated. If people don’t know the facts, how can they fix the problem?

Apparently, few, if any, of the people coming up with the wrong answers had taken a look at what I had explained six months earlier in The Grand Delusion: Balancing the Federal Budget Without Tax Increases. Examining the proposed 2011 federal budget, I concluded that balancing the budget on spending cuts would require cutting one-third of federal expenditures. I explained that if military spending, Medicare, Social Security, Medicaid, and interest on the federal debt were untouched, “89 percent of all other expenditures, including veterans’ benefits and health care, the CIA and other intelligence activities, NIH, military retirement, border security, immigration, the FBI, the courts, FEMA, the Coast Guard, federal prisons, and a long list of services that the country surely needs, would need to be axed.” I predicted, correctly, that attempts to cut Social Security would encounter widespread “howls of opposition,” as would proposals to cut military operations. I predicted, again correctly, that advances in space exploration would shift to “China, or perhaps Japan or Russia.”

In Why Republicans Can’t Propose Spending Cuts, Chait pinpoints some of the many flaws in the approach taken by the anti-tax, eliminate-government crowd. He describes the approach taken by “the CEO community and their publicists” who want to “cut deeply into entitlement spending” and who claim that “There’s money to be cut everywhere.” Chait, taking a view consistent with mine, posits that “There really isn’t money to be cut anywhere.” He notes that federal spending on social services lags behind other advanced countries, that Social Security benefits are “quite meager,” and that “infrastructure is grossly underfunded.”

Chait is of the opinion that the Bowles-Simpson plan failed because the panel could not reconcile the “gulf between perception and reality.” In other words, there is no way compromise can be made between delusion and sense. Chait provides a window into understanding the dysfunction of Congress. It is, in part, a consequence of the dysfunction of the nation and the delusion of those who believe fantasy rather than facts.

Chait criticizes the Bowles-Simpson plan as one that “simply pretended the federal government could have everybody do a lot more work for less pay.” That’s, of course, the secret of that “CEO community,” which sees cuts everywhere. That’s a community that enriches itself by firing employees and leaving those who remain to do the work of two or three employees, because it worships the short-term bottom line rather than long-term stability. Oddly, that community hides behind the word “prosperity,” but its philosophy has brought misery to far more people than it has brought any sort of confident financial position.

Ultimately, the anti-tax, cut-spending crew objected to the cuts suggested by Bowles-Simpson. Chait mentions Paul Ryan’s approach, which he characterizes as “kick[ing] the crap out of the poor,” and which would work only if “epic levels of suffering on the very poor” were acceptable. They’re not. And even things such as making Medicare needs-based, or fiddling with the CPI component of Social Security generates a drop in the bucket compared to the spending that must be cut to finance the tax cuts for the wealthy that were made ten years ago and that the anti-tax group wants to continue.

Chait concludes that the anti-tax, cut-spending folks don’t disagree with the inability to find spending cuts that don’t “inflict real harm on people with modest incomes” and that don’t “save small amounts of money.” They simply “don’t seem to understand it.” Thus, he concludes, the failure of Republicans to list specific spending cut proposals “is not just a negotiating tactic but a howling void where a specific grasp of the role of government ought to be,” and that “The spending cuts aren’t there because they can’t be found.”

Federal taxes are at the lowest they have been for many decades. Failure to connect that fact with the existence of a huge deficit, and attempting to pin the deficit on needless spending that does not exist demonstrates a howling void in understanding reality.

Monday, December 31, 2012

Is This Tax Preparation Nightmare Reawakening? 

Almost ten months ago, in Tax Return Preparation Disaster, I wrote about a tax return business called Mo’ Money Taxes, that had created nightmares for its clients. It has been sued by various state attorneys general, charged with filing inaccurate returns, imposing hidden fees on its clients, withholding client refund checks, distributing checks in amounts less than promised, and distributing checks that could not be chased. Reports circulated that thousands of tax documents related to its clients were found in dumpsters behind its offices. Other reports explained that the owner of the business was involved in a contentious divorce proceeding, replete with claims of physical assaults, adultery, unfit parenting, and drug use.

About a month ago came news, that reached me recently, about the latest undertakings by Markey Granberry, the owner of Mo’ Money Taxes. Although the lawsuits commenced by the attorneys general continue, and although employees of Mo’ Money Taxes have been indicted, Granberry has announced the establishment of a new tax return preparation business called Marquis Taxes. He explained that, with respect to the allegations arising out of the 2012 filing season, “thus far, no charges have been filed against no one regarding issues of last year.”

