28 November 2017

Yes It's 75,000 Pages, But Most of It Is Irrelevant to You

The length of the Internal Revenue Code and the regulations, rules, forms, and instructions that come with it, while staggering, are not for the most part of any real concern to ordinary citizens. The IRC (Title 26 of the United States Code) consists of 11 Subtitles. Of that total, the only one that is of real concern to the average citizen is Subtitle A. Income Taxes. To be sure, if buy booze, you pay the excise taxes in Subtitle E. But, you do not have to know anything about them unless you own a beer distributorship, you lucky dog. Further, Subtitle A has lots and lots of material that most people know nothing about. E.G. "Chapter 3 - Withholding Of Tax On Nonresident Aliens And Foreign Corporations" The relevant stuff is in Chapter 1 - Normal Taxes and Surtaxes.

The irrelevance pattern is repeated recursively in Chapter 1. Most of what affects individuals is in Subchapters-A and B, but the list of Subchapters goes on to Y. You probably do not need to know anything about H-Banking Institutions or  L-Insurance Companies. Once upon a time, a very long time ago, in a previous millennium, I needed to learn about Subchapter K-Partners and Partnerships for professional reasons. Please believe me when I tell you there is a special place in the 10th circle of Hell for the man who wrote the 25 page, 11,198 word, explanation of three words in §704(b)(2): "substantial economic effect". But, once again, you can spend, a long, productive, and happy life in total ignorance of that abomination.

It is true that some of the few remaining sections that are relevant to ordinary individuals have developed into very long disquisitions. For example §163, that authorizes the deduction of interest payments, has grown enormously. In the 1939 IRC, the provision (§23(b)) that was ancestral to §163, was 58 words long and included a rule about tax exempt bonds that was later put in a separate section. In the 1954 recension, it was 3 subsections of 258 words. It is now 14 subsections totaling 6835 words.
Some of that verbiage was added is to alleviate taxpayer problems, such as a subsection that turned, as if by wizardry, mortgage insurance premiums into deductible interest payments for a few years. Other provisions were inserted to deal with possible abuses like bearer bonds*. And yet other provisions were added to deal with market developments. Today everyone lives off of consumer credit. but, the first bank credit cards were not issued until 1958. When the first versions of the IRC were adopted, the common assumption was that money would only be loaned and interest paid for business purposes. The invention and spread of consumer credit necessitated a rethinking of the treatment of interest payable on consumer credit. In 1986, as part of the extensive amendments adopted that year, subsection (h) was added basically to disallow interest on consumer credit.

I have little doubt that vast stretches of the existing tax code could be rewritten to clarify and simplify it. But, I doubt that anyone really cares about it that much. People who have to deal with it have learned it as it is, and would rightly question whether any change would destabilize the meaning of the parts they have to deal with. Any rewrite would leave substance of the provisions alone, and that is where the problems lie.

Note: The 74,000 page figure comes from  Wolters Kluwer, CCH the publisher of the "Standard Master Tax Guide" a series of loose-leaf volumes containing: the text of the income tax provisions of the Internal Revenue Code; excerpts of relevant Congressional Committee Reports; IRS regulations; and summaries of IRS rulings and judicial opinions. Much of that material accumulates from year to year, e.g. judicial opinions from the 1930s are still in there. In 2013 the exact number they gave was 73,954. Every month, they sent you more pages with the latest developments to insert at various locations in the binders. Many law firms and accounting firms had full time employees whose job it was to keep the binders up to date. I am sure that, by now, most tax professionals use an on-line version to save the difficulty and expense of maintaining that much paper.

*For those of you who are blessedly of too young an age to have dealt with bearer bonds, they were paper certificates payable to bearer, i.e. whoever showed up at the issuer's place of payment and surrendered the piece of paper. Interest on the bonds was evidence by tiny post-dated checks (called coupons) printed on the paper, which were also payable to bearer. To cash them in you cut them off of the paper bond, and submitted them to the issuer for payment. The taxing authorities had to depend on the honesty of taxpayers to find out how much interest they received in a year. People who derived most of their income from cashing the interest coupons were called: "coupon clippers". Such people seldom clipped cents off coupons from the Sunday paper to keep their family's grocery budget in line.

18 November 2017

Tax Cuts

I am sorry, but we can't afford them. The Federal government needs revenue desperately. Its present and future obligations, both for bonded indebtedness and for entitlements (Social Security, Disability, Medicare, Medicaid, Obamacare, etc.), exceed its revenue producing capability as the current tax system is configured. Further, the US must rebuild the armed forces it has squandered so wastefully both by use and by abuse such as the F35 and the Zumwalt destroyer.

