Thursday, August 31, 2017

The Federal Government Is a Huge Insurance Company With An Army

(first published in North State Journal 8/30/17)

'Think of the federal government as a gigantic insurance company (with a sideline business in national defense and homeland security), which does its accounting on a cash basis, only counting premiums and payouts as they go in and out the door. An insurance company with cash accounting . . . is an accident waiting to happen.' -Former President George Bush 43 Treasury official, Peter Fisher, 2003

It has known in budget circles as 'The government is an insurance company with an army' statement.

Is it true?

The US federal budget is now 50% consumed by spending for Social Security, a social insurance program; Medicare and Medicaid, two of the largest health insurance programs in the country; and various other social safety net programs which act as insurance plans as well.

Except for one thing. None of these federal insurance programs operate as licensed sanctioned insurance plans as we see in the private sector where money is collected from the individual and invested or managed in a fiduciary manner to build assets to pay for claims in the future.

Money that goes to pay for Social Security claims of current retirees today comes directly from the payroll taxes of current working Americans.

Money that goes to pay for Medicare claims of current retirees today is close to 90% paid for by payroll taxes and general fund tax revenues paid by current working Americans and active taxpayers. The only part of Medicare health insurance coverage that is paid for by the participants, aside from the deductible, is the 25% of the Part B premium that pays for doctor bills. Part A payments for hospital expenses are 100% paid by payroll taxes of working Americans today.

Money that goes to pay for Medicaid coverage for our least well-off fellow citizens is 100% paid for by taxpayers at the federal and state level, an average of 67/33 split overall.

Since tax revenues are fungible and wind up being used for any and all government expenditures in reality, roughly 12% of every dollar spent in the federal budget is borrowed which means future generations will have at least $22 trillion in national debt to deal with no matter what happens in the next 4 years.

Given the massive amount of debt that has to be serviced in interest each year which accounts for 9% of all spending in the federal budget, the federal government is the largest bond company in the world paying over $266 billion in net interest to holders of US debt worldwide in 2016 alone.

If truth is told about our federal government today, we have 'the largest insurance AND bond company in the world with an army'.

What does this mean to future generations of Americans?

Will they pay 100% of all of their income, payroll, excise, estate and corporate taxes to cover the social insurance programs plus interest in 15 years in 2032 to support their Boomer parents in retirement as currently projected?

Will they have to pay 25% more in taxes to maintain the status quo in federal social insurance programs?

What will happen to them if, and probably when, interest rates return to some sort of 'normal' range of 5% on federal bonds? That will mean they will have to pay $1 trillion per year in net interest alone to service the national debt which will further compress any and probably all discretionary domestic program from building roads to keeping our environment clean.

Our current national debate has been dominated by politically charged issues since the 2016 election. The big issue we have failed to elevate to a national discussion stage is how are we going to change our government spending so our future will be bright for our children and grandchildren.

It is a discussion we need to have.

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Thursday, August 24, 2017

Don't Fall For 'Fake News' About Taxes!

(first published in North State Journal 8/23/17)
There is nothing more disturbing in all of American politics than the misunderstanding and deliberate deception when it comes to the progressive income tax code of the United States.

People vote for pocketbook issues that are important to their family. Reforming and simplifying the tax code is about as important as it gets to the average American family every day, especially when compared to all of the obsessive media coverage about Russia since the election to name one example.

President Barack Obama said this about taxes in a September, 2011 speech on the economy:

'Middle-class families shouldn’t pay higher taxes than millionaires and billionaires....Warren Buffett’s secretary shouldn’t pay a higher tax rate than Warren Buffett.' 

Conflating 'taxes paid' and 'tax rates' is inherently a dishonest political way to confuse the voting public. In a world of reason, anyone who pays millions of dollars in taxes in cold hard cash is shouldering far more of a tax burden to support our government activities than an average person who might be paying a higher 'tax rate' at any level of income.

Let's take a very simple example:

Take a look at the above chart and consider a secretary working for Mr. Buffett who makes $37,950 per year after all personal deductions are included on his or her tax form. They would owe $5226.25 in taxes for 2017.

Assume that this secretary makes $1 more somehow in a teeny, tiny bonus let's call it. Their income becomes $37,951 instead of $37,950.

That $1 will be taxed at a 25% tax rate according to current law. An additional 25 cents will be added to their taxes paid so that their total bill to the federal government will be $5226.50 instead of $5226.25.

See the difference? Very small amount in pennies paid but 10 percentage points higher than the 15% marginal tax rate paid on the amount between $9325 and $37,950 in taxable income.

Consider a very wealthy person such as Mr. Buffett coming along and filing his taxes behind the secretary at the local accountant office in Omaha, Nebraska. Many wealthy people make the vast majority of their income from appreciated long-term gains in their stock or real estate portfolios which are taxed at a 15% rate to recognize the long-term commitment it takes to make such growth happen in the first place.

Long-term asset appreciation is taxed at a lower rate since it is inherently risky to keep assets deployed in any long-term investment, many times which winds up being worthless and not taxable at all in which case the wealthy person loses all of his money AND the federal treasury gets nothing in taxes either.

