Category Archives: Federal Budget

Minimum Corporate Taxes

One of the ideas floating in diplomatic circles and in Congress is the concept of minimum corporate income taxes.  To understand what is being discussed, it is important to understand some basics of corporate law and income tax law as it applies to businesses.

Corporations come in all shapes and sizes.  They range from small charities to your local independent grocery store to big multi-nationals.  What they all share in common derives from the basic concept of the corporate structure — that the corporation is an independent legal person.  This basic concept allows people to become “owners” of the corporation — either shareholders who make money from the profits in a for-profit organization or as members who merely support and have a vote in electing the governing body in not-for-profit organizations.  The key thing for both is that, unless you participate in the management and do something that makes you personally liable, a person suing the corporation for corporate acts can only recover from the assets of the corporation and may not collect any judgment from the owners of the corporation.  This differs from a partnership (an unincorporated business with multiple owners) in which a claimant can go after the personal property of all of the partners or a sole proprietorship (an unincorporated business with only one owner) in which a claimant can go after the personal property of the sole owner.

One key thing about corporations is that they can have a single owner or multiple owners.   Thus, it is possible to have a parent company which is the sole owner of separate “subsidiaries.”  Putting it in a little more benign situation, think of a regional grocery company.   The regional company is the parent company.  But each of the grocery stores is its own corporation wholly owned by the regional company.  That way, if problems occur at one store, it does not bring down the entire chain of stores. Continue Reading...

Tagged | Comments Off on Minimum Corporate Taxes

Appropriations and Executive Orders

When President Obama was in office, we heard a lot from Republicans about how President Obama was usurping the power of Congress to write laws.  Since President Trump has been in office, despite President Trump going much further than President Obama ever did, the Republicans have been noticeably unwilling to do anything to oppose this practice of legislating by executive order.  The most recent invasion of congressional authority was the President’s decision that he could ignore the line items in appropriations bills because he wants more money for border wall construction than Congress was willing to appropriate.

Over 50 years ago, in Youngstown Steel vs. Sawyer, a case involving the temporary seizure of a steel mill at the start of the Korean War (i.e. a real emergency), the United States Supreme Court found that the seizure exceeded executive authority.  At that time Justice Robert Jackson (one of the leading conservative justices of the mid-20th Century) wrote a concurrence that recognized three potential situations which had different implications for presidential authority.  First, the president was acting with maximum authority if there was a congressional statute granting him that authority.  Second, the president was in a middle zone when Congress had taken no action.  In other words, while such a president would be relying on his constitutional authority, there was at least no law barring the action.  Finally, there was the circumstance in which there was a contrary statute barring the President’s action.  In such a case, a court could only allow the president to act if the president had independent constitutional authority and Congress lacked the authority to limit the president’s actions.

In the current circumstance, the debate will be over whether President Trump’s actions fall into category one (authorized by Congress) or category three (barred by Congress).  The President will be relying on the law governing declarations of national emergencies.  As part of that law, the President is authorized to engage in construction to support the use of the military in responding to such an emergency.  While the statute does not define national emergency, the past use of that power has usually been in the case of a military crisis or a national disaster.  Additionally, the authorization for construction to support the military is implicitly for support facilities (e.g. housing, etc.) not for construction of permanent structures intended for civilian use. Continue Reading...

Also posted in House of Representatives, Judicial, Senate | Tagged , , | Comments Off on Appropriations and Executive Orders

Tax Cuts vs. Tax Reform

The Republicans have set themselves the goal of passing tax legislation by the end of the year.  They took a major step by passing a budget resolution this past week which authorized tax legislation as long as that legislation had a net cost of less than 1.5 TRILLION over the next decade.  As such, as long as the CBO scores any legislation as complying with that cap, it is exempt from a filibuster.

That cap reflects a significant part of the current debate inside the Republican party — do they want a tax cut (reducing the overall tax burden) or tax reform (a revenue-neutral rewrite of the tax law).  This debate will be significant because the Republican approach is that those who make the most money pay the most taxes and therefore should get the most relief.  Thus, their proposals will be very top heavy on who gets the relief and the deductions most at risk will be those that benefit the middle class.

