Category: taxes

The Individual, Common and General Welfare

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August 29, 2021

by Stephen Stofka

In the short version of Monopoly, the property deeds are shuffled and dealt out to the players. Some think that God does the same with our talents and circumstances and that it our duty to play with what we are given. They argue that the proper role of government is to provide for the common welfare, like defense, police, schools and infrastructure. Some take a more secular view, arguing that the hands dealt are largely the result of past policies and practices, the good, bad and quite ugly. Given this history, government has a duty to correct these inequities. They argue that government should take an active role in improving individual welfare to raise the general welfare. Moderates argue that a mixture of individual and common welfare programs will best improve the general welfare but they disagree on priorities.

According to the Bureau of Economic Analysis, federal assistance for education, welfare and housing has increased 3 times since 1960 as a percent of GDP. During that period, health care spending at the federal level has increased 9 times; at the state and local level it has increased 3 times. To help offset these increases, federal spending on defense has declined by 67%. What distinguishes all these increases in spending is that they are targeted toward individual welfare in the hopes that an improvement in individual welfare will raise the level of general welfare.

State spending on the common welfare like education and transportation have both declined 25%. After several decades of this shift in strategy, our schools, roads, water and sewer systems are in bad repair because state revenues as a percent of GDP have changed little in the past fifty years while spending on individual welfare has increased. The $3.5 trillion infrastructure bill being debated in Washington targets that neglected common infrastructure.

The spending mix of families has changed as well. In 1964, 33 cents of every family’s expenses was spent on food. Today, it is only 13 cents, a drop of 67%. Despite that decrease in food spending, 1 out of 12 families relies on food stamps, the SNAP program, to help feed their families. Why is that? In the past four decades housing costs as a percent of GDP have gone up 30% (CRS, 2021). Since housing is the largest monthly expense for most families, this sizeable increase has significantly lowered individual welfare. Government programs help alleviate that stress.

During the Depression, a shared suffering prompted a shift in the role of government from public projects, the common welfare, to individual welfare. Many New Deal programs incorporated both elements in their design. Electric generating projects like the Hoover Dam and Tennessee Valley Authority (TVA) were built by men who sent part of their government paychecks to their families to help with food and housing expenses. A contribution to the common welfare helped relieve individual suffering. During that era, the Roosevelt administration and Democratic Congress initiated the Social Security program, requiring working Americans to contribute to a common fund which would be used to pay benefits to contributors when they retired. Those payroll tax contributions were the price of admission to the benefits of the program.

At that time, only states, local communities and private charities administered welfare programs. These were benefits paid to families based on their need, not an admission fee of contributions to the program. In the 1960s, the Johnson administration and Democratic Congress ushered in the Great Society programs that firmly established a precedent that raising individual welfare increased the general welfare. In the late 1970s, Democratic President Jimmy Carter fought this expansive role of government but his sentiments were countered by the liberal wing of his party, particularly the powerful House Speaker Tip O’Neill, a strong believer in the government’s power to correct social problems (Cuomo, 2021).

Conservatives argue that federal programs designed to increase individual welfare exceed the boundaries set out in Article 1, Section 8. Such programs may weaken the supports provided by family, church and local community (O’Neil, 2021, 106). They do not incentivize people to change their behavior. The programs encourage people to cast their vote for those politicians who promise more benefits, making the voting process a transaction, not a civic endorsement of a voter’s values. At a fundraiser in the closing weeks of the 2012 Presidential Election, Republican candidate Mitt Romney commented that the 47% of Americans who paid no income tax were the base constituency of the Democratic Party (Moorhead, 2012). His implication that half of Americans were moochers was a blow to his campaign.

Liberals argue that the “general welfare” clause of the Constitution implies a government duty to improve individual welfare. They counter that many people in poor communities do not have informal support networks to lean on. Many people did not choose their circumstances and their decisions, whether prudent or ill-advised, are not based on gaining access to a government program. Farmers, business owners and executives also vote for government programs like subsidies, lower taxes, and less regulation. All voters are motivated in part by their self-interest.

How do individual, common and general welfares interact? What is meant by the general welfare? What does it consist of? Shortly after the Constitution was presented to the states for ratification, anti-Federalists argued that “providing for the … general welfare” imposed few constraints on the federal government’s ability to tax the people to fund that general welfare (Debates). Americans continue to argue the merits of these programs and the role of government in their lives.

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Notes:

Photo by Camylla Battani on Unsplash

Congressional Research Service (CRS). (2021, May 3). Introduction to U.S. Economy: Housing market. Retrieved August 28, 2021, from https://sgp.fas.org/crs/misc/IF11327.pdf

Cuomo, M. M. (2001, March 11). The Last Liberal. Retrieved August 28, 2021, from https://archive.nytimes.com/www.nytimes.com/books/01/03/11/reviews/010311.11cuomot.html

Debates. “Centinel,” the pen name of Samuel Bryan, and “Brutus” were among several anti-Federalists who protested the insertion of the “general welfare” clause in the Constitution.  See Centinel I and Brutus V editorials.

Moorhead, M. (2012, September 18). PolitiFact – Mitt Romney says 47 percent of Americans pay no income tax. Retrieved August 28, 2021, from https://www.politifact.com/factchecks/2012/sep/18/mitt-romney/romney-says-47-percent-americans-pay-no-income-tax/

Dirty Laundry

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October 11, 2020

By Steve Stofka

On Friday, the New York Times released more of Donald Trump‘s tax records (Craig, Mcintire & Buettner, 2020). They reveal a money laundering scheme that Mr. Trump used to fund his 2016 campaign. In the closing months of the campaign, few Republican donors wanted to bankroll his bid for the Presidency, and he was short of funds.

The train to Vegas. In the aftermath of the 2008 financial crisis, Democratic Senate Leader Harry Reid tried to put together a project for a commuter train from California to Las Vegas. When the entire project was done, residents of the L.A. area would be able to take a train to Las Vegas instead of making the arduous drive via the I-10 and I-15 freeways. Anyone who has driven this route on a Friday can swear that it evokes Chris Rea’s song The Road to Hell.

By the time the project funding was put together five years later, Republicans controlled the House and several of their leaders rejected the idea. One was Jeff Sessions, the ranking member of the Senate Budget Committee and later Mr. Trump’s Attorney General; the other was Paul Ryan, the head of the House Budget Committee. They insisted that the project be built using American products; it couldn’t be done. Germany, Japan and China have become the global leaders in train manufacturing.  

