Budgeting 201: An Immediate Debt Crisis

USA vs. Cyprus: Gross Government Debt to GDP

- By: Larry Walker, II -

According to Speaker of the House John Boehner, “We do not have an immediate debt crisis.” No, then what would you call it? Seems to me it was immediate in 1995, and again in 2008, so what is it now? Are we just screwed? And according to Barack Obama, “We don’t have an immediate crisis in terms of debt. In fact, for the next 10 years, it’s gonna be in a sustainable place.” Yeah, what place is that, Wonderland? Have you people lost your minds?

The chart above is from data published by the International Monetary Fund in its World Economic Outlook Database, October 2012. Based on what's happening in Cyprus, for some reason I don't believe either of them. We had an immediate debt crisis in 1995 when our debt-to-GDP ratio reached 71%, insomuch that the government was shut down. And another in 2008 when it reached 76%, just before all hell broke loose. And now suddenly, as gross U.S. debt has surged beyond 100% of GDP, the problem is no longer immediate. If the debt isn't an immediate problem, when will it become one? Let me answer that for you.

The debt will become an immediate crisis when our economy inevitably dips into recession, a phenomenon which has occurred historically about once every 5 years since World War II. In fact, recession is exactly what's happening in Cyprus right now. But surely recession will never reoccur in the U.S., because government fixed that problem once and for all, right? I mean it cost us around $6.7 trillion over the last four years, but the problem is solved, right? With GDP surging at a robust growth rate of 0.4% (revised) in the 4th Quarter of 2012, how can our government possibly be wrong? Oh give me a break!

I believe part of what exacerbated the crisis of 2008 was an excessive amount of government debt. So what do you think is going to happen with our debt hovering above 100% of GDP, as the next crisis hits? Is the U.S. government prepared for another recession? Is there anything left in the tank? It sure doesn't look like it. Well, we're not going to sit around and let the government continue to tax us to death, and we're definitely not going for the unlawful seizure of our money and property, so I suggest you government guys get your act together and get serious about your spending problem, and that means now.

Instead of loosening standards and letting everyone who wants to – go on disability, welfare and food stamps; granting any illegal alien who desires – a free pass; and subsidizing any and everyone's health insurance bill, while the other half of us and our grandchildren get stuck with the bill, now is the time to tighten standards and cut the slack. The sequester is right! Reducing the size of government is right!

Government needs to learn how to say, “No”. It should be, ‘Sorry, you're going to have to go back to work, and you're going to have to go back to your own country, and you're going to have to chip in on taxes, because we can't have 50% of the populace taking care of everyone else.’ If our government doesn't learn how to say no, it's going to destroy this nation and along with it our freedom. Yes, the debt is an immediate crisis, and it is an imminent threat to the survival of the Republic.

The chart above is from the Federal Reserve Bank of St. Louis. I'll ask again. Does this look like it might be an immediate crisis, or just a tiny little problem years and years from now? It sure looks immediate to me, but maybe I'm just a bit more focused on surviving the unknowns, than sitting around fooling myself into thinking everything is going to be rosy ten years from now, if I just fold my hands, play a little more golf, and trust that someone else will handle it for me. Yeah, just like Cyprus, right? It's time to stop playing politics and face reality.

References:

My Data - USA vs. Cyprus: Debt to GDP

IMF: World Economic Outlook Database, October 2012

Related:

Budgeting 101: A Balanced Approach

What Does Sequestration Mean To You?

From AAA to AA- in Four Years

Uncorrelated: GDP and National Debt

#Debt

Budgeting 101: A Balanced Approach

I do believe that at some point government has borrowed enough. Although tax revenue is directly tied to economic growth, government spending is not.

- By: Larry Walker, II -

How does one balance a budget? Let me count the ways. Spend less than you take in annually, and you’ll live within your means. But how can governments comply? Why that’s easy. Simply calculate the rate of revenue growth in the previous year, then adjust the prior year's spending level by this multiple for the current year. If a deficit ensues, trim spending back into balance. If a surplus results, pass it back to taxpayers in the form of tax rate reductions. Most of us would call this a balanced approach.

Of course proponents of big-government will retort, “It doesn’t work like that. We must spend around 50% or more than we take in, to stimulate revenue; so that we can spend around 50% more than we take in, to stimulate even more revenue; so that we can spend around 50% more than we take in, stimulating ever more revenue, ad infinitum…” Yet, it’s rather obvious that the modern day extreme left-wing’s touted correlation between government borrowing and economic growth is nonexistent, as we proved in – Uncorrelated: GDP and National Debt.

It might be helpful for far left-wingers to remember the words of the Original Democrat, Andrew Jackson, who once said, “I am one of those who do not believe that a national debt is a national blessing, but rather a curse to a republic; inasmuch as it is calculated to raise around the administration a moneyed aristocracy dangerous to the liberties of the country.” For more, see my post entitled, From AAA to AA- in Four Years.

You see, “For Jackson politics was very personal,” says H.W. Brands, an Andrew Jackson biographer at the University of Texas. “He hated not just the federal debt. He hated debt at all.” Before he was president, Jackson was a land speculator in Tennessee. He learned to hate debt when a land deal went bad and left him with massive debt and some worthless paper notes. Thus, unlike POTUS #44, Jackson brought practical business experience to the White House.

When he ran for president, Jackson knew his enemy: banks and the national debt. He called it “the national curse”. In Jackson's mind, debt was “a moral failing”, says Brands. “The idea you could somehow acquire stuff through debt almost seemed like black magic.” But now days, if you listen closely to the Democratic Party, its enemy is no longer the national debt, but rather the average, anti-debt, fiscally responsible, Tea Party patriot.

The Balanced Approach

What would the federal government’s surpluses and deficits look like had it followed a balanced approach since 1929? Per the chart below, having begun with a surplus of $1 billion in 1929, the federal government would have realized a surplus of $835 billion in the 3rd quarter of 2012, compared to an actual deficit of around $1.1 trillion. Of course, all surpluses along the way could have been returned to taxpayers through periodic tax rate reductions, making income tax compliance at least somewhat worthy of the effort.

Under the balanced approach, when all spending is totaled from 1929 through 2012, the federal government would have spent a total of $39.4 trillion, versus the $66.9 trillion actually spent, for savings of $27.5 trillion. That means instead of a national debt fast approaching $17 trillion, we could be sitting on a national surplus of around $10.5 trillion.

The Unbalanced Approach

In contrast, what has the federal government’s unbalanced approach yielded? Per the second chart (below), having begun with a surplus of $1 billion in 1929, the federal government wound up running a budget deficit of approximately $1.1 trillion in the 3rd quarter of 2012. As you can see, the main imbalance has occurred since the year 2008, which is when the federal government adopted its current philosophy, where expenditures are completely decoupled from revenue growth – as if spending is suddenly a function of an imaginary 22nd Century economic boom. Meanwhile, approximately $6.7 trillion has been added to the debt since 2008, and the economy grew at a paltry annual rate of 0.4% (revised) in the 4th Quarter of 2012.

