The Fourteenth Banker Blog

July 25, 2010

Facing Reality

Filed under: Running Commentary — thefourteenthbanker @ 4:03 PM

While I do not support all the points of view in this post, I do find it a pretty clear reality check and agree with the premise that we need a multi party system rather than our two party system. The revenue source and expenditure graphic at the start of the post is from official budget numbers and does not address the activities of the Fed, which will soon come to more light, or the shadow activities of the Treasury, which claims to have made a profit on TARP, no mention being made of the many banks that are not even paying their TARP Preferred Dividends. Who is trying to collect on those by the way? It smells of a propping up operation.  That is enough to tell you that the books are cooked. We do need truthful leaders to address real issues.

In my prior post I linked an article pointing out that multinational companies are not paying their share of taxes. In this linked post, the suggestion is make that Marijuana be legalized and taxed heavily. Illegal drug sales are just one part of an underground economy that does not pay its share of taxes. That puts the narco industry on par with Exxon Mobil. Neither pay their taxes. Not being a tax expert, I don’t know that a VAT is the best solution, but it is from a category of solutions that increase the tax base. That must be done. Hedge Fund managers, multinationals, drug pushers, cash intensive businesses, and general tax cheats are screwing the rest of the tax payers and primarily W-2 employees that are already squeezed. So let’s get a share from everyone by revamping the tax system.

I like John Hussman and agree with both these ideas:

John Hussman had a creative solution to help the housing market. He came up with this idea in October 2008. Of course, the Bush and Obama idiots would never consider such a logical solution:

  • Congress can efficiently mute the impact of the mortgage crisis on “Main Street” by allowing a small change in foreclosure law. Specifically, in foreclosure proceedings, judges should have the ability to reduce the amount of principal on a mortgage loan, provided that the original mortgage lender receives a “Property Appreciation Right” or “PAR” from the homeowner. The PAR would be an obligation to repay the mortgage lender out of future appreciation on the home (including property subsequently purchased, until the obligation was relieved). Payment would occur either when the home was sold, or through an equity-extraction refinancing at some later date. In that way, homeowners would surrender some amount of future appreciation in return for an equivalent reduction in the mortgage principal. This would result in an immediate lowering of mortgage payments, yet the original mortgage lender would still stand to be made whole. To account for time-value, the amount of the PAR obligation could be allowed to increase at a small rate of interest. The homeowner would be able to keep the house. Importantly, there would be no need to continue major write-downs on mortgage securities, since only the character of the payments, not the value of the mortgage obligation itself, would change.

And

John Hussman has a fantastic idea regarding Social Security. This idea would benefit the working class and stick it to the rich. ”Drop the rate substantially, but include all income – wage and non-wage. Three-quarters of Americans pay more in payroll taxes than in income taxes. By reducing the wedge between the hourly amount earned by employees and the hourly cost paid by employers, this strategy would create immediate incentives for employment. Moreover, it would raise more revenue because at present, even Warren Buffett only pays Social Security taxes on the first $106,800 of income.” This idea would be an immediate boost to the economy as the average worker would take home more pay. Revenue from Social Security would increase by $200 billion.

On this one we do need to calculate a break-even point of income and make sure that it is not a tax increase too far down the economic continuum. That Social Security is a savings program is simply a fraud. So while some years ago I would not have supported decoupling payments from individual taxes, now is the time to do that.

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6 Comments »

  1. It is very interesting to consider just OASDI as a savings plan/ pension system. Then consider just where the system is being raped by criminal practices, disconnected tax policy and disregard of the Full Employment Act of 1946, as amended.

