Oct. 2010 Politics Part 3

PART 3 of 3: The Money Shot

A small business owner is interviewing candidates to be his new tax advisor. He asks each accountant one simple question: What is the answer if you add two plus two?

The first candidate answers “four.” The second accountant pauses, thinking that it might be a trick question, but then answers “four?” The third interviewee, a CPA, leans back in his chair and asks “What do you want the answer to be?”

We CPAs may not be very good at simple math, but we are often very good tax advisors.

I’m not a Nobel winning economist and I haven’t studied all the data and models used by the Congressional Budget Office for projecting things like the effects of specific tax law changes or the effects of retiring baby boomers on the national budget. I’ll do my best to start with actual facts, but some of you may not like my math. (Story of my life… people only like my math when they get the answer they want.) Even if you don’t like my math I hope that most of you will acknowledge that I make some valid points.

Let’s start with some good news and happy thoughts before we address the potential post-election pain that may be on the horizon.

TARP

So many people freaked out when the government passed the TARP (Troubled Asset Relief Program). OMG!… $700 billion? It will bankrupt the country!

What most people didn’t understand was that this was an investment, not an expense. Even at the time it was passed, the actual cost of the program was expected to be about half of that amount – on the high side. At the time, I wasn’t concerned as much about TARP as I was about the effects on our economy if the government had done nothing. Financial institutions would have started falling like dominos. Bear Stearns and Lehman Brothers were already down. Even George Bailey wouldn’t have been able to stave off the run on the banks, which would have led to disaster at the FDIC and the collapse of our economy as commerce came to a screeching halt.

Still, people want to blame someone for pissing away a lot of money. It’s all people are focused on these days (perhaps rightly). So who do we blame? TARP was passed before Obama became president. Ah… but some of the money got doled out while he WAS president. Fine, let’s blame him for half. Half of what it will actually cost.

A lot of the “mistakes” that happened with TARP happened in the early days as money was thrown at banks without restrictions. Eventually, TARP money started getting “invested” with strings attached, such as equity ownership and board of directors seats. Essentially, TARP put the government in the position of being a venture capitalist. Guess what… sometimes venture capitalists make money.

As of earlier this month, the projected total cost of TARP is now expected to be less than $30 billion. On top of the money being paid back, interest and profits are offsetting a lot of the losses that occurred because not all of the “investments” worked out. We won’t know for several years, but that number could be modified down further. It may even turn a profit! It wouldn’t be the first time that a government bailout turned into profit. (Thank you Lee Iacocca.)

Clearly some errors in judgment occurred during the execution of TARP investments. (Several regarding AIG.) What did you expect? They are politicians, not ACTUAL venture capitalists. In the end, a program that probably prevented the entire collapse of our economy for the low, low price of maybe $0 doesn’t sound that bad.

So good job: George W., Republicans, Democrats, Barack, some guy named Ben, and probably a few other people.

Two final thoughts on TARP:
• There are those out there who have said “Let them fail – the banks, the insurance companies, the auto companies… They are all broken – it’s time to hit the reset button.” I can’t say I disagree with the thought in general. I for one hope that we, the taxpayers, are done bailing out the likes of Chrysler. However, our country was already in the depths of the worst recession since the great depression. I don’t even want to think about where we’d be had they done nothing.
• “Oh sure… banks are paying us back with interest – by getting it from taxpayers in the form of higher fees!” Yes, fees are higher because banks now have to operate as businesses by charging fees for the services they provide instead of gambling on derivatives to make money. Would you feel better about the higher fees if all the banks were owned by the Chinese or the Saudis?

Stimulus

OMG!… $787 billion? It will bankrupt the country!

Obama probably wasn’t even unpacked in February of 2009 when Congress sent him the American Recovery and Reinvestment Act, AKA – The Stimulus Plan. The Democratic White House/House/Senate combo hit the ground running and the first substantial act was an effort to get the economy on track with a shot to the arm. Umm… yea… We’re not getting that money back.

It’s odd to me that “stimulus” has become a bad word. For all the talk about how it didn’t do what they said it would do, it’s not like the money was all pissed away. Only some of it! (Oh come on… where are my “glass half full” people?) We’re only about two thirds of the way into the stimulus plan (it’s a three year program) and it’s already hard to find an economist who doesn’t think its working. The “jobs saved” and promise of lower unemployment was bad marketing. It set the expectation too high. What it really did was reverse the trend of monthly job losses and it has helped people who were already unemployed tread water for a bit longer.