First, some Taxes 101 to set the background.  Both at the corporate level and at the personal level, calculating taxes begins with defining income.  Then there are certain authorized deductions from income that lead to a smaller income that qualifies as “taxable income.”  There are then income brackets in which you pay x% for the first $Y amount of income, than pay a slightly higher rate on the additional income above that amount (and just that additional income).  (E.g., If the top tax bracket is 40% and kicks it at $500,000, the taxpayer is only paying 40% on the income above $500,000 — so on an income of $700,000 that 40% only applies to the last $200,000 of income and the first $500,000 is taxed at a lower rate. )  After taxes are computed, the taxes can be reduced by tax credits.

For personal income tax, there are three basic types of “deductions”:  1) exemptions (a per person deduction); 2) the “standardized deduction” (a set default amount per person); and 3) “itemized deductions” (for those with enough deductions who would rather total up all of their deductions rather than using the standardized deduction).  To compensate for abuse of tax loopholes by the wealthy, there is also something called the alternative minimum tax (an alternative calculation of taxes that effectively limits the available deductions).

On the tax reform/tax simplification side of the Republican debate, the goal is to reduce the number of brackets, reduce the tax rates, and eliminate deductions.  (At its most extreme, you have the proponents of a flat tax — one rate, no deductions, no credits).  The asserted goal of some in this part of the debate is to make taxes simple enough to do on a postcard.  The key point is that, for those who want tax reform, cuts in the tax rates have to be offset by eliminating or reducing deductions and credits.

On the tax cut side, there is limited interest in simplifying the tax code.  Deductions are on the table only to the extent that the proposed tax cuts exceed the cap in the budget resolution.

The ultimate problem is that, as briefly noted, the Republicans are not really interested in a middle class tax cut.  It would be easy to draft a fair middle class tax cut — reduce the bottom two rates, increase the exemption.  Everybody benefits, and the total benefit is roughly the same in dollar amounts for both the billionaire and the person who sweeps the factory floor.  But that is not what is being discussed.  While we have not yet seen any actual bill, some of the proposed ideas make clear that the goal is to raise taxes on the middle class to cut them on the wealthy.

One idea is to double the standardized deduction.  By itself, that would not be a bad idea, but it is coupled with a proposal to eliminate the personal exemptions.  Since the exemption is about two-thirds of the standardized deduction, double the standardized deduction for a married couple is roughly equal to the current standardized deduction plus the personal exemptions for a married couple with one child.  If you have two children, you would actually be worse off under the new proposal.  Additionally, doubling the standardized deduction means that fewer will benefit from itemizing, thereby making it easier to go after some of the individual deductions such as the deductions for interest and property taxes for homeowners or for state and local income taxes.  (Even for some with one child or no children, their current itemized deduction plus the personal exemptions would exceed double the standardized deduction.)  Finally, under current law, the exemptions begin to phase out at around $250,000 of income ($310,000 for married couples).  So losing the exemption impacts middle class taxpayers but not the wealthy.

Another proposal that is floating around is to eliminate the tax deduction for contributions to some types of retirement plans.   For now, the potential targets seem to be plans that make current contributions tax deductible (but tax withdrawals during retirement).  On the other hand, Roth IRAs (in which you pay taxes now but all growth is tax-free) seem to be off the table.  Since, for middle class taxpayers, the current deduction (and exemptions for employer contributions) is necessary to make saving for retirement affordable (and there may not be enough retirement income to make taxes during retirement an issue), the deduction for current contributions is important.  On the other hand, a Roth IRA is beneficial to those who have a lot of potential retirement income and can afford to contribute to a retirement plan even if those contributions are not tax deductible.

On the other hand, while the final brackets have not yet been announced, it is pretty clear that the top rates will be reduced.  In addition, there are proposals to eliminate the alternative minimum tax which assures that even the Trump family has to pay some taxes even if it is not their fair share.  And, for those who make money from investments, there are proposals to treat capital gains even more favorably than they are under current law and to continue or expand the current favorable treatment of carried interest for the partners in investment firms.  (Of course, if you really wanted to simplify taxes, all income would be treated the same — whether earned income or income from investment.  While there are colorable arguments for some form of favorable treatment for investment income, by definition treating income from investments favorably does benefit those with the wealth to invest some of their money and requires those who do not have income to spare for investment to take a greater share of the tax burden.)