In Tax Return Preparation Disaster, I concluded:
My advice to taxpayers is that they ought not retain a tax return preparer until they have done due diligence and research, particularly opinions from existing clients, about the reputation and quality of the potential preparer. My concern is that the people most often victimized by the unscrupulous companies are those least able to check out the business. That is why the idea of requiring tax return preparation be done by preparers who have earned an IRS-issued “seal of approval” is so tempting. Given the choice between a bigger government or thousands of victimized taxpayers, I’m compelled to choose the former, even though ideally I’d prefer to purge the marketplace of the perfidious businesses.
Until the litigation underway in several states is concluded, and until the charges against the indicted employees are resolved, the key words are research and caution. Why risk it?

Friday, December 28, 2012

When Tax Revenues Fall Short, Who Gets Paid? 

Almost two years, in The Price of Insufficient Tax Revenue, I described how the “success” of tax reduction in New Jersey compelled the city of Camden to lay off half of its police force and one-third of its fire fighters. A few weeks later, in When Tax Cuts Cause Privatization, Taxpayers Pay More, Not Less, I explained how Camden also was compelled to fire its animal-control officers, with their jobs turned over to a private company, at a cost exceeding what it cost to employ the animal-control officers. It’s easy to identify the winners and losers in this tax-cut game.

Now comes news that another city in fiscal trouble, Oakland, California, dealt with the impact of revenue reductions by laying off one-fourth of its police force. Oakland ranks fifth among American cities when it comes to crime rates. Discharging 25 percent of the police force is a foolish thing to do. Oakland police have confessed that someone calling 911 is “looking at an indeterminate amount of time before an officer can respond.” Crime rates in Oakland have soared since the cuts took effect.

Oakland, facing a $32 million deficit, did not touch a $17.3 million payment that it makes to the Oakland Raiders and the Oakland Athletics. The Raiders, however, are not content with these payments. Instead, the team threatens to move to Santa Clara unless Oakland forks over support for a $1.5 billion stadium.

Oakland is not the only city that chose private professional sports over police protection for its citizens. Jacksonville fired police and cut other services so that it could repeatedly reduce the rent that it charges the Jaguars for use of the stadium partially funded by taxpayer dollars. Taxpayer dollars support professional sports teams throughout the country. Most of those teams are owned by billionaires.

The anti-tax crowd, oblivious to the harm that tax cuts do to ordinary citizens, backs tax increases when the revenue is funneled into private enterprise. For example, Indiana increased hotel, rental-car, and food and beverage taxes to fund the stadium used by the Indianapolis Colts. Reversing foolish tax cuts to provide revenue to care for the needy is some sort of outrageous sin in the minds of the anti-tax crowd, but jacking up taxes to pump money into the hands of the wealthy seems to be some sort of virtue to these folks.

It is outrageous that the anti-tax crowd casts into a “47 percent net” the people it considers to be “takers.” These folks do this without regard to whether the “taker” is a disabled military veteran, a person disabled by disease caused by private enterprise pollution of air and water, a person unable to work because of the consequences of being the victim of a crime that could not be prevented because a city had to let police officers go, a person disabled when doing a good deed to save the lives of innocent people, or a firefighter injured on the job. Yet when the rich show up, hat in one hand, bully-club in the other, these same opponents of “taking” start handing out taxpayer dollars to wealthy individuals and corporations, justifying their hypocritical decision with every possible baseless excuse available.

The typical justification that it is good for everyone to cut the taxes of the wealthy, or that it is good for everyone to collect taxes from everyone and funnel the proceeds into the hands of private corporations and rich individuals, has been disproven repeatedly. These actions have not generated jobs. They have reduced public safety. They have failed America.

Wednesday, December 26, 2012

Why Not Read the Entire Sales Tax Statute? 

A little more than a month ago, in A Not So Dopey Tax Question, I considered a tax question raised by the operator of New Jersey’s first legal marijuana dispensary. The question is easy to frame. Is medical marijuana sold in New Jersey subject to the New Jersey sales tax? At the time, the dispensary had not received an answer. I examined the New Jersey sales tax statute and concluded that medical marijuana is exempt because it meets the statutory definition of a drug sold pursuant to a doctor’s prescription, citing section 54:32B-8.1(a) of the New Jersey statutes, which provides an exception to the general rule of sales taxation in section 54:32B-3(a).

On November 30, the Regulatory Services Branch of the New Jersey Division of Taxation issued a Technical Bulletin in which it provided its answer to the question. It took several weeks for this publication to reach me.

According to the Division of Taxation’s TB-68, which “is based on current New Jersey law and governing regulations regarding the medical use of marijuana, . . . retail sales of medical marijuana are subject to [sales] tax.” The Bulletin cites section 54:32B-3(a) of the sales tax statute. The Bulletin then addresses the applicability of the sales tax to purchases of equipment used in the production of medical marijuana.