Vegas real estate tycoons, including Mr. Trump and his Vegas partner Phil Ruffin, would have benefitted greatly from the train traffic. The likelihood of such a project would be revitalized if Mr. Trump were President. Out came the checkbooks and the big Republican “whales” from Vegas, including Sheldon Adelson and Steve Wynn, contributed to the Trump campaign. His partner, Phil Ruffin, routed money through a shell company to Mr. Trump who used it to fund his campaign.

Although a court would have to decide, some of the campaign contributions were probably illegal. If Mr. Trump is elected again this year, he will shield himself from any prosecution and he would probably help protect others from adverse legal proceedings.

On Saturday, the newspaper was releasing still more evidence that Mr. Trump has used the Presidency to rescue his failing company from a heavy debt load. His hotels were already struggling before the Covid virus swept the world this year. Each new revelation indicates that Mr. Trump has built a house of cards like the Ponzi scheme built by Bernie Madoff, the former head of NASDAQ.

If Mr. Trump loses the election, he will face a legal and financial reckoning that he has delayed for the four years of his Presidency. His erratic and belligerent behavior may be partly in desperation. His former attorney, Michael Cohen, commented that if Mr. Trump were still his client, he would recommend that Mr. Trump resign the Presidency before his term is out, then arrange for Mr. Pence, his Vice-President, to issue him a pardon for any pending Federal crimes.

Mr. Trump is the first presidential candidate to “self-fund” his campaign and be successful. Surely, lawmakers on both sides of the aisle have learned a lesson. Are we a better country if a person can buy the Presidency? I think not.

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Notes:

Photo by Sahand Hoseini on Unsplash

Craig, S., Mcintire, M., & Buettner, R. (2020, October 09). Trump’s Taxes Show He Engineered a Sudden Windfall in 2016. Retrieved October 11, 2020, from https://www.nytimes.com/interactive/2020/10/09/us/donald-trump-taxes-las-vegas.html

Unauthorized Tax Revenue

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September 1, 2019

by Steve Stofka

This might be a sensitive subject for some – the amount of taxes that unauthorized immigrants pay. Homeland Security uses the term “unauthorized” (Note #1). Some people prefer the adjective “undocumented” but many immigrants have adequate documentation. Some prefer to use the adjective “illegal” but the only illegal act is being in the country without proper authorization. If someone is speeding but is obeying all other traffic laws, are they an illegal driver? In most cases, they are a legal driver committing an illegal act.

 Those who defend immigrants point out that they pay taxes, so they are contributing to our society. I was curious as to how much because I have not heard an immigrant advocate offer any data. I told my trusty hunting dog, Google, to go find them facts and bring them on back to me.

First the big picture. The total Federal, State and local taxes paid in 2016 was $5,300 billion, or $5.3 trillion (Note #3). What was the share that unauthorized immigrants paid? The Institute on Taxation and Tax Policy recently estimated that they paid almost $12 billion dollars in state and local taxes. The IRS says they paid $9 billion in payroll taxes (FICA) and almost $1 billion in income taxes (Note #4). The total is $22 billion.

How do they report? They get Federal ID numbers called ITINs. To encourage compliance with our tax laws, the IRS says they do not share this information with the immigration and naturalization folks in Homeland Security. I was amazed that unauthorized immigrants would file tax returns. They are not eligible for social security benefits or earned income credits available to low income families. They are not eligible for TANF – what most people call welfare. The only benefits they are entitled to are those directed toward children – free public education and school meals, child medical care and SNAP (food stamps).

So why file? If you follow that IRS link, you’ll find that an unauthorized immigrant who shows “good moral behavior” may have their deportation proceedings waived or be eligible to apply for citizenship after ten years of residence. What is one sign of good moral behavior? Paying taxes. What is a sign of bad moral behavior and might get someone deported? Not paying taxes. Good incentive to pay taxes.

Homeland Security estimated 12 million unauthorized immigrants in 2015. In the aftermath of the financial crisis, unauthorized immigration grew by a small 70,000 per year (Note #5). In the 2000s, the influx was almost 500,000 per year, and that was a decline from the record 1.4 million apprehended at the southern border in 2000. In 2019, the number of border apprehensions will approach one million (Note #6).

Numbers like these cause Americans to disagree strongly about policy choices related to immigration. In the 1980s, in the late 1990s and again in the 2000s, the numbers were high and we argued. This time is no different. These numbers don’t include visa overstays which make up 40 – 50% of the unauthorized immigrant population (Note #7). Let’s guesstimate the population at 15 million, about 4.6% of the population. That 4.6% is paying less than 1/2% of total taxes.

We can go look at unauthorized immigrants and say that they are leveraging their taxes – paying a small amount of tax to receive proportionately more in benefit. But that is the case for all low-income people, unauthorized or not. Low-income people buy less stuff, so they pay less in sales tax. They live in lower-valued properties, so they pay less property tax. They make less money, so they pay less income tax. Those are the three primary sources of tax revenue in the U.S.

When President Trump said he wanted higher quality immigrants, he meant that he is not anti-immigrant. He is anti-poor-immigrant. Like Trump, some say we don’t need more poor people; we already have too many poor people.  Some people anticipate that their taxes will go up to provide benefits for the growing number of poor people, documented or not. Few want higher taxes to pay for services to people who just arrived in the country.

When my grandfather came to this country more than a 100 years ago, there was no income tax, no social security tax and property taxes were relatively low. The only benefit for immigrant families was public education. There were no school lunches, no food stamps, no medical care for children. Despite that, anti-immigrant sentiment was strong enough to pass a bill in 1924 that cut off legal immigration for all except northern Europeans. Our grandparents and great-grandparents were far less tolerant of immigrants than we are today.

Let’s keep some perspective. People who are concerned that they will have to pay higher taxes for benefits are not evil or uncaring. Low-income people who are worried about competition for their jobs in the construction industry are not moral slugs. Whatever your occupation, imagine that the number of people available to do that kind of work doubled in your community. How would you feel? The more the merrier? Probably not. Those workers will compete for your job and that competition will hamper any future salary increases you can expect.

We all need to admit that immigration presents complicated moral, political and economic choices. History has taught us that we don’t know how to solve this problem in a way that satisfies most of us. Each time we have to choose which side of the rope tug we are on. Each side hurls insults and curses at the other side. This is not the new normal. This is the old normal. How about if we try the new normal, sit down and hash out the difficult details of a compromise?