Additionally, while not part of income taxes, Republican seem to be wanting to take another run at repealing the estate (“greedy heir”) tax.  Notwithstanding Republican rhetoric, the current law on estate taxes guarantees that, when most people die, their estates are not subject to estate taxes.  Instead, it only applies to the wealthiest of families.  While for some closely-held large corporations and sole proprietorships, it theoretically might be necessary to borrow money to pay estate taxes, there is little or no evidence that estate taxes have forced the sale of a business or some of the business assets.  But the law does mean that — after having the benefit of wealthy parents paying for the best schools and either hiring them into the family business or otherwise helping them get started in business — that children and grandchildren have to give some of the family wealth back rather than simply accumulating wealth from generation to generation like some ancient aristocracy.

In short, any “reform” in the tax cut is likely to make middle class taxpayers actually pay more in taxes while having little impact on the tax burden of the wealthy.  Meanwhile the “cut” part in any tax reform/tax cut is likely to substantially reduce the tax burden on the wealthy (and particularly on those like President Trump).  Of course, we do not know how much any of these proposals will benefit President Trump because he still has not released his tax returns.

The good news, of course, is that taxes are complex.  And the more that the Republicans want to cut the top rate, the more they will need to find offsets.  And most of the deductions and credits in the tax code are there because somebody strongly benefits from them — charities like the charitable deduction, the child care industry likes the child care tax credit, state and local government like the deductibility of state and local taxes, the real estate and construction industry like the deductibility of interest payments on homes and other real estate, business like the deduction for capital investments, etc.

When a draft bill is actually introduced, it will generate opposition.  At some point, if there is enough time, that opposition will place a brake on any attempt to get things done quickly.  Of course, the Republicans have been drafting behind closed doors and deviating from normal procedure (the 1986 tax reform bill took about eighteen months from start to finish) is to make sure that the opposition to the bill does not have enough time to make the bill toxic.  Simply put, the Republican majority needs some major legislation passed to show that they can govern.  They would like to be able to tell their base that they passed a large tax cut (with the hope that the base will not realize until after the election that the tax cut actually increased their taxes).  And they would like to deliver to their donors a bill that fulfills the wish list of the Republican donor class.  If the process takes longer than five or six weeks, it will become clear that the draft bill is simply a Frankenstein monster that does not match the public statements of Republican leaders.

Also posted in Economy, Politics | Tagged , , , , | Comments Off on Tax Cuts vs. Tax Reform

Budget 101

On Tuesday, Congress returns from their August “District Work Period” — a/k/a Summer Vacation.    Normally, September in Congress is about appropriations bills, but this year September is going to be even more hectic due to the U.S. nearing its debt ceiling and other budget issues.  To explain this year’s mess, a little budget 101.

Like the typical household budget, the government’s budget consists of revenue/income and expenditures/spending.  However, the government’s revenue consists mostly of taxes.  While a handful of taxes have sunset provisions (i.e. they expire at a certain point in time unless Congress passes a new law extending them), most taxes are permanent (i.e. it takes a new law to change the tax).  But how much revenue is raised by a given tax in a given year depends upon multiple circumstances (how many people with large estates die, how the economy is doing, how much of certain goods are imported).  So for budgeting purposes, revenue is always an estimate.

Similar, on the expenditure side, there are “mandatory” expenses (think the equivalent of mortgage and car payments) and “discretionary” expenditure (think groceries, you have to spend something but you can decide whether to go store brands or name brands depending upon how your finances are).   On the mandatory side, for the government are interest payments and what is commonly called entitlements.  Entitlements have gotten a bad name from conservative spinmeisters, but the term is a legal term reflecting that, if somebody meets the legal criteria for a particular program, they have a legally enforceable right to receive the payments from that program whether that program is Social Security, unemployment compensation, or Medicaid.  The discretionary side on the hand is most federal agencies.  Representing about 25-33% of total spending, Congress has to annually appropriate the money for these agencies (ranging from the military to the national endowment for the arts).

