More Phony Baloney from Art Laffer

Although I had planned to pen an article today regarding the stimulus plan and some other pieces of information from the week, I was alerted to this OP-ED piece in Today’s Wall Street Journal Online Edition and felt a need to respond. This piece is, in my humble opinion, another example of professional obfuscation by the very experienced Art Laffer. It requires little to dispose of this three-plus page propaganda piece, which states:

Since 1980, statutory marginal tax rates have fallen dramatically. The highest marginal income tax rate in 1980 was 70%. Today it is 35%. In the year Ronald Reagan took office (1981) the top 1% of income earners paid 17.58% of all federal income taxes. Twenty-five years later, in 2005, the top 1% paid 39.38% of all income taxes.
There are other ways of looking at tax receipts by income bracket. From 1981 to 2005, the income taxes paid by the top 1% rose to 2.96% of GDP, from 1.59% of GDP. There was also a huge absolute increase in real tax dollars paid by this group. In 1981, the total taxes paid in 2005 dollars by the top 1% of income earners was $94.84 billion. In 2005 it was $368.13 billion.

He goes on to devote almost an entire page to listing statistics about shares of taxes paid by the top 1% vs. the bottom 75% illustrating the point that the poor unfortunate top 1% have been carrying a much larger share of the total income taxes. What he does not explicitly mention is what I have set forth in the first graph above. The top 1% paid a larger share of the income taxes because the top 1% continue to get more and more of the total income. In fact, in 1986 the top 1% of taxpayers earned 11.3% of the total adjusted gross income reported to the IRS. In 2005 the top 1% earned 21.2% of the total adjusted gross income, an increase of 87.6%. In 1986 the top 1% paid 25.75% of all personal income taxes paid to the IRS. In 2005 the top 1% paid 39.38% of all the taxes, an increase of 53%. How is this bad for the top 1%? (See how easy it is to manipulate numbers? Think for a minute why percentage increase in income share is so much higher than the percentage increase in tax share. I will point this out to you, unlike some.) In reality, that entire page of percentages is irrelevant to anything other than deflecting from the fact that the rich have achieved higher riches relative to everyone else and this has occurred during the period in time that tax rates on the top 1% have been dramatically lower (the post 1981 period).


Mr. Laffer goes on to claim that the effective tax rate on the top 1% really does not change from year to year (thus proving my point above), concluding that this is because the rich find ways to alter their income so as to avoid the higher marginal rates (not that the wealthy don’t do some of this but it does not result in flat effective tax rates for the wealthy). There are two problems here. First, he is wrong as evidenced by the second graph above titled "Average Effective Tax Rate Top 1%". The effective rate does vary and the effective rate is measured over ALL income, not just the marginal portion at the higher rate. As a result we would expect the effective rate to vary much less than the marginal, and it does. The other problem is that if he is correct then the rich are masters at tax avoidance and the easy way to fix that is enforcement. His argument finishes with the proposition that if we cut taxes on the middle-class we will lose that revenue and if we raise taxes on the upper income earners, since they never pay the higher amount, we will lose income there too. Of course we just learned that this is not true, at least in connection with the top income earners.

Mr. Laffer’s piece ends with this hopelessly biased and unsupported conclusion:

Mark my words: If the Democrats succeed in implementing their plan to tax the rich and cut taxes on the middle and lower income earners, this country will experience a fiscal crisis of serious proportions that will last for years and years until a new Harding, Kennedy or Reagan comes along.
Trained economists know all of this is true, but they try to rebut the facts nonetheless because they believe it will curry favor with their political benefactors.

Really?

I have one final point about Mr. Laffer’s “analysis”. I find it interesting that he begins at the point in history when the highest marginal rates were dramatically lowered but goes no further back in time. I wonder if this change in income tax philosophy so strenuously argued for by the likes of Art Laffer has enabled the vast accumulation of wealth that appears to be concentrating at the top? I suspect there is a reason the analysis begins when it does.


Note: This article was revised from the original to add the second graph.

