It should be noted that the GAO does this every year for the IRS, providing an outside set of eyes on the procedures in place and recommending improvements. 

The IRS has in excess of 101,000 employees

Tax collections for fiscal year (FY) 2007 were $1.36 trillion from individuals and roughly $2.69 trillion in total, including employment and corporate taxes, estate, excise, and gift taxes.  For Individual income tax, the top 5% of income earners pay $816 billion or roughly 60% of this amount. 

According to the GAO report, the IRS made a assortment of accounting errors last year that “could adversely affect the reliability of its financial statements” and result in “duplicate or erroneous refunds.”

Among the mistakes were a “failure to record the receipt of a (single) taxpayer’s $3 million payment” and an $8 billion discrepancy between two separate accounting systems tracking how much money taxpayers owe. The audit also found a $5.1 billion “unexplained variance” between the amount the detailed tax files recorded and the total amount the agency took in last year. 

This is similar to any large corporation that handles a large inventory.  Supermarkets and other retail businesses are constantly reconciling their inventory.  The “book” is the recording of transactions made.  The “actual” is the actual count on hand. 

Considering the size of the IRS, the errors are all relatively minor infractions. 

The 41 recommendations given to the IRS addressed:

• internal controls,
• training and reviews of procedures processed by workers
• supervisor reviews were focused more on timeliness of processing rather than the accuracy of applying payments. 

The GAO sums up its assessment by referring to “long-standing material weakness in its internal control over unpaid assessment.”

There were no performance infractions except:

• failure to redistribute unpaid tax liability to all responsible company officers when a tax payment had been made, and
• reconciling inventory contents from Lockbox banks who forward unacceptable forms of payment such as traveler’s checks, gold coins, and other easily negotiable items of value.  On several occasions there were discrepancies between the inventory recorded and the inventory received.  

It is a good thing even the IRS has oversight control, so we can know our taxes are properly received.  And, it gives a little satisfaction to the American taxpayer that the IRS shares the stress associated with an audit.

We have finally finished our tax return for last year.  Instead of a refund, we owe a small mountain of debt to the IRS, and a small window of time to pay it. 

Let’s not panic.  This is a recession year.  We are not going to jail.  If the IRS put everyone in jail that couldn’t pay their taxes, there would be more people in, than out. 

We are going to look at this logically.  Our credit cards are ‘maxed’ and banks are not even calling us back when we apply for an unsecured loan.  Relatives are not an option, either because they have no extra money or we see our reputation as the family beggar lasting for generations.  We are on our own. 

What to do

Number one — file your tax return on time and pay as much as you can to minimize penalties and interest, or if you are not ready, file an extension but still pay as much as you can.  Remember, you won’t go to prison because you don’t have the money for your taxes, but not filing is a criminal act that could result in jail time.

Number two — contact the IRS (1-800-829-1040) to discuss your payment options.  They have regional offices around the country staffed with thousands of people ready to help.  There may be a wait, but they announce the waiting time, and it is worth waiting.

Remember this — our country is coming out of a recession.  One out of ten are still unemployed (15 million people).  These are people that took every dime they could lay their hands on and spent it to feed and provide for their families.  Do we think their first priority was making sure their taxes were current?  

The government has a problem.  They are spending huge amounts of money.  Their tax base is severely handicapped.  They are not going to be hard-lining anyone this year.  Rather, they are happy when taxpayers are willing to work out their debt.

They may offer short-term (12 months) extensions to pay, an installment agreement, or an offer in compromise (if you owe big dollars).  They cannot offer to put aside interest charges on money owed, but they may be able to waive late penalties. 

For more information, see The Collection Process  (http://www.irs.gov/taxtopics/tc201.html) and Tax Payment Options (http://www.irs.gov/taxtopics/tc202.html) and Form 1040 Instructions (http://www.irs.gov/pub/irs-pdf/i1040.pdf). 

The IRS wants to make a deal.  Call them—today. 

 What if you don’t file

There is a penalty of 5% per month for the balance owed until it reaches 25%.  If you do file, the penalty is only 0.5% per month.  Then there is the criminal act if you do not file.

Don’t ignore and don’t hide

Act before you get notices from the IRS about the unpaid tax bill.  Contacting them shows you are trying to resolve the issue, and they respond to that offer of cooperation.  Be truthful and ask for their help.  They have a lot of experience collecting (they started in 1862 to pay for the civil war), they carry guns when necessary and they have been increasing their enforcement efforts. 

Communication is the theme to working out the problem.  You can’t hide.  They will find you if necessary.  The sooner you approach them the easier they will feel about your intentions. 

Document the dates and the names of the people you speak with.  Keep notes on what was said and what commitments were made.  The IRS is emphasizing customer service. 

Options

Payment extension

Separate from penalties, the IRS charges about 4% annually (adjusted quarterly) on outstanding balances – a much better deal than credit card interest, and it doesn’t go on your credit report except if you default and the IRS files a Tax Lien. 

If you expect to have the money within 120 days, apply for a payment extension (http://www.irs.gov or 800-829-1040).  File on time to pay the 0.5% per month penalty plus interest instead of the 5% penalty per month plus interest. 

Installment plan

If there is no way to have the money in four months, the IRS provides an installment plan similar to a loan agreement.  Pay on time every month until the debt is paid.  The agreement is found online, or the IRS person you speak to can help you. 

Agree to pay what you can afford.  Missing or late payments on an IRS payment plan is serious business.  The IRS goes from being your friend to the worst collection agency nightmare you can imagine.

If you have been current in the past, you owe less than $10,000 and you can pay it off within three years, the IRS will approve the plan automatically.  If you owe less than $25,000 and can pay it off within five years, the IRS will probably approve it but may request details on your finances. 

If you owe more than $25,000, the IRS may approve a payment plan but will get much more detailed about your finances (form 433F). 

Starting a payment plan carries a $52 fee for automatic withdrawals from your bank account, or $105 if you send a monthly check.  This is on top of the interest and penalties for outstanding balances. 

Offer in Compromise

A last option for people who can’t come up with the full amount owed is to apply for an Offer in Compromise — essentially an agreement to pay the IRS less than you owe. But the IRS typically grants this only to people in dire financial circumstances. Only about one in five who apply are accepted. 

