Tuesday, August 16, 2022

Three-card monte and the family making $400,000 per year

Three-card monte is a confidence game in which victims are tricked into betting on the assumption that they can find the money card (often the Queen of Hearts) among three face-down playing cards. After the victim places their bet, the con artist shows that the money card is one of those three, turns all the cards over, and shuffles them around. The victim tries to focus their attention on the money card, not realizing that through a sleight of hand, the con artist moved the money card, and the victim cannot win.

Once again, Democrats and Republicans are arguing about taxes. The current argument is whether the Inflation Reduction Act’s apportionment for the IRS to add 87,000 agents will result in higher audit rates for “working-class families.” The GOP wants to characterize families making up to $400,000 as working class.

 Let’s leave the issue of what constitutes a working-class family to the side and look at the games the GOP plays with this definition. Idaho’s senior Senator, Mike Crapo (R), offered an amendment to the Democrat’s Inflation Reduction Act. In his press release, he says the amendment “would prevent the IRS from using its massive, $80 billion cash infusion on enforcement actions designed to squeeze more revenue out of American taxpayers who earn less than $400,000 per year.” The amendment failed, and now the GOP is saying that this proves that Democrats are lying when they say they don’t want to raise your taxes.

 Sen Crapo’s amendment is less than 40 words. It reads –

 “At the end of section 10301, add the following: (c) LIMITATIONS RELATED TO THE INTERNAL REVENUE SERVICE. – None of the funds appropriated under subsection (a)(1) may be used to audit the taxpayers with taxable incomes below $400,000.”

It seems pretty straightforward. If Democrats really don’t want the IRS auditing working-class families, why aren’t they willing to put it in writing? But like all things involving the law, words matter. In this case, one word matters. That word is “taxable” in the phrase “taxable incomes below $400,000.”

Anyone who’s ever filed a tax return knows you don’t pay taxes on what you earn. Rather, you adjust your gross income by deductions and credits to obtain your taxable income. It’s common for very high net worth individuals to have zero taxable income, even though they’ve earned a lot of money in a given year.  

Take Donald Trump, for example. In 2020, copies of his 2017 tax returns were published by The NY Times. They show that in 2017, Trump earned $373,629 in wages, $6,758,494 in taxable interest, $21,984 in ordinary dividends, $7,562,038 in capital gains, and $84,351 in pension payments for a total of $14,800,496 in gross income.

 Against this amount, Trump claimed $15,313,785 in business losses and $12,306,111 in loss carry forwards from prior years for a total of $27,619,896 in losses. This made his 2017 taxable income a negative $12,819,400. Even if we assume that Donald Trump filed a completely honest and proper tax return, under Sen Crapo’s $400,000 taxable income threshold, Donald would be a working-class family man protected from an audit.

In 1987, the IRS first required taxpayers to provide the social security number of any dependents they claimed. Before that, a taxpayer simply wrote a dependent's name on the form. Starting in 1987, the SSN would be matched against the social security database to ensure that fictitious social security numbers weren’t used and/or that the same number wasn’t used twice. The number of dependents fell by 7 million between 1986 and 1987. Did 7 million people suddenly disappear? Of course not. Taxpayers were cheating on their taxes.

Having started my career at Arthur Andersen’s International Tax Consulting Group, I know a little bit about taxes and how to minimize taxable income. An entire industry exists solely to reduce someone’s taxable income. Read the Wikipedia entries for BLIPS, SOS shelters, or Son of BOSS. All those are names for just one group of structures widely marketed by tax professionals to reduce taxable income. All these structures were eventually ruled illegal by the IRS. But the only way the IRS discovers that someone is using these structures is to audit them.

So when Mike Crapo and his colleagues tell you they want to protect working families, don’t fall for the con. Through his amendment, the GOP wanted to ensure that the richest of the rich, those individuals that can afford $1,000/hour plus attorneys and accountants to save them money by stretching what was permissible under the Internal Revenue Code, never get audited.

The GOP is using the $400,000 figure like the Queen of Hearts and wants you to focus all your attention on that. Then maybe you won’t realize that you’re the mark and you’ve been swindled because you’ll be paying taxes while the richest of the rich don’t.

If the GOP really wanted to help “regular” taxpayers, they would have changed “taxable” to “gross” income. That way, real working families wouldn’t be subject to increased audits, but the rich like Sen. Mitt Romney and Donald Trump would.  Mike Crapo is a Harvard-educated lawyer. He understands the significance of the change. He’s not stupid; he just assumes you are

Friday, July 29, 2022

The Measure by Which You Measure…

 For as you judge, so will you be judged, and the measure with which you measure will be measured out to you. 

- Matthew 7:2


In response to my post yesterday about GDP, someone asked if I thought it was appropriate to credit Biden for the 2021 GDP growth rate of 5.7% because that was achieved based on policies and legislation established before he took office. I believe it’s a fair question and will address it in this post.