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Why I Think We Will Have A Recession

Here is why I think we will have a recession. The graph above plots the Financial Obligations Ratio from the Board of Governors of the Federal Reserve. This ratio is an estimate of consumers' fixed payment obligations as a percent of their disposable income. Here is how the Board describes it:

The household debt service ratio (DSR) is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt.
The financial obligations ratio (FOR) adds automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance, and property tax payments to the debt service ratio.

So this ratio tells us the estimated percentage of the average person's disposable income that is already committed to making these fixed payments. The rest of the disposable income goes to pay for everything else including food, clothing, energy, education, savings, and so on.

The wavy line is the FOR for the third quarter of each year and the dark straight line is the trend line. I think this graph says a lot about why I hear people talking about being "tight" and not having extra income to spend lately. Add rising food and energy prices and I think there is just less truly discretionary money in the average household. This is also why I think any stimulus should be focused on consumers.

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Two Ways to Lose Your Job

I just wanted to juxtapose two situations that are similar but very different. The first relates to a person who lost their job when the factory he worked at closed. The second relates to a person who lost his job because he did a terrible job costing his company billions of dollars.

After 30 years at a factory making truck parts, Jeffrey Evans was earning $14.55 an hour in what he called “one of the better-paying jobs in the area.”… Wearing a Harley-Davidson cap, a bittersweet reminder of crushed dreams, he recently described how astonished and betrayed he felt when the plant was shut down in August after a labor dispute. Despite sporadic construction work, Mr. Evans has seen his income reduced by half.
So he was astonished yet again to find himself, at age 49, selling off his cherished Harley and most of his apartment furniture and moving in with his mother.

From the NYT here.

Former Merrill Lynch & Co. Chief Executive Stan O'Neal has found a new home: Alcoa Inc., which Friday named Mr. O'Neal as a director.
The move came a day after Merrill Lynch reported a $9.8 billion loss for the fourth quarter, the worst in the firm's 94-year history. The results were driven by $16.7 billion in losses on complex securities, subprime mortgages and other debt that piled up as the bank took what ratings firms have said were excessive risks under Mr. O'Neal's watch….
Mr. O'Neal left Merrill with benefits valued at $161.5 million from various pension plans and stock grants.

From The Wall Street Journal here.

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Where Should The Stimulus Go?

There is a lot of talk today about a stimulus package from the Federal Government to help counter the slowing economy. A lot of generalities were discussed during Fed Chairman Ben Bernanke's testimony before The House Budget Committee. You can read his prepared statement here.

Some pundits and politicians are arguing the stimulus should be focused on business with ideas such as accelerated depreciation. The thinking behind this is that it will stimulate businesses to acquire capital goods and the only cost to the government is the time value of money because businesses get the tax benefit now instead of over time. I haven't heard anyone yet limit such a plan to goods manufactured in the US, and without that this idea could be very watered down. That's also an issue with any of the other plans, however, but using a depreciation incentive to spur purchases of capital goods could be targeted toward domestic manufacturers as other plans may not be. Of course there are likely trade partner issues with any such limitations.

On the other end of the spectrum is giving to the poor. Expand the food stamp program and other help to the poor. The argument here is that these people will immediately spend the money and it will have the most immediate stimulative impact on the economy. If the stimulus is limited to tax breaks these people will see no help at all because they are not taxpayers to begin with.

Then there is tax relief for the investor class, otherwise known as the good old trickle down theory. According to this thinking, if we cut taxes on investing businesses will have access to capital and will invest thereby putting people to work and lifting all boats. Of course, if business in general is already sitting on large piles of capital then this plan would have no impact other than to add to the coffers of the wealthy.

Also under consideration is a tax break for the middle-class. The thinking here is that many people will spend it because times are tough, and so the stimulative impact will be relatively quick. An argument against this is that so many middle-class families are in so much debt that a large portion of such stimulus will go to paying down credit cards rather than new expenditures. This would help in the long run as consumers in too much debt can't consume, but there would be a delay in the impact. This plan could be attractive to the banks and credit card companies, so I think it has a pretty good chance of being at least part of any plan.