Before the early 1900s, the U.S. government functioned like most families in terms of its ability to borrow.  If the government made the decision to purchase something (i.e. passed an appropriations bill) and needed more money to pay the bills, it would simply borrow the money.  The right to borrow if necessary was contained in the appropriations bill.  In 1917, in connection with World War I, the United States, however, enacted a debt ceiling, a limit on what can be borrowed by the federal government.  Since then, that debt ceiling has been gradually increased, but every so often the U.S. bumps against the limit.

There are two significant ways that the federal government differs from the typical family that causes problems for the debt ceiling.  The first is what is commonly referred to as “trust funds.”  Several programs (with Social Security being the largest) have their own dedicated revenue source.  In many years, these programs take in more revenue than they spend.  Looking at the overall “unified” budget, those program surpluses make the total budget picture look better (larger surplus or smaller deficit).  However, the way that surpluses in these trust funds are handled is that the government borrows that surplus (issuing bonds to the trust funds).  These bonds to the trust funds count against the debt ceiling.    (Where a family borrowing against the money set aside for vacation to pay to replace the furnace would not count as additional debt for the family.)

The second problem is who holds the debt and how it is repaid.  Unlike the typical family, larger business and governments do not take out loans from a bank.  Instead, they issue bonds.  On a typical private loan (e.g., a mortgage), each month’s payment includes an interest payment and some additional money to reduce the principal.  On bonds, the debtor makes a periodic interest payment but the principal is paid as a lump sum when the bond “matures.”  And because, when bonds are issued, they are sold to multiple people, the debtor can’t just ask for an extension on the payment of the principal.  Thus, assuming that the government does not just have a spare $200 billion lying around, the government must first issue new bonds — borrowing from Sarah and Jane and thereby increasing its total debt — in order to make the payment that is due on the old bonds — eliminating the debt to Peter and Paul and reducing the total debt.  Thus, when the U.S. reaches its debt ceiling, failure to increase the debt ceiling forces the government to miss its legally required payment on its old debt.  The interest that the U.S. pays on its current debt in large part reflects the fact that bond purchasers believe that purchasing the government’s bonds is largely risk free — given the U.S. history of making its payments in full and on time.  If the U.S. starts to miss those payments due to an inability to increase the debt ceiling, the U.S. would almost certainly face a higher interest rate which (since interest payments are part of the annual expenditures of the U.S. government) would increase the deficit and require the government to borrow even more.

Because increasing the debt ceiling requires a new bill amending the law governing the debt ceiling, this process can become very political.  In the perfect world, in which everybody got along and did the right thing, the debt ceiling bill would be a “clean” bill (i.e. just altered the debt ceiling).  However, because ultimately the debt ceiling bill must pass, members of Congress and Presidents see an opportunity to force their proposal on other matter onto the bill — conditioning their vote in favor of the debt ceiling bill on their pet idea being included (whether that is increased — or decreased — funding for a particular program or a policy change).

Because of the way finances have worked out and the amount of the last debt ceiling increase, the debt ceiling is being approached at the exact same time as the annual appropriations process is nearing its deadline.  As noted above, Congress must pass annual appropriations bills for the discretionary expenditures.  In 1976, Congress moved the start of the annual fiscal year from July 1 to October 1.

In theory, the U.S. has a neat and organized budget process.  In early February, the President submits a proposed budget to Congress.  Congress gives those proposals serious consideration and, sometime around June, the House and the Senate come to an agreement and pass a budget resolution.  Congress then uses that budget resolution to draft the appropriations bills for the various departments (currently, there are twelve bills with some bills covering multiple departments) and agencies.  Those bills pass one by one with the last bill passing with time to spare before October 1.