That’s it. Nowhere in the Bulletin does the Division of Taxation mention, analyze, or deal with the applicability or non-applicability of section 54:32B-8.1(a). If a law student writing a paper on this issue failed to mention, cite, analyze, or deal with section 54:32B-8.1(a), he or she would be heading for a rather unpleasant grade. It’s not as though that provision is buried in some other volume or many pages distant in the same volume. Depending on pagination and the publisher, and whether or not the volume in question contains annotations, it’s on the same page or the next page. Law students are taught to look at the entire provision to determine if any exceptions apply. Nothing in the Technical Bulletin reveals whether it was written by someone with a legal education, but even someone without a legal education ought to understand the need to look beyond the general rule.

My point isn’t so much whether or not section 54:32B-8.1(a) applies. I think that it does. My point is that the Division of Taxation didn’t even consider it, or, if it did, chose not to favor the taxpaying public with the benefit of its conclusion. At best, this is sloppiness. It could be worse than that. It’s possible that someone decided that politically, the Division ought not say anything one way or the other about section 54:32B-8.1(a). If that’s the case, it is an outright violation of the fiduciary responsibility vested in the Division of Taxation not only to interpret and administer the tax laws appropriately, but to exercise such transparency as is required to permit taxpayers to understand the tax law so that they can comply. Regulation by fiat is not a cornerstone of a healthy democracy.

Monday, December 24, 2012

Tax Pledges: Never Say Never 

When House Speaker John Boehner floated his since-abandoned “Plan B,” he put most Republican members of Congress into a bind. Under Plan B, tax rates on individuals with income above $1 million would revert to the higher rates in effect before the Bush tax cuts were enacted. Though this expiration of a tax cut is simply that, the anti-tax crowd considers it to be a tax increase. Accordingly, the legislators who had signed on to Grover Norquist’s anti-tax pledge had to choose between supporting Plan B and violating the pledge, or opposing Plan B while holding fast to the pledge. As it turned out, informal canvassing suggested to Boehner that it would not make sense to put Plan B to a vote.

According to this report, Norquist conjured up “political cover” for his devotees, telling them that “they could support the Boehner plan B because it adhered to the meaning of their promise to oppose tax hikes.” How can that be? If someone decides to give up smoking, does the occasional cigarette not count because it “adheres to the meaning of their promise”? If a youngster promises his or her parents that they will not drink and drive, is driving after having one drink insufficient to put the youngster over the legal limit “adhere to the meaning of the promise”?

When people make absolute, unconditional promises, they end up trying to wiggle out when they discover that they have painted themselves into a corner. Life is full of anecdotes telling of conversations between a person who makes an absolute statement and who, when questioned about the applicability of the statement to a situation demonstrating the absurdity of the absoluteness of the statement, hems and haws and wiggles and dances in an attempt to defend the indefensible.

An example of this slippery slyness comes directly from Norquist and his allies. About a year and a half ago, in Tax Semantics, I explained the backpedaling that tainted Norquist’s attempts to walk his silly anti-tax tightrope:
First comes news that Grover Norquist described expiration of the Bush tax cuts as not a violation of his no-tax-hike pledge. He said, “Not continuing a tax cut is not technically a tax increase.” Speaker of the House John Boehner countered that allowing the tax cuts to expire would be the equivalent of a tax hike.

Then Norquist’s Americans for Tax Reform issued a statement explaining that failing to extend or make permanent the Bush tax cuts “would clearly increase taxes on the American people” and that “[i]t is a violation of the Taxpayer Protection Pledge to trade temporary tax reductions for permanent tax hikes.”
Is it any wonder that the Congress is so dysfunctional? Infected by absolutists who resist negotiation and compromise because it would demolish the foolish principles underlying their extremist stance, they prefer to defend their silly statements and pledges rather than doing their job of solving the mess they created.

It takes a good deal of courage to confess to having signed a foolish pledge. It takes a good deal of wisdom to understand that the pledge is foolish. It takes a good deal of honesty to explain to America why the foolish pledge is causing so much harm. Will the nation see these qualities coalesce in its Congress?

Friday, December 21, 2012

The Postponed Pain of Foolish Tax and Spending Decisions 

Eleven days ago, in When Tax Revenues are Short-Changed, What Should Be Cut if Taxes Are Not Raised?, I expressed my continued bewilderment at the lack of logical thinking demonstrated by most Americans when it comes to tax and spending policies. Three years and two years ago, respectively, in Poll on Tax and Spending Illustrates Voter Inconsistency, and A Grander Delusion: Cut Taxes, Don’t Cut Spending, Cut the Deficit, I had explored the deep flaws in the positions taken by the majority of those polled on these questions.