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Notes:

  1. Homeland Security uses “unauthorized” to refer to those in the country without proper authorization
  2. Tax Policy Center calculation of total taxes paid to governments at all levels  
  3. Estimate of taxes paid by unauthorized immigrants – PDF
  4. IRS data on payroll and income tax paid by unauthorized immigrants- PDF
  5. Estimate of unauthorized immigrants – PDF
  6. Apprehensions at the border – CBP
  7. Visa overstays – Potitifact

The Start of the Beginning

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April 7, 2019

by Steve Stofka

In 1971 former President Nixon announced that the U.S. was abandoning the gold standard of fixed exchange that had existed for almost thirty years. Within a short time, other leading nations followed suit. Each nation’s currency simply traded against each other on a global currency, or FX, market.

Since oil was priced in dollars and the world ran on oil, the U.S. dollar became the world’s reserve currency. Each second of every day, millions of US dollars are traded on the international FX markets. The demand for US dollars is strong because we are a productive economy. The euro, yen and British pound are secondary currency benchmarks.

When the U.S. wants to borrow money from the rest of the world, the U.S. Treasury sells notes and bills collectively called “Treasuries” to large domestic and foreign banks who “park” them in their savings accounts at the Federal Reserve (Fed), the U.S. central bank (Note #1). The phrase “printing money” refers to a process where the Federal Reserve, an independent branch of the Federal Government, buys Treasury debt on the secondary market. It may surprise many to learn that the Fed owns the same percentage of U.S. debt as it did in 1980. The debt in real dollars has grown seven times, but the percentage held by the Fed is the same. That is a powerful testament to the global hunger for U.S. debt. Here’s the chart from the Fed’s FRED database.

FedResHoldTreasPctDebt

In 1835, President Andrew Jackson paid off the Federal debt, the one and only time the debt has been erased. It left the country’s banking system in such a weak state that subsequent events caused a panic and recession that lasted for almost a decade (Note #2). Government debt is the private economy’s asset. Paying down that debt reduces those assets.

About a third of the debt of the U.S. is traded around the world like gold. It is better than gold because it pays interest and there are no storage costs. Foreign businesses who borrow in dollars must be careful, however. They suffer when their local currency depreciates against the dollar. They must earn even greater profits to convert their local currency to dollars to make payments on those dollar-denominated loans.

Each auction of Treasury debt is oversubscribed. There isn’t enough debt to meet demand. In a world of uncertainty, the U.S. government has a long history of respect for its monetary obligations. As the reserve currency of the world, the U.S. government can spend at will. Even if there were no longer a line of domestic and foreign buyers for Treasuries, the Federal Reserve could “purchase” the Treasuries, i.e. print money. Let’s look at the difference between borrowing from the private sector and printing money.

When the private sector buys Treasuries, it is effectively trading in old capital that cannot be put to more productive use. That old capital represents the exchange of real goods at some time in the past. In contrast, when the government spends by buying its own debt, i.e. printing money, it is using up the current production of the private sector. This puts upward pressure on prices. Let’s look at a recent example.

Quantitative Easing (QE) was a Fed euphemism for printing money. During the three phases of QE that began in 2009, the Fed bought Treasury debt. That was an inflationary policy that countered price deflation as a result of the Financial Crisis. In August 2009, inflation sank as low as -.8% (Note #3). It was even worse, but inflation measures do not include the dividend yield on money. To many households, inflation felt like -2% (Note #4). The Fed’s first round of QE did provide a jolt that helped drive prices up by 3% and out of the deflationary zone.

During the five years of QE programs, the Fed continued to fight itself. The QE programs pushed prices upwards. Near zero interest rates produced a deflationary counterbalance to the inflationary pressures of printing money. Because inflation measures do not include the yield on money, the Fed could not read the true change in the prices of real goods in the private sector. The economy continues to fall below the Fed’s goal of 2% inflation. There are still too many idle resources.

Leading proponents of Modern Monetary Theory (MMT) remind people that yes, the U.S. can spend at will, but that it must base its borrowing on policy rules to avoid inflation. A key component of MMT is a Job Guarantee (JG) program ensuring employment to anyone who wants a job. A JG program may remind some of the WPA work programs during the Great Depression. Visitors to popular tourist attractions, from Yellowstone Park in Wyoming to Carlsbad Caverns in New Mexico, use facilities built by WPA work crews. Today’s JG program would be quite different. It would be locally administered and targeted toward smaller public works so that the program was flexible.

The U.S. government has borrowed freely to go to war and has never paid that debt back. Proponents of MMT recommend that the U.S. do the same during those times when the private economy cannot support full employment. That policy goal was given to the Fed in the 1970s, but it has never been able to meet the task of full employment through crude monetary tools. With an active program of full employment, the Fed would be left with only one goal – guarding against inflation.

There are two approaches to inflation control: monetary and fiscal. Monetary policy is controlled by the Fed and includes the setting of interest rates. If the Fed’s mandate was reduced to fighting inflation, it could more readily adopt the Taylor rule to set interest rates (Note #4).

Fiscal policy is controlled by Congress. Because taxation drains spending power from the economy, it has a powerful control on inflation. However, changes in tax policy are difficult to implement because taxes arouse passions. We are familiar with the arguments because they are repeated so often. Everyone should pay their “fair share,” whatever that is. Some want a flat tax like a head tax that cities like Denver have enacted. Others want a flat tax rate like some states tax incomes. Others want even more progressive income taxes so that the rich pay more and the middle class pay less. Some claim that income taxes are a government invasion of private property rights.

Because tax changes are difficult to enact, Congress would be slow to respond to changes in inflation. The Fed’s control of interest rates is the more responsive instrument. The JG program would provide stability to the economy and reduce the need for corrective monetary action by the Fed. The program would help uplift those in marginal communities and provide much needed assistance to cities and towns which had to delay public works projects and infrastructure repair because of the Financial Crisis. As sidewalks and streets get fixed and graffiti cleaned, those who live in those areas will take more pride in their town, in their communities, in their families and themselves. This makes not just good economic sense but good spiritual sense. We can start small, but we must start.

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Notes:

1. Twenty to twenty-five times each month, the Treasury auctions U.S. government debt. Many refer to the various forms of bills and notes as “treasuries.” A page on the debt
2. The Panic of 1837
3. The Federal Reserve’s preferred measure of inflation is the Personal Consumption Expenditure Index, PCEPI series.
4. The annual change in the 10-Year Constant Maturity Treasury fell below -1% at the start of the recession in December 2007 and remained below -1% until July 2009. FRED series DGS10. John Maynard Keynes had recommended the inclusion of money’s yield in any index of consumer demand. In his seminal work Foundations of Economic Analysis (1947), economist Paul Samuelson discussed the issue but discarded it (p. 164-5). Later economists did the same.
5. The Taylor rule utility at the Atlanta Federal Reserve.