There are those who argue that this is the time to make the Bush tax cuts permanent. This just goes to show how extreme the position of this wing of the Republican party is. This would have zero impact until 2011, and is simply not relevant to the discussion of a stimulus plan. You can, however, count on those regular foot soldiers of the neocons who have gone a long way to destroying the fiscal health of our country to come out and tell us why this would be a good idea now.

As far as the Fed Chairman is concerned, he was non-committal on any particular stimulus package although he clearly warned that any plan that increased the structural fiscal deficit must be avoided, and government must address that issue sooner rather than later. He avoids recommending the solution to Congress, as he should, because he is not political (not supposed to be anyway) and this is clearly a political issue. What he does say is that the long term problem is simple arithmetic. What comes in must equal what goes out or at some point we have a crisis (and that point is within the next decade or two). In crafting a stimulus package:

As I have discussed on other occasions, the nation faces daunting long-run budget challenges associated with an aging population, rising health-care costs, and other factors. A fiscal program that increased the structural budget deficit would only make confronting those challenges more difficult.

I have a suggestion for Congress and the President. Since the years of following a policy of tax-cuts, borrow and spend have left us in the painfully foreseeable position of a pending fiscal crises, perhaps it is time to change course. As a place to begin, I suggest the research of Romer and Romer oft-cited by supporters of tax cut policies as evidence that their way is the best. What we do not hear about is the conclusion reached in that very same research report that a tax increase to repay an inherited deficit does not have a negative impact on economic growth. Just in case those tax cut pundits misplaced their copy, here is a link to it.

For tax increases to deal with an inherited budget deficit, the results are more interesting. The
point estimates imply that output does not fall at all following deficit-driven tax increases.

(From page 24)
If you would like a really good example of how the tax cut soldiers use this kind of report, here is a link to a recent Art Laffer report, as in the Laffer Curve. If you search this report for "Romer" you will find that he relies on it heavily. I cannot, however, find any reference in his report to an inherited deficit. I also love the title of his report: THE ONSLAUGHT FROM THE LEFT, PART I: FACT VS. FICTION. The true onslaught is a 28 year old attack on the poor and middle class from the right.

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Supreme Court Speaks, Investors Lose

OPINION ARTICLE

The Supreme Court published its opinion in the Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., et al. This case asked the court to determine whether, under rule 10(b)5 issued by the Securities Exchange Commission pursuant to the Securities Exchange Act of 1934, a company (a third party wrongdoer) that assists a publicly traded company in misleading the public about its financial results can be held liable to the investors in that public company for damages caused by the misleading actions.

In my humble opinion the case can be summarized as follows: It is better to let investors suffer at the hands of fraudulent business activities than to potentially raise the cost of doing business by holding businesses accountable for their fraudulent actions. The SEC can, in its discretion, take action against a third party wrongdoer but private investors cannot.

Here is my short version - the long version (with details) is below:

The Court noted two issues with allowing investors to sue third party wrongdoers other than its review and manipulation interpretation of prior law. The first is that it would raise the cost of doing business because every company would be exposed to potential liability and harassment by discovery proceedings for investors with weak claims. This could drive up the cost of doing business, and so businesses need to be protected from this harassment. The second is that this additional cost of doing business in the United States could deter foreign companies from issuing securities in our markets and doing business with domestic firms. Interestingly, the Court never addresses the cost to businesses or investors of meltdowns such as Enron and Charter and all of the other fraudulent market disasters experienced over the past decade. How can it conclude that the cost to business would increase when it does not even consider the other side of the ledger? What costs would go down if businesses acted more ethically? What about bad debt write-offs for one? Doesn’t this very decision reduce the cost of wrongdoing? These points are not addressed in the opinion. Nor does the opinion address the cost to the economy of a lower level of investor participation due to a lack of confidence in the market. This decision, in my opinion, was pre-determined and I wrote that back in October.

What businesses stand to gain disproportionately from this ruling? Think about the major financial institutions and all of those very complex transactions they helped structure for Enron. Think about those subprime securitizations and CDOs. You are now getting warm.

Here is the long version if you are interested in some specifics.