The deficit in the recently ended fiscal year* (FY 2017 ended 9/30/17) was $666 Billion Dollars, which was 3.5% of the GDP. Of course the deficit was financed by issuing bonded indebtedness. At the turn of the century, the US Government ran surpluses for the FYs 1998 through 2001. FY 2001 ended 30 September 2001 -- just 3 weeks after 9/11. FY 2002 began a string of deficits that peaked in FY2009 when the Panic of 2008, and the political panic spending in its wake, produced a post WWII record deficit of 1.4T$ (pseudo-scientific notation here, T stands for Terra or Trillion), but the string has not ended. The four year period, FY 2009 through FY 2012 saw 5T$ of deficits. Since then we have settled down in the 500G$ range.

*A Fiscal Year of the Federal Government begins on October 1 of the previous calendar year. FY 2017 began on 10/1/2016 and ended on 9/30/2017.
The GDP is about 20T$.  So is the gross Federal Debt. You could say that we have reached the point where the Debt equals, and soon will exceed, the size of the economy. But, only about 15T$ is in the form of outstanding bonds that are owned by persons who are not agencies of the Federal Government, mostly Social Security*. As such, the bonds owned by the Federal Government in so-called "Trust Funds" are just promises to keep paying SS pensions, medicare benefits, etc. even though the payments exceed the payroll tax revenues that have funded them for most of the past 80 years. (CBO is currently projecting that will happen in about 10 years).
Note: the CBO Web Site has lots of very informative reports and data. Their budget projections are here. Spend enough time with that stuff, and you will join the late, great B.B. King in singing: "I've got a mind to give up living, and go shopping instead, buy me a tombstone, and be pronounced dead") It is that depressing. Who is the CBO? The Congressional Budget Office, a supposedly non partisan body created and tasked by Congress with tracking the budget and Federal finances and explaining to Congress the cost of its folly. They do excellent work.
While we are at it, I should add some links to web sites that track the Debt and the deficit: U.S. Debt Clock National Debt of the United States Truth In Accounting. If you really want to wallow in it try: Financial Report of the United States Government
*The Federal Reserve banks own another big chunk of the total Federal Debt (~2.4T$), but economists and budget nerds regard that as being held by the public because the it is the  backing for all of those nice crispy Federal Reserve Notes in your wallet. What? You don't have any? Don't look at me, I haven't any either.
The optimistic political line is that the debt can continue to grow indefinitely as long as the economy grows faster. And this is true, until it isn't. The larger the debt is in relation to the economy, the more difficult it is to service. The nightmare scenario is that the interest on the debt starts to compound above the growth rate of the economy and simply compounds to the sky.

One might say, that only the publicly held debt represents an obligation that must be repaid. Much of it is owed to foreigners who might get testy if they are not paid. Especially the Chinese, who own about 3T$ of bonds and a whole bunch of ICBMs. But, even though Congress could lawfully stiff the beneficiaries of Social Security and Medicare, it is absolutely inconceivable that they could or would politically.

If Congress cannot not pay, then perhaps we should think of those obligations as being ones that we should recognize upfront. Truth In Accounting linked above says that the National Debt should really include 76T$ in future obligations of the Social Security and Medicare programs.

Economists Laurence Kotlikoff and Alan Auerbach, have claimed that the relevant number is what they call the Fiscal Gap which is the difference between the present value of all of government's projected financial obligations, including future expenditures for Social Security and Medicare and servicing outstanding official federal debt, and the present value of all projected future tax and other receipts. They have pegged this amount to be in excess of 200T$.

Further there a few trillions of dollars of debts owed by agencies or instrumentalities of the Federal Government, such as the alphabet soup of mortgage lenders that floats the price of houses far beyond the ability of the mass of homeowners to afford*, such as Fannie Mae (Federal National Mortgage Association or FNMA), Freddie Mac (Federal Home Loan Mortgage Corporation), Ginnie Mae (Government National Mortgage Association), and FHA. These entities have issued trillions of dollars worth of bonds and mortgage guarantees. If they were subsidiaries of private companies, the SEC would make the parent companies include their operations in its financial statements. but, the Federal Government doesn't have to do that. Why? Because they don't want to, and, besides, they do not want to scare the peasants.
*In the early 1970s, the median price of a house was less than 3 times the median annual household income. The median Family, i.e. the middle class, could afford the median house. During the inflationary period of the 1970s the ratio went up to 3.5 In the 1990s it went to 4. After 2002 it took off until it hit 5 at the peak of the housing bubble. During the Panic of 2008, it dropped back to 4.5. But fear not. The bubble has been re-inflated and the average is now almost 5.5. You have nothing to worry about, it is as safe as houses. If you want to learn more go to Political Calculations. He has lots of interesting, but not comforting information.
If you are inclined to whistle past grave yards, you can point to the example of Japan, which has a publicly held debt of about 250% of its GDP. I really doubt that the US could get away with that for a a few reasons. First, the Japanese people are thrifty, and they have not run a trade deficit. Therefore, almost all of the Japanese Government bonds are domestically owned. Second, those bonds pay very little interest. Even the 30 year bonds pay less than 1%. US 30s pay about 2.8%, which is low, but not that low. Third, Japan has an extraordinary amount of social cohesion and trust. The US is closer than most of you think to a shooting civil war.