Conclusion

Although federal tax revenue is a function of economic growth, government spending is not. In other words, as the economy grows, tax revenue increases; and as it shrinks, tax revenue declines. Anyone who doesn’t understand this should return to the 6th grade for a refresher in basic math. On the other hand, government spending is a function of revenue. That is to say, as tax revenue rises and falls, so follows the amount available for government expenditures. Surpluses and deficits are directly linked to the level of government spending. When government spends less than it takes in, there is a surplus; when it spends more than it takes in, a deficit. It’s really that simple.

If the federal government is to ever regain control over spending, it must start with the rate of revenue increase (or decrease) in the previous year, since this is the only reasonable way of projecting the amount available for the current year, and then adjust its current year spending level accordingly (up or down). As soon as a deficit appears, the role of government is to trim spending back into balance. When a surplus results, government’s role is to pass the savings back to taxpayers, in the form of tax rate reductions. This we call, “the balanced approach” – and there is none other. Don't patronize me. There is really only one question, Will the Democratic Party ever recover its bygone common sense?

Reference:

My Worksheet on Google Drive

BEA: Table 3.2. Federal Government Current Receipts and Expenditures

Related:

From AAA to AA- in Four Years

Uncorrelated: GDP and National Debt

#Debt

What Does Sequestration Mean To You?

Government is the Problem

- By: Larry Walker II -

“Originally passed as part of the Budget Control Act of 2011 on the heels of the debt ceiling compromise, the sequester was intended to pressure the Joint Select Committee on Deficit Reduction (the “Supercommittee”) to agree on a budget of $1.5 trillion by way of spending cuts and revenue increases over the next decade.”

The above excerpt is from the National Council on Disability’s webpage entitled, What Will Sequestration Mean for People with Disabilities? A similar blurb may now be found on about every other government agency website, followed by a breakdown of how many disabled, homeless, widows and orphans will be left for dead, unless the federal government repeals its week-old budgetary cuts and instead raises taxes by around 40.7% across-the-board, which is about what it would take to come anywhere close to balancing the federal budget without such cuts.

But, the real question is what does the sequestration mean to you? I can’t answer that, but I can tell you what it means to me. What the sequestration means to me is that the U.S. government has decayed to the point of passing dummy laws, solely for the purpose of pressuring the very lawmakers who pass them, to enact real laws. In other words, government enacted the Sequester as law; solely as a means of pressuring itself into repealing it, and when its attempt failed, the mock law remained permanent.

I mean it’s akin to me signing a blood covenant stating that, “In my household, we will do without cable television, cell phone data plans, dining out, movies, snacks, and all other non-necessities, until such time as we actually have the money to pay for it,” but doing so, solely for the purpose of pressuring myself into deciding which we are going to do without – cable television, cell phone data plans, dining out, movies, snacks, or all other non-necessities. However, since there already wasn’t enough money to go around, and since I had already signed the covenant in my own blood, there was really nothing else to decide. So why didn’t I just make that decision from the get go? Actually, I did. “To thine own self be true.” ~ Anonymous

The lesson for government: Don’t pass a law you don’t intend to enforce. And for the public: Government is not the solution to our problems, government is the problem. Signing a bill into law, solely for the purpose of pressuring lawmakers to repeal it, and then whining about it when they refuse, is indicative of the kind of leadership emanating from the White House these days. “In America you have a right to be stupid – if you want to be.” ~ John Kerry, Secretary of State (2/26/2013). Yeah, so who’s looking stupid now?

A Different Look at Full-Time Employment

The Rise in Part Time Employment since the Great Recession

- By: Larry Walker, Jr. -

There are five categories among all nonagricultural workers who are officially counted as employed: government workers, private household and private industry workers, the self-employed and unpaid family workers. Among them there are three additional status classifications: those employed part time for economic reasons, part time for noneconomic reasons, and those employed full-time. An analysis of recent trends reveals that the number of part time workers is on the increase, while the number of full-time workers is on the decline.

Before we begin, the aforementioned status classifications of nonagricultural workers are defined as follows:

Part time for economic reasons refers to those who worked 1 to 34 hours during the reference week for a reason such as slack work or unfavorable business conditions, inability to find full-time work, or seasonal declines in demand.

Part time for noneconomic reasons refers to persons who usually work part time for reasons such as childcare problems, family or personal obligations, school or training, retirement or Social Security limits on earnings, and other reasons. Excluded are persons who usually work full time but worked only 1 to 34 hours during the reference week for reasons such as vacations, holidays, illness, and bad weather.

Employed full-time refers to those who worked 35 hours or more during the reference week. This includes workers who have both one full-time and part time job as well as those whose combined hours in two or more part time jobs total at least 35. Are you with me so far? Good.

The chart above displays the number of nonagricultural workers employed part time for economic reasons. It extends from January 1992 through January 2013 for historical context, but what should stand out is the difference between where we are today, versus the month the recession began. In December 2007, at the onset of the Great Recession, 4.6 million workers were employed part time for economic reasons. Yet as of last month, three-and-a-half years after the recession ended, the figure stands at 8.5 million, an increase of 3.9 million, or 83.4%. How’s that for progress?

If measured from the peak of misery, I suppose one could perceive an improving situation, however in more concrete terms, Americans are actually worse off today than at any time since 1993. No amount of words can change the facts.

The second chart (above) shows the number of nonagricultural workers employed part time for noneconomic reasons. This isn’t all that relevant on its lonesome, because it represents those working part time because they want to. However, what is significant is that the number has grown by a staggering 6.3 million since the early 1990’s. In fact, when combined with the previous chart, we find that as of January 2013, a total of 26.7 million out of the 139.7 million officially counted as employed (see chart below), or 19.1%, are merely part-timers. This would be great if our workforce was able to work fewer hours for greater pay, without need of governmental assistance, but we all know that’s not the case.

So what? So, the next chart (above) shows that in July of 2000 there were a total of 135.1 million nonagricultural employees, that the number grew to 145.1 million by July of 2007, and that it has since declined to 139.7 million. Again, if measuring from the peak of misery, it would appear that the employment situation has improved, but in real terms, we have 5.4 million fewer workers today, than we had in 2007. Thus, we are effectively back where we left off at the end of 2005, more than seven years ago. I guess that’s good in the eyes of some, but when discounted for the growth in the number of part time workers the situation is bleak.

In the last chart (above), when the number of nonagricultural workers employed part time, both for economic and noneconomic reasons, is subtracted from the total employment level, we find that the number of full-time workers has declined from 123.1 million in July 2007, to 112.9 million in January 2013. In other words, we currently have 10.1 million fewer full-time workers than existed at the pre-recession peak. Also notable is the fact that the number of full-time jobs in existence today, 112.9 million, is fewer than the 115.9 million which existed in July of 2000, more than a decade ago.

I suppose one could find a way to twist these numbers into a bright and rosy future, that is if one has no sense of where we have been or where we are headed, but since government spending is currently twice what it was just a decade ago, and politicians are frantically grasping to fill a gap, which for all of their efforts has merely widened, I fail to comprehend their hardheadedness.

