Fiscal Cliff Proposals Assault Charitable Giving

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by: Bryan Baumgart - 12/7/2012

As I described in my post on "The Role of Government", if we truly wish to take care of America's poor and needy, it must be done through charity. 

Progressive taxation aimed at redistributing wealth to the needy is well intentioned, but eventually succeeds only in destroying wealth and creating poverty.

Economic policies that lead to wealth creation and encouraging charitable giving through tax credits not only result in more effective social assistance, but guarantee the sustainability of that assistance.

Characterized as "loopholes", tax credits for charitable giving now find themselves on the chopping block in the infamous fiscal cliff negotiations.

Because the majority of charitable giving is made by wealthy Americans, the Democrat's tax hike proposal is sure to have a negative affect on charitable giving.  The Republican's counter proposal isn't any brighter for charities. In the past, it was President Obama pushing for reduced tax credits for charitable giving, but now we find the GOP putting forth a plan calling for the same.

Their proposals would not only negatively affect charities, but colleges, universities and hospitals as well. Donations are the primary source of income for most charities and because these donations are encouraged through resulting tax credits, removing this incentive would likely be devastating to charities and non-profits who often receive a third to half of their annual donations in the month of December as people begin to think about income taxes and the need for deductions.

Colleges received just over $30 billion in donations in 2011, and the largest gifts most colleges receive are typically made with awareness of tax benefits.

“There’s just no question that it will hurt charitable giving.” - Charles Phlegar, vice president for alumni affairs and development at Cornell University

The deduction for charitable giving costs about $52 billion in tax revenue per year, but the assistance it provides to America's poor and needy is immeasurable!!!
Tell your representatives to leave the charitable giving tax credit alone!!! 

Deflation: Making Sure "It" Doesn't Happen Here

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The trend is abundantly clear; the U.S. economy has been slowing for more than six months and is perilously close to contraction.

After growing at a robust 4.1% clip in the last three months of 2011, gross domestic product fell to 2% growth rate in the first quarter, before falling again to 1.5% in the second quarter.

Using monetary policy, the Federal Reserve has made repeated attempts to stimulate the economy and raise it from its listless state. The Fed has held short term rates at a remarkably low level of between 0% and 0.25% since December 2008. It has also purchased nearly $3 trillion worth of Treasuries and housing-related assets to lower long-term interest rates and try to spur the economy.

If these efforts have worked at all, they have so far averted a double-dip recession. Yet, these extraordinary measures have not resulted in an economic recovery. To the contrary, things are getting worse.

Clearly, the economy is contracting, or deflating. Recessions are technically defined by two consecutive quarters of contracting GDP. Though we aren't there yet, the current trend is worrisome. Recessions are, by definition, deflationary. Above all else, the Fed fears deflation; it is harder to control than inflation and once it takes hold, deflation can be crippling.

The U.S. economy is built on a perpetual growth model. Deflation aside, even stagnation is debilitating. Growth is imperative.

The Fed likes inflation because it makes debts easier to repay. But inflation also devalues the money in everyone's pockets and bank accounts.

At a rate of three percent annual inflation, your money loses 30 percent of its buying power over the course of a decade. For example, inflation was 27% from 2000 to 2010. That's a hidden tax on all Americans, young and old, rich and poor. So, inflation is also a pernicious thing.

With that in mind, what follows are highlights from a speech given by Ben Bernanke on Nov. 21, 2002. This is the infamous speech that earned Bernanke the moniker "Helicopter Ben."

As you read the speech, bear in mind that it was given a full six years before the financial collapse, which led to the federal funds rate being reduced to its present level of 0% to 0.25%. It was also four years prior to Bernanke being nominated as chairman of the Federal Reserve.

As you'll see, Bernanke had a plan, a vision and a philosophy — all of which explains what is going on today, monetarily. You can see Bernanke's utter fear of deflation. Concerns about inflation? They hardly exist. In fact, Bernanke makes clear that central banks seek an inflation rate between 1 and 3 percent per year.

Bernanke also outlines the "special problems" that central banks face when the federal funds rate reaches zero due to deflation. This should cause the reader to wonder how bad the problem could become, considering that the rate is already effectively zero. As Bernanke notes, a zero interest rate places a "limitation on conventional monetary policy."

However, in Bernanke's view, even when the interest rate has been forced down to zero, the Fed "has most definitely not run out of ammunition."

There is a singular strategy always at the Fed's disposal, according to Bernanke, providing it "considerable power to expand aggregate demand and economic activity" and allowing it "to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero."

What is that strategy, you are surely asking?

Printing money.

The problem is that printing large sums of money, without any relation to a corresponding increase in the amount of goods and services in the economy, devalues all of the money in circulation.

"By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so," said Bernanke, "the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation."


Note: The bolded areas are my emphasis. The italicized areas are Bernanke's.

Deflation: Making Sure "It" Doesn't Happen Here

The Congress has given the Fed the responsibility of preserving price stability (among other objectives), which most definitely implies avoiding deflation as well as inflation. I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States and, moreover, that the U.S. central bank, in cooperation with other parts of the government as needed, has sufficient policy instruments to ensure that any deflation that might occur would be both mild and brief.