Another comeback is that the US Government cannot go broke because it can print the Dollars it needs to pay off its obligations. The response to that is yes, it can. But, how much will those Dollars be worth. If they are so abundant as to be worthless, we have hyperinflation. Welcome to Argentina. Or worse, Wiemar Germany.

Here is the way I see it. The Federal Debt is too large, and we are running large deficits even though this is a time of relative prosperity. The bigger the debt and the deficit are, the smaller our margin for error and unforeseen events is. There could be a worldwide recession not caused by the United States. War is always a possibility. We did not foresee the collapse of the Soviet Union, or 9/11, we may not foresee the next war.

Risk of a truly catastrophic event, like the collapse of the Federal Government is asymmetrical. If it doesn't happen, we go on from day to day suffering the slings and arrows. Some people say that we should throw down the Federal Government because it is corrupt and oppressive. But, history suggests that such an event is far more likely to cause enormous chaos and suffering than to lead to a happy solution. Louis XVI called the Estates General because he was out of money. What followed should be a cautionary tale for us. I have already mentioned the Soviet Union and Wiemar Germany. Bad examples abound. Happy endings are rare.

Prudence suggests that this is a good time to get our financial house in order.

What follows are statements from pundits who have said good and prudent things about tax cuts. First Robert Samuelson from the liberal Washington Post:

Under-Taxed America
November 9, 2017
WASHINGTON -- We Americans are having the wrong debate. Almost all the arguing over the Trump administration's proposed tax cut centers on two issues. Will the tax reduction stimulate faster economic growth? And is the proposal too generous toward the wealthy and too stingy toward the middle class and poor?

Interesting questions, to be sure -- but mostly irrelevant to the nation's long-term well-being.

The truth is that we can't afford any tax reduction. We need higher, not lower, taxes. What we should be debating is the nature of new taxes ..., how quickly (or slowly) they should be introduced and how much prudent spending cuts could shrink the magnitude of tax increases.

To put this slightly differently: Americans are under-taxed. We are under-taxed not in some principled and philosophical sense that there is an ideal level of taxation that we haven't yet reached. We are under-taxed in a pragmatic and expedient way. For half a century, we haven't covered our spending with revenues from taxes.

Of course, there are times when borrowing (that is, budget deficits) is unavoidable and desirable. Wars. Economic downturns. National emergencies. But our addiction to debt extends well beyond these exceptions. We have run deficits with strong economies and weak, with low inflation and high, and with favorable and unfavorable productivity gains.

Since 1961 ... federal budgets have been in surplus in only five years. ...

Based on present policies, it's doubtful that things will get much better. Aging baby boomers are inflating Social Security and Medicare spending. ... the Congressional Budget Office projects that the budget deficit ($666 billion in 2017) will grow as a share of the economy.

* * *

The unspoken assumption that justifies big and continuous deficits is that -- rhetoric to the contrary -- they pose no serious danger to the economy. We can run deficits forever without suffering ill effects. ...

Excessive federal borrowing poses three theoretical dangers. First, it could raise interest rates and "crowd out" the private investment essential for higher living standards. Second, it could trigger a financial panic, if private investors would no longer buy Treasury securities except at exceptionally high interest rates. And finally, a large national debt could make it harder for the government to borrow heavily during a true crisis.

* * *

But that's not us. By now, it must be obvious: We are no longer responsible. The urgent need is to plug the huge gap between government spending and tax revenues. Naturally, we aren't doing that.

Next Robert VerBruggen from the conservative National Review:

Cutting Taxes with Borrowed Money: Will a growing debt eat away at economic growth?

November 9, 2017
* * *

The House GOP’s new tax bill would reduce revenue by almost $1.5 trillion over the next ten years, according to the Joint Committee on Taxation (JCT). ...