Mr. Buffett makes $100 million in long-term capital gains profits from his investment and then pays 15% of that gain to the federal government and writes a check for $15 million to Uncle Sam.

'But he has paid a lower tax RATE than his secretary!' people on the left will scream.

So what? He has paid $15 MILLION in cold hard cash to the federal government whereas his secretary paid a total of 25 CENTS at the higher marginal tax rate. Which would you rather see if you want your government to continue to operate?

Hopefully as this troubled summer ends, we will see Congress start to address the whole issue of tax reform.  Don't get distracted by the 'fake news' difference between tax 'rates' and taxes actually 'paid'.

The battle cry of 'tax the rich more!' sounds good and resonates well in a speech designed to rouse the understandable human passions of fairness and equity. It fails as sound fiscal policy if it ignores basic arithmetic we all should have learned in elementary school.

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Wednesday, August 16, 2017

Fire and Fury

Churchill, Truman and Stalin at Potsdam, July 26, 1945
(first published in North State Journal 8/16/17)

"They will be met with fire and fury like the world has never seen.”

Has any American President before President Trump ever issued such direct and descriptive terms to a foreign adversary? Or has every other President turned the other cheek when the United States has been threatened by a madman, dictator, Emperor, King or power-mad maniac and let them do what they wanted to do?

Consider the excerpts below from the Potsdam Declaration of July 26, 1945 which was signed by
President Harry S Truman, Chiang Kai-shek, the President of China and Winston Churchill, PM of Great Britain and issued to the Emperor of Japan as the ultimate ultimatum to end the bloodiest war the world has ever known, World War II:

  1. 'The full application of our military power, backed by our resolve, will mean the inevitable and complete destruction of the Japanese armed forces and just as inevitably the utter devastation of the Japanese homeland.
  2. The time has come for Japan to decide whether she will continue to be controlled by those self-willed militaristic advisers whose unintelligent calculations have brought the Empire of Japan to the threshold of annihilation, or whether she will follow the path of reason.
  3. We call upon the government of Japan to proclaim now the unconditional surrender of all Japanese armed forces, and to provide proper and adequate assurances of their good faith in such action. The alternative for Japan is prompt and utter destruction.'

Other US Presidents have ‘rattled the saber’ when it came to identifying the threat to American and free world interests and spoken directly about the danger at hand.

Ronald Reagan called Libyan strong man Muammar Kaddafi ‘a mad dog of the Middle East (who) has a goal of a world revolution’ (1986)

Thomas Jefferson responded to the tribute demands of the Bey of Tripoli with this short, direct answer: ‘I sent a small squadron of frigates into the Mediterranean.’ (1801)

Teddy Roosevelt didn’t say ‘Speak softly but carry a big stick’ because he was inviting foreign adversaries to a tea party at the White House.

Perhaps if President Trump had cribbed the above language from the Potsdam Declaration and had Chinese President Xi Jinping sign it along with every ally America has around the world, his threats to North Korea might have been considered less alarming to the mainstream media and his political opponents.

No one really knows what is going on inside the head of Supreme Leader of DPRK Kim Jong-Un. He and his father and grandfather have been bewildering outside observers since 1946 like evil villains in a bad James Bond movie series.

Perhaps he is jockeying for more concessions as he exacted from Presidents Bill Clinton and Barack Obama. Perhaps he is appearing to stand up to ‘evil America’ to prolong his regime amidst fears his life will end in similar fashion to Romanian dictator Nicolae Ceausescu and his wife who were overthrown and publicly executed on Christmas Day, 1989.

In 1981, Israel grew so concerned about Saddam Hussein in Iraq developing a nuclear reactor they instigated an air strike and destroyed it before it was fully operational.  If China can not or will not force North Korea back into the world of reason, what choice would the free world have left other than to destroy any nuclear missile before it left its launchpad?

The one thing the world has to agree on is that the Supreme Leader of North Korea must never be allowed to push the button that launches a nuclear-tipped missile anywhere in the world.

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Thursday, August 10, 2017

Lottery Millionaires versus 'Regular' Millionaires

(article first published in North State Journal 8/9/17)

Richard Reeves has written a book, “Dream Hoarders” to explore the widening gap between the upper income class of America and everyone else.

The gap is widening, there is no doubt. But is it because upper-income people are deliberately ‘hoarding’ things and intentionally ‘denying’ others the fulfillment of their dreams and aspirations?

Do upper-income people do things that are inherently detrimental to society or do they actually contribute a lot more to society than they take out themselves?

Consider this stark example:

There have been perhaps 10,000 large to mega-large lottery and Powerball and Super-Mega-Powerball winners in America over the past 25 years that have made people millionaires to super-millionaires.

The odds of winning the most recent national Powerball was estimated to be one in 292 million. There are about 320 million people living in 126 million households in America today to give you some perspective.

Did these lottery super-winners create tons of new jobs for anyone else on their way to becoming super wealthy? Did they invest in any new plant, machinery or technology that was created by other people who employed hundreds, perhaps thousands of other people who supported their families on those jobs in order to become ‘super-wealthy’?