Two set-top box makers (Motorola and Scientific-Atlanta) knowingly entered into phony transactions with Charter Communications so Charter could fool its accountants and report higher income than it actually had. It was a classic fraud scheme wherein Charter swapped long-term depreciation expense for short-term reportable income. Charter then issued false financial statements, investors purchased the stock, the scheme was revealed, and the investors lost money. Now the investors want the set-top box makers who entered into these fake transactions with Charter to pay. Here are the facts from the Court:

Charter, a cable operator, engaged in a variety of fraudulent practices so its quarterly reports would meet Wall Street expectations for cable subscriber growth and operating cash flow. The fraud included misclassification of its customer base; delayed reporting of terminated customers; improper capitalization of costs that should have been shown as expenses; and manipulation of the company’s billing cutoff dates to inflate reported revenues. In late 2000, Charter executives realized that, despite these efforts, the company would miss projected operating cash flow numbers by $15 to $20 million. To help meet the shortfall, Charter decided to alter its existing arrangements with respondents, Scientific-Atlanta and Motorola…

Respondents supplied Charter with the digital cable converter (set top) boxes that Charter furnished to its customers. Charter arranged to overpay respondents $20 for each set top box it purchased until the end of the year, with the understanding that respondents would return the overpayment by purchasing advertising from Charter. The transactions, it is alleged, had no economic substance; but, because Charter would then record the advertising purchases as revenue and capitalize its purchase of the set top boxes, in violation of generally accepted accounting principles, the transactions would enable Charter to fool its auditor into approving a financial statement showing it met projected revenue and operating cash flow numbers. Respondents agreed to the arrangement.

So that Arthur Andersen would not discover the link between Charter’s increased payments for the boxes and the advertising purchases, the companies drafted documents to make it appear the transactions were unrelated and conducted in the ordinary course of business. Following a request from Charter, Scientific-Atlanta sent documents to Charter stating—falsely—that it had increased production costs. It raised the price for set top boxes for the rest of 2000 by $20 per box. As for Motorola, in a written contract Charter agreed to purchase from Motorola a specific number of set top boxes and pay liquidated damages of $20 for each unit it did not take. The contract was made with the expectation Charter would fail to purchase all the units and pay Motorola the liquidated damages.

To return the additional money from the set top box sales, Scientific-Atlanta and Motorola signed contracts with Charter to purchase advertising time for a price higher than fair value. The new set top box agreements were backdated to make it appear that they were negotiated a month before the advertising agreements. The backdating was important to convey the impression that the negotiations were unconnected, a point Arthur Andersen considered necessary for separate treatment of the transactions. Charter recorded the advertising payments to inflate revenue and operating cash flow by approximately $17 million. The inflated number was shown on financial statements filed with the Securities and Exchange Commission (SEC) and reported to the public.

So what did the court decide? Well, first it determined that the set-top box makers didn’t make any misleading statements, so they didn’t directly violate the statute in question. The next step, then, is to determine if they can be held liable under a theory of aiding and abetting Charter’s misstatements. The court then goes through a long history of cases explaining that the set-top box makers did not do anything “in connection with the sale of a security” so again they are not liable, and they had no affirmative duty to disclose this information to the public nor did they communicate these acts to the public so the public could not have relied on them. The dissenting opinion does a good job of debunking these arguments in my opinion.

The investors argued:

Liability is appropriate, petitioner [the investor] contends, because respondents [the set-top box makers] engaged in conduct with the purpose and effect of creating a false appearance of material fact to further a scheme to misrepresent Charter’s revenue. The argument is that the financial statement Charter released to the public was a natural and expected consequence of respondents’ deceptive acts; had respondents not assisted Charter, Charter’s auditor would not have been fooled, and the financial statement would have been a more accurate reflection of Charter’s financial condition.

Liability is appropriate, petitioner contends, because respondents engaged in conduct with the purpose and effect of creating a false appearance of material fact to further a scheme to misrepresent Charter’s revenue. The argument is that the financial statement Charter released to the public was a natural and expected consequence of respondents’ deceptive acts; had respondents not assisted Charter, Charter’s auditor would not have been fooled, and the financial statement would have been a more accurate reflection of Charter’s financial condition.