To qualify, taxpayers must provide detailed accounting of their financial situation and agree to stick to strict minimized living expenses.  Qualification includes a history of timely filing and paying taxes, and that “collection of the entire tax liability would create economic hardship, or exceptional circumstances exist where collection of the entire tax would be detrimental to voluntary compliance.” 

The IRS cautions that an offer in compromise is only for taxpayers in extreme financial circumstances, far worse than financial problems.  It is not a way to evade paying taxes. 

This program requires an application (Form 656) plus a $150 fee plus the offer, and a nonrefundable deposit of as much as 20% of what you’re offering to pay (submitted with the offer).  Offers can be a lump sum cash payment or set payments over a short time period.  Get plan approval from the IRS before paying. 

There are three payment options; cash offer (90 days), short-term deferred offer (24 months), and long-term deferred offer (60 months).

Final approval can take three to nine months, although the IRS will accept the plan by default if it not rejected or returned within 24 months.  It will be based upon equity in your assets and future income.  Interest will still be accrued until the debt is settled. 

Think twice about companies promising a settlement of  “pennies on the dollar.”

The IRS offers some help on choosing a tax preparer.

http://www.irs.gov/individuals/article/0,,id=133088,00.html

From the IRS —

It is important for taxpayers to find qualified tax professionals if they need help preparing and filing their tax returns.

• Unqualified tax preparers may overlook or miss legitimate deductions or credits that could cause their clients to pay more tax than they should.
• Unqualified preparers may make costly mistakes like taking illegitimate deductions or credits that cause their clients to initially pay less tax than they should but later incur assessed deficiencies, penalties, and interest when the errors are uncovered. 

Most reputable preparers will ask to see your receipts and will ask you multiple questions to determine your qualifications for expenses, deductions and other items. By doing so they have your best interest in mind and are trying to help you avoid penalties, interest or additional taxes that could result from an IRS examination.

Remember, no matter who prepares a tax return, the taxpayer is legally responsible for all of the information on that tax return.

Here are some suggestions to consider when hiring a tax professional:

Avoid preparers who:

• claim they can obtain larger refunds than other preparers. If your returns are prepared correctly, every preparer should come up with substantially similar numbers. 
• inflate personal or business expenses, false deductions, unallowable credits or excessive exemptions on returns prepared for their clients. Preparers may, for example, manipulate income figures to fraudulently obtain tax credits, such as the Earned Income Tax Credit.
• guarantee results and refunds.
• base fees on a percentage of the amount of the refund. A practitioner may not charge a contingent fee (percentage of your refund) for preparing an original tax return.
• delegate your return down to someone with less training or some unknown worker. 
• exports your return to a foreign country for preparation.  Foreign countries do not have the same security and privacy laws as the United States nor is there any recourse should your information be compromised as a result of lax or nonexistent privacy procedures.

Choose a preparer who:

• you will be able to contact and be responsive to your needs.  You should know exactly who works with your tax matters at all times and how to contact that person.  Ask who will actually prepare the return before engaging services. 
• has the proper credentials meet your needs or if your state mandates licensing or registration requirements for paid preparers.   Only attorneys, CPAs and enrolled agents can represent taxpayers before the IRS in all matters including audits, collection actions and appeals. Other return preparers may represent taxpayers only in audits regarding a return that they signed as a preparer. 
• signs the tax return and provides a copy
• has no questionable history with the Better Business Bureau, your state’s board of accountancy for CPAs, your state’s bar association for attorneys, the IRS Office of Professional Responsibility (OPR) for enrolled agents or the oversight agency in states that license or register tax preparers (as of 2008, California and Oregon are the only two states that regulate paid tax preparers). 

Ask if the preparer is affiliated with a professional organization that provides or requires its members to pursue continuing education and holds them accountable to a code of ethics.

Check IRS.gov for information regarding abusive shelters and other tax schemes and scams. Remember, if it sounds too good to be true, chances are it is.

The IRS can help many taxpayers prepare their own returns without the assistance of a paid preparer. Before seeking a paid preparer, taxpayers might consider how much information is available directly from the IRS through the IRS Web site such as: 

• e-file for Individual Taxpayers
• Free File
• Free Tax Return Preparation For You by Volunteers

Unfortunately, unscrupulous tax return preparers do exist and can cause considerable financial and legal problems for their clients. Examples of improper actions by unscrupulous preparers include the preparation and filing of false income tax returns that claim inflated personal or business expenses, false deductions, unallowable credits or excessive exemptions.

Even if someone else prepares a tax return, the taxpayer is ultimately responsible for all the information on the return. For that reason, taxpayers should never sign a blank tax form. And they should review the return before signing it and ask questions on entries they don’t understand.

In some situations, the client, or taxpayer, may not know of the false expenses, deductions, exemptions and/or credits shown on his or her tax return. However, when the IRS detects a fraudulent return, the taxpayer — not the return preparer — must pay the additional taxes and interest and may be subject to penalties.

The IRS Return Preparer Program focuses on enhancing compliance in the return-preparer community by investigating and referring criminal activity by return preparers to the Department of Justice for prosecution. The IRS can also assert appropriate civil penalties against unscrupulous return preparers.

Excerpts from public record documents on file show the following examples.

Preparers have been sent to prison for anywhere from two to six years and ordered to pay fines and restitution for defrauding the government and tax evasion by preparing false tax returns in order to create or to increase income tax refunds for their clients, and diverting false refunds to their own accounts.

Preparers have also been sentenced for posing as a CPA, preparing false tax returns, using their personal information and forging their signature in identity theft schemes.

Tax scams have included “experts” “decoding” the IRS code to convince clients they were not liable for federal income tax, “finding” deductions the IRS do not want taxpayers to know about, setting up sham nonprofit corporations to avoid taxes and other “zero tax” schemes. 

Tax evasion is a risky crime, a felony, punishable by five years imprisonment and a $250,000 fine.  Audits can lead to investigations and trials.  Relatively speaking, the number of tax evasion trials is relatively few, but the IRS has a conviction rate of 81-89%, and the average sentence is 18 months. 

The IRS is very accommodating when it comes to paying taxes, especially in this recession.  But if fraud is suspected or uncovered, they can be your worst enemy. 