According to POTUS, “We’ve created 6 million new jobs under my administration.” But according to reality, we currently have 5.4 million fewer workers than we had just over five years ago, 10.1 million fewer full-time workers, and 3.9 million more are employed part time for economic reasons. So you tried your plan, and it failed, and the employment situation won’t improve until government stops playing enabler, gets out of the way, and let’s God reign.

“Without God there is no recovery, only disappointing substitutions and repeated failures.” ~ Friend of Bill’s

The data presented in this post was obtained through the Current Population Survey (CPS), a monthly sample survey of about 60,000 households conducted by the Bureau of the Census for the Bureau of Labor Statistics.

References:

My Worksheets: Part Time Workers for Web

A Different Look at Part-time Employment | Bureau of Labor Statistics

Table A-8. Employed persons by class of worker and part-time status

Paranoid LA Cops: Shoot first, use brain never.

- By: Larry Walker II -

“Two women who were shot by Los Angeles police in Torrance early Thursday during a massive manhunt for an ex-LAPD officer were delivering newspapers, sources said.” One of the victims was shot in her hand, which was likely raised; the other in the back, classic.

Riddle the vehicle with bullets first; find out whether you got the stocky black male suspect or a couple of innocent women later. Did they even think to run a check on the vehicle’s tag first, or are they really that stupid? Was the tag legitimate? Did the passenger(s) even remotely resemble the suspect’s description? Did the tip come from a legitimate source? LAPD wants this guy dead so bad that they are behaving like rabid dogs; corybantic, crazed, demented, desperate, enraged, fierce, and fit to be tied.

Hundreds of LA cops have taken to the streets and hills armed with assault weapons and God knows what else, this time in search of one of their own. Does it really take hundreds of cops to find one suspect? Not hardly. That is unless 90% of the populace is on his side. Has the LAPD ever heard of intelligence? Are they unfamiliar with the word, investigation? How much intelligence went into riddling the first blue truck spotted, more or less matching the suspect’s vehicle description, with 33 bullets injuring two innocent news delivery women?

What about the guy in the following video? Man Mistaken For Manhunt Suspect.

View more videos at: http://nbclosangeles.com.

One wrong move and he would have been dead. Some anonymous informant called the police and said, “He’s right here, sitting in the parking lot,” and LAPD raced over threatening the very life of a stocky baldheaded black man. This guy is lucky to still be breathing. If you look anything like the suspect, you better get the hell out of Southern California, and even if you’re not anywhere near Los Angeles, and there’s no resemblance whatsoever, your safety is in jeopardy.

This madness has to stop before dozens of innocents are injured or murdered. The national media has just created a mass panic and now every bald stocky black man in America is a suspect. Hey, don’t take this lightly, they’re already saying that the rogue cop could be anywhere, aren’t they? He could have been in my office this morning. He could be any bald stocky black man attempting to board a bus, train, plane, or embarking on a cross-country drive.

Since he’s not really a public threat, but just a thorn in the side of what for all we know is a corrupt police force, maybe it’s time for the Feds to step in and begin conducting a proper investigation. I would like to see this guy given the opportunity to turn himself in, and receive a fair trial. If he did what they say he did, he should take the rap and do the time. And likewise, if the officers he named in his manifesto are guilty of what he accuses, they should also take the rap and do time. At this point, we really don’t know victim from villain. If the suspect dies, we may never know the truth.

The public should be less afraid of the suspect than those conducting the massive manhunt. At this point, I’m less afraid of Dorner than the LAPD. The real threat is allowing hundreds of cops to menace the countryside, armed with assault weapons, ready to riddle any bald stocky black man, or anyone else for that matter, with as many bullets as possible. It kind of makes the concept of a national gun control policy nothing but a ruse. You want to take away the rights of law abiding citizens, while government law enforcement officers are left virtually unchecked? No, that’s not how this works.

LAPD should get a clue. You’ve just taken the bait, hook line and sinker. You’re guilty of exactly what your former associate and accuser states: running around like you own the world, bullying, racial profiling, using the N-word, and pointing guns at and shooting innocents; instilling fear in the public you’re supposed to serve. I have much respect for cops who know their role and uphold the law and the Constitution, but I hold in contempt any sorry mutt who races to a scene and unloads his/her weapon without so much as a thread of evidence. Perhaps it’s time for the LAPD to clean house.

GAO: “No Opinion” on U.S. Financial Audit

Comments on 2012 Financial Statements of the U.S. Government

- By: Larry Walker II -

The Government Accountability Office (GAO) is required to audit financial statements for the U.S. government each year. What the GAO found in its Fiscal Year 2012 Audit published on January 17, 2013 is clearly unacceptable. If you take a few moments to read the report, what you’ll discover is that not only has the U.S. government been operating without a budget for the last three years, but even worse its books and records are so out of order that financial auditors were unable to render an opinion. You can bet that all the major credit rating agencies are paying attention and will render an opinion when judgment day arrives, and that day should be right around the corner. Following are some highlights from the latest report (in italics) along with a brief commentary.

Disclaimer of Opinion

“Because of the federal government’s inability to demonstrate the reliability of significant portions of the U.S. government’s accompanying accrual-based consolidated financial statements for fiscal years 2012 and 2011, principally resulting from limitations related to certain material weaknesses in internal control over financial reporting and other limitations on the scope of our work, we are unable to, and we do not, express an opinion on such accrual-based consolidated financial statements. As a result of these limitations, readers are cautioned that amounts reported in the accrual-based consolidated financial statements and related notes may not be reliable.”

Based on the auditor’s inability to express an opinion on the federal government’s financial statements, it is my opinion that any request to raise the debt ceiling should be summarily denied. Were the federal government a private entity, its creditors would be cashing out now and asking questions later. But since the federal government has a seeming unlimited ability to borrow without ever reducing its debt principal, perhaps my personal perceptions are overly rational. Then again, any decision based upon uncertainty or unreliable information can later come back to bite. If the federal government’s financial statements are so unreliable that auditors are unable to express an opinion, my gut instinct is to limit exposure, cut losses and move on.

"While significant progress has been made in improving federal financial management since the federal government began preparing consolidated financial statements 16 years ago, three major impediments continued to prevent GAO from rendering an opinion on the federal government’s accrual-based consolidated financial statements over this period: (1) serious financial management problems at DOD that have prevented its financial statements from being auditable, (2) the federal government’s inability to adequately account for and reconcile intragovernmental activity and balances between federal agencies, and (3) the federal government’s ineffective process for preparing the consolidated financial statements."

The Department of Defense (DOD) is no longer the largest drag on the federal budget; the Department of Health and Human Services (HHS) came in at number one last year, while the Social Security Administration (SSA) clocked in at number two, responsible for 23% and 22% of net federal costs, respectively. DOD now represents the 3rd largest item in the federal budget, consuming 21% of the government’s $3.8 trillion in net costs for FY 2012, yet its financial statements are currently not auditable. That means we really have no idea what DOD is buying, what it already owns, or the true nature of its future liabilities.