Before going further I should say that my comments today reflect my own views only and are not necessarily those of my colleagues on the Board of Governors or the Federal Open Market Committee.

The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand — a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers. Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending — namely, recession, rising unemployment, and financial stress.

However, a deflationary recession may differ in one respect from "normal" recessions in which the inflation rate is at least modestly positive: Deflation of sufficient magnitude may result in the nominal interest rate declining to zero or very close to zero. Once the nominal interest rate is at zero, no further downward adjustment in the rate can occur, since lenders generally will not accept a negative nominal interest rate when it is possible instead to hold cash. At this point, the nominal interest rate is said to have hit the "zero bound."

Deflation great enough to bring the nominal interest rate close to zero poses special problems for the economy and for policy. First, when the nominal interest rate has been reduced to zero, the real interest rate paid by borrowers equals the expected rate of deflation, however large that may be. To take what might seem like an extreme example (though in fact it occurred in the United States in the early 1930s), suppose that deflation is proceeding at a clip of 10 percent per year. Then someone who borrows for a year at a nominal interest rate of zero actually faces a 10 percent real cost of funds, as the loan must be repaid in dollars whose purchasing power is 10 percent greater than that of the dollars borrowed originally. In a period of sufficiently severe deflation, the real cost of borrowing becomes prohibitive. Capital investment, purchases of new homes, and other types of spending decline accordingly, worsening the economic downturn.

Although deflation and the zero bound on nominal interest rates create a significant problem for those seeking to borrow, they impose an even greater burden on households and firms that had accumulated substantial debt before the onset of the deflation. This burden arises because, even if debtors are able to refinance their existing obligations at low nominal interest rates, with prices falling they must still repay the principal in dollars of increasing (perhaps rapidly increasing) real value.

Beyond its adverse effects in financial markets and on borrowers, the zero bound on the nominal interest rate raises another concern — the limitation that it places on conventional monetary policy. Under normal conditions, the Fed and most other central banks implement policy by setting a target for a short-term interest rate — the overnight federal funds rate in the United States — and enforcing that target by buying and selling securities in open capital markets. When the short-term interest rate hits zero, the central bank can no longer ease policy by lowering its usual interest-rate target.

Because central banks conventionally conduct monetary policy by manipulating the short-term nominal interest rate, some observers have concluded that when that key rate stands at or near zero, the central bank has "run out of ammunition"— that is, it no longer has the power to expand aggregate demand and hence economic activity. It is true that once the policy rate has been driven down to zero, a central bank can no longer use its traditional means of stimulating aggregate demand and thus will be operating in less familiar territory. The central bank's inability to use its traditional methods may complicate the policymaking process and introduce uncertainty in the size and timing of the economy's response to policy actions. Hence I agree that the situation is one to be avoided if possible.

However, a principal message of my talk today is that a central bank whose accustomed policy rate has been forced down to zero has most definitely not run out of ammunition. As I will discuss, a central bank, either alone or in cooperation with other parts of the government, retains considerable power to expand aggregate demand and economic activity even when its accustomed policy rate is at zero.

There are several measures that the Fed (or any central bank) can take to reduce the risk of falling into deflation. First, the Fed should try to preserve a buffer zone for the inflation rate. That is, during normal times it should not try to push inflation down all the way to zero. Central banks with explicit inflation targets almost invariably set their target for inflation above zero, generally between 1 and 3 percent per year.

Under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.

The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning.

U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

In the United States, the Department of the Treasury, not the Federal Reserve, is the lead agency for making international economic policy, including policy toward the dollar; and the Secretary of the Treasury has expressed the view that the determination of the value of the U.S. dollar should be left to free market forces. Moreover, since the United States is a large, relatively closed economy, manipulating the exchange value of the dollar would not be a particularly desirable way to fight domestic deflation, particularly given the range of other options available. Thus, I want to be absolutely clear that I am today neither forecasting nor recommending any attempt by U.S. policymakers to target the international value of the dollar.

Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934. The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation.

Each of the policy options I have discussed so far involves the Fed's acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.

You Can't Expect Justice in a Corporatocracy

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For any society to survive, much less thrive, it must be rooted in trust. The citizenry must trust the government and, most importantly, the justice system. It also helps if the people trust the banks that hold their money and finance their nation's economy.

However, that sort of trust is now virtually non-existent in our society.

According to a Gallup poll, only 18% of Americans — an all-time low — have confidence in banks. And a Pew Research survey found that Americans' trust in government is only marginally higher, at 22%.

Perhaps Americans have come to the conclusion that their government is colluding with the banks against their best interests. The examples are far and wide. In fact, they are so numerous that listing them all would be tedious, and reading them all would be cumbersome.

But, just to make the point, here are a few less than shining examples:

The SEC charged Wells Fargo with selling products tied to risky mortgage securities, causing municipalities and non-profits to suffer substantial losses as a result.

In response, Wells Fargo, the nation’s biggest consumer bank, recently agreed to pay a $6.5 million fine for these offenses without admitting or denying the charges.

Wells Fargo reported second-quarter pre-tax profits of $8.9 billion. This means that Wells Fargo will cough up a $6.5 million penalty from the nine-thousand-million dollar profit it made in just the second quarter of this year alone. That's about 0.07 percent of a single-quarter's profit.