Report suspected tax fraud and abusive return preparers by completing Form 3949-A and mailing it or a letter with similar information to:

Internal Revenue Service
Fresno, CA 93888

Related Links:
Tax Return Preparer Fraud
Choosing a Tax Preparer ( audio transcript; video)

Millions of Americans now receiving their $10.25 individual weekly windfall from President Obama‘s “Making Work Pay” tax credit may be in for a disagreeable surprise next spring.

The government may want some of that money back.

The tax credit is supposed to provide up to $400 to individuals and up to $800 to married couples as part of the economic recovery act voted into law last February.  Workers began receiving the tax credit in paychecks they received after April 1, when employers were required to implement the new tax tables.

Revised withholding tables issued by the IRS extract less from individual paychecks for the tax credit.  The $10.25 individual weekly rate is based on the 39 remaining weeks in 2009.  It’s a simple change, for people who have one job.

There are, however, circumstances that will cause millions of taxpayers to get much more spendable cash than they are entitled to, and Uncle Sam will want this extra funding repaid at tax time.

The IRS is aware of the problems the tax tables will cause many consumers, but is keeping quiet.  I suppose the IRS is hoping many of the over-receivers will be expecting a refund, and will not complain because their refund will be smaller.  The average refund was just below $2,700 for 2008 income.

Taxpayers who plan their withholding close to their expected obligation might be in for a surprise. 

The revised tax tables credit workers with 6.2 percent of their earned income, up to a $400 maximum for individuals and up to $800 for married couples filing jointly.  Ineligible are individuals grossing over $95,000 and couples taking in more than $190,000.

The tax credit was designed specifically to help boost the economy by collecting less from workers and thereby giving more money to consumers. 

In his appraisal of his first 100 days in office, President Obama praised the tax credit as one of his achievements, promoting that 95 percent of working families will qualify for it in the next two years.

The tax tables don’t take into account several common categories of taxpayers:

• A worker with two jobs will receive a potential $400 increase in the take-home pay at each job, up to $800, but is only eligible for a maximum credit of $400. The excess must be repaid at tax filing time, either through a smaller refund or paying in cash.
• Married couples filing jointly are eligible for an $800 credit. If both spouses work, the new withholding tables give them each $600 (total $1200), and the excess $400 must be repaid. The IRS recognized the problem and adjusted the withholding tables, but the fix was imperfect.

Note: Fifty-five percent (33 million) of married couples have both spouses working for a paycheck.

• A college student with a job making $10,000 will receive $400 that must be returned if the student is listed as a dependent on their parent’s tax return.

Fifty million retirees face even bigger potential headaches.

For people who receive Social Security, Supplemental Security Income, Railroad Retirement benefits or Veteran’s Disability benefits, the Social Security Administration is sending out $250 payments in May as part of the economic stimulus package.  These payments are meant to provide a boost for people who don’t qualify for the tax credit.

Several retiree categories will face potential problems from the new tax tables.

• Retirees who have earned income and Social Security will receive the $400 benefit in their paychecks and the one-time $250 payment in their Social Security check. They must pay back the $250 when they file their tax return.
• Retirees who have federal income taxes withheld from pension benefits will receive the $400 benefit due to the new tax tables, but since pension benefits are not earned income, they don’t qualify for the tax credit and it will have to be returned.
• Retirees with working spouses who are having taxes withheld at the married rate will receive an excess of $400 through the working spouses paycheck that must be returned.

Treasury Secretary Timothy Geithner said in March that both Treasury and IRS understood the concerns and were “exploring ways to mitigate that effect.”  No news since.

Don’t be caught in the repay surprise:

• Check all federal withholding amounts with those received before April 1. Include all paychecks (you and spouse), Social Security and Pension payments. Multiply that difference by the number of remaining paychecks and payments for 2009.
• Check federal withholding for children with earned income. Calculate any overage and have them readjust their federal withholding amounts.
• Change of federal withholding rates and additional taxes to be withheld may be requested on Form W-4 available from employers and the IRS.
• The IRS and many private tax preparers have a calculator on their Web site to help taxpayers figure withholding.

Remember, the maximum benefit is $400 per worker, $800 per married couple.  If one spouse receives only Social Security benefits, their benefit is $250 for a total of $650.

If you did not have earned income, you are not eligible for the $400 recovery tax credit.

IRS website calculator and W-4 form

“Attention Pensioners: Pensioners do not qualify for the Making Work Pay credit, unless they receive earned income.  However, the new withholding tables apply to all taxpayers, including pensioners.  The IRS has a withholding calculator pensioners and others can use to make sure enough tax is being withheld from their pay.  Adjustments to withholding can be made by filing Form W-4P, Withholding Certificate for Pension or Annuity Payments.” 

IRS withholding calculator

Another calculator

The bad news:

• Nonfarm payroll employment fell sharply this month (-598,000) bringing the total unemployment from 11 million (7.2%) up to 11.6 million (7.6%).
• Job losses were large and widespread across nearly all major industry sectors. Goods producers, Manufacturing and Construction led the way down with a job decrease of about 1.5% each. Education and health services increased jobs by .25%.
• Employment has declined by 4.1 million since January 2008 with about half of this drop occurring in the past 3 months.

January 2009

The total Civilian labor force stands at 153.7 million.  There are 11.6 million people unemployed putting the rate at 7.6% of the available work force.  In modern times, this unemployment rate was last reached in September 1992 and only in the 1980 – 1986 years before that. 

Comparing now with the final month of the last major downturn in November 1982, the total Civilian labor force then stood at 111.1 million.  In that month, there were 11.9 million people unemployed accounting for 10.8% of the available work force (average for the year was 10.6 million unemployed and the rate at 9.7%).

Over the past 12 months, the number of unemployed persons has increased by 4.1 million and the unemployment rate has risen by 2.7%. 

Not since June 2003, has 22.8% of the unemployed been looking for work 27 weeks or longer.  This month, the figure for long-term unemployed doubled to 2.6 million (22.4%), from the 1.3 million (18.1%) in January 2008, while short-term (less than 5 weeks) unemployed rose to 3.7 million.

From the end of Quarter IV, the Civilian labor force decreased by nearly a million workers (-932,000) who dropped out of the labor pool. 