Now comes yet another poll that tells us that although most Americans support raising taxes for people with incomes over $250,000, and think that this is insufficient to solve the budget problem, they also oppose cutting spending for Medicaid, cutting military spending, increasing the Medicare eligibility age, or slowing the increase in social security benefits. If those steps are not taken, there is no way to eliminate or reduce the deficit absent tax increases for many more taxpayers than simply those with incomes over $250,000.

When there is a problem, the cause matters, because the cause provides pathways to solutions. Refusal to identify the cause of a problem slows or blocks the development of a remedy. “Just fix it” is much easier to accomplish when the cause is known. Understanding the cause also reduces the chances of the problem resurfacing.

The so-called fiscal cliff, or budget deficit issue, arises because of two decisions. One was the decision to reduce tax revenue, to the point where total revenue is lower than it has been for many decades. The second was the decision to add trillions of dollars to military and homeland defense spending without raising taxes to defray the cost. The first decision came with the same disproven claim that it would create economic growth and in turn increase tax revenues that failed when previously attempted. Instead, millions of Americans lost jobs, the economy plunged into one of the nation’s worst recessions, and economic growth stagnated. The other decision, regardless of one’s views on the necessity of the actions that were undertaken, added trillions to the budget deficit.

I have explained the arithmetic several times, in posts such as A Memorial Day Essay on War and Taxation, Peacetime Tax Policy While Waging War = Economic Mess, Some Insights into the Tax Policy Mess, What Sort of War is the “Real Budget War”?, and
Borrowing Money to Fund Tax Cuts. I have pointed out that war requires sacrifice, that sacrifice for the sake of war means giving things up to finance military expenditures, that the idea of having both guns and butter has been tried and disproven numerous times, and that the nation would have collapsed had the Bush era approach to fiscal and budget policy been followed during World War Two. Several readers have commented that I am wrong because “this isn’t 1941.” Unless someone can prove otherwise, cutting $100 of revenue from a balanced budget while adding $900 in expenditures generates a deficit, now, in 1941, in 2001, in 2003, and in any other year. Every attempt to prove that it is possible to cut revenue, add expenditures, but not create a deficit relies on what a Republican president aptly called “voodoo economics.”

The first cause of the problem can be fixed by taking two steps. Although the first seems to be facing less political opposition, the second would generate howls of protest. The first step is to repeal the Bush tax cuts. For everyone. The second is to collect the revenue that would have been collected had the Bush tax cuts not been enacted. Of course, that isn’t going to happen. Translation: the problem isn’t going to be solved unless the second cause of the problem generates a solution.

The second cause of the problem can be fixed in one or both of two ways. The first way is to cut back military spending to adjust for the deficit spending of the past decade. That, according to the poll, is unpalatable to the majority of Americans. The second way is to find revenue to pay back the debt incurred to finance expenditures that were undertaken without a supporting revenue base. But that brings us back to the first cause of the problem and the inadequacy of the solutions reflecting that cause.

This is why the folks who created the problem try to divert attention to solutions that do not reflect the cause of the problem. Cutting social security, whether by slowing increases, changing eligibility ages, or otherwise, is a scapegoat approach. It is a diversionary tactic designed to take Americans’ eyes off of the actual causes of the problem. Social security did not cause the problem, and in fact it financed part of the Bush era deficit. Social security will pose budgetary issues in the future, and things need to be done to cut those problems off at the pass, and may include slowing increases and raising eligibility ages, but that ought not be something used to pay for foolish tax cuts and deficit military spending of the past decade. The same can be said of Medicare, which faces future problems very soon. Other programs, such as food stamps, educational assistance, veterans’ benefits, and similar social net expenditures, not only are not the cause of the problem, but are symptoms and by-products of the underlying causes. For example, the increased spending for veterans’ benefits is an additional cost of the two wars. The increased spending for food stamps is a direct consequence of the economic collapse spawned by foolish decisions in the early part of the last decade, including not only unwise tax cuts and deficit military spending but unfettered bad behavior by too many unregulated actors in the so-called free market. In any event, cutting every federal expenditure aside from military spending, interest on the debt, social security, Medicare, and Medicaid will not balance the budget or even come close.

The solution to the budget deficit will be painful. It is the pain that should have been felt by all Americans, and not just members of the military and their families and friends, while the nation engaged in war. It is postponed pain, and it is inevitable. If the budget deficit is not solved, and the nation goes over the fiscal cliff, there will be pain. There is no escaping the economic pain. To quote another Republican president, “I don’t like it but there it is.”

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