Sounds like perfectly sound logic to me, and it would place liability where it belongs, at the doorstep of the wrongdoers. So why does the Court reject this argument? Here we see the true agenda behind this ruling:

Were this concept of reliance to be adopted, the implied cause of action would reach the whole market-place in which the issuing company does business; and there is no authority for this rule…

In Blue Chip [a prior Court case], the Court noted that extensive discovery and the potential for uncertainty and disruption in a lawsuit allow plaintiffs with weak claims to extort settlements from innocent companies…

Adoption of petitioner’s approach would expose a new class of defendants to these risks. As noted in Central Bank [a prior Court case], contracting parties might find it necessary to protect against these threats, raising the costs of doing business… Overseas firms with no other exposure to our securities laws could be deterred from doing business here. See Brief for Organization for International Investment et al. as Amici Curiae 17–20. This, in turn, may raise the cost of being a publicly traded company under our law and shift securities offerings away from domestic capital markets.

So in the end, the Court does not want to protect individual investors from this type of bad activity because it could raise the cost of doing business for all companies. Inherent in that decision is the belief that it is better to let investors and other businesses suffer at the hands of fraudulent business activities than to potentially raise the cost of doing business by holding businesses accountable for their fraudulent actions. Absent from this reasoning is the cost to businesses of fraudulent practices (which has just gone down for the wrongdoers) and the cost to businesses and society due to lower investor participation in the financial markets. How many businesses entered into transactions with Charter based on its reported financial condition to later find out they could have a write-off on their hands? How many investors burned by these frauds have left the market and what is the cost of this loss of participation?

In making its ruling the Court goes beyond this case into what the law is, concluding that there is no private right of action in the Securities Exchange act (a private right means every day citizens can sue under it vs. only the government) for aiding and abetting in a securities law violation. The Court points to legislative action were the congress passed a new law that specifically provides for this liability but only mentions the SEC for enforcement. From this, the Court concludes Congress did not want to provide a private right of action in these cases. So, in the end, we the people as individuals cannot sue to recover damages from companies that aid and abet in these cases, only the SEC can. If it decides not to, nothing happens, and it may or may not recover damages for the investors.

Who may benefit from this ruling? Think about the major financial institutions and all of those very complex transactions they helped structure for Enron. Think about those subprime securitizations and CDOs. You are now getting warm. Who makes fees from underwriting securities? Warm again. The Court, in its infinite wisdom, has determined that protecting these interests is more important than ensuring ethical business practices.

If you would like to read the opinion of the Court, you can find it here.

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Who Is Purchasing your Candidate?

OK, this is just to let everyone know why I think nothing will really change after this election. Financial CEOs will continue to take home mega paydays, hedge fund and private equity managers will continue to get 15% income tax treatment, interest rates on credit cards will stay high, and we the taxpayers will bail out the wreckage from the subprime meltdown caused in large part by the financial industry. You may be thinking "oh no, all the candidates are for change." Well, before you vote you should know who your candidate will owe if they get in.

Go here and click on your candidate. How far down the list is the first financial firm? How far down is Goldman Saks, Merrill Lynch, Citi, JP Morgan Chase, and so on? By the way, don't just look at who, also look at how much. Note who is missing as contributors to those candidates that are doing poorly or have dropped out. Then go Here and take a look at some of the same numbers organized by industry.

Campaign finance and lobby reform are the only things that will change anything about our system of government as it stands today, in my humble opinion. If we really want change I think we need to deal with three issues in the politician's life cycle: getting in; being in; and getting out.

On getting in it seems more evident in each election that we need campaign finance reform. Looking at the links I have posted drives that point home for me.

On being in, I would like to see some serious ethics reforms with oversight from independent sources, and perhaps large pay raises for all members of congress at the same time. The pay raises could attract more qualified candidates (as could campaign finance reform) and perhaps make them a little more immune to special interests.

On getting out, that's a difficult one. Here is a good example of the problem. Apparently Representative Richard Baker (R-LA)is stepping down to take a very lucrative position in an industry he has received a lot of financial support from and one he dealt with while in congress:

Baker also serves as a longstanding member of the House Financial Services Committee, where he is widely viewed as an expert on capital markets, insurance, and housing finance.