 

The Nature of Money

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March 31, 2019

by Steve Stofka

Modern Monetary Theory (MMT) helps us understand the funding flows between a sovereign government and a nation’s economy. I’ve included some resources in the notes below (Note #1). This analysis focuses on the private sector to help readers put the federal debt in perspective. In short, some annual deficits are to be expected as the cost of running a nation.

What is money? It is a collection of  government IOUs that represent the exchange of real assets, either now or in the past. Wealth is either real assets or the accumulation of IOUs, i.e. the past exchanges of real assets. When a sovereign government – I’ll call it SovGov, the ‘o’ pronounced like the ‘o’ in love – borrows from the private sector, it entices the holders of IOUs to give up their wealth in exchange for an annuity, i.e. a portion of their wealth returned to them with a small amount of interest. A loan is the temporal transfer of real assets from the past to the present and future. This is one way that SovGovs reabsorb IOUs out of the private economy. In effect, they distribute the historical exchange of real assets into the present.

What is a government purchase? When a SovGov buys a widget from the ABC company, it also borrows wealth, a real asset that was produced in the past, even if that good was produced only yesterday. The SovGov never pays back the loan. It issues money, an IOU, to the ABC company who then uses that IOU to pay employees and buy other goods. A SovGov pays back its IOUs with more IOUs. That is an important point. In capitalist economies, a SovGov exchanges real goods for an IOU only when the government acts like a private party, i.e. an entrance fee to a national park. Real goods are produced by the private economy and loaned to the SovGov.

What is inflation? When an economy does not produce enough real goods to match the money it loans to the SovGov, inflation results. Imagine an economy that builds ten chairs, a representation of real goods. If a SovGov pays for ten people to sit in those ten chairs, the economy stays in equilibrium. When a SovGov pays for eleven people to sit in those ten chairs, and the economy does not have enough unemployed carpenters or wood to build an eleventh chair, then a game of musical chairs begins. In the competition for chairs, the IOUs that the private economy holds lose value. Inflation is a game of musical chairs, i.e. too much money competing for too few real resources.

A key component of MMT framework is a Job Guarantee program, ensuring that there are not eleven people competing for ten jobs (Note #2). Labor is a real resource. When the private economy cannot provide full employment, the SovGov offers a job to anyone wanting one. By fully utilizing labor capacity, the SovGov keeps inflation in check. The  idea that the government should fill any employment slack was developed and promoted by economist John Maynard Keynes in his 1936 book The General Theory of Employment, Money and Interest.

The first way a SovGov vacuums up past IOUs is by borrowing, i.e. issuing new IOUs. I discussed this earlier. A SovGov also reduces the number of IOUs outstanding through taxation, by which the private sector returns most of those IOUs to the SovGov.

Let’s compare these two methods of reducing IOUs. In Chapter 3 of The Wealth of Nations, Adam Smith wrote that government borrowing “destroys more old capital … and hinders less the accumulation or acquisition of new capital” (Note #3). Borrowing draws from the pool of past IOUs; taxation draws more from the current year’s stock of IOUs. Further, Smith noted that there is a social welfare component to government borrowing. By drawing from stocks of old capital it allows current producers to repair the inequalities and waste that allowed those holders of old capital to accumulate wealth. He wrote, “Under the system of funding [government borrowing], the frugality and industry of private people can more easily repair the breaches which the waste and extravagance of government may occasionally make in the general capital of the society.”

Borrowing draws IOUs from past production, while taxation vacuums up IOUs from current production. Since World War 2, the private sector has returned almost $96 in taxes for every $100 of federal IOUs. Since January 1947, the private sector has loaned the federal government $371 trillion dollars of real goods, the total of federal expenditures (Note #4). What does the federal government still owe out of that $371 trillion? $15.5 trillion, or 4.17% (Note #5). If the private sector were indeed a commercial bank, it would expect operating expenses of 3%, or $11.1 trillion (Note #6). What real assets does the private sector have for the difference of $4.4 trillion in the past 70 years? A national highway system and the best equipped military in the world are just two prominent assets.

The federal government spends about 17-20% of GDP, far lower than the average of OECD countries (Note #7). That is important because the accumulated Federal debt of $15.5 trillion is only .9% of the $1.7 quadrillion of GDP produced by the private sector since January 1947. Our grandchildren have not inherited a crushing debt, as some have called it. In the next forty years, the U.S. economy will produce about $2 quadrillion of GDP (Note #8). If tomorrow’s generations are as frugal as past generations, they will generate another $18 trillion of debt.

Adam Smith called a nation’s debt “unemployed capital,” a more apt term. The obligation of a productive nation is to put unemployed capital to work for the community. Under the current international system of national accounting, there is no way to account for the accumulated net value of real assets, or the communal operating expenses of the private economy. Without a proper accounting of those items, we engage in noisy arguments about the size of the debt.

In next week’s blog, I’ll examine the inflation pressures of government debt. I’ll review the Federal Reserve’s QE programs and why it has struggled to hit its target inflation rate of 2%. We’ll revisit a proposal by John Maynard Keynes that was discarded by later economists.

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Notes:
1. A video presentation of SovGov funding by Stephanie Kelton . For more in depth reading,  I suggest Modern Monetary Theory by L. Randall Wray, and Macroeconomics by William Mitchell, L. Randall Wray and Martin Watts.

2. L. Randall Wray wrote a short 7 page paper on the Job Guarantee program . A more comprehensive 56-page proposal can be found here 

3. Adam Smith’s The Wealth of Nations was published in 1776, the year that the U.S. declared independence from Britain. Smith invented the field of economics. The book runs 900 pages and is available on Kindle for $.99

4. Federal Expenditures FGEXPND series at FRED.

5. At the end of 1946, the Gross Federal Debt held by the public was $242 billion (FYGFDPUB series at FRED). Today, that debt total is $15,750 billion, or almost $16 trillion dollars. The difference is $15.5 trillion. The debt held by the public does not include debt that the Federal government owes itself for the Social Security and Medicare “funds.” Under these PayGo pension systems, those funds are nothing more than internal accounting entries.

6. In 2017, the Federal Reserve estimated interest and non-interest expenses for all commercial banks at 3% (Table 2, Column 3).

7. Germany’s government, the leading country in the European Union, spends 44% of its GDP Source

8. Assuming GDP growth averages 2.5% during the next forty years.

9. International Accounting Standards Board (IASB) sets standards for public sector accounting.

 

Taxes – the Necessary Good

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Taxes shall be levied according to ability to pay. – Franklin D. Roosevelt

August 19, 2018

by Steve Stofka

In the aggregate taxes are necessary and beneficial to everyone. Because Federal taxes act as a drain from the economic engine, they are different from state and local taxes. How those taxes are levied is a matter of policy debate, but they are necessary for the survival of a nation’s government and its economy. Revenue from natural resource production that is owned by a national government acts as a tax. Failing to understand that concept weakens and cracks governments around the world.