Further, according to GAO, most of the increase in DOD’s cost during FY 2012 was attributed to its Military Retirement Fund and other benefits programs. Since at the same time, the bulk of HHS and SSA costs come from major social insurance and postemployment benefits programs administered by those agencies (e.g., Medicare for HHS, and Social Security for SSA), that means better than 50% of federal spending (more than $1.9 Trillion) is directed towards retirement security, medical care, and other social welfare programs, which technically account for the entire $1.3 trillion shortfall realized by the federal government in FY 2012, and then some.

Intragovernmental Insanity

The national debt is comprised of debt held by the public and intragovernmental holdings. Intragovernmental holdings are debts the federal government owes to itself, a phenomenon only possible within the realm of the criminally insane. For example, as of the end of FY 2012, the Treasury has borrowed a total of $2.7 trillion from the Social Security Administration (its entire Trust Fund), and more recently from federal employee pension funds in order to meet its unmanageable over-inflated obligations. The total debt outstanding has grown from $5.7 trillion at the end of fiscal year 2000 to $16.4 trillion as of January 17, 2013. Included within this figure, intragovernmental debt has grown from $2.3 trillion at the end of fiscal year 2000 to $4.9 trillion as of January 17, 2013 (see table below).

As if the sheer weight of its total debt isn’t bad enough, according to GAO, the federal government can no longer adequately account for and reconcile its intragovernmental activity or the balances owed between federal agencies. Here’s an example. Back on June 28, 2010, the United States Postal Service, Office of Inspector General (OIG) discovered that the Postal Service had made a $75 billion overpayment to the Civil Service Retirement System (CSRS). However, since according to Note 24 of the GAO report (page 120), the Civil Service Retirement and Disability, and Civil Service Health Benefits Program Trust Funds are currently $849.1 billion and $240.0 billion in the hole, respectively, why would CSRS care?

USPS to CSRS: “Hey, you guys owe us $75 billion.”

CSRS to USPS: “Hey, give us a break; we’re already over a trillion dollars in the hole.”

USPS to CSRS: “My bad, we keep forgetting.”

World War Infinity

“Prior to 1917, the Congress approved each debt issuance. In 1917, to facilitate planning in World War I, Congress established a dollar ceiling for Federal borrowing. With the Public Debt Act of 1941 (Public Law 77-7), Congress and the President set an overall limit of $65 billion on Treasury debt obligations that could be outstanding at any one time. Since then, Congress and the President have enacted a number of debt limit increases. Most recently, pursuant to the Budget Control Act (BCA) of 2011, the debt limit was raised by $400 billion in August 2011 to $14.694 trillion, by $500 billion in September 2011 to $15.194 trillion, and by $1.2 trillion to $16.394 trillion in January 2012.”

Let’s make this clear. Prior to 1917, Congress approved each and every debt issuance request made by the Treasury Department. It was with the outbreak of the 1st World War that a debt ceiling was first established. This gave the Treasury some latitude in keeping the government afloat without impairing wartime activities. So it would make sense that after the end of World Wars I and II, Congress would resume its role of approving each debt issuance. But instead, the U.S. government has morphed into a permanent war mentality. Now, a small minority of borderline insane pundits are actually advocating for complete removal of any form of debt ceiling. It’s World War Infinity, they surmise. Like spoiled little children, they have conned themselves into believing that the role of government is to borrow and spend our way into a utopian entitlement paradise. Where are the adults?

"In addition to the material weaknesses underlying these major impediments, GAO identified four other material weaknesses. These are the federal government’s inability to (1) determine the full extent to which improper payments occur and reasonably assure that appropriate actions are taken to reduce improper payments, (2) identify and resolve information security control deficiencies and manage information security risks on an ongoing basis, (3) effectively manage its tax collection activities, and (4) effectively monitor and report loans receivable and loan guarantee liabilities."

While a minority within the realm of the spoiled and irresponsible are vying for total removal of any limits on the national debt, we have just been informed that the federal government has no control over improper payments, no ability to manage information security risks, cannot effectively manage its tax collections, and is unable to effectively monitor and report its loans receivable and its ballooning loan guarantee liabilities. It seems to me that the federal government should get a grip on its internal infrastructure before another dime is borrowed or spent. However, even if the federal government were able to show improvement in these areas, there are other issues on the horizon threatening to derail its entire operation.

Risks and Uncertainty

According to GAO, there are risks that other factors could affect the federal government’s financial condition in the future, including the following:

• The U.S. Postal Service (USPS) is facing a deteriorating financial situation as it reached its borrowing limit of $15 billion in fiscal year 2012 and finished the year with a reported net loss of almost $16 billion.

• The Federal Housing Administration (FHA) reported that its liabilities exceeded its assets by about $15 billion as of September 30, 2012, and that the capital ratio for its Mutual Mortgage Insurance Fund fell below zero during the fiscal year. In addition, the ultimate roles of Fannie Mae and Freddie Mac in the mortgage market may further affect FHA’s financial condition.

• Several initiatives undertaken during the last 4 years by the Board of Governors of the Federal Reserve System to stabilize the financial markets have led to a significant change in the composition and size of reported securities on the Federal Reserve’s balance sheet. The value of these securities, which include mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac, and the Government National Mortgage Association, is subject to interest rate risk and may decline or increase depending on interest rate changes. Therefore, if the Federal Reserve sells these securities at a loss, future payments of Federal Reserve earnings to the federal government may be reduced.

The USPS, FHA, and Federal Reserve are in over their heads, and either technically bankrupt, or soon to be. Yet, the only answer proffered by our so-called leaders in Washington, DC is to keep borrowing. Is this really the only viable solution? The Post Office borrowed $15 billion and then lost almost $16 billion last year. Does that sound like an entity worthy of another loan? Not in my world. It seems to me that instead of continuing to prop it up, it’s time for the USPS to go the way of the dinosaurs. The FHA and Federal Reserve can follow suit.

Also according to GAO, examples of assets and liabilities reported by the federal government that are subject to substantial uncertainty include the following:

• The federal government’s consolidated financial statements as of September 30, 2012, include approximately $109 billion of investments in two government-sponsored enterprises—the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) (reported net of about $85 billion in valuation losses). In addition, as of September 30, 2012, the financial statements include about $9 billion of liabilities for future payments to Fannie Mae and Freddie Mac and disclose a projected maximum remaining potential commitment to these entities of about $282 billion under agreements between Treasury and the entities. The future structures of these two government-sponsored enterprises and the roles they will serve in the mortgage market must still be determined.

• The federal government reported Troubled Asset Relief Program (TARP) direct loans and equity investments of approximately $40 billion as of September 30, 2012 (reported net of about $23 billion in valuation losses), of which approximately $20 billion related to loans to and equity investments in certain entities in the automotive industry.

• The federal government reported that the Pension Benefit Guaranty Corporation’s (PBGC) liabilities exceeded its assets by about $34 billion as of September 30, 2012. PBGC is subject to further losses if plan terminations that are reasonably possible occur.