Does this sound like justice to you? Will such a fine cause Wells Fargo to change its behaviors and practices? That's a rhetorical question.

A Senate report issued in July found that a "pervasively polluted" culture at HSBC allowed the bank to act as financier to clients moving shadowy funds from the world's most dangerous and secretive corners, including Mexico, Iran, Saudi Arabia and Syria.

The report said large amounts of Mexican drug money was likely to have passed through the bank. HSBC's U.S. division provided money and banking services to some banks in Saudi Arabia and Bangladesh that are believed to have helped fund al-Qaida and other terrorist groups.

The U.S. unit of the London- based HSBC, Europe’s biggest bank, “offers a gateway for terrorists to gain access to U.S. dollars and the U.S. financial system,” according to the report.

Laundering money for criminal enterprises, including drug cartels, is nothing new for the Big Banks.

In 2010, Wachovia Bank (now owned by Wells Fargo) paid $160 million to resolve a criminal probe that Mexican cartels were using currency-exchange firms to launder cash through the bank.

British bank Standard Chartered recently agreed to a settlement of $340 million with New York’s top banking regulator, Benjamin Lawsky, over claims that it laundered hundreds of billions of dollars in tainted money for Iran and lied to regulators in the process.

The New York Department of Financial Services charged that the bank schemed with Iran for nearly a decade to hide from regulators 60,000 transactions worth $250 billion.

Lawsky’s office threatened to revoke the bank’s state license at a hearing scheduled this week, prompting Standard Chartered to settle. Such a move would have been a death knell for the bank.

For a bank that announced record profits of $6.78 billion in 2011, a $340 million fine is nothing more than a slap on the wrist. In fact, it amounts to just 5 percent of last year's profits. That sort of expense is simply calculated into the cost of doing business.

According to the New York Times, a trove of e-mails and memos detail an elaborate strategy devised by the bank’s executives to mask the identities of its Iranian clients and to thwart American efforts to detect money laundering.

In light of all this, it's tough for anyone to reasonably claim that justice was served because Standard Chartered paid a $340 million fine. Sadly, that sort of outcome is the rule, rather than the exception.

The report issued by the Financial Crisis Inquiry Commission nearly two years ago found that, by 2006, Goldman Sachs traders knew that they were selling dangerous investments packed with subprime home mortgages. Goldman was making big profits on these toxic investments, which they privately characterized as "junk," "dogs," "big old lemons" and "monstrosities."

These mortgage investment products eventually collapsed in value, bringing down the housing market and very nearly the American economy along with it.

Despite misleading investors about the risks of a mortgage-backed investment product known as Abacus (which Goldman was in fact betting against), Goldman Sachs was allowed to settle with the Securities and Exchange Commission for just $550 million.

Goldman had revenue of $28.8 billion and net income of $4.44 billion in 2011. Once again, the fine was merely a slap on the wrist that will not dissuade or prevent the Wall St. bank from similar behavior in the future. Such a penalty is merely calculated into its cost of doing business.

The SEC has also dropped its investigation into Goldman Sachs over a $1.3 billion mortgage bond known as Fremont Home Loan Trust 2006-E, even though it indicated earlier this year that charges were likely. Moreover, the Federal Housing Finance Agency had filed a lawsuit against Goldman alleging that it knew that Fremont, a subprime lender, was selling it mortgages certain to fail.

The Department of Justice also announced that it is ending its own Goldman investigation, launched after a congressional investigation chaired by senators Carl Levin (D-Mich.) and Tom Coburn (R-Okla.) issued a report that found Goldman Sachs sold investments "in ways that created conflicts of interest with the firm’s clients and at times led to the bank's profiting from the same products that caused substantial losses for its clients.”

In May, the SEC dropped its probe of Lehman Brothers, even though an independent examiner appointed by the bankruptcy court of the defunct bank concluded that there were "actionable claims" against senior Lehman officers for using an accounting tool known as Repo 105 to book billions of dollars in phony sales to disguise the true extent of the bank's financial woes.

These are just the latest indications that the federal government has been neutered by Wall St. The revolving door between Washington and Wall St. has created a good old boys network, a corporate/political alliance that now controls our government. Our alleged leadership has been bought and paid for.

Regulation is dead. The industry's complaints about the burden of regulatory rules are absurd and fantastical.

Accountability and an adherence to the law are no longer expected from the Banksters. They do whatever they wish, gutting laws, ripping off their clients and paying meager fines to continue their perverted business as usual. Justice is only for regular people.

Ethics, scruples and moral decency are wholly absent. The government refuses to enforce its own laws and it allows bank lobbyists to water down others until they are meaningless.

More than 2,500 banking lobbyists are swarming the halls of Congress each week, fighting reform, meaning that the Big Banks now have five lobbyists for every member of Congress.

The Justice Department refused to pursue cases against Angelo Mozilo, the former head of the defunct mortgage giant Countrywide and Joseph Cassano, who ran the financial products division at AIG. These two men were central figures in the financial collapse, which led to the crisis that continues to destabilize our economy. And yet they remain free men.

I could go on and on with examples of paltry fines, dropped charges and cases that were never even opened. It's all so disgusting and disheartening. How can this nation claim to observe the rule of law when it refuses to uphold and enforce its laws?

How did the mega banks and corporations become exempt?