The inability to create money constrains state and local governments (Note #1). Taxes paid act as income for goods and services received from those governments. The Federal government has no such constraints. It does not need tax income as such. Rather, it must drain taxes to offset the amount of spending that it pumps into an economy. Inflation, the chief measure of extra money in an economy, rises when the Federal government doesn’t drain enough in taxes. As inflation rises, people turn to goods and service exchange that is not recorded and not taxed. The underground economy tries to offset the hidden tax of inflation.

As Venezuelans flee the runaway inflation in their country, they are running from too much spending and not enough taxation. Yes, it is counterintuitive. Venezuela owns the world’s largest reserve of oil. The net revenue from that oil competes with the taxes that a private oil company would pay to the government. The national government “owes” itself the tax revenues that it would have collected from a private company. Oil production has declined from 2.4 million barrels per day in 2008 to 1.2 million barrels in 2018 (see Note #2). Corruption and incompetence are the chief causes of the decline. Net oil revenue has declined by 95% from the bull market levels of the mid-2000s. Because the national government has not been paying their taxes, inflation has exploded the economy.

Because national politicians begin their careers in local politics, they regard a nationalized resource (NR) as a source of income, not an economic drain. That drain must be kept open through spending in oil infrastructure, training and transportation. In Venezuela, 2016 gross oil revenues were 20% of GDP and a net of less than 5% (see Note #3). Inflation taxes 100% of an economy. Because NR revenue acts as a pressure relief on inflation, that 20% portion of GDP affects 100% of the economy. A lack of understanding of the nature of a NR led to the crisis and decline of Great Britain in the 1970s, China in the 1960s and 1970s, and Zimbabwe in 2008.

How should a national government levy taxes on the taxpayers within the economy? FDR suggested “ability to pay.” For the past one hundred years we have measured ability to pay by income. Is that a good measure? French economist Thomas Piketty suggests that assets are a better measure. Local governments use this method to collect property taxes. Consider a retiree with $500K in liquid assets, who is taxed on $10K in interest and dividends earned each year. Clearly, the retiree’s assets are a better indication of his ability to pay. Should Congress abolish the income tax and tax people and corporations a multiple of what they pay in property taxes on their primary residence or business locations? Those living in high tax suburban and ex-urban areas might move toward lower-taxed urban areas. Would suburban areas actively recruit businesses to widen their tax base and lower property taxes? An intriguing thought.

Tax levies are the subject of endless debate because people cannot agree on what constitutes a fair tax. In the aggregate, the pressure reducing function of taxes benefits everyone, but is especially beneficial to those with less income. Should a national government impose a head tax on everyone? It could. That would amount to $15,000 per person this year, more than some families make. How does a national government extract tax money from its poor? It doesn’t. From 1958 – 1962, China forced taxes out of poor farmers in Mao’s Great Leap Forward (Note #4). Millions starved as a result.

Everyone should contribute equally to shared benefits, but practicality triumphs over principle. The survival of the national government becomes paramount. Some form of redistributive taxation must ensue. How to shape that redistribution? A government could take all the wealth of the ten richest people in America and still be short $3.8 trillion (Note #5). All the debate falls between total equality and total unfairness, and neither accomplishes the task of draining enough taxes out of the engine. A government could spend nothing: no defense, no research, no border or shore protection, no pension, medical or education spending. That’s a government in name only, and not for long. Other governments will want to capture control of that country’s resources.

The vast middle of the debate is an endless variety of proposals of “fairness” in both taxing and spending, a debate that has changed little since Cicero argued for his proposals in the Roman Senate in the first century B.C.E. What is not debatable is that a nation’s taxes must be roughly guided by its spending. A nation like Venezuela, which taxes half of what it spends, was headed for an economic tsunami of high inflation and inevitable collapse.

The debate is important. Just as it did in Rome two thousand years ago, consolidated party power corrupts. Because the current Presidency and House are held by the same party, we can expect a strong growth rate of net input, spending less taxes, and the data confirms the prediction. Net Federal input in the first full year of the Trump administration, April 2017 – March 2018, grew at a record-breaking annual pace of 19.6%, far above the sixty-year average of 8%. However – because Federal input has been so low this decade, the Federal government must continue this torrid pace of input in 2018 and 2019 just to reach the 8% average.

Republicans have held the House for the majority of the past three decades. Neither party agrees with the other party’s priorities, so the Republican strategy has been simple. They talk fiscal discipline and curtail Federal spending during Democratic administrations so that Republicans can spend big on their priorities when they have the Presidency. The Democrats did this for forty years when they held the House from 1954-1994 and will do so again when they have their next Congressional “run.”

To sum up: taxes are good, in general, but bad in the particular. No nation’s leader has stood on the world stage and said, “To tax or not to tax, that is the question.” For a nation and its economy, “to tax” is synonymous wtih “to be.”

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Notes:

1. Before the Civil War, each state controlled banking within its border (National Bank Act). For a deeper dive into state financing, try this Brookings Institute article.

2. A background paper on Venezuela oil (PDF). Crude oil production in the first quarter 2018 fell to 2.19 million barrels, a thirty-year low (Reuters). The Venezuela government spends more than 40% of GDP but collects only 20% in taxes (Statistica). During the 1997-2006 oil bull market, net revenues to the Venezuelan government averaged $20B per year (background paper above). Last year it was less than $1B. On August 20th, Venezuelans will lose their gasoline subsidies and pay a competitive price for gasoline (PDVSA article).

3. Gross oil revenue in 2016 was $48B, 20% of GDP of $236B (Reuters article). Exxon Mobil had a net profit of 6.5% in 2011. Venezuela would greatly benefit if the oil production was owned privately and paid 25-30% in income and other taxes.

4. Frank Dikotter was one of several historians afforded access to People’s Party records of the Great Leap Forward. He wrote an exhaustive account of human folly in Mao’s Great Famine .

5. Richest people in America  – Wikipedia 

Miscellaneous

Gold is down more than 10% in the past few months. BAR is a gold ETF launched in the past year. As an alternative to GDL and IAU, it has the lowest expense ratio at .2%. Here is a June 2018 article on the ETF.

Taxes – A Nation’s Tiller

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Printing money is merely taxation in another form. – Peter Schiff

 

August 12, 2018

by Steve Stofka

The Federal government does not need taxes to fund its spending, so why does it impose them? Taxes act as a natural curb on the price pressures induced by Federal spending. Taxes can promote steady growth and allow the government to introduce more entropy into the economic system.

