See the amount of Federal Tax Refunds issued for the day and tell me this is not inefficient

Below is a small section of the US Treasury's daily report on various metrics.  It is a short document and has some pretty interesting numbers as they pertain to the operations of the Federal Government.  I urge you to check it out.

I was lead to it from this Wall Street Journal blog entry.

This section made me pause.  It shows on a daily, monthly and yearly basis the amount of refunds the Federal Govt sends back to businesses and individuals. Presumably this is because after filing tax forms these entities proved to the government they over-paid throughout the year in tax withholding.

You can see the numbers below.

Tax refunds issued for the day were $397 million; for the month-to-date is $5.474 billion; and for the year-to-date is $361.193 billion.

It is nice to get these checks, but wouldn't it be more efficient to not go in such a roundabout way to keep the money flowing in the first place?  Seems like a significant amount of Dead Weight Loss is created--all it is doing is moving money in a circle and creating significant transaction costs, i.e. time, tax preparation, bureaucracy to handle it, etc, ad nauseam.

A Consumption tax? A Flat Tax?  A Something Else Tax?  Just explicitly pay what you owe, no more and no less.

Maybe I am just having a bad day... :)

From US Teasury Daily Report.

More evidence the Federal government is a book-keeper and not a doer.

Here is some isolated data from the just released 2015 Budget Outlook by the White House.

Once again I find myself staring at numbers that demonstrate the Federal Government has become more of an entity that writes checks ("Transfer Payments") to people and less of one that "does things".

Below you see blocks of decades and a high lighted portion that shows transfer payments as a percent of ALL Federal government outlays for that last year of the decade (it is NOT an average for the decade).

Less of the budget spent on transfers, more available for "fun stuff" like defense, roads, bridges, education, space program, etc ad infinitum...sort of.

In 1950 we could spend 68% of the budget on all those fun things.  In 2014 we have only 30% to spend.

I am not saying this is a good thing or a bad thing, but it IS a thing.

I think most people don't give this much consideration on either side of the political spectrum when debates about the Federal budget take place.  Did I say "debates"?  Oh, I meant shouting matches. My bad.

One observation.  I do not know what happened in the 1950's that almost doubled private transfer payments (before dipping again in the 60's) but if I had to guess I would say it was a result of the GI Bill and the various benefits conferred on WWII vets.

Anyone else have any idea(s)???

A single mom with two kids will get a 39% pay increase if the minimum wage goes to $10.10, right? She will be the first one to tell you NO, not even close! See the numbers here.

Here is a table (I modified it a little) from The Economix that shows how an increase in the minimum wage from $7.25 to $10.10 per hour will affect different peoples NET INCOME. That is income after taxes are subtracted and benefits are added in.

Two things (at least 2) happen when your income increases: (1) the payroll taxes owed increases and (2) government benefits tend to decrease because they are "means tested". This means the amount a person receives depends on the level of income earned AND the benefit decreases as income increases.

I high-lighted the "Single Mother with Two Children" category because these families tend to have higher poverty rates than the other categories.  And we care about the poor, right?

The first table shows the minimum wage at its current level of $7.25. The wage earner would pay no income tax on that level of income, but pay $1,154 in mandatory payroll taxes (6.2% in Social Security and 1.45% in Medicare tax(es)).  They would receive tax credits (a "refundable tax credit") in the amounts of $5,460 and $1,812.  They would also be eligible for $2,898 in a food stamp (SNAP) benefit.

If you take the persons total income, subtract payroll taxes, then add in the tax credits and the SNAP benefit, their effective "take home pay" is $24,069.

Using this number we can calculate the "effective hourly wage rate" ($24,069/2,080 hours (40 hours per week times 52 weeks) or $11.57 per hour in wages/tax credits and benefits. Remember that number.

Source: Economix at The New York Times

But what happens to the single mother's effective wage rate when the minimum wage increases to $10.10 per hour (a 39% increase)?  Will here total compensation rise by that much?  See the 2nd table.

Wage income increases.  Payroll taxes increase (the more you earn, the more you pay).  Income tax at that level of income is still $0.  However, there are changes in the mix of tax credits and SNAP benefits. On net, those are LOWER than they were before.