Without the stimulus, unemployment would have gotten and would likely still be significantly higher. Was it worth $787 billion? I think it’s more important to look at how it was spent and determine if it was spent wisely. Here are a few thoughts:

• Infrastructure.  We were going to spend the money anyway, so why not do it now? Roads, bridges, public transit, electric grid, rail transportation… I’m not talking about bridges to nowhere. I’m talking about fixing stuff that we have that is crumbling and building stuff that we need to facilitate commerce. Well, maybe a bridge to nowhere or a stupid fence got snuck in, but most of the stuff was/is needed. I get frustrated when less important projects get done and desperately needed ones don’t, but in general it seems that infrastructure spending is well spent. The biggest beef seems to be that these dollars haven’t gone out fast enough.
• Aid to states.  With high unemployment and lower property values our states were not getting the revenues they expected. Sure they need to cut back. But some help for police, fire, education, and other programs seemed wise.
• Unemployment benefit extensions.  I’m not sharing an opinion on this one, except to say it probably would have been passed as a separate bill anyway. Just like the other unemployment extensions.
• Hey – how about cutting taxes and letting taxpayers decide how to stimulate the economy? What a great idea! Ahem… Over a third of the stimulus package was tax cuts for individuals and small businesses. What, you didn’t get your check? Sneaky how the government trickled it out a few bucks at a time so that you’d spend it (to stimulate the economy) instead of using it to pay down debt or save for retirement. Such as?
  • The biggest line item of the stimulus package, over $116 billion, was for the Work Opportunity Tax Credit. It’s as if Obama was pretending to be Oprah. “You get $400 and you get $400 and you…” You know that payroll tax holiday that Republicans are always saying we should have? Most of you got one. Check with your tax preparer, or me, to see where you got it or find out why you didn’t.
  • It seems like every year Congress puts a patch on the tax code to reduce the effects of the dreaded Alternative Minimum Tax. Last year’s patch was nearly $70 billion. Maybe someday they will fix the problem instead of burying patches for tens of billion of dollars into other bills. (I can dream, can’t I?)
  • Child tax credits, earned income credits, homebuyer credits, residential energy credits, bonus depreciation for businesses, NOL carrybacks for small businesses…

So, glass half-full people… forget that it was a huge price tag for one bill. Let’s think of it as an example of government efficiency. Some of it is crap, but most of this money was going to get spent anyway. Most of it we needed. Instead of dozens of small bills for things like infrastructure, tax breaks, tax fixes, unemployment benefit extensions and more – they did it all with one bill. Does $202 billion sound better? Only $202 billion was for the fiscal year that ended last year. $353 billion was for the year that just ended. The rest goes in the budget for the year ending September 30, 2011. Hey… how’s that budget looking?

2011 United States Budget

Funny thing… the United States is currently operating without a budget. I know that’s probably normal for most people – I don’t have a budget these days. I just hope enough comes in each month to cover what needs to go out. But this isn’t normal for the US Government. It is the first time since 1974 that we haven’t had a budget in place by the beginning of a fiscal year. Congress was kind enough to pass a “continuing resolution” on the last day of the fiscal year, September 30, so that government wouldn’t shut down until after the election. Without an approved budget or another continuing resolution we shut down on December 4. So what’s the holdup?

For starters, I’m guessing that no one in Congress wanted to put their name on a budget that projects a $1.3 trillion dollar deficit before the election. After the election I suspect we may have a similar problem. (Did you feel that cool shadow of doom start to creep into this blog post? I was so upbeat about TARP and Stimulus.)

In my mind, the two biggest problems are tax cuts and old people. (Who says I don’t know how to make friends?) Let’s look at some of that budget.

First the income side. Total income is project to be about $2.6 trillion, almost all of which comes from income taxes and payroll taxes. This figure assumes the extension of the Bush tax cuts for individuals with income under $200,000 and families under $250,000. I’m guessing it also includes some increases based on economic growth which is yet to be seen. If Republicans get their way, the Bush tax cuts would be extended for everyone. The price tag for that is an additional $700 billion over ten years. I’ll round off a little and suggest that if Republicans got their way it would drop the revenue side to about $2 trillion for fiscal 2011. But total expenses are expected to be $3.8 trillion – more tax cuts just made the problem worse. How do we fix that? Cut expenses!

Anyone else notice that all the politicians are talking about cutting expenses but none of them will be specific about where?