First, I think every President gets too much credit when things go right in the economy and gets too much blame when things go poorly. That’s just the nature of the politics. Second, I agree that it is often difficult to precisely measure the impact of any single action, Presidential or otherwise is on the aggregate economy, particularly when it is evaluated by just one figure like aggregate GDP. GDP is just one figure in the overall economy and can be improperly interpreted if not analyzed in the context of the overall picture.


That being said, I think an honest discussion of the issue requires an equal measuring stick. As the person acknowledged in his original message to me, Trump took credit for the economy from the moment he took office. I’d point out that he often took credit for economic performance from before he took office (citing stock market performance from the date of his election in early November 2016 rather than his inauguration in mid-January 2017) to highlight how great the economy was (I don’t think the economy and the stock market are the same thing the way he does). Of course he inherited a fantastic economy. But history also shows us that the rate of economic growth slowed during his presidency (even before Covid). So I guess the answer depends on the perspective. 


Democrats love to point out that Bill Clinton had four years of balanced budgets (actually he even had small surpluses). But what they don’t like to mention is that the balancing was a direct result of the revenue generated when George H.W. Bush’s broke his “read my lips, no new taxes” 1988 RNC convention pledge. Bush Sr raised taxes in the Omnibus Budget Reconciliation Act of 1990 and that ended up costing him the 1992 general election when he was first attacked in the primaries and then had his electoral base splintered with Perot in the mix. Even Bill Clinton used Bush‘s broken pledge to call into question his integrity.


Likewise, Obama both gets blamed (by Republicans) and gets credit (by Democrats) for TARP and the bank bailouts which were part of the Economic Stabilization Act of 2008 signed by George W. Bush in October 2008 but not fully implemented until after he left office. That blame directly led to the rise of the Tea Party in the 2010 election. At the same time, Democrats hold out the bailout as a massive accomplishment and an illustration of how the Obama administration saved the global banking system when the heavy lifting was in fact done by the Bush administration and the 110th Congress.


But let’s imagine that Obama didn’t implement TARP as enacted by Congress. A tremendous amount of governing gets done by executive branch action both by regulation and by determining who leads an agency and therefore the policies it adopts. If that happened and the 2008 financial crisis worsened instead of improved, would that be Bush or Obama’s fault? 


So does Biden deserve credit for every bit of the 5.7% economic growth? Personally, I don’t think so. But if the MAGA crowd is going to point to Trump and say, “look at what a great job he did on the economy” and take credit for everything from January 20, 2017, then that’s the same measure I’ll use when speaking about Biden.


Given that Trump’s 1.6% economic growth was the worse since records began and we know that growth was slowing, I’m perfectly fine saying that Trump’s performance should be measured using 2008-2022 figures. But the equal measuring stick then means that Trump then bears the responsibility for the inflation figures for that same time frame. 


We can’t use one measuring stick for Republican Administrations and another for evaluating Democrats. 



D(ebt) is what converts the GOP in to GDP

Social media is abuzz with stories of how today’s GDP report proves we are now in a recession. And while an “official” recession is technically determined by a panel of economists (something that usually happens well after the recession has ended), the common understanding of a recession is two consecutive quarters of negative economic growth – which is exactly what we’ve just experienced.


But what do all these words means?


The most common method of calculating GDP is the “expenditure approach.” This adds the total amount spent by private consumers for goods and services, the total amount spent by governments (both federal and local), the total amount of investments made (in equipment, inventories and housing), and the net exports in a given period of time (typically a quarter or a year). 


You might want to note two things: (1) the more the government spends, the higher the GDP and (2) government debt doesn’t show up anywhere in the formula. Therefore, GDP increases as long as the government is spending money, even if it is money it doesn’t have. 


One of the common cries of Republicans is that we have to bring the size of government back under control. Currently, direct government expenditures make up about 17.3% of our GDP.


Joe Biden has now been President for five full economic quarters. Government expenditures have fallen each of those quarters (from 2021Q2 through 2022Q2). In contrast, government expenditures rose each year during Trump’s presidency and the federal debt ballooned. Trump added more debt in 4 years than any other President in our history.


So when a Republican points out how “great” the economy was under Trump, remind them that GDP growth during his term was an annualized 1.6% (the lowest of any President since Herbert Hoover [think 1929 and the Great Depression]), and that a large portion of that was generated by a federal government spending money it didn’t have. The Trump administration grew the size of government and left us the bill. In contrast, the GDP grew 5.7% in Biden’s first year. 


Now don’t get me wrong, the economy has slowed and the GDP report shows decrease in goods and investments. But if the Biden Administration had continued the fiscally irresponsible, grow the federal government through ever increasing deficits policies that Trump advocated, Joe wouldn’t have ended up with two consecutive quarters of GDP contraction.


[Oh, and before anyone screams “but inflation.” All my data is based on real (not nominal) dollars using the 2012 base used by the Bureau of Economic Analysis, the agency that issued this morning’s GDP report.]