This nation's Supreme Court has upheld the absurd notion that corporations are people, due all the same rights under the law. While such a suggestion is absurd on its face, the deeper problem is that corporations — such as banks — are afforded an entirely separate set of rights and privileges that are not afforded to real, living, breathing, human citizens.

This nation's judicial, executive and legislative branches of government are all corrupt. How can anyone reasonably expect Wall St. or big business in general (Big Media, Big Energy, Big Agriculture, Big Pharma, Big Insurance, etc. ) to be otherwise? They are all part of the corruption.

The heart of the problem is that corporate financing of political campaigns has led to corporate control of our country. Corporations have bought our government and they now own it. They control the country and the government.

This nation is now a corporatocracy. We are officially the United States of Corporate America.

Fiscal Cliff an Opportunity to Correct Fiscal Imbalances

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A point that I've repeatedly made on this site is that the U.S. government has both a spending problem and a revenue problem.

In the last fiscal year, the government collected 15.5 percent of GDP in revenue and spent 22.4 percent. That's a considerable problem and it cannot continue.

Due to high unemployment plus lower incomes and wages, tax revenues have plunged from their historical average of !8 percent of GDP. As a share of GDP, income tax revenues are at their lowest level since 1951, when Harry S. Truman was president.

To offset this lack of private demand, the government increased expenditures to fill the void and undergird the economy. Yet, that has grown the government to excessive proportions, which is not good for the long term health of the economy.

A 1998 Congressional Joint Economic Committee study concluded the optimal size of government to maximize economic growth was about 18% of gross domestic product. The government is now spending well above that.

Washington's profligate ways go back many years.

Over the forty years ending in 2008, federal revenues averaged about 18.3 percent of our economy, while spending averaged over 20.6 percent, resulting in an average deficit of about 2.4 percent. Since 1970, the Federal Government has run deficits for all but four years (1998–2001).

All those deficits have added up to a national debt that now exceeds $16 trillion, and counting. Medicare and defense spending are the biggest drivers of the government’s continual deficits and massive debt.

The U.S. dedicates 18% of GDP to healthcare — the greatest share of any nation in the world and about twice as much as other industrialized nations.

By the end of the Congressional Budget Office’s 10-year budget forecasting period in 2022, Medicare outlays will be more than $1 trillion a year. For the entire ten-year period, 2013-2022, Medicare will cost taxpayers $7.7 trillion.

However, American workers pay a Medicare tax (separate from the income and FICA taxes) that funds the hospital insurance system, which provides medical benefits to eligible individuals upon reaching age 65. That tax may be raised, or benefits lowered, to counter shortfalls. The same is not true with military spending.

Pentagon spending accounts for over 50 percent of all discretionary spending in the federal budget, and overall security spending constitutes two-thirds of the discretionary budget, according to the CBO. Military spending has tripled since 1997. Simply put, the Defense budget is bloated and wasteful.

According to estimates by Nobel Prize-winner Joseph Stiglitz and Professor Linda Bilmes of the Harvard Kennedy School, when all the costs are counted, the Iraq invasion and the Afghan war will each cost US taxpayers $3 trillion dollars. Both were unfunded. In other words, the two wars doubled the U.S. public debt.

When all defense-associated spending is added up — including the Defense Department, Overseas Contingency Operations, the Department of Veterans Affairs and the Department of Homeland Security — all of the mandatory and discretionary programs amount to a whopping $877.9 billion annually, according to the Office of Management and Budget.

And this doesn't even include the money dedicated to the Department of Energy to maintain the nation's nuclear weapons arsenal.

Based on the Government Accountability Office’s latest long-range alternative budget simulation, by the end of this decade our interest payments will become the largest single expenditure in the federal budget. By 2040, all of our federal tax revenues will add up to cover only our two biggest expenses: interest on our debt plus Medicare and Medicaid. Everything else — Social Security, defense, education, road building, you name it — will fail to be funded.

Washington has finally accepted that it has a significant problem that can no longer be ignored and passed on to the next group of legislators. Negotiations are underway to avoid the fiscal cliff. Congress will also have to negotiate another raise of the debt limit. Furthermore, Congress hasn't even passed the fiscal 2013 budget, which was submitted by the White House back on February 13th.

It's worth noting that the fiscal year began on October 1st and runs through next September. So, the government has been operating for more than two months (one-sixth of the year) without a formalized budget.

One of the big sticking points in negotiations to avoid the fiscal cliff is President Obama's insistence that income tax rates go up for the wealthiest Americans. Most congressional Republicans are against that idea.

House Speaker John Boehner claims that raising taxes on the top 2 percent of income earners would be unfair because half of those taxpayers are small business owners who pay their taxes through their personal income tax filing each year.

The Speaker made that assertion again this week. Yet, Boehner has been repeatedly corrected on this by fact-checkers. In fact, the Speaker's office says that he misspoke when he made that claim this week, although it's a misstatement he's made more than once.

Last year, some analysts at the Treasury Department took a closer look at what constitutes a small business, and they defined them as those making up to $10 million.

They excluded all those that were making over $10 million. At the other end, they threw out people who might have a big salary from a day job and then a little small business on the side.