(From his congressional website)
Perhaps a simple prohibition against this would help.

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Stubborn Poverty

This "article" is actually a response to a question in another blog here. It is a good thread and I encourage giving it a read and a vote. Here is the question I want to address here because a picture tells a thousand words and I don't think I can post a picture in a comment box:

The question for me is this: In a free society, where people are free to make bad choices, how much poverty can we eliminate without rewarding, and hence encouraging, bad choices?

And despite $6.6 Trillion spent on anti-poverty programs, the poverty rate has not budged much since 1968--regardless of the party in power or plan of attack.

I think this is a really good question, good enough to send me to the Census Bureau to dig up the chart above. What it shows is that poverty in this country was very bad in the 1950s and fell throughout the 1960s and 1970s. At first I thought the downward trend had a lot to do with the economy in general, but looking at the GDP growth rates doesn’t seem to indicate that was the reason. Labor unionization likely played a part as some jobs that did not provide a living wage became subject to collective bargaining (a trend that is now reversing).

I then looked at the minimum wage. I found this quote here.

The minimum wage was first enacted in 1938 as part of the Fair Labor Standards Act (FLSA). It is enforced by the U.S. Department of Labor's Employment Standards Administration. Initially just 25 cents per hour, the minimum wage has been raised several times in the decades since. In real (inflation-adjusted) terms, the minimum wage reached its peak in 1968, when it was worth $6.92 in 1998 dollars.

So minimum wage legislation could certainly explain some of the downward trend in poverty over this time period. Today, the minimum wage has finally been raised again to $6.55 beginning in July of 2008 and $7.25 in July 2009. At the current rate of $5.85, a full time minimum wage worker would make about $12,000 per year working 40 hours per week with no vacation. This is above the poverty line for a single person, but well below the $16,000 poverty line for a family of three. And getting “Mom” out to work does not pay because childcare costs more than the available earnings. At $7.25 per hour we get close to the line for a family of three, but by that time it will be further below the poverty line due to inflation. So what we see is that many very hard working people live in poverty.

(On minimum wage – if we make employees more expensive, we provide incentive to innovate. This results in fewer jobs in that particular field, but more jobs in the field of the innovations. So, the idea that raising the minimum wage translates directly into inflation is just wrong, and in fact raising it could be, in the long run, exactly the incentive we need to continue innovating to compete globally.)

Then there is The Great Society, and the war on poverty launched by the Johnson Administration. This war included all of the types of programs I here today’s conservatives speak about, such as community development, job training, education, and so on. You can get a pretty good summary of those here. Two of the most important programs implemented were Medicare and Medicaid, and this likely had a lot to do with the rapid decline in poverty among seniors. Note that the poverty rate among seniors in 1959 was in the 35% range, hardly justifiable based on laziness and clearly unacceptable by today’s standards.

So, certainly the programs of The Great Society launched during Johnson’s War on Poverty in the 1960s had a lot to do with declining poverty rates throughout the 1960s. Since those programs were fully implemented and integrated into our society, the poverty rate has remained somewhat stable although they have begun to track up again. I think this goes back to the minimum wage issue.

So, back to the original questions. First:

In a free society, where people are free to make bad choices, how much poverty can we eliminate without rewarding, and hence encouraging, bad choices?

I wish I had an answer to this question but the fact is I do not. This is a question that I believe is impossible to answer because the only way to do so is to know how many people being helped would actually not need it if it were not available to them. We did see, however, what happened in our society when it was not there – a quick look at the graph tells me that poverty rates were very high by today’s standards and would be unacceptable to us in this more modern era.

The second question:

And despite $6.6 Trillion spent on anti-poverty programs, the poverty rate has not budged much since 1968--regardless of the party in power or plan of attack.