    First, OASDI is separate legal trust fund of government that is consolidated with the USG Operating Fund. The OASDI Trust fund had a ” Surplus” invested entirely in loans to the USG Operating Fund of $2,503,612 millions at the end of 2009. The fund received income $807,007 millions and Paid out $669,686 millions in 2009 for a net asset growth onvested of $137,321 millions.

    http://www.ssa.gov/OACT/ProgData/fyOps.html

    First things first. Every Year the OASDI revenues are shorted , at least , $100 billion for OASDI alone for criminal evasion of payroll taxes under the guise of ” independent contractor arguements. Indeed, many employers of illegals and the destitute pay out in cash. They do not withhold personal OASDI or pay over the matching. As a Tax Manager, i was a responsible party for a very large union and office payroll. My job also included oversight on seeing to it that subcontractor’s were compliant with payroll law. Evasion in the right to work states, inparticular is simply awesome. At $100 bn a year since payroll tax compliance all but ended on the enforcement of Section 530 of the Revenue Act of 1978 around a decade ago, the OASDI Trust fund was shorted at least$ 1,0000,000 millions. Probably more. Talk to an honest employer who is unable to compete with these payroll tax cheats who also escape unemployment and workers comp insurance? They are heavily at a disadvantage and eventually join the ranks of the cheaters to survive. In the business I was in, our customers were big corporations and were ourselves very big too. The system built in recovery of these taxes into prices. So, the little guy cheats the little guy here, for the most part. My professional problem involved subcontractors that had a loss they could not cover raising the temptation to cease paying over their payroll taxes and being seized by the IRS. We tried to work it out to avoid flushing the subcontractor. Replacing a key subcontractor tens to collapse projects.

    Removing the SS cap on wages is long , long overdue. Doing so though would greatly expand abuses in the bonus system to avoid the tax. Naturally, one could tax all capital gains as payroll . But, you collect OASDI retirement payments based on the funds you pay in so a device would be required to allocate funds for retirement payments outside of direct contributions. A surcharge increase in benefits. Here would be another highly divisive of commonwealth issue.

    So, to me, it is obvious a hybrid system is created for revenue collection.

    Payrolls flee the United States to avoid payroll taxes. Notwithstanding WTO and other international agreements, a device will be needed to tax imported goods and services. A simple half OASDI imposed on imported goods at the border is about the best we could hope for. After all, there would be no payouts generated by the funds themselves.

    If we really want to kill off the US, make OASI needs justified. The Socialist nations of Europe understand that the taxes are paid because all will get them back later in general terms. That said, there must be an upper limit to retirement benefit payments.

    Note that the Operating Fund Deficit of the United Staytes Government would be 42.5 Trillion higher if the OASDI were consolidated.

    I deliberately leave out Medicare here. There is a huge, huge difference between OASDI and Medicare. OASDI has no servive system attached. They send out money once a month. It cannot be raped by service providers as Medicare is. OASDI is subject to employer rape. What about the Self Employed? In the late 1940’s, after the IRS understood the implications of withholding, the government deliberately had a revenue policy of discouraging self employment. Their initial major burning issue was the American family farmer. Who did cheat like hell and do I know it from personal experience. I had one grandpa that never filed a tax return and owned 1000 acres more or less.

    Self employment taxes, fully enforced, would increase the OASDI trust fund at least another $ 50 bn annually. I have a friend today who constantly complains how low his OASDI is? He was always self employed. For forty years or more he did everything he could to lower his self employment. Now he suffers. I graphed out his payouts to future receipts over the years and he only said . I will not live to collect or the government would be unable to pay.

    There are those that say the government will dishonor their debt to the Trust Funds. Such people do not realize that the state will have ceased to exist also.

    The deceit involved here is all pervasive.

    Comment by Jerry J — July 25, 2010 @ 5:14 PM | Reply

  2. OOps, the national deficit, if the OASDI surplus were not consolidated with the Operating Fund would be $2.5 trillion higher.

    Most people do not understand that consolidations are convienient fictions. The operating units included are separate legal entities.

    Just for fun. The United States is the United States, right? if so, why are the fifty states, the 2200 counties, all the cities and school districts not consolidated too? The result would obviously be unusable. Consolidating the Trust Funds is just a device to hide the real Operating Fund Deficit. The handiwork of LBJ to hide the operating fund deficits he was creating in 1967.

    Comment by Jerry J — July 25, 2010 @ 5:46 PM | Reply

    • SS and Medicare are the greatest Ponzi of all, because the funds were spent by USG and not reported in the operating deficit. That’s not so say it must totally collapse, there are other alternatives that require hard choices. But it was an accounting fraud endlessly repeated as convenient by politicians on both sides of the aisle. Some understood it and some were to stupid, blinded, or uneducated in financial matters to understand it.