Normally, the argument against raising the deficit is put in simple terms — by whatever party is out of power, of course. Our debt is already about 77 percent of our GDP, a number that will rise to 91 percent by 2027 under current law and will only get worse from there. Realistically speaking, this is going to force a combination of tax increases and entitlement cuts at some point in the future, and the longer we wait, the more brutal those measures will have to be. Starting from such a precarious position, we have no business making our deficits even worse, whether by cutting taxes or by increasing spending. ...

But there’s an additional layer of complication to the debate over tax cuts funded through higher deficits, one amply illustrated in competing studies of the GOP tax plan from the Tax Foundation and the University of Pennsylvania’s Wharton School. The former says the plan would boost economic growth and create jobs, and that as a result we would lose significantly less than $1.5 trillion in revenue. The latter, by contrast, says the bill would have essentially no long-term effect on the economy.

* * *

We’ll start with the Tax Foundation. The organization predicts “3.6 percent higher GDP over the long term, 3.1 percent higher wages, and an additional 975,000 full-time equivalent jobs.” Furthermore, it projects that the “after-tax incomes of all taxpayers would increase by 4.4 percent in the long run,” a benefit fairly evenly distributed across the economic spectrum.

The group says the plan will reduce tax revenue by $1 trillion when economic growth is taken into account. Interestingly, without accounting for growth, it pegs the revenue loss at almost $2 trillion over a decade, higher than the estimate from the JCT. (The gap apparently stems from some differences in the data and assumptions the two groups use in their modeling.) This means the Tax Foundation foresees enough economic growth to create $1 trillion in federal revenue, and to cut the total revenue loss in half.

That huge gain doesn’t come from the reforms to the individual income tax. In fact, the Tax Foundation estimates those reforms’ effect on economic growth at zero. Instead, “the larger economy and higher wages are due chiefly to the significantly lower cost of capital under the proposal, which is mainly due to the lower corporate income tax rate.” The statutory corporate rate would fall from 35 percent to 20 percent under the plan, putting the U.S. roughly in line with the average for other developed countries.

... the CEA wrote, “by lowering the user cost of capital and making more investments profitable, multinational corporations and foreign capital can be attracted to invest in the U.S. economy.”

* * *

The Tax Foundation’s analysis is more or less what conservatives have had in mind when pushing “dynamic scoring,” as opposed to the old “static scoring”: Tax cuts benefit the economy, and a stronger economy means more tax revenue, so tax cuts “pay for themselves” to some significant degree (if not entirely).

But it turns out two can play at that game. The Penn Wharton study is dynamic, too, and its results are shockingly different. It finds that there would be some economic growth by 2027 -- but not much: GDP would be a whopping 0.33 to 0.83 percent bigger. ...

Why do the GOP’s tax cuts fail to boost the economy in Penn Wharton’s analysis? ... The simplest way to put the argument ... is this: When the government borrows money ... people will lend the government money that they otherwise would have invested in the American private sector. Thus the deficit “crowds out” private investment, counteracting the pro-investment effect of cutting the corporate tax.

This is hardly settled science. A Congressional Budget Office paper in 2014 rounded up the literature and reported a “high degree of uncertainty”: “For each dollar’s increase in the federal deficit, the effect on investment ranges from a decrease of 15 cents to a decrease of 50 cents, with a central estimate of a decrease of 33 cents.”

The Tax Foundation doesn’t even model this effect. “While past empirical work has found evidence of crowd-out, the estimated impact is usually small,” it contends in the new report. “Furthermore, global savings remain high, which may help explain why interest rates remain low despite rising budget deficits.” ...

Penn Wharton ... points out that “since the year 2000, foreign savers purchased about 40 percent of annual increases in Treasury security issues impelled by higher federal deficits” — implying the rest had to have come from U.S. savers, who most likely would have found other domestic investments otherwise.

* * *

First, even in the Tax Foundation’s more optimistic analysis, the bill would reduce federal revenue by $1 trillion over a decade. So Republicans should stop pretending that they won’t be making the debt significantly worse if they continue down this path. If they think it’s a good trade to hike the debt in exchange for (hopefully) boosting the economy, they should make their case openly.