In other words, the federal government “invested” $109 billion into Fannie Mae and Freddie Mac, which resulted in $85 billion in valuation losses, yet it plans to invest another $291 billion going forward. Another $63 billion was invested in loans made to TARP, which reported $23 billion in valuation losses ($20 billion of which is attributable to loans made to the auto industry). And the PBGC’s liabilities now exceed its assets by around $34 billion and it may be subject to further losses going forward. And what’s the federal government’s solution? Raise the debt ceiling, borrow more, and keep propping up failed entities, otherwise it fears the whole house of cards may come crashing down. Perhaps it’s time to get real and just go ahead and begin dismantling the entire criminal enterprise, one failed agency, entity and fund at a time.

Conclusion

The GAO was not able to express an opinion on the U.S. government’s financial statements, but that doesn’t stop us from reading between the lines. Either we deal with our fiscal problems now, or later. Leaving my granddaughter’s a legacy of failure is not something I’m willing to support. It’s time to grow up, and demonstrate it by cutting the federal government down to its bare bones. Do this today and we might have a chance; wait until tomorrow, and according to GAO, the U.S.A.’s debt-to-GDP ratio will reach 395% by fiscal year 2087 and rise continuously thereafter. If Congress raises the federal government’s debt ceiling without fundamental fiscal reform, then we all deserve everything we’ve got coming to us, nothing. Until such reform takes place, government ilk can count me out. Don’t call me, don’t write me, don’t ask me to invest in federal debt issues, and don’t dare ask me for another dime.

References:

Financial Audit: U.S. Government’s Fiscal Years 2012 and 2011 Consolidated Financial Statements

What GAO Found

Related:

War on Wealth III | National Debt Review

Postal Service OIG Discovers $75 Billion Overpayment, Again

Social Security: A Breach of Trust - Notes on 2010 Financial Statements of the U.S. Government

Debt Ceiling: Evidence of Absence

“Raising the debt ceiling does not authorize more spending. It simply allows the country to pay for spending that Congress has already committed to.” ~ POTUS ::

:: By: Larry Walker II ::

Wow, that was enlightening. I really had no idea. Now I get it. He must be talking about last year, when Congress voted unanimously in favor of the president’s budget, then walked it over to the Senate, which also unanimously approved. That’s when Congress committed to another trillion dollars of deficit spending, right?

Too bad that never happened. In reality, the president’s budget failed to attain a single vote in Congress.

“Before taking up their own budget plan for next year, House Republicans pushed a version of President Obama's $3.6 trillion budget to the floor for a vote, and it was it was unanimously defeated, 414-0.” ~ Fox News (March 28, 2012)

“President Obama's budget suffered a second embarrassing defeat Wednesday, when senators voted 99-0 to reject it.” ~ Washington Times (May 16, 2012)

Well, perhaps he meant this year, when Congress approved an across-the-board tax hike on every American, and at the same time delayed the previously committed automatic spending cuts for two months? But wasn’t that less about spending and more about fairness (or something)?

“President Obama signed into law the American Taxpayer Relief Act (H.R. 8) late Jan. 2, permanently extending the 2001 and 2003 tax cuts for individuals earning up to $400,000 and postponing automatic, across-the-board spending cuts for two months.” ~ Bloomberg BNA (January 7, 2013)

Now I’m confused. Exactly when did Congress commit to another trillion dollars in deficit spending?

Evidence of Absence

Evidence of absence is evidence of any kind that suggests something is missing or that it does not exist. For example: If it's raining outside, then the streets will be wet. So it may be assumed that if the streets are not wet, then it is not raining outside. Does that make sense? If so, then so should the following:

The national debt increases when government spending is out of control, so if the national debt does not increase, then government spending is under control.

So what is a debt ceiling? Is it not a limit which prevents the nation from incurring additional debt, beyond a level which Congress has already committed to? If so, then POTUS may have it backwards (as usual). If raising the debt ceiling does not authorize more spending, as POTUS so stated, then it may also be said that, not raising the debt ceiling does not authorize less spending. But that’s just nonsense.

I hate to spoil the party, but since the previous increase to the debt ceiling has already been spent, we must conclude that government spending is indeed out of control. Thus, the real issue is not whether Congress should raise the debt ceiling (once again), but rather who, or what, keeps authorizing the federal government’s blatantly obvious spending problem.

Let us be clear. The absence of positive action to increase the debt ceiling will cause the size of government to decrease. Contrariwise, the act of raising the debt ceiling leads to increased spending, more indebtedness, higher taxes and bigger government. If the debt ceiling is not raised, then the federal government must live within its means. So what’s it going to be? Shall we begin living within our means, or will we trudge forward, wantonly borrowing, seemingly without limit?

References:

Evidence of Absence

Appeal to Ignorance (Shifting the Burden of Proof)

Argument from Ignorance

List of Fallacies

There is No Platinum Bullet

But there is plenty of Gold ::

Here are my recently edited Google+ comments on, “Hey, let’s avoid the debt-ceiling standoff by minting a trillion-dollar platinum coin instead.”

Yeah, let's borrow another trillion dollars, and then use it to buy a trillion dollars worth of platinum. Then we can mint it into a gigantic non-marketable, non-negotiable coin, deposit it into the Treasury, and use it as collateral for the cost of buying the Platinum and minting it into a gigantic coin. That sounds like a real winner, eh? Yeah, it’s a dumb idea, and not even possible since there isn’t a trillion dollars worth of platinum lying around anywhere for the taking.

On the practical side, why not just take the 261,498,900 troy ounces of Gold sitting in the Treasury, which is something the federal government already owns, then sell it all for $433 billion? This would raise $422 billion net, since the government would first have to redeem the gold certificates held by the FRB for $11 billion, which the gold currently stands as collateral. Then we can use the proceeds to cover 40% of this year's budget deficit. Once this has been accomplished, then next year we can _ _   _ _ _ _   _ _ _ _ _ _ _ _ _ (you fill in the blanks).

One of the commenter’s admitted that the idea was crazy, but then went on to say that he thinks eliminating the debt ceiling is a good idea. His reasoning was that the government is constitutionally mandated to pay its debts, or something. To this I replied, “You just said the government has to pay its debts, and then said there should be no debt ceiling because the government must pay its debts. So how is the federal government’s act of continuing to borrow more on an unlimited basis synonymous with paying its debts?” He continued to repeat the same foolishness without stopping to try to understand my point, so my interest in the conversation waned.

My creditors have extended to me credit within certain limits. If I exceed those limits I will be forced to pay a penalty, and the extension of credit will cease. If I don't bring the debt balance below the limit quickly enough, my accounts may be closed at the lenders discretion. Even an unlimited credit line has an implied limit. That is the point at which the debtor can no longer reasonably make principal and interest payments while meeting its basic obligations.

Having worked in the past as a corporate credit manager, I can state that when extending credit, one of the considerations is whether the debtor has enough annual income to cover principal and interest payments on all of its outstanding debt, while at the same time being able to cover its basic obligations. Using the same logic, it doesn’t take a degree in accounting or finance to understand that the U.S. government is already well beyond this capability. It is not setting aside monies to pay its debt principal, and is in fact not making principal payments at all. It is basically continuing to borrow more in order to meet its basic obligations, including the interest it pays on the debt.