      Comment by thefourteenthbanker — July 26, 2010 @ 7:51 AM | Reply

  3. “Congress can efficiently mute the impact of the mortgage crisis on “Main Street” by allowing a small change in foreclosure law. Specifically, in foreclosure proceedings, judges should have the ability to reduce the amount of principal on a mortgage loan, provided that the original mortgage lender receives a “Property Appreciation Right” or “PAR” from the homeowner.”

    Ya!…Sure!
    This is exactly the failure to pass a bill including this provision that made Senator Dick Durbin blurt this very candid observation about the financial sector: “Quite frankly, they own the place!” (that “place” being the Senate of the US of A)

    Those who endlessly railed about the “sanctity of contracts” (what a laughable talking point) to defeat the above mentioned provision never had the elementary decency to admit that business law ALLOW cram down of mortgages in foreclosure during bankruptcy proceedings.

    But hey! We can’t let individuals to have the same rights as corporations, can’t we?

    Comment by Dr. Frankie — July 25, 2010 @ 9:09 PM | Reply

  4. The graphic illustration in the Burning Platform linked in 14th Bankers piece shows up the old adage , not being polite anyway. Figures do not lie but liars do figure.

    Here is the 2008 Trustees summary piece about OASI, DI , HI and SMI operations in 2008. OASI is retirement. DI is Disability Payments under SS. HI is Medicare. SMI is Supplemental Medical Insurance recently put into effect. OK , all of the above took in $1,294,000 millions and paid out $1,101 ,000 millions for a net surplus of $193,000 millions.

    http://www.ssa.gov/OACT/TRSUM/index.html

    That means in the numbers of the consolidated graph presented in the Burning Platform piece should be adjusted for the surplus items in both receipts disbursements to arrive at the General fund receipts and payouts with some leftovers like the Highway Trust Fund left in. Now , we get to the factual situation where disbursements exceed revenues in the here and now. Where the bleeding is taking place right now .

    After doing this elementary bit of adjusting to the Burning Platform graphic presentation it is patently obvious that the big loser needing restructuring is military expenditures. Do what any big Wall Street Bank did. Fire the troops and cancel the military supplier contracts. Either that, or those people on whom we lavish our military efforts should be made to pay the cost. They used to do that by plunder in the good ol days. Empire must be made to pay or the Empire falls on it’s ass.

    Big business managers cut first what is bleeding now and that is not the still surplus investment trusts where you pay for what you get minus some political plundering . Collect the damn taxes already owed and largely criminally evaded and the OASI and DI funds will do fine for a considerable time. As for Medicare, eliminate legal liability for medical providers and substitute a penalty system to weed out the bad performers. Certainly, clean up the fraud. Make medicine no fault. Buy your own coverage if you get mutilated or knocked off by the medical system.

    THe Burning platform suggests paring Medicare. That is fine, but I would want a refund of ” premiums ” paid in plus interest for the fifty year period I paid in.
    This is fun, heh, heh.

    Consolidated numbers can hide all kinds of grifts.

    Just auditing and collecting 90 % of evaded payroll taxes under the independent contractor grift would increase the Trust Funds assets at least $800,0000 millions allowing the interest and penalties to stay in the operating funds. Of course, a few million smaller businesses would be gone. Of course this is impossible and every sharp little guy operator knows it too. These people, almost by acclamation, in their heart of hearts, believe they are preventing theft of their assets. That tells me there is a massive failure of a meeting of the minds in the US. The big boy’s buy the government. The little boys simply achieve the same result their way. Then we have organized crime apart from and in addition to all these good little people avoiding being stolen from.

    It is very interesting to see these business operators personally taking checks from customers to the banks to cash them. Very common in many service operations. They also discount for cash.

    The moron is the person who works to get a W-2. Or heaven forfend a 1099 for services rendered. I watched over a vast 1099 system that is utterly moronic .

    The liar aspect is that people shift attention to what might be a serious wound in the future to shift attention from the severed artery spurting blood right now.

    Comment by Jerry J — July 25, 2010 @ 11:20 PM | Reply

  5. It would be nice to have a two-party system. Right now we have the conservative party and the insane party.

    Croak!

    Comment by The Raven — July 26, 2010 @ 1:14 AM | Reply


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