During World War 2, the Federal government ran deficits that were 25% of the entire economy (Note #1) and five times current deficit levels as a percent of the economy. Despite its monetary superpowers, the government imposes a wide range of taxes. Why?

Using the engine model I first introduced a few weeks ago (Note #2), taxes drain pressure from the economic system and act as a natural check on price inflation. During WW2, the government spent so much more than it taxed that it needed to impose wage and price controls to curb inflationary pressures. Does it matter how inflation is checked? Yes.

When price pressures are curbed by law, people turn to other currencies or barter. During WW2, the alternative was barter and do-it-yourself. Because neither of these is a recorded exchange of money, the government collected fewer taxes which further increased price pressure in the economic engine. After the war was over and price controls lifted, tax collections relieved the accumulated price pressures. As a percent of GDP, taxes collected were 50% more than current levels.

For the past fifty years, Federal tax collections have ranged from 10-12% of GDP, but they are not an isolated statistic. What matters is the difference between Federal spending and tax collections, or net Federal input. During the past two decades Federal input has become a growing share of GDP.

FedSpendLessTaxPctGDP

During the past sixty years, that net input has grown 8% per year. The growth rates have varied by decade but the strongest rates of input growth rates have occurred when the same party has held the Presidency and House. Neither party knows restraint. The lowest input growth has occurred when a Republican House restrains a Democratic President (Note #3).

FedNetInputGrowth

Let’s compare net Federal input to the growth of credit. As I wrote last week, the Federal government took a more dominant role in the economy in the late 1960s. By the year 2000, net Federal input grew at an annual rate of 10.3%, over one percent higher than credit growth. During all but six of those years, Democrats controlled the House and the purse. During those forty years, inequality grew.

FedNetInputCreditGrowth

During the 1990s and 2010s, government should have increased its net input to offset the lack of credit growth. To increase input, the government can increase spending, reduce taxes or a combination of both. When GDP growth is added to the chart, we can see why this decade’s GDP growth rate has been the lowest of the past six decades. It’s not rocket science; the inputs have been low.

FedNetInputCreditGrowthGDPGrowth

A universe with maximum entropy is a still universe because all the energy is uniformly distributed. At a minimum entropy, the universe exploded in the Big Bang. Too much clumping of money energy provokes rebellion. Too little clumping hampers investment and interest and condemns a nation to poverty. As an act of self-preservation, a government adopts redistributive tax policies. Among the developed nations, the U.S. is second only to France in the percent of disposable income it redistributes to its people (Note #4).

A nation can either tax its citizens directly, or add so much net input that it provokes higher inflation, which taxes people indirectly through the loss of purchasing power. Of the two alternatives, the former is the more desirable. In a democracy we can vote for those who spend our tax dollars. Inflation is both a tax and an unmanaged redistribution of money from the poor to the rich. How so? Credit is money. Higher inflation rates lead to higher interest rates which reduce access to credit for lower income households, and give households with greater assets a higher return on their savings.

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Notes:
1. Federal Income and Outlays at the Office Management and Budget, Historical Tables

2. The “engine” was first introduced in Hunt For Inflation, and continued in Hunt, Part 2 , Engine Flow , and Washington’s Role.

3. Federal spending less tax collections grew at a negative annual rate during the Clinton and Obama administrations. Both had to negotiate with a hostile Republican House in the last six years of their administrations.

4. “U.S. transfer payments constitute 28.5% of Americans’ disposable income—almost double the 15% reported by the Census Bureau. That’s a bigger share than in all large developed countries other than France, which redistributes 33.1% of its disposable income.” (WSJ – Paywall) The OECD’s computation of the GINI coefficient is based on disposable personal income, which is calculated differently in the U.S.

Miscellaneous:

Average GDP growth for the past sixty years has been 3.0%. The average inflation rate has been 3.3%. The 60-year median is 2.6%. The average inflation rate of the past two decades have been only 2.1%.

A good recap of the after effects of the financial crisis.

 

Washington’s Role

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“The rich are much better placed to feed at the public trough. The poor get crumbs.” – Steve Hanke, American Economist, 1942 –

August 5, 2018

by Steve Stofka

In the past fifty years, the increasing role of the Federal government in the economy has been the chief contributor to inequality. In the last years of the Bush administration, America became a socialist economy. Credit growth under the Trump administration has not changed from the levels during the Obama administration. On this score, Trump is Obama II.

Since the Great Recession, the federal government has far surpassed the role of banks in net input into the economic engine. In the post WW2 period, the annual growth in credit outstanding (see Notes #1) to households, corporations, state and local government surpassed the net input of the federal government, its spending less the taxes it drained out of the engine. The blue line in the graph below is the growth in bank credit.

CreditGrowthvsFedInput1953-1970

The Great Society and the escalation of the Vietnam War in the 1960s marked a changing role for the Federal government. Bernie Sanders marked the early 1970s as the beginning of the increase in inequality. Bernie suggested that the Federal government should have a greater role in the economy to correct the problem. Bernie has it backwards, as I will show. It is the greater role of the Federal government in the economy that has contributed to inequality. The hand that feeds the poor becomes the hand that feeds the rich.

Under subsequent presidents after 1968, both Republican and Democratic, the Federal input into the economy dominated the net – loans minus payments – input of bank credit. When the Federal government spends more than it taxes, it becomes a proxy debtor for individuals, state and local governments who cannot borrow enough to meet their needs. As the net credit input into the economy sank in the last two years of the Bush administration, 2007-2008, the role of the Federal government approached the levels of western European socialist governments.

CreditGrowthVsFedInput

The Obama Administration and super-majority Democratic Congress of 2009-2010 simply held that input level established earlier by the Bush Administration and a Democratic House. When Republicans took control of the House in 2011, they fought with the Obama Administration to reduce the input level. From 2012 through 2015, the growth in credit eclipsed the net input of the Federal government. Since early 2016, the growth in Federal input has once again dominated the role of the banks in the private economy. After the tax cuts passed last year, the Federal government will drain less taxes out of the economy and further cement its dominant role as an input into the engine.

For the past 65 years, quarterly credit growth has averaged 1.9%. In the last ten years, it has averaged .4%. From April 2017, two months after Trump took office, through March 2018, quarterly net credit growth averaged the same .4% as it did during the Obama years. Banks may express confidence in the Trump presidency, but their credit policies indicate that they have as little confidence in Trump’s Washington as they had in Obama’s Washington. Unless Trump can turn that sentiment, his administration will suffer the same lackluster growth as the Obama administration. If the Federal government continues to dominate economic input, Trump’s pledge to drain the swamp will be broken. Federal economic power only feeds the K-Street crocodiles lurking in the swamp waters.