When all totaled together NET INCOME is now $28,200.  Certainly higher than it was before, but how much higher? As much as the minimum wage increase, as I think most people would believe?

If we divide $28,200 by 2080 hours worked in a year we get an effective wage of $13.56.

If we compare the change AFTER we include all the relevant numbers we can see that the single mom with two kids is making $13.56 per hour instead of $11.57.

That is an increase of 17%.  Far cry from the 39% increase in the minimum wage.

So, when discussing the minimum wage and the magnitude of help it will give a single mother, we need to include more than the nominal increase in it.

It tells only half the story.  BUT a hardworking single mother will probably already be able to tell you that things are not always as they seem.

US Defense spending from Soup to Nuts. No, really, from soup to nuts...

From Mother Jones:  See more on defense spending at the link.

Soft drinks and Federal Food Assistance ("Food Stamps"). See here why Coca Cola is so interested in this relationship...

Just doing some reading and came across an article on Coca-Cola's lobbying effort to make sure soft drinks are not excluded from purchase under the SNAP program (formerly known as "food stamps).  SNAP stands for Supplemental Nutrition Assistance Program. 

I wondered why they would be so interested.

The lobbying group Science in the Public Interest estimates that $4 Billion of the $80 Billion allocated to the SNAP program (that's 5%)  is spent on carbonated soft drinks by recipients. This total does NOT include non-carbonated drinks like Monsters, Gatorade, etc, so the total on high sugar content drinks is likely significantly higher.

I was curious about how much this $4 Billion in transfer payments was as a percent of total soft drink sales.

In 2012 total soft drink sales were about $60 Billion, however that includes all outlets where soft drinks can be purchased such as restaurants, vending machines, sporting venues, grocery and convenience stores.

SNAP benefits cannot be used at all these locations. They can only be used at grocery and convenience stores primarily.  According to a WSJ article total sales in grocery stores and convenience stores are about $28.7 Billion of the $60 Billion.

$4 Billion as a percent of $28.7 Billion is 14% of total soft drink sales that are derived from the SNAP program.

NOW I know why they are so interested---that is substantial for the industry...and Coke.

Let the special interest money flow...

Creating poor incentives: "The Startling Rise of Disability in America"

National Public Radio (NPR) has a terrific article (and graphs!!) on the rise in the number of people receiving Federal Disability Compensation.  It is quite eye-opening.

Seems like this program has resulted in TONS of un-intended consequences.

People have an incentive to lie and they are enabled to do so by government and other self-interested parties (read the part about the "disability-industrial complex"). 

It creates a lack of respect for a well-intentioned program and causes the rest of the population to be more cynical about government than is necessary.    

"...The federal government spends more money each year on cash payments for disabled former  workers than it spends on food stamps and welfare combined. Yet people relying on disability payments are often overlooked in discussions of the social safety net.  

People on federal disability do not work. Yet because they are not technically part of the labor force, they are not counted among the unemployed.

In other words, people on disability don't show up in any of the places we usually look to see how the economy is doing. But the story of these programs -- who goes on them, and why, and what happens after that -- is, to a large extent, the story of the U.S. economy. It's the story not only of an aging workforce, but also of a hidden, increasingly expensive safety net...."  NPR. "Unfit for Work: The startling rise in disability in America"

I encourage you to read it.  It is important for understanding the citizen-to-government relationship and how a breakdown in this relationship (mainly a lack of respect) is very harmful to the nation.

My short, in simple terms, take on why Medicare will continue to cost more and be a bigger part of the Federal budget for many years to come.

My short, in simple terms, take on why Medicare will continue to cost more and be a bigger part of the Federal budget for many years to come.

Let's use a very simplistic example to illustrate.

Assume there are 100 retired people receiving $100 per year in Medicare benefits.  The total cost for Medicare is $10,000 for year 1.

Assume in Year 2 we add 10% more retirees.  Now we have 110 retirees receiving $100 (assume no increases in prices) in Medicare benefits.  The total cost for Medicare is $11,000 in Year 2. 

Assume in Year 3 we add 10% more retirees BUT we cut the amount we spend on Medicare payments by 5% (arbitrary number I choose). Now we have 121 retiress receiving $95 in Medicare benefits. The total cost for Medicare is $11,495.