No. The answer is that maybe 100 or so state employees at the state lottery office had jobs because of the lottery in their states. Certainly not thousands. Or hundreds of thousands.

On the other hand, it is estimated that there are now close to 10.8 million millionaires in America according to a CNBC report on March 24, 2017. “In 2016, there were 9.4 million individuals with net worth between $1 million and $5 million, 1.3 million individuals with net worth between $5 million and $25 million, and 156,000 households with more than $25 million in net worth,” the report says.

You have a much higher chance of becoming a millionaire in any other fashion than playing the lottery. One in 12 households in any other venue versus one in 292 million for Super Powerball.

Some no doubt did it the old-fashioned way with inherited wealth from their families. However, according to some wealth managers, less than 2 percent of all the wealth created by the fantastically wealthy families in the 19th and 20th Centuries has survived beyond even the third generation of grandsons and granddaughters. Much of that wealth was squandered along the way which also finds its way into the pockets of hard-working carpenters and laborers who build their mansions or luxury yachts before they declare bankruptcy.

Many, if not most of these millionaires made their fortunes not all by themselves but by hiring and working with great people and paying them to help build the company. Once a Bill Gates or Steven Jobs or Jeff Bezos starts to build a company based on their ground-breaking ideas, ordinary folks who join their teams early on not only get paid for their services but get fringe benefits such as health care insurance coverage and retirement plans, which sometimes includes stock that appreciates in value in the growth of the underlying company they are helping build.

The tip of the spear might be the fabulously wealthy people we all read about in the news. The truth of the matter is those entrepreneurs and business leaders made a fortune for themselves while also providing income, benefits and jobs to millions of people beyond them.

It is difficult to consider the vast number of millionaires being ‘dream hoarders’ deliberately trying to prevent others from succeeding in life. After all, they need non-millionaires to help them succeed in the first place.

We all benefit from that collective success.

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Thursday, August 3, 2017

This Is What A Budget Reconciliation Bill Looks Like


(from opinion page of North State Journal printed 8/2/17)

'Son, in the US Senate, there are no rules!'

So said former Senate parliamentarian Bob Dove at the completion of a two day seminar on Senate rules in 2003 when asked to sum it all up for new Senate staffers.

Now that health care reform has been torpedoed in the U.S. Senate in dramatic fashion by Senator John McCain’s deciding ‘no’ vote last week and by Republican Senators who are not up for re-election in 2018, where does that leave health care reform efforts?

For now, nowhere. The Affordable Care Act is still the law of the land whether you like it or not. Until Congress passes a bill that gets signed by President Trump, Obamacare remains the law of the land with all of its attendant promise and problems.

The Omnibus Budget Reconciliation Act of 1990 Act (pictured above) ushered in a decade of spending restraint, PAYGO budget discipline and led to four surplus budgets from 1998 to 2001.

The strategy all along from the Republican side was to pass health care reform first under reconciliation rules in order to free up enough spending savings over 10 years to allow a massive tax cut—reform bill to be passed afterwards. Budget reconciliation measures cannot increase the deficit; they can rearrange the deck chairs of tax and spending policy but cannot add to the baseline debt.

Those are the rules. We didn’t make them up. Budget reconciliation was a tool passed in 1974 to allow for expedited consideration of bills relating to spending, revenue and budget matters with only a 50 percent +1 majority in the Senate instead of the 60-vote threshold to close debate and proceed to a vote.

Now that health care reform has collapsed in the Senate, what does that mean for tax reform?

It probably means a scaled-down version of tax reform, perhaps by as much as 50 percent less. Health care repeal and replace was expected to save anywhere from $1 trillion to $2 trillion in spending over the next decade, most of which would ‘pay for’ the majority of a massive tax reform package some estimated to be close to $3 trillion over 10 years. On top of that, budget savings in the rest of the federal budget amounting to close to $1 trillion over 10 years were going to be folded into this budget reconciliation package to form what might have been called “MOBRA 2017” or the Massive Omnibus Reconciliation Act of 2017.

Tax reform will now take center stage for consideration and regular order appropriations bills will be passed to incorporate the majority of budget savings.

Will we see health care reform again this year? Many conservatives now believe Obamacare exchanges will collapse under its own weight without taxpayer bailout of the insurance companies. So why try again?

States that have expanded Medicaid under the 100 percent match for five years are now beginning to feel the pinch of having to pay for 10 percent of the expansion cost since ACA called for a reduction to 90 percent match after five years. Budget pressures will start to force match rates back down to the historical average of 63 percent federal and 37 percent state-funded further weakening Medicaid expansion.

Could the Senate take up health care again under budget reconciliation rules? Yes, if both houses pass another budget resolution and sends out a second set of reconciliation instructions. They could do that 100 times if they so choose.

As Bob Dove said, though, ‘there are no rules’ in the US Senate which means we could see health care again before the end of the year. Don’t hold your breath but stranger things have happened.

This year as a matter of fact.

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