The reality does not match the theory.  While the President’s proposed budget is somewhat considered by the two budget committees, they mostly draft their own budget resolution.  More importantly,  Congress does not manage to pass a budget resolution every fiscal year.  Finally, Congress does not complete the appropriations process on time.  Instead, at the end of every September, Congress plays chicken with shutting down the federal government (since without an appropriations bill for a department, the government can’t pay the people who work in that department to come to work on October 1) before ultimately passing, maybe a day or two later, a continuing appropriations bill that funds whatever departments still need an appropriations bill for a period of time to allow Congress to finish work on the bills for those departments.  (And in most years, after two or three continuing appropriations bills, Congress will pass an “omnibus” or consolidated appropriations bills covering the remaining departments.

This year, if I am reading the appropriations page correctly, with four weeks left to go, only the House has passed a budget resolution.  The House has also passed its version of the Defense appropriations bill.  The House Appropriations Committee has apparently sent five of the other eleven bills to the floor.  However, on the Senate side, the budget resolution and all twelve appropriations bills are still in committee.  As with the debt ceiling bill, the need to pass a continuing appropriations bill by the end of September invites gamesmanship with the President and both parties in Congress trying to get their own policy proposals added to and incorporated into whatever finally passes.

Tossed on top of the appropriations process is the impact of Hurricane Harvey.  For whatever reason, Congress almost always appropriates the minimum that FEMA needs for each fiscal year.  In many years, and this year is no exception, a major natural disaster occurs that literally swamps that appropriation requiring a supplemental appropriation.  While the ultra-conservatives squawk about the supplemental appropriation — at least when the disaster is not in their backyard — the appropriation ultimately passes.  The need for a large supplemental appropriation (and continued funding through Fiscal Year 2018) to deal with Hurricane Harvey will certainly impact some other proposed expenditures (like a swiss cheese border wall).

The budget resolution adds another wrinkle to the process because of Senate rules, specifically the “Byrd Rule.”  Under the Byrd Rule, if Congress passes a budget resolution, the Senate can bring to the floor one “reconciliation” bill per budget resolution that contains statutory changes to implement the non-appropriations parts of the budget resolution.  (Those non-appropriations parts must still impact revenue or entitlements.)  That one reconciliation bill is not subject to a filibuster, (but is limited to provisions that have a fiscal impact and are consistent with the budget resolution).  When the budget resolution expires at the end of the fiscal year, the ability to use it to pass a reconciliation bill also expires.  The Senate’s plans for this year included using the budget resolution for Fiscal Year 2017 (adopted this January) for health care reform and to pass a new budget resolution for Fiscal Year 2018 for tax reform.  If the Senate does not take up healthcare reform before September 30, it will need to pass two budget resolutions — an initial resolution and a revised resolution for Fiscal Year 2018 –if it wants to pass both health care reform and tax reform without any effort to gain Democratic support.

In short, the rules governing the budget and government spending require Congress to actually get something done this month.  They must pass a debt ceiling increase to avoid defaulting on the national debt.  They must pass some appropriations bill, if only a continuing appropriations bill to avoid a government shutdown.  And if the Republicans are not intending to give up on a partisan version of health care and tax reform, they will need to pass a budget resolution sooner or later.

Tagged , , , , | Comments Off on Budget 101

Deciphering the Federal Budget

Tonight 45 will speak about the budget plan his folks leaked out yesterday.  He’ll likely speak about other things, also, but that budget is all over the news and he’ll capitalize on that.  However, it’s rare that Congress actually passes a budget (the last time was in 2015, and that was the first time in six years) and rarer still that the presidential framework made it through the process.

So, let’s take a look at what was proposed, where it falls apart, and then what the process actually involves. Go get a cup of coffee, you’re going to need it.

First, the good news. Appropriations come from Congress, not from the Executive branch.  Per the Origination clause in the Constitution, all appropriations bills must start in the House, although the Senate may concur and/or offer amendments. In real life, normally this leads to negotiations between the Chambers prior to anything being enacted. Thus, nothing is happening quickly. That means there is time to lobby your reps for things that matter to you.

Next, the massive increase in military spending. It’s pretty obvious from what Cheeto said today about this being a “Nationalistic” budget and how we need to win wars, that he’s committed to getting a lot of Americans killed for no reason. To get the money through Congress would be a hard slog as we are a war-weary nation. Further, it would require 60 votes in the Senate (think: 8 Democrats) to remove the existing cap, and legislation to work around sequestration.  However, and this is the scary part, there is something called “overseas contingency operations” spending.  That’s how they fund war. And it is, de facto, a black hole of your tax dollars that don’t get accounted for in the budget. It’s a backdoor into funneling money to defense without having to deal with the caps.