We cut payments ("saved" money!), but the overall cost of the program increased.

While we may be able to slow the "per person" payments (cost) for Medicare, the overall cost of Medicare is going to INCREASE because of the sheer number of recipients moving into eligibility for the program.  We may be able slow the growth in cost ("bend the cost curve") relative to projections, but we will not be able to make it less expensive overall. 

That is the reality.  That is the budget challenge, it seems to me. 

Ezra Kline (Washington Post) has a post on this topic (where I got the idea) and has this paragraph that highlights the issue for me:

"...There’s a reason that policymakers prefer to talk about health-care costs than old people. If the problem is just rising costs, then perhaps there’s some cost control “silver buller” — maybe premium support, or paying for quality rather than service — that will cut costs without hurting anyone. But if the problem is more people, then the answer, really, is higher taxes, lower benefits, more debt or some combination of the three..." (emphasis/underline mine)

My simple explanation of what a "Tax Expenditure" is---this is a term you WILL hear more about in the coming weeks as we approach ANOTHER budget crisis.

My take on the difference between a Tax Expenditure and a Government Expenditure.  This stuff tends to hurt most peoples brains BUT the distinction matters because it is a BIG topic of discussion with Congress and the President as they attempt to tackle our Federal budget problem(s).

(When I refer to "Government" below, I am referring to the Legislative and Executive branches because they determine taxing and spending policy)

You earn $1,000 in income.  Government taxes that income at 10%.  You pay $100 in taxes. Government then spends that $100 on a program to promote clean air.  You are taxed and the government spends it--- a straight up "Direct Government Expenditure" towards a policy goal).

Alternative scenario.

You earn $1,000 income. Government taxes that income at 10% and you owe $100 in taxes. Assume at this moment the Government has your $100.  Instead of spending it directly on a program to promote clean air, government returns it to you in the form of a $100 tax credit for buying a hybrid car to promote clean air.  You have your $100 back to spend on something specific.

This is referred to Government spending (to accomplish a goal they COULD do themselves with the tax revenue) through the Tax Code---or more simply, a "TAX EXPENDITURE" 

A Government Expenditure is when government taxes you and spends the money directly to achieve a policy goal.

A Tax Expenditure is when the government forgoes the tax revenue it WOULD HAVE collected from you and though tax credits and/or deductions allows you to spend it on a specific thing to achieve a policy goal.

Below is a list of the most expensive and popular Tax Expenditures.  The numbers to the right represent the amount of tax revenue forgone by the Federal government because of the granting of various tax deductions and tax credits to achieve various policy goals. (number is "billions of dollars")

Source: Business Insider

My summary of the impending "Federal Budget Sequestration" in 9 sentences plus a "Have a good day!"!

The "Good News"---The actual amount that agencies need to cut THIS budget year amounts to approx $45Billion, about half the $85Billion we have heard so much about.  The $85Billion number we see bantied about includes cuts that can be delayed into future budget year(s).  I dont say this, the Congressional Budget Office says as much.  Such is the corrupt nature of Federal Budgeting/Accounting.

The "Bad News"---The cuts are "across the board"cuts.  In other words, ALL Federal Agencies affected (not all are) have to cut a few percentage points off ALL programs under their purview, regardless of the merits of the program. If one program is GREAT and very effective, then it has to cut the same percentage as a program that may be ineffective or redundant.  A more significant cut in one area cannot be made to subsidize no cut in another.  Such is the corrupt nature of the way the law was phrased.

Have a good day!!

If you spill milk after January 1st you will want to cry because it might cost as much as $8.00 a gallon. Congress does it to us AGAIN! This is a strange story you have to read to believe.

Caught up in the morass in Congress (House AND Senate) is the fate of the latest Farm Bill.  If it is not renewed on or before January 1st, the price of milk MAY dramatically increase as a result. (See HERE for more on this story).

This is the result of an archaic provision that says if the bill is NOT renewed in a timely manner then the formula for determining the prevailing "Price Floor" paid to dairy farmers will revert to calculating the price floor using 1949 (yes, you read that right) production costs.  Adjusted for inflation, that means the price floor is estimated to DOUBLE, hence doubling the price of milk overnight.