We see that the basic premise of this question is correct because the poverty rates have not improved all that much since 1968 when most of the major Great Society programs were enacted. However, this may be in part an answer to the first question. Perhaps in this great society where people have the opportunity to amass great wealth and live with luxuries unimagined by most people in this world through all of its history, the cost is a 12-13% of the population living in poverty (I would hope not, but our track record seems to support it). The losers, if you will, in the great game we call our “free market” economy. So the question then becomes this: In our Great Society, do we want to see the accumulation of wealth never before seen in the hands of the few while we fail to honor our promises to provide benefits for those who are in need of them? Do we want to trade massive wealth for the few for massive suffering for the many? That is the question at hand, and I come down very clearly on the side that says share the wealth a little more. Has the $6.6 trillion been well spent keeping millions of our seniors and children out of poverty for the past 40 years? That’s a judgment call for each of us to make. The “free market” conservatives apparently think not, while the “bleeding heart” liberals think so. These programs have been under attack since 1980 and we are approaching, in my fear, a point of no return as this debate goes on and the wealth moves up.

One final note - the wealth distribution is not fully justified by "free markets" and all one need do to observe this is to follow the money in politics. If you want to eliminate waste, that would be the best place to start, in my humble opinion.

For more statistics on poverty go here.

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Federal Budget for 2006

Here are the rest of the federal budget numbers re-classified in a way that I think makes them understandable. They are approximate because the government figures use varying classifications depending upon where you get the numbers from. These amounts also ignore unemployment insurance, but the net impact of doing so is relatively small. The inflows are without including any payroll taxes as that is dealt with in the Social Security and Health Care pieces referred to below. Outflows are without Social Security and the portion of Medicare paid for by payroll deductions. My hope was to isolate those programs from the other government programs that we fund through general revenues rather than payroll taxes that fund Social Security and a portion of Medicare. By doing it this way, if you want to know how much you are paying toward any particular item you can get a very rough estimate by multiplying the amount you paid in federal income tax times the percentage to the right of the outflow category (plus your share of the additional national debt used to fund the shortfall, so add another 30% or so).

Interest expense is not "net interest" because the portion that the government considers a wash (about $169 billion) is "paid" to trust funds like Social Security but then immediately re-borrowed. Because of this the government accounting figures a net interest amount as though it really wasn't paid. In any event, about $100 billion of the interest expense is paying the interest on the money borrowed from Social Security, so if you like you can add that to your retirement costs.

Non-SS Mandatory Income Security includes all of the means tested entitlements.

The difference between the inflow and outflow explains the additional half trillion or so of national debt from end of year 2005 to end of year 2006 (approximately $574 billion).

A final note - to really understand who benefits and who pays in our system it is necessary to go beyond a simple inflow/outflow analysis. It requires a real analysis of the tax code to understand who is getting a better deal and who is not. One example of this is the capital gains treatment of carried interest for hedge fund and private equity managers that allows them to pay 15% on large portions of their (often seven figure) incomes. I hope, however, that this analysis provides some insight.

For health care go here.
For Social Security go here.
For welfare go here.

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Federal Health Care Expenses

2006, Dollars in millions.
Here are the numbers for Federal health care expenditures. By way of background, Medicare Part A, hospitalization, is paid from payroll deductions while Parts B and D are paid from premiums and general revenues. Part A is currently self funding, but projected to fall into major deficit in the short and long run. In addition, Parts B and D are drawing from the general funds at a level that requires the President to propose modifications by 2009. What all of that means is the costs of health care are expected to increase dramatically and there has been no trust fund established for the bulk of the costs.

All of the numbers come from Tables 2.4, 3.2, and 8.5 of The Office of Management and Budget (OMB) 2008 Budget Of The United States Government Fiscal Year 2008 Historical Tables except for Premiums, Taxes on Benefits and Interest which came from Status of Social Security and Medicare Programs, A Summary Of The 2007 Annual Report.

To sum this up, the Federal Government spends 22.7 cents of every dollar it collects (over and above payroll deductions) on health care. If you are an "average" taxpayer making $50,000 per year and paying 12.45% of your income in federal taxes, then you are contributing $1,414 to health care from income taxes and $725 from payroll deductions (1.45%) for a grand total of $2,139.00. This is in addition to any non-governmental health care you may be paying for.

For Social Security go here.
For welfare go here.
For the balance of the budget go here.