When they narrowed the definition that way, what they found was about one in five taxpayers in those top two brackets is a small business owner. And of all the income in those brackets that would be taxed at a higher rate, only about 7 percent comes from small businesses.

Republicans say that raising tax rates on the highest earners would result in a loss of jobs.

However, when the Congressional Budget Office looked at what the affect of raising those taxes would be on jobs, they found it'd really be pretty tiny — about 200,000 jobs over the course of a decade. That's about as many jobs as the economy has been adding in one or two months.

Additionally, a recent report by the non-partisan Congressional Research Service (CRS) found no correlation between top tax rates and economic growth, a central tenet of conservative economic theory. Specifically, the report found that there is no evidence that tax cuts for millionaires and billionaires leads to improved economic growth. The CRS analysis compared tax policy with GDP patterns over the last 65 years.

The report was first released in September, but was removed from public circulation shortly thereafter because Senate Republicans objected to the findings.

Republicans say any new revenue should be raised by curbing tax breaks.

Given that 45 percent of U.S. households do not pay income tax (either because they don’t earn enough or through credits and deductions) and 3% of taxpayers contribute around 52% of total tax revenues, a major overhaul of the U.S. taxation system is in order. In fact, eliminating tax breaks may ultimately be a better, fairer way to raise more revenue.

The problem is that anti-tax crusaders like lobbyist Grover Norquist, and his Republican adherents in Congress, have insisted that any tax reform which reduces or eliminates write-offs, deductions and exemptions must be revenue-neutral. If that's the case, then what's the point? This cannot be an exercise in futility amounting to nothing more than simply rearranging the deck chairs.

Simply increasing tax rates on the wealthiest Americans would not raise enough revenue to address the nation's fiscal crisis. Additional measures are needed.

If the Bush tax cuts were allowed to expire on couples whose income is over $250,000 and singles over $200,000, it could raise close to $1 trillion over 10 years, according to Tax Policy Center data. Allowing the Bush tax cuts to expire on income over $500,000 ($400,000 for singles) could raise at least $315 billion over a decade. And if the Bush tax cuts were allowed to expire on income over $1,000,000, at least $242 billion could be raised.

As you can see, squeezing additional revenues from only the very wealthiest Americans results in increasingly diminishing returns.

To truly get at the revenue problem, all of the numerous tax loopholes must be closed and deductions eliminated. Lobbyists have spent the past couple of decades getting favored status for their varied interests and layering the tax code with assorted breaks, deductions, write-offs and loopholes.

After all, what's the point of tax brackets if the effective rate people are paying is less than that written into law?

Republican Senator Bob Corker of Tennessee has circulated a proposal to cut the deficit by $4.5 trillion over 10 years. Corker would address entitlements by gradually increasing the age for Medicare and Social Security eligibility and would lower cost of living increases for Social Security.

As for taxes, Corker would not raise rates, but would cap itemized deductions at $50,000. The senator says there are $1.2 trillion in loopholes and deductions in the tax code at present. His hope is to "simplify the code."

Corker says his proposal, "keeps rates where they are but generates revenues from wealthy citizens by closing loopholes."

And he believes that such an idea would popular, telling NPR, "I would say that most Americans would like to see the tax code get rid of all the loopholes that exist there."

He's probably right. What most Americans surely want is fairness. They'd like to know that some taxpayers aren't granted the privilege of special breaks the rest of us aren't privy to. The highest-income households enjoy more than 40% of the benefits of all tax breaks taken every year, according to the Tax Policy Center.

However it is arrived at, the government needs to increase revenue and reduce spending.

Some economists and analysts advance the notion that a country can indefinitely run deficits without endangering its economic survival as long as those deficits remain below its rate of economic growth.

However, the U.S. has a debt that exceeds $16 trillion and is still growing. Though it will be impossible to ever fully repay that debt due to the nature of money itself, it is important to begin continually chipping away at the debt rather than adding to it. Otherwise, the bond market will eventually turn on the U.S., sending interest rates soaring.

The trouble for the U.S. is that we are in a sustained pattern of about 2% economic growth and it is difficult to foresee that changing over the next few years. Any sudden internal or external shocks (economic crisis in Europe or Japan, for example) could easily tip the U.S. into recession.

That's the concern with the fiscal cliff. According to the Congressional Budget Office, the looming combination of tax increases (the end of the payroll tax holiday and the Bush tax cuts) and legislated budget cuts will lead to a recession, shrinking the economy by 1.3% in the first half of 2013.

The upside is that the CBO also says the economy will then expand 2.3% in the second half. There's some pain upfront, but there's some relief in the end.

Congress and the nation are faced with a moment of truth. Though this combination of hikes and cuts will be painful, it is needed nonetheless. Congress needs to swallow this bitter medicine and take a leap off the fiscal cliff.

Yes, it will result in a recession next year, but the long term benefits will make it worthwhile. Congress has avoided these difficult decisions for far too long and to avoid them any further will result in an even worse predicament down the road.

The time for easy choices or good alternatives has long since passed.

Real Effective Tax Rates | Romney's versus Obama's

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Content of Character ::

According to a report released by the Tax Foundation, an effective federal tax rate of 14.0% is higher than what 97 percent of Americans pay.