A price floor is used to help reduce individual farmers exposure to market price fluctuations that agricultural commodities are routinely subject to due to factors generally out of control of the farmer.  It guarantees, in advance, the farmer will receive a minimum price for their commodity if the bottom falls out of the market and the market price falls below production costs.  This has been farm policy in the US since the 1930's.

If the market price decreases (demand decreases, supply increases, or some combination of both) then the farmer receives the predetermined Price Floor price. The Price Floor in this case is said to be "Binding" on the market. The Price Floor price will become the de facto market price for everyone else.

If the market price increases (demand increases, supply decreases, or some combination of both) then the farmer receives the market price and not the Price Floor price.  The Price Floor is said to be "Non-Binding"on the market.  Farmers are receiving a market price HIGHER than the Price Floor. They are better off and don't need the Price Floor to fall back on.

The purpose of the Price Floor is to keep farmers from losing money in the short-run so they can stay in business.  It guarantees them a certain amount of income to meet expenses and hopefully break-even, at best, at the end of the harvest.

Here is the kicker: Right now the market price for milk is HIGHER than the Price Floor (dairy farmers are not unhappy at this point). The Price Floor is "Non-Binding". However, if the Farm Bill does not pass in a timely manner, the Price Floor is expected to increase significantly ABOVE the market price and the Federal Govt will pay the Price Floor price to farmers.  The Price Floor will become the new de facto market price everyone else pays.FOR NO OTHER REASON THAN THE INACTION OF THE HOUSE AND SENATE!

Below the fold, is my detailed explanation of how a Price Floor works. Complete with graphs!!! 

This is an important concept in Microeconomics, so I hope it helps with understanding how this particular government action described above affects a market.

Interesting graphic showing how someone earning $69,000 or $29,000 ends up with the same income (cash and non-cash) after taxes/benefits/subsidies are factored in/out. Enlightening regardless of your politics.

This chart has been bouncing around various blogs. I tried to find something to counter the points made here but could not find anything substantial. I made some edits, just to highlight reference points to make it clearer.

The chart suggests that a single mother (with 2 children and lives in Pennsylvania) earning a gross income of  $69,000 in a year ("D") would have a net income (after taxes and adding in any cash and non-cash benefits) of $57,327 ("C").

IF a different mother earned a gross income of $29,000 ("A") in a year, she would have a net income (after taxes and adding in any cash and non-cash benefits) of $57,045 ("B"). 

Their after tax/after benefits (cash and non-cash) would just about equalize their income.  The mother with the $69,000 income would be a net "loser" of $11,673 and the mother with an income of $29,000 would be a net "gainer" of tax dollars/subsidies of $28,045.


Source: Here

This is interesting BUT there is more!  If this data is correct and this is the system people operate under, there is a GLARING unintentional consequence here.  Can you see it?

Look at the income level and benefit level at point "B", $29,000.  This this mother earns $1.00 more what happens to her level of benefits overall?  Yikes, they decrease by much more than the extra dollar she earned from, perhaps, a raise or a promotion.  This is a significant penalty for someone who is just getting by. 

So, what happens to the incentive to earn more, and by implication to be more productive? Notice the same thing happens to someone when they reach the $45,000 income level. The next dollar earned is VERY costly. 

People trying to get by and do the best they can are going to respond to the real-life, immediate, incentives put in front of them. 

This does not appear to be a system that promotes self-sufficiency as people climb the income ladder. 

Maybe I am looking at it wrong.  What do you think?  Tell me where I am going off the rails.



A Tax To Die For...Here I briefly explain another "Fiscal Cliff" tax issue: The Estate ("Death") Tax...

One of the least talked about aspects of the "fiscal cliff" is the Estate Tax, sometimes referred to as the "Death Tax".  It is the Federal Tax owed on the value of a what someone leaves behind to their heirs.  Here is how it works, in its simplest terms.

See the graphic below (the left hand potion of the graphic) for the tax rate as it is now, as it might be if the "Bush Tax Cuts" expire and what the President would like it to be. 

You can see the tax rates expressed as a percentage and the amount that is EXEMPT from the tax in BOLD.  Any estate with an assessed value UNDER these threshold amounts would not be subject to the estate tax at all.