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Social Security Figures

2006, Dollars in million

Here is my estimate of the 2006 Social Security budget. These are estimates as they come from different sources (which is necessary to obtain the full picture). The data represent 2006 Old Age & Survivors Insurance (SSI) and Disability Insurance (DI) which are both funded through payroll deductions.

For the revenue side, I used both The Office of Management and Budget (OMB) 2008 Budget Of The United States Government Fiscal Year 2008 Historical Tables Tables 2.4 (page 43) & 8.5 (page 142), and Status of Social Security and Medicare Programs, A Summary Of The 2007 Annual Report. On the outflow side I used the OMB report.

Net savings to the fund is the amount of the increase in the Old Age & Survivors Insurance (SSI) and Disability Insurance (DI) trust funds for the period. Note that a significant contribution to Social Security revenue comes from interest on funds borrowed by the Federal Government from the trust funds and taxes on benefits. These get ignored when looking only at the OMB Budget figures but are certainly relevant here. The interest represents interest paid (and, of course, re-borrowed) by the Federal Government to the trust fund. Although I am calling these estimates, the net increase to the fund based on the SSA figures is within $1.5 billion looking at their figures vs. my estimates. This is pretty good, especially considering the fact that the OMB Budget report has Social Security outlays of $548,549 million in table 3.2 and $543,900 million in table 8.1. But hey, what's $4.5 billion among friends? (It was explained to me by an intern at OMB that this is due to classification differences.)

For "Welfare" costs go here.
For health care go here.
For the balance of the budget go here.

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How Much Does Welfare Cost?

Based on information I received from the Office of Management and Budget I have revised this post. The numbers changed by enough that I though it worth revising.

I have been involved in some discussion of late regarding fairness of our tax system, income distribution, and income redistribution. It seemed to me that there was a lot missing in these discussions. In particular, the facts! So I set out to plow through some government reports to get a handle on were the money comes from and where it goes. This has turned out to be quite a challenge, especially since I am not an accountant (although I think even some accountants would be baffled by some of this stuff).

As I progressed it became obvious to me that this is a project that will need to be broken down into pieces. I decided the first piece would be welfare related expenditures because that has been a popular topic in my conversations and political debates. With that introduction, here are some of the welfare figures. I hope to have more analysis soon, depending upon when one very nice young intern named Karl at the Office of Management and Budget gets back to me with some information. (Karl has since gotten back to me which is why this has been revised. Thank you Karl!)

According to The Budget for Fiscal Year 2008, Historical Tables, total outlays for Means Tested Entitlements in 2006 were $354.3 billion. This was 2.7% of GDP and

Includes Medicaid, food stamps, family support assistance (AFDC), supplemental security income (SSI), child nutrition programs, refundable portions of earned income tax credits (EITC and HITC) and child tax credit, welfare contingency fund, child care entitlement to States, temporary assistance to needy families, foster care and adoption assistance, State children’s health insurance and veterans pensions.

(from Table 8.1, page 133)

The cost of these programs has increased from 0.8% of GDP in 1962 (before Medicaid) to 2.7% of GDP in 2006, or by 1.9% of GDP. If we exclude Medicaid, health care for children and veterans pensions it is 0.89 % of GDP, or $117 billion. (The numbers for the excluded items are found in Table 8.5, page 142). This represents approximately 7.5% of total non-Social Security receipts to the Federal Government. So, for every one of your tax dollars to the Federal Government, about 7.5 cents goes to these programs. I hate to use averages, but the average taxpayer had a tax rate of 12.45% in 2005 (the latest data available here), so if we multiply things out we see that about 0.93% of the average taxpayer’s income went to non-medical “welfare”. So, if you made $50,000 and paid $6,225.00 in Federal income tax, approximately $465.00 went to all of these programs x-health care and veterans pensions.

Next up I hope to isolate some of the health care numbers. I believe this is truly where our fiscal crisis lies and I hope to see whether I am correct. It will require working through historical budget numbers together with Social Security numbers - my head hurts already!

For Social Security go here.
For health care go here.
For the balance of the budget go here.

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