But assuming that the increased defense funding would come via the budget process, there is still the need to make cuts to stay within the requirements of sequestration, and to go with the “spend a dollar, cut a dollar” logic that avoids ballooning the deficit.

So where does money go from the Federal budget? A great source for information is the National Priorities Project, which not only tracks this information, but provides a great deal of background to help people understand the process.

The budget  is divided into three parts: mandatory spending, discretionary spending, and interest on the debt. Approximately 65% is mandatory spending: While the Bannon Administration can make some cuts, today’s promise is that Social Security, Medicare and Medicaid will remain untouched, and assuming that Veteran’s Affairs will likewise be left alone means that only about 8% of the mandatory part of the budget can be touched, and that would encompass food, agriculture, transportation and “other”.  Likewise, it would be pure insanity to refuse to cover interest on the debt.

Source: National Priorities Project. Reprinted with permission.

So let’s take a look at discretionary spending, from whence the cuts would come. The chart on the left shows the 2015 numbers, the last year for which data is available.

The number for the military is about $54 billion.  The likeliest target is that orange “Government” pie piece in the lower part of the chart.  Cutting that pie piece will mean firing a lot of government workers. Will the administration really want to raise unemployment? Further, a lot of the money from Government, Education, Housing and Community, Energy and Environment, etc., goes to big companies with government contracts. Will they be willing to throw all those people out of work also?

You may be wondering how some things are both Mandatory and Discretionary spending. Take Social Security. The monies paid to recipients are mandatory, the employees that process those checks and do the rest of the work are considered discretionary. It will be difficult to keep the program operational if there is no one to run it.

Perhaps we’ll hear in detail exactly which cuts are proposed tonight. And perhaps he’ll also talk about the debt ceiling. Interesting factoid on that:

March 15 of 2017 will be a crucial data for all Americans on the planet. On this day, the debt ceiling “holiday” put together by Obama and Boehner expires. Moreover, the debt ceiling will freeze at US$20 trillion, which is the same number it is at today. From that point forward, no more debt can be created by the US economy. Considering the country burns through US$75bn worth of cash every month, the US may find itself out of tangible money by the Summer of 2017. Although it is unclear if this will happen, it is a rather troublesome idea. Source

Source: National Priorities Project. Reprinted with permission.

Another leg to this stool is where the money comes from that funds the Federal government. Yes, taxes is part of it, but what’s interesting is how much more money comes from individual taxpayers compared to corporations. People say that they pay too much in taxes, but most people pay a far lower rate for Federal taxes than they think they do. Honest. It’s the math. But you can see all income sources in the chart on the right.

Listen carefully when he talks about the need to cut taxes: every plan I’ve seen from the GOP has included cuts for corporations (who are currently taxed at an effective rate about 10 – 15% of what they paid back in the 1950’s and 60’s when our economy was growing at a much faster rate than it is now) and the very wealthy, who also pay far less than they used to pay, viz effective rates.

One thing that may come up is the “simplification” of the tax code, which would mean doing away with many tax breaks. One of the largest would be the home mortgage deduction. Think what that might do to the housing market. Hmm. The flat tax would, greatly extolled by failed presidential candidate Steve Forbes, mean that people would pay a flat percentage of their income. No deductions, no exemptions, but at a supposedly lower effective rate than people are paying now. Don’t believe it. The only way to keep this revenue neutral would be a VAT system, where taxes are paid at every step of a purchase from raw material to what is bought at the store.

So, we’ll see what gets said tonight. And as a final note, the speech tonight is a Constitutional requirement. In most years, it’s called “The State of the Union” address, but when a president is in his first year, it’s called an address because normally the State of the Union looks back on the prior year, which is the previous administration. (Article II, Section 3, Clause 1.) Continue Reading...

Also posted in Donald Trump, Economy | Comments Off on Deciphering the Federal Budget