07 July 2016

Gun Control

I’ve got a short piece. "Are Gun Control Laws Constitutional?," in the Washington Monthly's online edition. The URL is http://washingtonmonthly.com/2016/07/07/are-gun-control-laws-constitutional/

17 May 2016

Race Report

On Sunday, May 15, I rode in the Connecticut Masters Games 20 and 40 kilometer cycling races. I finished second in the 75-79 age group in both races. (I’m 74 now, but for these purposes, your age is your age on the last day of the year.)
The CT Masters Games are held every May, in a wide range of sports. For the last five years or more, the cycling races have been held in New Britain on a fairly flat 0.98 mile loop in Walnut Hill Park.
There are separate award for women and men for each 5-year age group from 40 up, although some of the groups race together. I raced with the 65+ men, and we started one minute after the 40+ women.
When I first did CT Masters way back in 2004, it was somewhat amateurish and the competition wasn’t all that stiff. It’s still amateurish (in the best way), but in the last few years the Games have developed some sort of affiliation with USA Cycling, the country’s main amateur cycling group. That, combined with the Games being open to non-CT residents, means that a better (than me) class of riders has been showing up. This year, the 70-74 group featured two national champions. As a result, I and quite a few other oldsters got dropped before the two-mile mark, something that’s never happened to me in past years.
I rode by myself for a few miles and then gradually picked up or was picked up by a few other stragglers, and we worked together, though not very well. For those of you who don’t know much about cycling, riders in a group can go much faster than a lone rider, and the bigger the group, the faster you can go. That’s because air resistance plays such a big role that the rider at the front ends up doing 20-30% work than the riders behind (though that 30% figure may only applies to professionals, who go really fast). Still, at any level, you go faster if you can rotate the lead. It was even more important yesterday, where the wind was averaging 19mph, with the only mild uphill on the course facing right into the blast.
Our own rotation was helter-skelter, with some riders contributing more than others, and the pulls being longer than optimal. Plus, at about 10 miles we got lapped by the women’s lead group, followed closely by the men’s leaders. (In the process some rather unladylike things were said to me for not getting out of the way fast enough.) The rule is that the women aren’t supposed to ride with the men and vice-versa, so our little group got split up and it took some time to reform.
The 20K and 40K races are run as a single race: Your time and placement are recorded at 20K (actually 12 laps, or 11.76 miles) and then you continue on to 40K (24 laps, or 23.52 miles). But everybody finishes on the same lap, so when we were lapped, our races became 11 and (if we didn’t get lapped again, which we didn’t) 23 laps. In the confusion I lost track of when our 20K race finished, and I never heard the bell that is rung to signal the start of the final lap, so I was never aware of the 20K finish.
There were never more than six in our group, but eventually that number got whittled down to three as riders fell off the pace. We also rode with two women who had been separated from their lead pack. We weren’t supposed to work with them, and didn’t for the most part, but they were there, yo-yoing as much as 25 yards behind or ahead.
I sprinted for the 40K line, finishing second in our troika. I didn’t know then what age groups my companions were in, but the guy who beat me was the 75-79 winner; the third 75-79 rider was a few minutes behind us. It turned out that all the 75-79 riders (there were four of us at the start) had been dropped more-or-less when I got dropped.
The results are posted here. I averaged 19.4 mph for the 20K and 19.2 for the 40K. This is about what I did last year, but somewhat slower than in prior years. On the other hand, I did a lot of pulling (which I never had to do in past years), and there was a lot of wind, so it wasn’t all that bad. I’ll get ‘em next year.

10 April 2016

Philosophy paper

I’ve just published a philosophy paper, “Relativism Defended,” in Cogent Arts & Humanities, an online journal. The URL is http://www.tandfonline.com/doi/full/10.1080/23311983.2016.1166685.
Here’s the “Public Interest Statement” (a Cogent requirement) for the article:
Relativism—the view that different people can have conflicting accurate representations of (i.e. beliefs about) the world—is a position with few friends in the philosophical establishment. But the argument for such relativism is straightforward, proceeding in easy steps from premises about human psychology that have widespread acceptance. Moreover, the standard arguments deployed against relativism—that it is internally inconsistent, that it doesn’t distinguish between accurate and inaccurate representations, or that it doesn’t allow us to question other people’s views—seem wrongheaded. Being a relativist does not mean that you get to believe whatever you like. Rather, relativism gives us a way to understand why we often don’t agree, and how we might resolve belief conflict.

19 January 2016

New article

I’ve just published a long (6,000+ words) article on media bias, “The Times and General Motors: What Went Wrong?”, in Cogent Arts & Humanities, an online journal. Here’s the public interest statement that Cogent requires authors to submit:
The New York Times’ coverage of General Motors’ recall of defective ignition switches in over 2.6 million cars was badly distorted. The reporters ignored the only detailed independent study of the problem, instead filling the vacuum with stories that reflected their own preconceptions. These biases are not unique to The Times or the particular story, but can be expected to warp media coverage of much organizational decision-making, especially where complex technical issues are involved.