Unemployment: increases for this month were highest among teenagers at 12.6%, followed down by African-Americans, female heads of households, and Hispanics.  The lowest unemployment started with Asians at 6.9%, followed up by Adult women, Whites and Adult men. 

The number of unemployed workers age 55 and older jumped 70% in the past 12 months, and workers with college degrees jumped 85 percent.  Layoffs are also hitting middle managers and professional service firms.  Earlier job cuts were concentrated in retail, construction and manufacturing.  The proportion of older workers has increased 50% since 1982. 

Unemployment climbs over the young and inexperienced up through age, education and middle management.

Over the past 12 months, earnings for hourly employees increased an average of 3.9%, and weekly employee earnings rose by 2.7 percent.

This month, 2.75 million people were attempting to re-enter the work force after parenthood or retirement and 2.1 million people wanted work, were available for work and had looked for work in the last 12 months, but just not in the last 4 weeks.

 
Note: The Census Bureau surveys 60,000 households across the country to insure an accurate demographic survey.  The unemployment rates are extrapolated from the survey results.  The figures for January 2009 include updated population estimates.

The quoted unemployment rate excludes people who have stopped looking for work because they believe no jobs are available (discouraged workers) and others outside the labor force.  They are counted separately.

Looking at jobs needed to reduce unemployment with the total Civilian labor force at 153.7 million:

To restore employment to the 5% level of 2008, 4 million people will have to regain their job or new jobs.  It is a tall slope to climb. 

With 1982 unemployment at 9.7%, and the government taking aggressive action, it was still five years (1989) before unemployment receded to 5.3%. 

The approach that time, however, was to fix the economy at the expense of the worker.

The president’s $787 stimulus bill signed into law hopes to create about 3.5 million jobs.  Lower estimates put that figure at 2 to 2.5 million jobs by the end of 2010, reducing the unemployment rate to 6%.  That will do for a start.

But some Republicans still insist that the same techniques used by Ronald Reagan in 1982 will work for this economic crisis.

Inflation was then at 13.5% and unemployment at 7.5%.  Federal Reserve chairman Paul Volcker squeezed inflation from the economic system, by raising the federal funds rate to 20%, forcing the prime interest rate up to 21.5%.  This extremely tight monetary policy intentionally plunged the U.S. economy into a deep recession and wiped inflationary psychology and expectations out of the system.

Upper bracket taxpayers had their taxes reduced along with capital gains taxes to the tune of $749 billion over 5 years.  The tax loss was almost completely recaptured with increased taxes when the recession ended five years later.

It was a good plan then, except for high unemployment for five years while the economy recovered.  The average worker suffered with job loss while the wealthy and big business rebuilt their fortunes.

 
Trickle-down economics must have every piece in place and be entirely without blockages top to bottom in order to succeed.  And, the process is slow.  This is how it is supposed to work:

1. Taxes must be high enough that economic expansion is currently stifled. 

Now, economic expansion is stifled by lack of demand, not taxes.

2. The lowering of taxes must be noticeable enough to the wealthy that they will consider investing the extra money and not save it or spend it only on personal consumption.

In 1982, the top tax rate was reduced from 70% to 50% for incomes over $212,000.  Today’s top tax rate is already down to 35% for incomes over $372,950 filing singly or jointly.

There’s a blockage.  How much would the top income tax rate have to be lowered from 35% to encourage investment?  A small reduction would not be sufficient to interest a wealthy investor.

3. The stock market must be attractive enough for the wealthy to consider investment there, as opposed to, for example, foreign investments, commodities (like oil), or real estate.

There’s another blockage, and a major one at that.  Companies are folding left and right, domestic and foreign.  The stock market doesn’t sound like a good investment to me at this time and wouldn’t to investors. 

The market was driven to highs by a spending economy.  Real estate is better, and commodities (like oil) are always good investments.

4. Stock market companies who receive the investment must, in turn, invest in expansion and increased employment, with the goal of increased production and lowering prices of their products.

If stock market companies received investments, they would gladly expand their production, if they could be assured of or even encouraged that there would be demand for their products.  They would be happy if they could sell off their current backlog.

5. The demand for the products must increase as production increases so the company still makes at least the same profit as before the expansion.

Consumers are currently keeping their wallets shut, buying only what they need, fearful of further downturns for the economy affecting them, and hoping for lower prices.  The economy is far from increased demand.  

The place to put investment is at the consumer level to be used as discretionary income.  If consumers buy goods, companies will increase production to meet the demand, creating jobs and breaking the downward cycle.

The president’s plan to provide jobs, lower taxes and inject discretionary funds into the consumer level, and increase confidence in the future is a good one.  Let’s see if it works.
 

More on the economy to come.  Stay tuned.

OK, simple enough, but Daschle disclosed to the Senate Finance committee that he used it about 80% for personal use and didn’t disclose it or pay taxes on the personal transportation benefit.

He discovered it himself when he found out he was the president’s pick, filed amended tax returns and paid the back taxes and interest before the Senate Finance committee hearings.

“Under Section 132 of the Internal Revenue Code, the value of transportation services provided for personal use must be included in income.” 

Now here’s the complication and the lines between business and personal cross.  What if the Daschles were going to an invited business affair in the car?  Is the transportation personal, or business?  Is the transportation to do business considered business?  My transportation expenses to my first job are not deductible as business expenses, only my transportation expenses to my second job, and not from there to home.

So what if the Daschles were going out to a personal dinner in the car, and Tom’s cell phone rang from a business contact.  Would the ride suddenly transport into a business expense for as long as the conversation lasted?

Lawyers face this dilemma all the time.  They may go out to a business lunch to discuss a legal issue, and the lunch is a business expense.  What if they start talking about the Super Bowl during dessert and coffee?  Do they divide up the check accounting-wise to business and personal?  What portion of the waiter’s tip goes to business?

Members of the committee staff from both parties have been examining a number of other issues, including Tom Daschle’s relationship with EduCap, a student loan company.

Members have been asking if Tom Daschle should have been registered as a lobbyist as well while working at the law firm Alston & Bird, where the firm was registered as a lobbyist for EduCap and as well as health care companies.

In his financial disclosure report, Mr. Daschle said he received compensation for providing “policy advice” to EduCap. The exact amount was not disclosed, but it was more than $5,000.