- By: Larry Walker, Jr. -

And according to The Tax Policy Center, the average effective federal tax rate for all Americans, as a percentage of cash income, was only 9.3% in 2011. Those in the Top 20 Percent (with incomes over $103,465) paid an average of 14.9%, while those in the Bottom 20 Percent (with incomes below $16,812) received back refundable tax credits averaging 5.8% of their incomes.

Within the Top Quintile, the Top 1 Percent paid an average rate of 20.3%, while the Top 0.1 Percent paid an average of 19.8%. It’s important to note that these are averages, which means that within each quintile some pay more than the average and others less. But overall, since the average effective federal tax rate for all of America is 9.3%, this represents a kind of minimum benchmark. What’s your effective federal tax rate?

Under the traditional model, in 2011, Mitt and Ann Romney paid an effective federal tax rate of around 14.0% (see definitions at the end), while Barack and Michelle Obama paid 17.8% (see table below). So does that mean the Obamas are more patriotic? Before you answer that, consider that the Romneys paid a total of $1,912,529 in federal income taxes, versus the Obamas $150,253. So does this give the Romneys the upper hand?

Digging a little deeper, it turns out that the Romneys paid an effective state and local tax rate of 11.3%, compared to the Obamas 7.0%. The Romneys also paid $1,541,905 in state and local taxes, compared to the Obamas $59,804. Shouldn’t state and local taxes be counted as well, since they are, after all, taxes? Yes, of course.

So when all taxes are on the table, the Romneys overall effective tax rate was 25.2%, compared to the Obamas 24.8%. And, the Romneys paid a total of $3,454,434 in federal, state and local taxes, versus the Obamas $209,057. So in light of these facts, is one of the two presidential candidates better suited for the Oval Office than the other? Is one a tax deadbeat and the other a saint? If a presidential candidate’s effective tax rate matters, then this election should be a toss up. But if it doesn’t, then Barack Obama’s entire – fair share monologue – is nothing but rubbish. The question is – what really matters?

Real Effective Tax Rates

Perhaps a more suitable measure of patriotism may be found in one’s real effective tax rate. One way of lowering U.S. tax liabilities is through charitable giving. When gifts are given to charity, the taxpayer no longer controls the assets, and so is granted a deduction against his (or her) taxable income of as much as 50% of adjusted gross income. Depending upon one’s marginal tax bracket, the tax savings may be as high as 35% of the amount given.

What happens to the money once it has been gifted? It gets spent by recipient organizations on salaries and wages, goods and services, real property, or is otherwise invested toward its charitable endeavors. Thus, charity is wealth redistribution, or if you will, a type of voluntary taxation. I would add that charitable giving is a much more efficient means of spreading the wealth than the U.S. government’s wasteful method, which after a certain limit may be summed up as little more than legalized robbery.

In 2011, the Romneys gave away $4,000,000, or about 29.0% of their income, although they only chose to claim a tax deduction of $2,250,772. The Obamas donated $172,130 or about 20.0% of their income. When we add this voluntary taxation to the total amount of taxes paid, we find that the Romneys paid a real effective tax rate of 54.4%, compared to the Obamas 45.1% (see table below).

Just to add some perspective I included data from the Roosevelts and the Carters tax returns (above). It’s interesting to note that in 1937, Franklin and Eleanor Roosevelt donated $3,024, or only about 3.2% of their income, while in 1978, Jimmy and Roselynn Carter gave away $18,637, or about 7.0%. When we add the amount of the couples voluntary taxation through charitable gifts, to the total amount of taxes paid, we find that the Roosevelts paid a real effective tax rate of 33.3%, compared to the Carters 45.6%. So was FDR a slacker? Was Jimmy Carter slightly more patriotic than Obama? And isn’t Mitt Romney a better man than them all?

Note: The Roosevelts income of $93,602 in 1937 is equivalent to $1,504,178 today, while the Carters income of $267,195 in 1978 is equivalent to $948,325. A study of historical Presidential tax returns is interesting, informative, and highly recommended for anyone serious about tax reform, as is a study of historical income tax rates.

Tax Return Analysis: Romneys versus Obamas

Following are some other key statistics from the Romneys and Obamas tax returns:

It’s notable that 94.8% of the Romneys income came from investments – interest, dividends and capital gains, versus -12.8% for the Obamas. The Obamas tax return includes a capital loss carryover of $116,151, a consequence of failed investments from the past. That’s interesting, since Barack Obama is the one always harping on the idea of government investment, yet all the while it turns out that successful investing is a trait beyond the scope of his expertise. Small wonder his taxpayer-funded green energy investments have turned out to be dismal failures.

What’s even more notable is the fact that roughly 62.4% of the Romneys income came from capital gains and qualified dividends which, based on current law, are taxed at a maximum rate of 15.0%. In contrast, around 99.0% of the Obamas income came from wages and net book sales which are taxed at ordinary rates of as high as 35.0%. Thus the Romneys effective tax rate should be considerably lower than the Obamas; but it turns out that both couples effectively paid about the same overall effective tax rate, 25.2% versus 24.8%, as explained earlier. So in spite of favorable capital gains rates, overall effective tax rates tend to balance out. One reason for this phenomenon is that most of the States don’t reciprocate (i.e. there is no favorable capital gains rate at the state level).