Like it or not, the U.S. government has an implied credit limit, which has already been surpassed. It is currently borrowing to meet its basic obligations including interest paid on its "interest only" credit line. At this point, if the federal government were to raise income tax rates by 50% on everyone, it still wouldn’t be enough to cover principal and interest payments and to meet its basic obligations. To get there, on its current trajectory, would take better than a 100% across-the-board tax hike. Until the federal government balances its budget, there’s really nothing to look forward to or even discuss.

When creditors stop issuing credit, or begin to demand higher interest rates to compensate for the risk of default, that's when the house of cards comes crashing down. When it comes to the federal debt, there is no platinum bullet. This government must either cut spending dramatically, or raise taxes by more than 100% across-the-board, it’s either that or face extinction.

Related: Solving the Debt Crisis | A Catch-22; From AAA to AA- in Four Years

Photo Via: The Most Expensive Journal

Phantom Tax Credit for Elderly and Disabled

A Tax Credit in Name Only (TCNO)

- By: Larry Walker, II -

A couple of weeks ago I wrote about how during this year’s continuing education courses it suddenly dawned on me that the base amounts used in calculating the taxability of social security benefits are exactly the same in tax year 2012 as they were in 1985. Well here’s another example of elder abuse. Congress has failed to inflation adjust the limitations on the Credit for the Elderly or the Disabled since it was last upgraded back in 1984. I am frankly surprised that this credit is still around, since in its present form it’s completely useless to 99.999% of taxpayers. Why is it still taking up space in IRS instruction booklets?

Back in 1981, when my study of tax law began, it was known simply as the Credit for the Elderly. It initially applied to persons over the age of 65, or under 65 if they had taxable income from a public retirement system. In tax year 1984 it became known as the Credit for the Elderly and the Permanently and Totally Disabled. It was also in 1984 that the same limitations that are in place today were established. Since 1988 it has been known simply as the Credit for the Elderly or the Disabled.

Although it sounds appealing, due to the failure to adjust for inflation, it has become a tax credit in name only (i.e. completely useless). How’s that, you say? Well, like I said, its name may have changed over the years, but the initial amounts and income limitations have not.

Maximum Credit

The maximum amount of the credit is limited to 15.0% of the following initial amounts, based on one’s filing status. (Note: For the disabled, the initial amounts used in calculating the tax credit cannot be more than the amount of the taxpayer’s taxable disability income.)

• $5,000 if Single, Head of Household or Qualifying Widow(er)

• $7,500 if Married Filing Joint and both spouses qualify

• $5,000 if Married Filing Joint and only one spouse qualifies

• $3,750 if Married Filing Separate and you did not live with your spouse at any time during the tax year.

Thus, on paper, the maximum amounts of this nonrefundable tax credit (at 15.0% of the initial amounts) are limited to the following:

• $750 if Single, Head of Household or Qualifying Widow(er)

• $1,125 if Married Filing Joint and both spouses qualify

• $750 if Married Filing Joint and only one spouse qualifies

• $562.50 if Married Filing Separate and you did not live with your spouse at any time during the tax year.

Since this is a nonrefundable tax credit, even if you are magically somehow able to qualify, you can only actually use the credit if you have a regular income tax liability. In other words, the credit cannot be used to offset self-employment taxes, penalties on retirement distributions, or other taxes found on lines 56 to 60 of Form 1040. The credit is figured on Schedule R and entered on line 53 of Form 1040.

Limitations

It sounds fantastic, and maybe it was in 1984. But since hardly anyone can qualify for the credit anymore, it’s really meaningless today. The main problem here is that the same income limitations in place in 1984 are in effect in 2012. So who can qualify today?

If your adjusted gross income (AGI) is equal to or greater than the following amounts, then you do not qualify for the tax credit.

• $17,500 if Single, Head of Household or Qualifying Widow(er)

• $25,000 if Married Filing Joint and both spouses qualify

• $20,000 if Married Filing Joint and only one spouse qualifies

• $12,500 if Married Filing Separate and you did not live with your spouse at any time during the tax year.

Additionally, if the nontaxable part of your Social Security and other nontaxable pensions is greater than the following amounts, you are also excluded from the credit. No, really.

• $5,000 if Single, Head of Household or Qualifying Widow(er)

• $7,500 if Married Filing Joint and both spouses qualify

• $5,000 if Married Filing Joint and only one spouse qualifies

• $3,750 if Married Filing Separate and you did not live with your spouse at any time during the tax year.

Finally, if one-half of your Excess Adjusted Gross Income (defined as adjusted gross income minus the following limits), plus the nontaxable portion of your pensions is greater than the initial amount of the credit, you are also disqualified.

• $7,500 if Single, Head of Household or Qualifying Widow(er)

• $10,000 if Married Filing Jointly

• $5,000 if Married Filing Separate and you did not live with your spouse at any time during the tax year.

In other words, you must reduce the initial amount of the credit, by one-half of your Excess AGI and your total nontaxable pensions.

The Problem

Think inflation. The average monthly Social Security benefit for a retired worker was about $1,230 at the beginning of 2012. So a single retiree with an average benefit would receive around $14,760 per year. A married couple with an average benefit would receive around $29,520 per year. So with that, let’s see whether or not it’s even possible to qualify for this tax credit.

Example 0: Let’s say you are single, over the age of 65, and receive social security benefits of $14,760. Since social security isn’t taxable until half of your social security plus your other income (both taxable and tax exempt) exceeds $25,000, if that is your only source of income, then none of it is taxable, and the Credit for the Elderly or the Disabled doesn’t apply. So let's try to figure out the precise circumstances under which the credit does apply.

1. In order for 50% of your social security benefits to be taxable, your income from other sources (both taxable and tax exempt) must be greater than $17,620 [17,620 + 7,380 (½ of social security benefits) = $25,000].

a) But if this is the case, then your adjusted gross income is also likely to be more than the AGI limit of $17,500, so you will not qualify for the credit.

b) And since only half of your social security is taxable, because the nontaxable portion of $7,380 (14,760 / 2) is greater than the $5,000 limit for nontaxable pensions, you don’t qualify.

c) Also, since your adjusted gross income is likely greater than $17,500, subtracting the limit for excess adjusted gross income of $7,500 leaves $10,000, which when divided by 2 is equal to or greater than the initial amount of $5,000, which means you don’t qualify. Got it?

2. In order for 85% of your social security benefits to be taxable, your income from other sources (taxable and tax exempt) must be greater than $26,620 [26,620 + 7,380 (½ of social security benefits) = $34,000]. But then, you are also likely disqualified due to both (a) and (c) under #1 above. Got that?

3. And there’s another problem. Because the standard deduction for a single person over the age of 65 in 2012 is $7,400 [5,950 + 1,450], and the personal exemption allowance is $3,800, your adjusted gross income must be greater than $11,200 to even have an income tax liability. In other words, if your adjusted gross income is under $11,200, you don’t qualify. But if your AGI is between $11,200 and $17,500, and the nontaxable portion of your social security benefits is less than $5,000 (item #1 (b)), then you might qualify.

a) However, if your AGI is between $11,201 and $17,499, then in this example, the nontaxable portion of your social security benefits will be greater than $5,000 which disqualifies you under item #1 (b).