EduCap reports to the Internal Revenue Service that it does business as the Catherine B. Reynolds Foundation and is the principal underwriter of the annual meetings held by the American Academy of Achievement, which has, on several occasions, honored Mr. Daschle.

In its report, the Senate Finance Committee said its staff was still reviewing “whether travel and entertainment services provided to the Daschles by EduCap Inc., Catherine B. Reynolds Foundation” and the Academy of Achievement “should be reported as income.”

Enough to give you a headache?

I’m certainly not saying the Senate Finance committee is wrong or accusatory in their findings.  Certainly, taxes and business dealings are the easiest to find, and we certainly want our top government officials as clean as possible.

The IRS relies on estimates with as much backup as possible for credibility in estimates like that.  I suppose Tom could have kept a detailed log (maybe on his Blackberry) of travel and entertainment purposes with dates and times, or written a personal check at the end of each trip in which part of the ride was personal.   Please!!

There are lots gray areas in income tax collection, and if Tom Daschle is under scrutiny, other officials including the president are faced with the same daily dilemmas.  That’s why they all have aides to take care of the minutia.  And if they don’t, they can help the employment problem by hiring one.

I would hope the Finance Committee will soon confirm Tom Daschle and other presidential choices while still doing their jobs.  I know I would feel more comfortable if Tom Daschle were putting his full attention to improving our health care, and the president was able to concentrate fully on fixing the economy.

When questioned about the delay to confirm Tom Daschle, a spokeswoman for the Finance Committee, said, “There’s been a lot on the committee’s docket.” 

No wonder.

The House version of the economic stimulus package was passed 244-188 almost entirely on party lines (so much for bipartisanship) with every Republican voting against it.

Republicans wanted to strip spending for rebuilding roads and bridges and upgrade healthcare and schools, and instead provide only tax cuts of about $478 billion.

Ed.note:  I didn’t think so during the campaign, but Obama was right.  The Republicans are out of touch.  The members of Congress don’t see the need for upgrading health care, since they are part of the Federal Employees Health Benefits program that gives them top-level health care with many choices, mostly paid for by the government.  They can’t see roads and bridges in need of repair from private jets and limousines.  And they don’t need jobs, but what good is a tax cut to the millions that are out of work and have no income to tax?

There are also aggressive groups against the stimulus, collectively known as the “Do-Nothings.”  Their arguments include that the stimulus money is aimed at getting consumers spending and borrowing again where spending and borrowing were the problem in the first place.  I would feel better if they understood the problem was centered on borrowing to spend, not spending by itself. 

Our economy relies on the balanced and even flow of money.  For the individual, this boils down to monthly payments.  The economy collapsed because the supply of money in paychecks, etc. suddenly failed to keep up with the speed of the stream of capital required to pass from debtor to creditor.  Since everyone is both a debtor and a creditor, the flow slowed to a trickle for all, and creditors stopped extending credit.

The opponents quote the government regrets spending in crisis, quoting the Iraqi war (preemptive strike against a dictator with a history of attempted genocide by poison gas?), the Patriot Act (more than 700 thwarted terrorist attacks?), and the $700 billion bailout plan (still in process, but judged a failure by opponents).

Many of the Do-Nothings argue that a painful recession is the best way to cure American’s runaway culture of irresponsibility and debt and the government should allow the economic chips to fall where they may.  It is brutal but it is called capitalism and it works, where the alternative is socialism and it doesn’t work.

Ed.Note: These are all Republicans speaking who would do anything, including the destruction of America to make the other party look bad.  And Socialism is not an all or nothing policy – that’s called Communism.

Full-page ads against the stimulus will include the names of 250 economists who oppose the stimulus.  According to the Bureau of Labor Statistics, there are 12,740 working economists (SOC code 19-3011) in this country, at an average annual salary of $86,700.  That is less than 2% that have a dissenting opinion; hardly a mandate. 

The Do-Nothings advance that it is morally improper to deliver a crushing debt load to the next generation.  The thought passes my mind that the next generation will be a lot fewer if people feel they have no economic future and refuse to bring children into that world. 

It is also historical fact that these bailouts are mostly recovered by the government over a period of time through an increased tax base and compliance from working Americans.  What better way to spend our money than to attempt to provide for our children’s future, especially by improving the educational system, which is the lion’s share of the spending.

The Do-Nothings point out that housing sales rose 6.5 percent from November to December and this could be an indication that lower prices will draw buyers into the system.  They minimize the point that the increase for that month was based on the strength of bargain hunters picking up foreclosed properties. 

Ed.Note:  I am not sure I trust an economist who considers a single month a trend.  I know two young couples, both with high-paying jobs and no children who have purchased five foreclosed properties with the intent of renting them.  They are not exactly a portrait of the average American family.

On the other hand, to be fair, the Do-Nothings point out that without the stimulus, corrections are being made naturally.  Weak companies are going bankrupt.  It is hoped that the stronger ones will pick up their market share and laid-off employees.  Other companies, like the automakers are facing the facts that they haven’t been making the products that customers really want. 

American families are paying down their enormous debt.  This helps the economy because the money is paid to the credit card company or bank, where it can add to its reserves and extend more credit to those who need it.  When backs are against the wall, Americans know the right thing to do.

“Our standard of living must come down to the point where it can be supported by organic output,” quoting an interview with an investment consultant.  Weren’t those guys some of the ones who helped topple the economy in the first place?

The Do-Nothings fully expect to lose their argument, but put out the ads because they feel they have to Do Something.  And even though they are against it, they think it won’t work because it is not enough.  ??

His two-year $820 billion economic recovery blueprint includes plans for computerized medical records, a national electricity grid to distribute renewable energy, lower taxes for everyone under his ‘affluent’ income line, modernized schools, and education initiatives.  The House bill includes roughly $550 billion in domestic spending and about $275 billion in tax cuts.

The goal is to advance the policies the president laid out in his campaign, including education improvement, health care cost reductions, moves toward energy independence and aid to low and middle income workers.

When passed, the legislation will require all business funding recipients to publish a plan for using the funds, along with purpose, cost, rationale, net job creation, and contact information about the plan to a new website Recovery.gov so that the public can review and comment.