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Notes

  1. The growth of credit outstanding (net input) is a function of new credit issued (input), debtors’ payments on existing loans (drain) and the write-off of non-performing loans (drain).

K-Street in Washington is the location of many of the nation’s most powerful lobbying firms.

 

Caution: Strong Growth Ahead

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This week, the Congressional Budget Office (CBO) released their estimate of the fiscal impact of the AHCA, the draft version of the Republican health care reform plan. I’ll take a look at the CBO methodology later in this post. For those who may be tiring of the almost constant focus on the AHCA, let’s turn our attention to some economic indicators.

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CWPI (Constant Weighted Purchasing Index)

February’s survey of purchasing managers (PMI) indicated a broad base of confidence among purchasing managers in most industries. New orders in manufacturing are surging, an expansion more typical in the early stages of recovery after recession. Regardless of how one feels about Trump, there is a sense of renewal in the business community. Consumer Confidence is at record highs. Confident of finding another job, the number of employees who are quitting their jobs is at a 16 year high.

The CWPI is a composite of both the manufacturing and non-manufacturing PMI surveys and is weighted toward the two strongest indicators of future growth, employment and new orders. Since October, the composite has been rising from mild to strong growth.

CWPI201702

For most of 2016, new orders and employment were below their five year average.  Since October, they have been above that average.

EmpNewOrders201702

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Housing

The Housing Market Index released by the National Assn of Homebuilders just set a multi-year record. Housing starts are strong and single family homes under construction are the best in ten years. A popular ETF of homebuilders, XHB, is nearing a recovery high set in August 2015. 58,000 construction employees found work during a particularly warm February. Now the big picture. As a percent of the working age population, housing starts are still at multi-decade lows.

HouseStartsPctWorkPop201702

There has been an upshift toward multi-family units in some cities but, in a broad historical context, these are also near all time lows as a percent of the working age population.

MultiFamPctWorkPop201702

A primary driver of new housing construction, both single and multi-family, is the growth in new households, which is still soft. In 2016, households grew by 1%, below the 30 year average of 1.2%, and far below the 70 year average of 1.7%.

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Consumer Credit

Here’s an interesting data series from the FRED database at the Federal Reserve: the percent of people with subprime credit in each county. Click on the link and zoom in to see the data for a particular county. In New York City, Manhattan has a 16% subprime rate, less than half the 35% rate of the nearby Bronx. Give the link a few seconds to load the data and display the map.

Subprime

On July 1st, the credit rating agencies will remove tax liens and judgments from their records if liens do not include the full name, address, SSN or date of birth of the debtor. This will raise the credit scores of hundreds of thousands of subprime consumers.

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Real Estate Pricing Tool

Trulia has a heat map, by zip code, of the median home price per square foot. I will include this handy tool on the tool page.

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IRS Data

Of the 145 million returns filed, 46 million itemized deductions. Under the Republican draft of tax reform (PDF), almost all deductions would be eliminated in favor of a standard deduction that is almost twice as large as current law, $12,000 vs. $6300. (Deductions, Child Credits ). Half of capital gains, interest and dividends would not be taxed. For most filers, the dreaded 1040 tax form is only 14 lines. Publishers of tax software like Intuit are sure to lobby against such simplicity.

BetterWayTaxForm.png
Health insurance reform is the prerequisite to tax reform.  If House Speaker Paul Ryan encounters strong resistance in his own party to health insurance reform, his tax reform plan will be stymied as well.

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AHCA

This past Monday, the Congressional Budget Office released their “score” (summary report and full PDF report) of the American Health Care Act, or AHCA. Score is a euphemism for the 10 year cost estimate that the CBO customarily gives on proposed legislation.

The CBO was careful to stress the uncertainty of their estimate. A critical component is the human response to changing incentives and the tentativeness of future state legislation. With most major legislation, the CBO estimates the macroeconomic effects. They did not include such an analysis in this report and note that fact. In short, the CBO is saying “take this estimate with a grain of salt.”

The headline number was the amount of people estimated to lose their health insurance over the next ten years – a whopping 24 million. Democrats used this ballpark estimate as a defining fact as they bludgeoned the plan. How did the CBO come up with their numbers?

Medicaid is the health insurance program for low income families and individuals.  When the program was introduced in 1965, enrollment was 1/4 million.  Today, 74 million are on the program.  The federal government and states share the costs of the program; the federal share averages 57%. Under the ACA’s Medicaid expansion, low income individuals younger than 65 without children could enroll.  An increase in the income threshold enabled more people to qualify for the program.  The federal share was guaranteed to not fall below 90% of those individuals enrolled under the expansion guidelines.

Medicaid (CMS) reports that 16.3 million people were added to Medicaid under the ACA expansion program and represent almost 75% of all enrollment under ACA. California has 12% of the U.S. population, but accounts for more than 25% of additional enrollees under Medicaid expansion. (State-by-state Medicaid enrollment ) Only 31 states adopted Medicaid expansion. The CBO estimates that those 16.3 million are 50% of the total pool of individuals that would be eligible if all states adopted the expansion program. So the CBO estimate of the total pool is almost 33 million.

Undere current law, the CBO estimates that additional states will adopt expansion so that 80% of the estimated total pool, or 26.4 million, will be enrolled under Medicaid expansion by 2026.  Under the AHCA, the CBO estimates that only 30% of that eligible population of 33 million, about 10 million, will be enrolled as of 2026. 26.4 million (under ACA) – 10 million (under AHCA) equals 16 million whom the CBO estimates will lose coverage under Medicaid. Note that this is a lot of blue sky math.

To summarize the ten year loss estimate under the rollback of Medicaid expansion: 6 million current enrollees and 10 million anticipated enrollees.

Medicaid expansion accounts for 16 million fewer enrollees. Where are the remaining 8 million missing? In the non-group private market. Currently, there are 11.5 – 12 million enrolled in these individual plans, an increase of about 5 million over the 6.6 million enrollees in 2007 (Health and Human Services brief) . The CBO estimates that, in 2018 and 2019, 2 million additional enrollees would take advantage of the ACA subsidies to buy policies. That results in a potential pool of about 14 million. Under the AHCA, the CBO estimates that the non-group private insurance market will return to its former level of 6 – 7 million, a loss of about 8 million.

Voila! 16 million under Medicaid expansion + 8 million in non-group private insurance = 24 million loss.

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Side Note

How do people get their health insurance?
74 million people, about 25% of the population, are enrolled in Medicaid. Half of Medicaid enrollees are children.
55 million, about 16% of the population, are on Medicare.
Over 150 million, or 50% of the population, are enrolled in an employer group plan (Kaiser Family Foundation).
Approximately 27 million, or 9% of the population, are uninsured.