• Old people. I don’t know if we have final audited numbers for the fiscal year that just ended, but I think we spent about $1.2 trillion on Social Security payments and Medicare. Even if I’m off a hundred million, the number for this year will be a lot higher and it gets worse for the next several years as baby boomers flood into retirement. I’m the first to admit we need to start looking at some changes here, but find me a politician willing to cut payments to grandpa and a bunch of little old ladies. Death panels starting to look good? Hey, I saw a movie called Logan’s Run that had some ideas we could use. However I think we should assume that none of the politicians have the testicular fortitude to touch this hot potato and estimate $1.3 trillion for 2011. Where else can we cut?
• Defense and homeland security. Let’s call it $900 billion. (I was tempted to round up to a trillion, but that’s just rude.) I get it, we’re at war. But let’s play a little game. Let’s end the war, identify billions in other savings and cut the overall defense budget to say $500 billion. Hey that was fun – I think I just got the deficit under a trillion. Unless we extend Bush tax cuts to everyone.
• Everything else. Let’s see… Total expenses of $3.8 trillion, but let’s take out $200 billion for that stimulus bullshit and I saved $400 billion on defense a minute ago, so call it $3.2 trillion. Subtract $1.3 trillion for old people and $500 billion for the newer leaner defense budget because we miraculously and instantaneously ended the war. Probably need $200 billion or so for interest on the debt and some money for the VA since we take care of our troops. That leaves $1.2 trillion for everything else. Cut everything else in half and we still have… a nearly half trillion dollar deficit. Dammit!

Forget the silly math. My point is this: Extending the Bush tax cuts for everyone cuts projected revenue to about $2 trillion a year. We spend that much on Social Security payments, Medicare and defense. Even with planned defense spending decreases we still have increasing SS and Medicare costs because of an aging population. The $2 trillion isn’t going to get cheaper. Where does the money come from to pay for everything else?

Put everyone back to work and grow the economy as much as you want. Let’s say that increases government income by 40%, which I believe to be unlikely if you extend all the Bush tax cuts. You’d still need to cut the cost of EVERYTHING beyond SS/Medicare/defense by over half to balance a budget. No matter what you think about government waste, I submit that this would be impossible.

When Clinton left office we had balanced budgets and an economy that was working even if taxes were a little too high. Bush cut taxes too much and by the end of his presidency we were headed for trillion dollar deficits. I submit that tax rates belong somewhere in the middle. Not too high, not too low. Something Goldilocks would be comfortable with.

We need to cut government spending. A LOT. But taxes still need to go up and not just for the top 2% of taxpayers. We can’t hit them for the whole bill.  It’s simple math!

Don’t like that math answer?  Good thing  I’m a CPA.  Stay tuned after the election for some tax law coverage, including my 3-point plan to increase federal revenues without creating a new tax or raising rates beyond the Bush tax cuts.  I know I just said that it can’t be done, but I’m just that good.  Here’s a hint, Obama is actively working on two of them and I alluded to one of those in part 2 of this series.  Another teaser:  Some of you will prefer higher tax rates.

We still have some doom to talk about.

The Election and Extension of the Bush Tax Cuts

So here we are, days away from the election. We don’t have an approved budget, we have a government limping along with the help of continuing resolutions, and so far the Bush tax cuts are still set to expire on December 31. Any guesses on what will happen between next Tuesday and the end of the year?

Let’s say the Democrats keep the House and the Senate. (Bear with me.) Hurray – they won! The House passes tax cuts for individuals under $200k and families under $250k and sticks a huge tab to the top 2% of taxpayers just as Obama wants. Senate Republicans filibuster because they want all the cuts extended, nothing gets passed, they run out of time and we are looking at obnoxious tax hikes January 1. Hmmm…

Let’s say Republican’s take the House. (Pretty likely.) Hurray – they won! Bush tax cuts for everyone! Except the Republican’s don’t take control until January. We have a lame duck session of Congress to deal with. Fine… tax cuts for 98% of the people – Everyone wants that, right? Wrong. Republicans will fight it because they don’t want the Democrats to get credit for a tax cut when they will get control in a few weeks. Democrats theoretically might have enough votes, but a lot of those guys just got pink slips and won’t be motivated to vote. Let the new guys deal with this mess in January.

Run the scenario a half dozen ways and I see the large possibility that we don’t have tax law extensions until well into the new year. Scared yet?

If Congress can’t agree on the budget or tax law extensions then how about that continuing resolution to keep the doors open? Several of the conservative Republican candidates have flat out suggested that the government should shut down. No one to process tax refunds when people start filing tax returns. No one to process payments to government vendors. All national parks are closed. Certain construction projects stop. Do I need to go on?

Final Thought

No matter who wins next week I think we have a couple of scary months coming. However, at some point I believe that a modicum of sanity will be restored and our fresh batch of elected leaders will find a way to… not completely f*ck us over. It’s the optimist in me.
This concludes my three part series, but (as noted) I’ll be back with more commentary after the election. I welcome your comments, but I may not get back to you for a day or so. I’m headed to Washington D.C. for the Rally to Restore Sanity (and/or Fear). Tune in to Comedy Central on October 30 and watch for me in the crowd.

Please vote.