Example: at the "Current Policy" if an estate is valued at $6.12 million the first $5.12 million is exempt from taxation, but the Estate Tax would claim 35% of the remaining $1 million---$350,000 tax due.

Under Obama's Policy $2.62M ($6.12M - $3.5M) would  be subjected to a 45% tax = $1.18M tax due.

If Bush Taxes Expire $5.12M ($6.12 - $1M) would be subjected to a 55% tax = $2.82M tax due.

Source: Wall Street Journal

The circles on the right show how much in potential revenue each of these policies my bring into the Federal coffers (color coded to the info on the left) over a 10 year period (divide by 10 to get yearly tax revenue). 

One of the difficulties with this tax is that it can place the heirs of the deceased in a awkward and potentially damaging financial situation.

Refer to the  example I used above.  Assume this was your grandparents situation but ALL of the estates value was tied up in land and a nice house that sits on that land. Assume in their last will and testament they bequeathed it to you because they wanted it to stay in the family. 

Because all of the value is in a "non-cash" asset, YOU would have to come up with the $350,000 (OR the tax under the other alternative measures) to pay the Estate tax. OUCH!  If you could not pay the tax, then you would be forced to sell the property to pay the tax (or borrow it, I suppose)

I tend to think most estates in the US are this way---values are tied up in non-cash physical assets like houses and land and heirs struggle to maintain what they have been bequeathed. 

Whether that is right  or wrong, well, I don't know and never will.  I don't have any rich people in my family so this is an issue I can only write about and not actually experience.  :)

Federal Budget spending in stacks of $10,000 bills sitting on pallets. See the three towers of political gridlock right here. Here's your sign...

The 3 pillars of the Federal Budget illustrated here--Social Security, Health Care (primarily Medicare and Medicaid) and National Defense. The rest is commentary, in my opinion.

The stacks are composed of individual pallets with packets of $10,000 bills. Each pallet holds $100,000,000 (100 Million dollars).

The fastest growing of these is Health care.  This is the reason this should be THE topic of discussion in the Presidential election, for better or worse.

More great visulazations like the HERE.

Source: DemocracyInfo

Cartoon " Desert Island Recession"---See if you agree with the premise and conclusion...

The genesis of a recession.  I have a problem beginning with the frame "The Next Day".  How about you?

From Gocomics  Via Mike Norman

I think the President SHOULD have said "The Federal employment sector is doing just fine". Here is the proof in one easy graph...

Planet Money at NPR has been following the change in government jobs at the Federal, State and Local level since the beginning of the recession. 

Due to the first large stimulus package in 2008 that aided states in budget crisis, employment actually increased for State and local governments during the downturn.

As you can see from the graph below since the exhaustion of Federal stimulus local government employment has taken the biggest hit, losing over 400,000 jobs, followed by State level jobs at loss of about 100,000.

Federal employment has remained elevated ABOVE pre-recession levels.

You could say "Federal employment is doing fine". State and local not so much.

How does this compare to private sector jobs?

Looking this next graph you can see the magnitude of government job loss, in relative terms, pales in comparison to private sector job loss.  We still have a long way to go....

Entitlement Spending and Public Investment in 3 easy graphs. Hey, this is not a flashy subject but none more important...

The following sets of graphs illustrate the "Emperor has no clothes" in terms of the Federal Budget. Everyone knows the problem but no one does much about it.
Mandatory, or non-discretionary, Federal spending is concentrated in 3 major areas--Social Security, Medicare and Medicaid (and its subprograms). As illustrated in the first graph, these programs over time have steadily consumed a larger part of the Federal budget---approx. 47%!

Other parts of the budget consist of non-mandatory, or discretionary, spending.  Within this category you have "Investment Spending" by the Federal government. The following is a definition of Federal Investment from HERE:

"Federal investment is the portion of Federal spending intended to yield long-term benefits for the economy and the country. It promotes improved efficiency within Federal agencies, as well as growth in the national economy by increasing the overall stock of capital. Investment spending can take the form of direct Federal spending or of grants to State and local governments. It can be designated for physical capital, which creates a tangible asset that yields a stream of services over a period of years. It also can be for research and development, education, or training, all of which are intangible but still increase income in the future or provide other long-term benefits."