About $275 billion is designated for tax cuts sent directly to the states to protect the jobs of firefighters, local government employees and public health workers as well as tax credits for education and first time homebuyers.

Job-creating road and bridge funds ($90 billion) will favor repairs to existing structures rather than funding new ones.  Repair jobs can be initialized faster, quickly injecting payroll spending into the economy, as well as curtailing urban sprawl leading to increased fuel consumption.

There will also be jobs created for clean energy development ($58 billion), a national electric grid, and funds to weatherize homes and public buildings.  It is hoped the recovery plan will spark energy efficient thinking and building as well as renewable energy technologies.

There is close to $142 billion allocated for education to protect the jobs of teachers as well as attempt to stop the “dropout crisis” and provide an easier path for many American youth to become productive taxpayers.  Studies have shown that cutting the dropout rates in half would pay back $9 for each $1 invested, representing new tax revenues and savings in welfare and incarcerations.

Funding will also go toward expanding wiring providers and implementing universal broadband service to extend Internet service to rural areas.  Internet access will allow companies to hire remote workers to work at home, saving on office expenses as well as allow individuals the opportunity to run small businesses on the Internet.  It will also be a vehicle for coordinating expanded health care records.  It is estimated that for each $1 invested in this area will return about $10 in increased productivity to the economy.

Health care investments ($111 billion) to the states to expand Medicaid will result in cost reductions connected to the medical industry’s expanded use of information technology.  The expanded use of technology to coordinate medical records ($20 billion) will minimize duplication, re-entering the same data, and “doctor shopping” for multiple issues of the same prescriptions.  On the negative side, this technology expansion has people concerned over privacy on a national network, but tight encryption methods are readily available.

President Obama’s election mandate, along with a party majority in Congress, presents him with an opportunity to spend and cut taxes more than any president in our history, with the possible exception of Franklin D. Roosevelt in the Great Depression. 

To highlight the momentum of the recovery proposal, we can compare it to the $16 billion stimulus Bill Clinton asked the Democratic-controlled Congress for in 1993 when he had just come into office, and they turned him down.

So far, this Congress has only cut out a $3,000 tax credit for businesses for each new hire.

The size of this package is annually nearly half as much as the total federal annual discretionary spending budget with the exception of Social Security, Medicare and Medicaid. 

The package is expected to be on the president’s desk by February 13, a scant three weeks after he took office.

He soon expects to sign legislation against gender pay discrimination (signed 1/29/2009) and for low-income child health care.  He has already issued an executive order removing the ban on federal abortion funding and expects to soon revive federal financing for embryonic stem-cell research.

Ed.Note: The Lilly Ledbetter Fair Play Act of 2009 was signed into law after passing both houses almost strictly along party lines.  The Republicans are acting like spoiled brats, voting against any Democratic legislation, no matter how it advances the causes of right and good for the country.  This was a vote by Republicans against Democrats, but it comes across as a vote against women and minority equality. 
I am ashamed of the Republican party.

President Obama will spend a lot of time himself lobbying for the passage of this bill.  He wants to go to the American people and report that this is a package passed by both parties in Congress.  However, Republican ‘nay Sayers’ claim this package will not work, so they are voting not to do anything with regard to government spending and have no positive suggestions of their own, except tax cuts.  The Republican approach is to offer tax cuts, and let the social economy recover and advance at a natural pace, a process that could take decades.

The package passed the both the House Appropriations committee and the committee on Ways and Means strictly along party lines and it is likely the bill will pass Congress along party lines as well.  This is another example of one Party driving while the other becomes a dragging anchor.

In addition to the $820 billion stimulus package, better known as the American Recovery and Reinvestment plan of 2009, the president will oversee the distribution of the second half of the $700 billion TARP program.  He has said he will have a strong message for bankers about sitting on any taxpayer bailout money, reminding them of their commitment to restart credit to both business and individual and work with struggling homeowners to avoid foreclosure.

Political analysts and reporters keep talking about “trickle-up” and “trickle-down” economics.  What do these terms mean?  Personally, I’m interested only in “trickle to my pocket.”  But as far as taxes are concerned, I pay what the government says to pay.  They decide how to apply the money.

President-elect Barack Obama has spoken in multiple election speeches about trickle-down economics and how it has often had the opposite of its intended result, stating: ” … instead of prosperity trickling down, the pain has trickled up – from the struggles of hardworking Americans on Main Street to the largest firms of Wall Street.”

The trickle-down economics viewpoint cherished by the Republican Party sees tax breaks that benefit mostly the wealthy, who will invest it in companies that will expand operations, increase employment, and produce cheaper goods resulting in a higher standard of living for all.

This economic model relies on each step acting according to plan.  The tax break-generated extra income must be large enough that the wealthy individuals invest it instead of saving it or spending it on personal consumption. 

The public company receiving the investment must use it to expand existing operations, instead of buying back stock or buying competitors.  The expansion must result in increased domestic employment, rather than outsourcing.  Finally, the business expansion must result in profits on cheaper goods purchased by the public. 

But does it work?

The Richard Nixon administration did not cut taxes.  He thought the incentive for the wealthy to invest in the market was zero.  Instead, the government controlled wage and price increases, but not interest rates.  The economy ground to a halt with high inflation, a condition known as stagflation. 

The Ronald Reagan administration Federal Reserve chairman Paul Volcker, squeezed inflation from the economic system by raising the federal funds rate to 20%, deliberately causing a recession.  As interest rates were gradually lowered, the administration cut taxes by $479 billion over five years, and pulled the economy out of the recession, recouping $476 billion over the five years from increased tax revenues.

The George W. Bush administration avoided an impending recession in 2001, lowering taxes as an economic preemptive strike.  In spite of the bursting of the dot-com bubble just before he took office, the 2001 9/11 attacks, and wars in Iraq and Afghanistan, President Bush managed to keep the country out of recession, until the bursting of the U.S. housing bubble at the end of his second term. 

It has been 17 years of growth.

The $1.35 trillion in tax cuts over ten years was expected to be mostly repaid by the time they ran out in 2011.  The recouping of the ten-year tax breaks is now a new ball game, depending on when the current recession will end, and how close to pre-bubble levels we return.

Does supply-side economics work? 

Tax cuts are the key. 