4. Even if you don’t receive social security, and the nontaxable portion of your other pension income is less than the $5,000 limit, when calculating the credit, you must then subtract one-half of your excess AGI plus your nontaxable pensions, from the initial credit amount, in order to determine your limited tax credit. So at the low end, your Excess AGI would be $3,700 (11,200 – 7,500), and at the high end it would be $10,000 (17,500 – 7,500). But this poses further problems.

a) The initial amount of your tax credit is limited to $5,000, but this must be further reduced by one-half of your excess AGI, which will either be $1,850 (3,700 / 2) at the low end, or $5,000 (10,000 / 2) at the high end, plus the nontaxable amount of your pensions (i.e. up to $5,000). So at the low end, assuming a nontaxable pension of $5,000, the initial amount of your credit is limited to -0- (5,000 – 1,850 – 5,000), and at the high end it is also reduced to -0- (5,000 – 5,000 – 5,000).

5. Finally, if none of your income is from social security, you don’t have any other nontaxable pensions, and assuming all other criteria are met, then in order to qualify for the tax credit, the adjusted gross income of a single taxpayer is limited to being between $11,201 and $17,499. Simple, right?

a) However, since the amount of the actual tax credit is further limited to 15.0% of the initial amount (after the reduction of one-half of excess AGI), the maximum amount of the credit can be no greater than $472.50 [(5,000 – ((11,201 – 7,500) / 2)) * 15.0%], and this would be further limited to the amount of income tax actually owed.

b) At the low-end, a single retiree with AGI of $11,201 qualifies for the maximum credit of $472.50 [(5,000 – ((11,201 – 7,500) / 2)) * 15.0%], but would have an income tax liability of $0 [(11,201 – 11,200) * 10.0%]. Thus, the credit is useless.

c) In the mid-range, a retiree with AGI of $14,350 would have a tax liability of $315 [(14,350 – 11,200) * 10.0%], and would qualify for a tax credit of $236 [(5,000 – ((14,350 – 7,500) / 2)) * 15.0%]. That would about cover the cost of calculating this monstrosity.

d) At the high-end, a retiree with AGI of $17,499 would have a tax liability of $630 [(17,499 – 11,200) * 10.0%], and would qualify for a tax credit of $0 [(5,000 – ((17,499 – 7,500) / 2)) * 15.0%]. Thus, the credit is once again useless.

Summary: In order for a single retiree to qualify for the Credit for the Elderly or the Disabled, his Adjusted Gross Income must fall between $11,201 and $17,499, and he must either not be on social security, or the nontaxable portion of his combined pension income must be less than $3,150 (5,000 – 1,850). The mid-range amount of the final tax credit for such a rare individual would be around $236 (between -0- and $472.50), while the maximum credit would only be available against an income tax liability of -0-. Thus, in order to qualify for the optimal credit, a single retiree would have to have an adjusted gross income of around $14,350, with no income from social security and no other nontaxable pension income.

The results for married couples and the disabled are similar. The example above is just a long way of proving that the Credit for the Elderly or the Disabled has become obsolete due to the failure of Congress to adjust its 1984 initial amounts and limitations for inflation.

Solution

The table below shows the limitations in force in 1984 and 2012, along with the inflation adjusted amounts. As you can see, a simple inflation adjustment would more than double the income limitations, likely causing at least some elderly and disabled taxpayers to qualify. So why hasn’t this been done? Is it too hard, or has Congress simply forgotten?

The maximum amount of the credit would increase to 15.0% of the following initial amounts, based on filing status. (Note: For the disabled, the initial amounts used in calculating the tax credit cannot be more than the amount of the taxpayer’s taxable disability income.)

• To $11,131 from $5,000 if Single, Head of Household or Qualifying Widow(er)

• To $16,697 from $7,500 if Married Filing Joint and both spouses qualify

• To $11,131 from $5,000 if Married Filing Joint and only one spouse qualifies

• To $8,348 from $3,750 if Married Filing Separate and you did not live with your spouse at any time during the tax year.

Thus, on paper, the maximum amounts of the nonrefundable credit (at 15.0% of the initial amounts) would increase as follows:

• To $1,670 from $750 if Single, Head of Household or Qualifying Widow(er)

• To $2,505 from $1,125 if Married Filing Joint and both spouses qualify

• To $1,670 from $750 if Married Filing Joint and only one spouse qualifies

• To $1,252 from $562.50 if Married Filing Separate and you did not live with your spouse at any time during the tax year.

Now that’s more like it. It’s not all that, but it’s better than what we have today. Inflation Indexing should be an integral part of tax reform. It’s not right to screw our seniors and disabled out of a tax credit, when an automatic adjustment is granted in other areas of the tax code. We should have more respect for the elderly and disabled.

Example 1 (before)

The following example is based on one used by the IRS. It calculates the tax credit before and after the proposed inflation adjustments:

You are 66 years old and your spouse is 64. Your spouse is not disabled. You file a joint return on Form 1040. Your adjusted gross income is $14,630. Together you received $3,200 from social security, which was nontaxable. You figure your credit as follows:

You cannot take the credit since your nontaxable social security (line 2) plus your excess adjusted gross income (line 3) is more than your initial amount on line 1.

Example 1A (after) – The same circumstances as in example 1, except that all limitations have been adjusted for inflation.

Your potential tax credit is now $1,189.65 which will be limited by the amount of income tax shown on line 46 of your Form 1040 tax return.

Example 1B – This is the income tax calculation for the couple in Examples 1 and 1A.

Since the sum of the taxpayers' standard deduction, additional standard deduction for one spouse being over the age of 65, and the deduction for personal exemptions are greater than their adjusted gross income; the taxpayers' do not have a tax liability. Thus, in this case, although they qualify for the tax credit in Example 1A, they are not able to, and do not need to use it. However, what’s changed is that after the inflation adjustment, the couple could potentially have up to $38,000 of adjusted gross income (or around $24,000 more than in the example) and still qualify for the tax credit.

Conclusion

The Credit for the Elderly or the Disabled is a Tax Credit in Name Only (TCNO). In its present state it is completely useless to 99.999% of Americans. It’s easier for a camel to go through the eye of needle than to qualify for this phantom credit. Its initial amounts and limitations should immediately be adjusted for inflation (although the numbers probably need a bit more tweaking). If Congress refuses to make these simple adjustments, then all references to this tax credit should be purged from the Internal Revenue Code, from all income tax forms and publications, and from the IRS’s computers. It costs money to print B.S., and frankly, it’s a waste of time to calculate and explain to a senior or disabled person why they are not qualified.

Related:

Taxing Social Security Taxes

#Taxes

References:

U.S.Inflation Calculator

2012 Schedule R

2000 Schedule R

1990 Schedule R

1985 Schedule R

1984 Schedule R

1983 Schedule R

1981 Schedule R

1980 Schedule R

The Fiscal Responsibility Cliff

Talk About Crazy Bastards...