Next, we find that the Romneys paid $102,790, or 0.8% of their income, in foreign taxes, while the Obamas paid $5,841, or 0.7%. Thus, on a percentage basis, both families earned about an equal amount of their income from foreign sources. So is either candidate more likely to outsource American jobs than the other? I guess Obama could limit sales of his books to the USA, and cut-off the rest of the world, as if that would make any sense. I’ll let you figure that one out.

Next, we discover that the Obamas claimed a retirement contribution deduction of $49,000, or 5.8% of their income, while the Romneys claimed none. Foul! The question is that since Barack Obama now qualifies for a $191,000 a year presidential pension, why is he continuing to maximize the simplified employee pension account (SEP) deduction? In the private sector, the most anyone can exclude from income for retirement purposes, including employer matching contributions, is $49,000 per year. Yet Barack Obama gets to claim this maximum deduction, while at the same time deferring taxes on the annual contributions the U.S. Treasury makes to his pension account. Does that sound fair to you? Is Obama paying his fair share?

Is a guaranteed $191,000 a year for life, on top of a virtually unlimited presidential expense account, insufficient for Mr. Obama? In stark contrast, Mitt Romney refused to take a salary while he served as Governor of Massachusetts. So has anyone bothered to ask if he would waive his presidential salary? Would he also consider waiving the presidential pension and lush lifetime expense account? Somebody needs to ask that question. By the way, Mitt Romney could have claimed exactly the same SEP-IRA deduction that the Obamas did, based on his net business income, which would have further reduced his tax liability, but chose not to. So what does this say about character?

Next, the Obamas also claimed a $47,564 home mortgage deduction amounting to 5.6% of their income, while the Romneys claimed none. Wow! So since the Obamas claimed both a $47,564 home mortgage deduction, and the $49,000 maximum retirement contribution exclusion, while the Romneys claimed neither, this gave the Obamas an 11.4% handicap. Note: According to the Internal Revenue Service, in tax year 2010, only 25.8% of tax filers claimed the home mortgage deduction, which kind of makes the case for placing limits on this deduction.

Now when it comes to charitable contributions, as stated earlier, the Romneys gave $4,000,000, or around 29.2% of their income, while the Obamas gave $172,130, or 20.4%. But since the Romneys only chose to write-off $2,250,772, their actual deduction amounted to just 16.4% of their income. So once again the Obamas had a slight advantage, yet when their total itemized deductions are compared, we find that the Romneys amounted to 34.2% of their income, while the Obamas amounted to 33.0%, or about the same.

Finally, the Romneys federal taxes included an Alternative Minimum Tax (AMT) of $674,512, representing 4.9% of their income, while the Obamas incurred a liability was $12,491, or 1.5%. The AMT limits certain deductions and tax preferences to ensure that high income earners pay at least a minimum amount of tax. So what will happen when the AMT is eliminated? Will the rich pay less in taxes? Not necessarily, because if the same deductions and tax preferences for high income earners were eliminated from the get go, then the AMT wouldn’t be necessary. Isn’t this the objective of tax reform, to eliminate deductions and preferences, lower tax rates, and thus simplify the tax code? So when tax rates are cut by 20% in the next year or two, and that’s where we’re headed, the first place to look for deductions and preferences to eliminate is within current AMT regulations.

Content of Character

So what’s the point? First of all, we learned that in 2011, the Romneys paid a total of $3,454,434 in federal, state and local taxes, while the Obamas paid $209,057. When state and local taxes were added to the mix, we found that the Romneys paid an overall effective tax rate of 25.2%, versus the Obamas 24.8%. But when charitable contributions were figured in, we discovered that the Romneys paid a real effective tax rate of 54.4% compared to the Carters 45.6%, the Obamas 45.1%, and the Roosevelts 33.3%.

What should be clear is that measuring a person by the size of their effective tax rate reveals nothing about their character. If those who pay the largest share of taxes are the most patriotic among us, then that all but eliminates everyone except for the Top 1 Percent. If effective tax rates are so important, then why not simply convert to a flat tax (i.e. the FairTax)? That way the concept of effective tax rates becomes meaningless. In a perfect world it seems this would be the goal.

Is paying more taxes than absolutely necessary savvy? No, but anyone who voluntarily pays more must really love this country. Mitt and Ann Romney didn’t claim all of the charitable contributions they could have, and thus paid a higher amount in taxes than legally required. When it comes down to it, no one that I know cares anything about increasing their own personal effective tax rate; most are like the Obamas, preoccupied with finding ways to reduce it.

The main point of this post has been to prove that measuring any American by the size of their effective tax rate reveals next to nothing about the content of their character. Thus, Barack Obama’s entire fair share mantra turns out to be nothing but rubbish. The rich already pay more than their fair share sir. It’s time to bring on a business guy, someone who really understands what’s going on in this country. It’s time to lower income tax rates, limit deductions and preferences, broaden the tax base, and reduce the size of government. It’s time to lower the federal deficit and move towards a balanced budget. It’s time to purge Barack Obama’s jaded philosophy of – do as I think, not as I do.

Definitions:

(a) The Traditional Model – Under the traditional model, the effective tax rate is calculated by dividing total income taxes (before tax credits and other taxes), by total income (before exclusions and deductions).