The graph below shows the decline over time of Federal Investment as a percentage of the Federal budget.  The implication is that there is significantly less funding for public works projects that confer benefits on everyone that the private market does not supply.

The last graph puts these two areas of the Federal budget together.  Budget dollars are not unlimited.  Over time, mandatory transfer payments to senior citizens and the poor have significantly surpassed non-mandatory public expenditures/investment in infrastructure. 

The Federal government does not do much of anything anymore in terms of physical public goods. They pretty much just write checks.  Think about that.

How do we address this issue? I dunno, I am just a high school economics teacher.  You will have to ask the Emperor and the Court Jesters we call the Executive and Legislative branches.

Was Romney right in saying we need fewer Fire Fighters? See the graphs/data here before yelling at me...

Here are a couple of graphs showing some interesting information regarding firemen (and women).

The first one shows the decrease in the number of fires since 1980 (the RED line and look at the left hand scale) of about 40% and the increase in the number of firefighters (BLUE line and look at the right hand scale) of about 40%.  We have many more firemen fighting fewer fires.

Source: Marginal Revolution

The second graph is pretty self-explanatory.  The left scale shows the number of calls to the fire department  for medical calls (BLUE line), actual fire calls (Solid RED line) and false alarms (dotted RED line). 

Source: Marginal Revolution

In most cities we have firehouses that support BOTH ambulance service and firefighting equipment/trucks.  The trend in the graphs seem to show we need fewer, expensive full service firehouses and more ambulance based houses with less capital requirements (trucks, etc) that would be less expensive. 

Having said this, I LOVE MY FIRE DEPARTMENT!! :)

UN calls for a billionaires tax to help the world's poor. Thought I would re-write the headline so it actually solves the problem...

Saw this headline on Yahoo!News: 

UN calls for 'billionaires tax' to help world's poor.

I thought this is what the headline should really be to actually produce some positive results:

"UN calls for 'billionaires tax'  government  reforms in under-developed countries to help world's poor become billionaires (or millionaires, thousand-aires, or whatever they would like to be)"

Just sayin'...

Nice population pyramid charts to remind us of the ticking fiscal timebomb awaiting the next generation. THIS is what the OWC's SHOULD be protesting...Go South protesters-- towards Capitol Hill...

Click on the video below to see the age-demographic change occurring in the US.  This is ground zero for a potential busted national budget in the coming decades.  Notice the shape of the pyramid in 1981, specifically the proportion of young working age adults to the retired population (65 and older).  It is a distinct triangle with a wide base and narrow top.  There are far more younger workers paying social security taxes and medicare taxes relative to the recipients, 65 and older.  This is ok---this entitlement program is solvent.

 As the decades pass, notice how the pyramid shape becomes more like a pear.  This is not so good.  The proportion of workers to retirees becomes more equal.  However, what does not become more equal is the tax revenue-to-tax expenditure ratio--expenditures will drastically increase relative to the tax revenues (at current payroll tax rates).  Retirees are living longer, there are more of them and their health care needs (read that "costs") will only increase. This is not ok---this will make these two retiree entitlement programs INSOLVENT, unless serious reform takes place--now.  Well, now is almost too late. Should have been done 15-20 years ago.

 Each of the graphs are below as well (Source for the Graphs HERE)

The problem with Social Security in one easy chart---too few "youngs" working for too many "olds"....

With all the political talk surrounding much needed reform of entitlement programs, mainly Social and Medicare, the graph below illustrates the heart of the problem.  These two programs are funded directly by payroll taxes levied on current workers wages (go HERE for a primer on these two taxes). Over the last 80 years, because of demographic changes in our population, there are fewer and fewer wage earners supporting an ever increasing number of retirees and other eligible recipients.

Strip away all the high flautin' political rhetoric on the issue you are left with this simple math---Workers must pay more in payroll taxes and/or we cut benefits to the "olds". 

Another option is we "grow" out of the problem---the economy recovers, we get back to full-employment and payroll tax revenues increase---that helps, but it does not reverse the numbers below.

Source: Carpe Diem