In the three cases cited, Nixonomics failed due to no tax breaks, Reaganomics and Bushonomics succeeded because of tax breaks, even though Reagan had to pull the country out of deep recession first.

Trickle up

Keynesian economics, also known as the trickle-up effect and favored by the Democrats, is a different type of macroeconomic philosophy that holds that:

1.      Tax cuts can be used as an economic stimulus if spread across the entire economy, not just toward one specific group (like the wealthy). 

2.      Tax cuts should be used to increase demand, not supply, and should be targeted at cash-strapped, lower-income earners, who are more likely to spend the additional income.

3.      Spending on goods demanded by the public will result in business expansion, increased employment, raising of standards of living followed by more demand.

Keynesian or demand-side economics proposes that consumption or demand is the key to economic prosperity and that production or supply follows. 

Percentage-wise, it is obvious the wealthy spend less of their disposable income in the economic market.  Dollar for dollar, the working class will release more into the economic system than the wealthy, simply because there are more of us. 

The trickle-up effect states that directly benefiting the working class will cause them to spend their disposable income, buy more goods, encouraging more product output.  As the supply of goods and services increases in response to increased demand, the wealth of the society as a whole improves and benefits will “trickle up” to the wealthy.

John Maynard Keynes was a British economist who still remains the world’s foremost expert on recessions and depressions.  Although he died halfway through the 20^th century, his findings are still accurate today.  He knew how we got into recession, and he knew how to get out. 

People are conventional.

Keynes developed the theory that increasing government deficits stimulates an economy.  He also developed the theory that rational people in times of uncertainty fall back to conventions that give them comfort and assure them they are doing the right thing. 

Conventional behavior turns into group behavior reinforcing their assurance.  As an example, people think housing prices will return to their original values, and once we are out of this recession, the economy will grow again from the point it left off. 

That is uncertain.

Keynes approach was based on his conception of money as a “store of value” rather than a method of payment.  The desire to hold money with its perceived fixed value is a gauge of our distrust of our own calculations of the future.  We think the more we have, the more we are protected against future uncertainty.

Keynes said that this uncertainty theory extends to banks (and credit card companies), that will raise interest rates to borrowing consumers to increase their own “store of value” heedless of the guiding interest rate charged by the Central bank.

Private banks will eventually follow the Central bank’s leadership and slowly reduce their lending rates, but their reluctance to spend will initially clamp down on credit and liquidity.  This will leave the ball in the government’s hands to spend and stimulate the economy.

Government spending to “prime the (economic) pump” include infrastructure improvement programs (roads, bridges, dams, schools), tax cuts to workers, and the direct application of spendable cash.

Deficit spending

John Maynard Keynes was one of the first economists to advocate government deficit spending as part of a fiscal policy to cure a recession. His theory is that increased government spending in areas that give discretionary income to the worker class will raise demand and increase consumption. 

He argued that the solution to recession  or depression was to stimulate the economy with a combination of two approaches :

• Reduction(s) in interest rates led by the Central bank, to stimulate cash flow
• government investment in repairing, upgrading and improving the nation’s infrastructure employing many thousands, and providing discretionary income for their families. This results in more spending in the general economy stimulating more demand for goods, resulting in a upward cascading cycle of recovery.

Stimulus savings

The upward recovery cycle can be short-circuited with excessive saving throughout the population, reversing the upward cycle.

Excessive saving decreases investment and demand, causing companies to cut back, increasing unemployment and completing the circle by cutting  back on saving. 

Advocates of Keynesian economics hold that economic stimulus should be directed towards the lower-income worker class, as they are more likely to spend the money than to save it.

The purpose of the stimulation is to get the economy moving again. 

Economics against the tide

Keynes promoted countercyclical economic policies that act against the tide of the business cycle of economic expansion and contraction.  This means embracing deficit spending when a nation’s economy is in recession and unemployment is relentlessly high. 

We have already seen that fiscal stimulus increases the market for business output, raises cash flow and profitability, sparks employment and business optimism, and encourages investment, increasing gross domestic product (GDP).  This accelerator effect means that government and business can be complements of each other rather than substitutes. 

Government spending and investment in public goods not provided by profit-seekers, such as public healthcare, education, and infrastructure upgrade and repair will also encourage the private sector’s growth in suppliers and employment.

On the reverse side of the business cycle, in boom times with excessive demand-side growth, reducing government spending for public goods, raising taxes and interest rates to suppress inflation will cool the economy.

Herbert Hoover‘s 1932 tax increase making the Depression deeper, and Franklin D. Roosevelt‘s fiscal policies of public projects are examples pointing to the potential success of the trickle-up approach as a way out of our dismal economic situation.

Let’s hope a policy that works to dig us out comes soon. 

Political analysts and reporters keep talking about “trickle-up” and “trickle-down” economics.  What do these terms mean?  Personally, I’m interested only in “trickle to my pocket.”  But as far as taxes are concerned, I pay what the government says to pay.  They decide how to apply the money. 

The current administration largely uses supply-side economics.  In a phrase, money is applied to the top level of the economy, with the hope placed in the fairness of industry controllers that it will trickle down to the worker class.

Supply-side economics as an economic definition is a macroeconomic philosophy that holds that:

1.      Lowering income taxes and capital gains tax rates will encourage the wealthy to invest in stock market companies.  Wealthy would describe people in the higher tax brackets, who would benefit most from these tax breaks by gaining more disposable income.

2.      These investments made by the wealthy (if they make the investments) will encourage businesses to expand and produce an increased supply of goods and services at lower prices. 

3.      That expansion in turn, will result in economic growth, increasing employment, disposable income for more workers, and demand for these goods.

Supply-siders feel that in a high tax rate environment, lowering taxes to the right level can raise revenue by causing faster economic growth.

This philosophy is also referred to as “trickle-down economics.” 

·        Proponents argue economic growth will flow downward from top to bottom, indirectly benefiting those workers who do not directly benefit from the tax changes. 

·        Opponents argue that “trickle-down” policies, if they work at all, provide a very slim benefit by the time they reach the worker, due to the benefits taken out at every level.

Advocates of the trickle-down effect believe that a free market, unrestrained by heavy taxation, regulation and other forms of government controls, will cause an increase in wealth for society as a whole, part of which will “trickle down” benefits from the wealthy to the worker class, increasing their standard of living.