Before the ACA, almost 50 million, or 16% of the population, were classified as uninsured. About 6 million of these uninsured had high deductible insurance plans called catastrophic plans. Offered by large insurance companies, they contained exclusions for pre-existing conditions, did not cover pregnancy, or mental disease, but were adequate for many self-employed tradespeople, contractors, consultants and farmers. (Info) In late 2013, the ACA redefined catastrophic plans by specifying the minimum benefits that a catastrophic plan must offer and, in 2014, began offering these plans through the state health care exchanges.

Border Adjustment Tax

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March 5, 2017

Gary Cohn,  President Trump’s Chief Economic Advisor, says that the Border Adjustment Tax (BAT) is off the table. This is a key revenue raiser, a hidden tax, in the Republican scheme to lower corporate taxes. We will continue to hear about BAT as the fight over tax reform heats up. What is it and how will it affect American families?

First, a bit of context. Most other developed countries have a VAT, or Value Added Tax, on purchased goods and services. In the EU most VAT taxes range from 20-25%. In America, we have state and local sales taxes that might add as much as 8 – 10% to the cost of a good. A VAT is like a Federal sales tax of 20%.

Unlike a VAT tax that affects most goods and services, the BAT will affect only imported goods. Here’s an example of the BAT tax using Big-Box as an example of a large merchandiser similar to Wal-Mart.

Big-Box imports a DVD Player for $80 (Cost of Goods Sold) and sells it for $100, making $20 gross profit. It has $5 other costs which are deducted from gross profit to reach a taxable profit of $15. Let’s say that Big-Box’s effective Federal tax rate is 30% (27.1% per Congressional Research Service). $15 taxable profit x 30% = $5 (rounded) Federal Tax.  Big-Box has a net after-tax profit of $10, or 10% of the retail price.  Remember that.  Current law = 10%.

Under the BAT proposal, Big-Box could not deduct the $80 it paid for the good because it is an import. Big-Box’s gross profit is now $100. Subtracting the $5 other costs, the taxable profit is $95. Multiply that by a lower 20% corporate tax rate and the Federal tax is now  about $19, far more than the $5 using the current tax system. Big-Box paid $80 cost + $19 in tax = $99, leaving them a gain of $1, or 1%.  Current law = 10% profit.  Proposed law = 1% profit.

For Big-Box to make the $10 after-tax profit it has under the current tax system, it would  need to raise the price of the DVD player about $15.  After paying a 20% tax ($3) on the additional revenue, it will net an additional $12. So the customer now pays $115 for a DVD player that used to be $100.  No change in quality.  Just an extra $15 out of the consumer’s pocket for an imported CD player.

What if Big-Box buys the DVD player from an American supplier for $100?  Under BAT, the $100 direct cost of the DVD player would be deducted from the sale amount, giving Big-Box a tax CREDIT of $20 ($20%).  The after-tax cost of the player is now $80 direct and the same $5 indirect cost = $85. To make a $12 net profit as under the current system, Big-Box could sell the DVD player for $97 and undercut another vendor selling the same DVD player for $115.

In theory, customers would rush to the vendor selling American DVD players. BUT, there is only one DVD manufacturer in the U.S. (Ayre Acoustics) and we don’t know how many parts of their product are imported.  The transition could take years and consumers will pay more for many household goods during that time.

Some products can only be imported.  Most of the lumber used to build homes is imported from Canada.  This hidden tax will be added onto the prices of homes and remodels.  Most diamonds are imported and will bear this hidden tax.  Businesses will lobby to have their product excluded where there is no alternative to an import.  This will be a boon for lobbying firms.

Businesses, particularly durable goods manufacturers, anticipate a complexity in this new tax. Planes, cars, boats, sporting goods and appliances are made with parts from a variety of countries, including the United States. Assessing the component value of imports and exports may require a judgment call by the company, and that is subject to dispute with the IRS. This is sure to become a headache.

Should the BAT become law, customers who have benefitted from the lower prices of imported goods are sure to complain loudly at the higher prices. Retailers have opposed the scheme. Republicans are promising tax cuts for middle class households but the tax reduction won’t offset the extra cost of many household goods.

Republicans have long resisted tax increases in their effort to shrink the size of the government yoke on American families. Many have signed a pledge not to raise taxes. To avoid any appearance of raising taxes, Republican lawmakers had to hide the tax and this was the best they could do.

Side Note: Why not just add the extra $20 as an import tax, or duty? Import taxes are paid to the government by the importing company of record when the goods are received in the country. Even if an item sits in a warehouse as inventory, the import duty has been paid, creating a cash flow problem for companies. With both VAT and BAT taxes, the tax is not charged until the good or service is sold.

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IRA Contributions

Did you put off making your IRA contribution for 2016? In May 2011, I compared several “timing” scenarios of investing in an IRA for the years 1993-2009.The choices were making a contribution on:
1) July 1st, the middle of the tax year;
2) January 31st following the tax year;
3) April 15th following the tax year

The 1st option had a 2.5% advantage over the 2nd option because of the longer time frame invested. An even greater advantage was an option not on this list. Contributing an equal amount every month produced a 4% greater gain over the first option.

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Stand up or Sit Down

The Bureau of Labor Statistics published a study  of  the time workers spend standing/walking or sitting. The average worker spends 3/5th of their time standing or walking.

timestudy
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Education in the 21st Century

“Education technology is like teenage sex: everyone talks about it, nobody really knows how to do it, everyone thinks everyone else is doing it, so everyone claims they are doing it…”

That’s just one quote from this TechCrunch article on the investments needed in K-12 and higher education. The author feels that the appointment of Betsy DeVos as Secretary of Education will break up a coalition of interests that has stymied the adoption of technology in classrooms.

Readers who do not support Ms. DeVos may still find themselves in agreement with the author’s comment that “in both K-12 and higher education, technology remains supplemental to chalk-and-talk practices as old as the hills, and not much more effective from a pedagogical standpoint.”

Those who are sympathetic to teacher’s unions will bristle at this comment: “In K-12, the most promising applications of technology have been found most consistently in private and charter schools — freed from the strictures of teachers unions.”

The author discusses a new “10/90” proposal to give higher education institutions some “skin in the game.” Under an Income Share Agreement (ISA), higher education schools would contribute 10% of the amount of every federal loan. After graduation, students would make loan payments based on a fixed percentage of their income for a fixed number of years, with a clear cap on the total amount paid. The schools would recap their money ONLY if students graduated and would thus be more invested in the future of their students.