(b) Effective Federal Tax Rate – The effective federal tax rate is determined by dividing total federal income taxes (before tax credits and other taxes), by total income (before exclusions and deductions).

(c) Effective State and Local Tax Rate – The effective state and local tax rate is determined by dividing total state income taxes, real estate taxes, and personal property taxes claimed on federal Schedule A, by total income (before exclusions and deductions).

(d) Overall Effective Tax Rate – The overall effective tax rate is calculated by dividing total federal income taxes (before tax credits and other taxes), plus total state and local taxes as in (c), by total income (before exclusions and deductions).

(e) Real Effective Tax Rate – The real effective tax rate is calculated by dividing total federal income taxes (before tax credits and other taxes), plus state and local taxes as in (c), plus charitable contributions, by total income (before exclusions and deductions).

References:

The Romneys 2011 Tax Return

The Obamas 2011 Tax Return

The Roosevelts 1937 Tax Return

The Carters 1978 Tax Return

Romney’s Taxes: A Window Into Charitable Giving

Even at 14%, Romney Pays a Higher Rate than 97% of His Fellow Americans

Ex-presidents have huge expense accounts

PresidentObama’s Taxpayer-Backed Green Energy Failures

Bush's Legacy: Debt

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September 25th 2008

UNITED STATES - The Bush legacy is going to include a nasty four-letter word: debt.

On second thought, make that staggering, long-term debt, perhaps in excess of $11 trillion, that will tie the hands of the next president and Congress, to say nothing of imposing a crushing burden on taxpayers.

Just a few months ago, the Iraq war looked like the biggest thing in the eight-year era of the second President Bush, during which his party controlled Congress for six years.

Just a couple of Sunday mornings ago, Bob Woodward of the Washington Post said on national television that the war in Iraq “is probably the most important thing going on right now,” adding that in January the war in Iraq will be topic one in the next administration, and topic two will be the war in Afghanistan.

Now the country suddenly is facing a financial crisis fraught with the possibility of unprecedented economic disaster.

If that isn’t enough to make you reach for the antacid tablets, the president still has about three months left in office, plenty of time for yet another calamitous turn of events.

The national debt was about $5.7 trillion when Bush took office in January 2001. Today, after almost eight years and a couple of wars, the debt has risen to about $9.7 trillion.

And, by the way, that figure might rise another $1 trillion or so before Bush steps down on Jan. 20.

The national debt ceiling today is $10.6 trillion. Treasury Secretary Henry Paulson wants Congress to raise that to $11.3 trillion to clear the decks for massive borrowing to deal with the nation’s financial crisis.

A national debt of $11.3 trillion would come to more than $37,000 each for every man, woman and child in the United States.

And all this comes during an era of allegedly conservative, fiscally responsible Republican domination in Washington.

Obama's Achilles Heel: China

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UNITED STATES - The US National Debt continues to go up $3.87 billion USD per day and is currently hovering around $12.4 trillion.

The problem is its going to continue to skyrocket as long as the United States is fighting off a recession, two wars and high oil prices. US President Barack Obama thus has his work cut out for him, problems left behind by George W. Bush, and his problems are quantified by the statement that "Most Americans don't buy American, they buy Chinese."

"Most Americans don't buy American, they buy Chinese."

That is not completely true. What is true that on average the USA imports $2 trillion USD worth of products every year of which approx. $300 billion is from China (approx 15%).

That is peanuts when you realize the USA only exports an average of $65 billion to China annually. The end result is an annual trade deficit of $235 billion taken out of the American economy and bolstering China's economy.

China is not the only country that enjoys a trade deficit with the United States. Japan, South Korea and numerous other countries trade heavily with the USA, often in products that Americans "need" in terms of electronics, but also a lot of products that could be made in North America but has been outsourced instead.

What the USA needs is more factories inside America that is hiring people, making products Americans can use (preferably products and equipment that will make them more competitive internationally) and are priced fairly.

Otherwise what we're opening ourselves up to is to communism... Oh dear, I said it. The dreaded C-word.

If the USA cannot shake off the recession and high unemployment rate America's economy will continue to flounder and will eventually be forced to create a more socialist-based economy as capitalism falls apart. This means government "work-fare programs", huge cutbacks to arts & culture funding (including Hollywood), an increase in food stamp usage, and a skyrocketing crime rate as Americans become more desperate for survival.

The 1st thing the USA needs to do is put a halt on all free trade discussions with Asia. America isn't ready for such big trading partners. The economy is too fragile right now.

The 2nd thing the USA needs to do is find cheaper alternatives to expensive oil. Oil prices are simply too high and its hampering transportation costs of materials/products. Hydrogen power perhaps.

The 3rd thing the USA needs to do is cut taxes on the poor, increase taxes on the rich. The poor will spend every dollar they have anyway, whereas the rich have a tendency to stick their money in the bank and sit on it.

The 4th thing is create tax breaks for companies that operate solely in the USA. This will benefit small businesses and new startups.

The 5th thing the USA needs to do is enforce mandatory retirements. Old people who keep working when they should be retired are essentially stealing jobs from younger Americans. Exceptions can be made for industries that have a shortage (ie. doctors), but otherwise these people need to be put out to pasture.

The end goal is to get more Americans working and building things again, creating opportunities for a new generation of hard working Americans.