Increasing taxes reduces trade between businesses and discourages investment like an international trade barrier or tariff, meant for that purpose.

Nixonomics

In 1971, Republican President Richard Nixon ended the the U.S. Gold standard, where the value of the U.S. dollar was pinned to the fixed value of gold.  Almost immediately,commodity prices such as oil and gold, spiked up. Actually, the value of commodities remained constant while the dollar was devalued. 

As a result, the stock market lost half of its value between the market peak of 1972 and its bottom in 1982, with investors seeking better returns in commodities and real estate. 

Decreasing market investment caused companies to cut back, increasing unemployment. Unions influenced business owners to keep raising prices, fearing more wage hikes, causing inflation.  Nixon refused to cut taxes since he said the incentive to invest in the market was zero.  The result was a stagnant economy with high inflation, better known as stagflation.

Wage and price controls were put into effect, but interest rates were allowed to run free.  The result was rapidly rising interest rates and tight credit.  Inflation caused wage earners to creep into ever higher tax brackets, losing wage increases to taxes.  The number of households able to afford mortgages diminished.

This was an example of supply-side economics gone bad.  High taxes, high inflation and uncontrolled interest rates in a free market economy caused the economy to grind to a halt.

Reaganomics

Skip ahead to 1981 when Republican Ronald Reagan became President.  Unemployment was at 7.5% and inflation was at 13.5%. 

Federal Reserve chairman Paul Volcker squeezed inflation from the economic system, by raising the federal funds rate to 20%, forcing the prime interest rate up to 21.5%.  This extremely tight monetary policy intentionally plunged the U.S. economy into a deep recession and wiped inflationary psychology and expectations out of the system.

Economist Robert Mundell convinced the President to reduce upper bracket and capital gains taxes to increase national output and tax revenue, and that would bring inflation under control.

The ensuing tax cuts, reducing taxes by $749 billion over five years, drew the country out of recession, and the tax receipt level quickly returned, then surpassed previous levels.

This was an example of supply-side and trickle-down economics that worked.  After the economy was intentionally put into a coma, it was restored to health with lower unemployment levels and higher wages, as well as lower prices for consumers.

There are arguments whether the tax cuts actually paid for themselves in the Reagan era.  Take away natural increases due to inflation, increased FICA taxes and corporate taxes, tax revenue in constant dollars decreased by $2.77 billion in that time period.  And recouping $746 billion is not bad.  But one thing is clear, that Reaganomics dramatically reversed the American economic decline of the 1970s.

Trickle-down supply-side economics is the model cherished by the Republican Party.

Shortcomings

The supply-side of the argument has its shortcomings.  The conditions must be correct and  the trickle-down stream must be entirely without blockages in order to work:

1.      Taxes must be high enough that economic expansion is currently stifled.

2.      The lowering of taxes must be noticeable enough to the wealthy that they will consider investing the extra money and not save it or spend it only on personal consumption.

3.      The stock market must be attractive enough for the wealthy to consider investment there, as opposed to, for example, foreign investments, commodities (like oil), or real estate.

4.      Stock market companies who receive the investment must, in turn, invest in expansion and increased employment, with the goal of increased production and lowering prices of their products.

5.      The demand for the products must increase as production increases so the company still makes at least the same profit as before the expansion.

The economy must continue to expand, with people buying an increasing number of the lower cost product. 

Supply-side economics proposes that production or supply is the key to economic prosperity and that consumption or demand is secondary. 

In other words, supply will influence demand.

Bush-onomics

Skip ahead again to 2001, with our current President George W. Bush. 

Bush inherited an unsteady economy from Democratic President Bill Clinton.  Over the three quarters prior to March 31, 2001, the economy grew only at a 1.1% annualized rate.  Much of this was credited to the bursting of the the dot-com bubble.

With threats of impending recession from Federal Reserve Chairman Alan Greenspan, Bush argued with Congress for a $1.35 trillion tax cut over ten years to stimulate the economy and create jobs.  It was approved.

The early 2000s recession (which was not technically a recession) following the 1990s boom was not as bad as was predicted, but was still characterized by outsourcing followed by large layoffs, and recovery without strong employment growth. 

Despite the resultant effects of the 2001 9/11 attacks, President Bush managed to keep the country out of recession.

Large numbers of economists were against the tax cuts, saying they will fail as a stimulus and “will worsen the long-term budget outlook … [and] generate further inequalities in after-tax income.”  The President claimed the tax cuts paid for themselves through economic growth, but it took them until FY2006 to surpass the 2000 level and will take until 2011 to recover all the funds advanced. 

Economist Arthur Laffer stood alone in stating that the tax cuts were “what was right,” because after the 9/11 attacks and threats of recession, the President “needed to stimulate the economy and spend for defense.”

Side note: Even with the tendency of the business cycle to produce periodic recessions,  under Bush’s administration the length of time between recessions has extended to a record-breaking 17 years of sustained growth, in employment, personal income and Gross Domestic Product (GDP).  In addition, there were decreases in the government deficit for years 2005, 2006, and 2007.  Deficits however, still add to the public debt. 

The previous record between recessions was 11 years, 1958 – 1969. 

The supply-side economics of the Bush administration shows that he acted prior to a recession taking hold. 

1.      Taxes were not stifling to business investors, even though the economy was struggling.

2.      Tax cuts issued up to 2003 resulted in a 20% increase in income of the top 1% income households. 

3.      The stock market received a great deal of investment, rising  nearly 32% from January 2001 (10,686) to October 2007 (14,093). 

4.      Production expanded, reducing unemployment from a high of 6.3% in 2003 to 4.4% in March 2007, with an average of 5.2%.

This was an example of supply-side and trickle-down economics that worked for seven years, prior to the ‘economic downturn.’  The President executed a preemptive strike and kept the nation out of recession for most of his two terms in office. 

Recession of 2008

The economic downturn is a harsh reality of economic cycles.  It is now up to our President elect to lead us back to prosperity.

This recession, started by the bursting of the U.S. housing bubble, leaves businesses with their expansions hanging like a stone around their necks with no customers and sharply reduced stock value. 

But that is the subject of another post.