- By: Larry Walker, II -

Hiking tax rates now, in advance of the pending 2013 Medicare Tax Increase from 2.9% to 3.8% on those making $200K ($250K if married), the new 3.8% Medicare Tax on Investment Income including capital gains, the 2014 health insurance tax on individuals of $695 to $2,085 (plus inflation) depending on family size, and the 2014 shared responsibility penalty of $2,000 per employee on companies with 50 or more part-time employees (working 30 hours or more), probably isn’t wise. Legislator's must pare any further tax increases with the hikes already baked in the cake.

Many of the provisions commonly referred to as the Bush Tax Cuts were phased in gradually between 2003 and 2010 culminating in maximum favorability in 2010. Since Congress has already extended these temporary provisions for two years, I would have no problem with returning to the pre-2008 tax law right now (i.e. the laws in effect prior to the Stimulus package which only added to the current morass). I would hesitate to call removing the 2010 concessions and Stimulus subsidies a tax hike, because each were designed to be temporary in nature, not extended ad infinitum. However, if Congress insists on raising income tax rates, then any such increases should be gradual (i.e. phased in over a 7 to 10-year period), not jammed in all at once.

Lawmakers should be careful not to turn a blind eye to what’s already beneath the icing while cooking up the next barrage of tax law changes. In my opinion, the Obama Administration is not qualified to address income tax matters; it lacks mathematical fortitude. Its words are mere noise, good for little more than forefinger exercise in locating the mute button, at least for me. You crazy bastards have already screwed up everything for three years in a row. We really don't have the time or patience for anymore of this nonsense. You've talked enough. It's time to get off the T.V. shows and do some work. Step one should be a mandatory crash course in income tax law for all legislators and the White House. You really should take a timeout to contemplate the monstrosity you've already created before making another move.

References:

Under Obamacare, Medicare Double Taxation Begins in 2013

Obamacare’s Effect on Small Business

Get ready to fill out Obamacare’s individual mandate tax form

IRS issues proposed regs. on 3.8% net investment income tax

Proposed regulations - Net investment tax

Related: #TAXES

Tax Fairness | Reverse Parity

It’s Magic!

- By: Larry Walker, II -

The current 2012 Tax Rate Schedule is shown below. Applying the Obama-Doctrine, single filers making over $200,000, and married filers making over $250,000 would get a tax hike. However, since there is no cut-off at either $200,000 or $250,000 in the current tax rate schedule, the 33% bracket would need to be split, resulting in a sharp tax increase for a handful of unfortunate individuals.

Thus, taxpayers with taxable incomes between $200,000 ($250,000 if married) and $388,350 would see their taxes rise by 20%, while those with incomes over $388,350 would get that plus a marginal increase of 13.1% on income above the new ceiling (see tables below).

So what’s the effect?

We’ll use the married filing joint filing status in the following examples to determine the overall effect.

# 1 – If you’re married and have taxable income of $400,000, your taxes will increase by 19.4%, or by $9,667.

# 2 – If you’re married and have taxable income of $1,000,000, your taxes will increase by 14.3%, or by $37,267.

# 3 – If you’re married and have taxable income of $10,000,000, your taxes will increase by 13.2%, or by $451,267.

# 4 – If you’re married and have taxable income of $20,000,000, your taxes will increase by 13.2%, or by $911,267.

# 5 – If you’re married and have taxable income of $100,000,000, your taxes will increase by 13.2%, or by $4,591,267.

What’s wrong with this picture?

First of all, those with taxable incomes below $200,000 ($250,000 if married) get to keep the tax rates they’ve had for the last 10 years, plus all the other garbage in the tax code, which is being called –– a tax cut. So in other words, for 95% of Americans, nothing is the new something.

Secondly, those who already pay the highest tax rates will receive a 13.2% to 20.0% tax hike, which is being called –– fair. However, tax rates will go up the most not on millionaires and billionaires, but rather on single individuals with taxable incomes between $200,000 and $388,350 and married couples with taxable incomes between $250,000 and $388,350.

So why not just admit it? This isn’t a tax cut for the middle-class. And it’s not so much a tax hike on millionaires and billionaires. What it represents is a massive tax hike on those with taxable incomes between $200,000 ($250,000 if married) and $388,350, and a more modest hike on millionaires and billionaires. Got it?

If a top marginal rate of 33% has been proven to raise more revenue than higher rates, due to the Laffer Curve (see video: Do High Taxes Raise More Money?), then why are we even talking about raising rates above the 35% mark? Aren’t rates already too high? Couldn’t we achieve the same parity by keeping top rates where they are and simply cutting tax rates on the 95% of Americans with incomes below the new ceiling? Why, yes we could. And here’s what the new tax rate schedule would look like if we were to do just that.

The 10%, 15%, 25%, 28% and 33% brackets are reduced by 13.2% (the same amount of increase currently being proposed on the wealthy), and are thus lowered to 8.7%, 13.0%, 21.7%, 24.3% and 28.6%. Note that the 35% bracket is still lowered to include those with taxable incomes over $200,000 ($250,000 if married), so that those making between $200,000 ($250,000 if married) and $388,350 will still see a modest increase of around 6%, but isn’t this the group we we’re trying to screw anyway? Yep! So there you go.

You say, “But what will your plan do for the deficit”? I say, what does the one on the table do for the deficit? Score them both dynamically (skip the static nonsense) and see which plan raises more revenue in the long-term. Not that it really matters though, since the main goal here is fairness, right? Well, that’s what my plan achieves.

Reverse Parity Tax Effects

So here’s how the Obama-Doctrine stacks up against the reverse parity plan. At current tax rates, married taxpayers filing jointly pay the following taxes (see table below).

Under the Obama Doctrine, married taxpayers filing jointly get nothing at taxable incomes below $250,000, and realize a 13.1% (rounded down) tax increase at upper levels. This means income tax burdens would increase by $451,267 to $4,591,267 for those with taxable incomes between $10,000,000 and $100,000,000, respectively (see table below).

But under the Reverse Parity Plan, married taxpayers filing jointly will realize a 13.2% tax cut at taxable incomes below $250,000, and only negligible savings at upper levels. This means income tax burdens will decrease by $875 to $7,842 for married couples with taxable incomes between $50,000 and $250,000, respectively (see table below). At the same time, income tax burdens will fall by $5,074 for those with taxable incomes over $1,000,000, representing a negligible decline.

It’s the same thing the White House is striving for, except in reverse. The big difference is that under the reverse parity plan the middle-class gets a genuine tax cut, not just smoke and mirrors, while the upper-class pays an effectively higher tax rate, roughly 13.1% more than those with taxable incomes under $200,000 ($250,000 if married), and this is achieved without actually raising tax rates. The only exception, of course, is those poor saps stuck between taxable incomes of $200,000 ($250,000 if married) and $388,350, but that’s life, right?

It’s real simple. If ‘no change’ for 95% of Americans can be deemed a tax cut, then ‘no change’ for the remaining 5% can likewise be deemed a tax hike. It’s magic! Ninety five percent of taxpayers receive a stimulative tax cut, the top five percent get nothing, the Laffer Curve is respected, and fairness is restored. Problem solved. Now it’s time to tackle the real problem, those elusive spending cuts.

Related:

Taxing Social Security Taxes

#Taxes

Video: Do High Tax Rates Raise More Money?