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2017-04-27 08:27 by Karl Denninger
in Federal Government , 346 references
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Let's look at it through the lens, darkly, since we have few details but just "principles":

First, the standard deduction is doubled.  This means $12,000 earned without income tax for a single person and $24,000 for a married couple

Second, as stated all deductions other than mortgage interest and charity are gone.  This is paired with deleting the AMT, which would be nonsensical to keep without the deductions.  Left unsaid is whether municipal bond interest remains untaxed (I'll assume "yes".)

So what disappears?  Plenty.

Many have bleated that "state and local tax deductions" are gone in this plan.  Today you can allegedly deduct your state property taxes, for example.  But this is only worth something to you if you itemize.  That's because if you itemize you do not get the standard deduction at all.  You can choose either to itemize or take the standard deduction (and presumably still will be able to) but until you get into the $100,000+ income range it is almost never to your advantage to itemize.  Therefore, for those in the middle class mortgage interest + property taxes are less than the standard deduction.  This will be doubly true with a doubled standard deduction; ergo, this "going away" will not hurt the middle class person at all, but it will cause those who have big, expensive houses (and the income to pay for them) to lose the deduction on a decent part of their property tax -- which they currently can take.

This is arguably good as it stops rewarding states and local governments for inefficient use of money and ridiculously high property taxes in the first place.  It's not that hard to find places with a $20,000+ annual property tax burden on a $750,000 house at all, which is flat-out nuts.  Many of these places have seen property taxes double or more over the last decade.

But where this plan is going to run into huge problems is in the following classes of deductible expenses which, it appears, are all going away:

  • EITC.  This is a refundable tax credit for both having kids and making a relatively small amount of money and it's huge because it's refundable.  In other words you can get it back even if you owe no tax, which results in the government literally paying you to live.  Good luck killing this one as it is a literal riot-starter in the big cities.  Keeping it blows up the plan instantly.

  • Personal health care expenses.  This is subject to a minimum of 10% of your AGI (in other words you have to spend more than 10% of your adjusted gross income before you can use it, and can only deduct the excess) but for those who run into huge medical expenses it's pretty big.  The number of people who get hammered by this in the middle class is relatively small, but the impact for those who do will be large.

  • Traditional IRAs.  This appears to be gone too.  The Roth will be untouched because ROTH IRAs are paid into with after tax money.  This one I really don't like for the simple reason that there is nothing to prevent the government from reneging on the "promise" not to tax earnings and withdrawals in a ROTH.  They can and probably will break that promise in the future; a "traditional" IRA evades this risk because you pay into it with pre-tax money, but pay taxes when you take the money out -- and thus it is not exposed to the government taxing you twice.

  • What happens to small-business SEPs/SIMPLEs?  If SEP and SIMPLE deductability on pass-throughs disappears (and you must assume it will) that will have a major impact on single-member LLC retirement planning as those plans allow tax deferral of a huge amount of otherwise-earned income.  This would be seriously bad for retirement planning for those with six-figure+ incomes; it is a feature of the current code that I've used and so have millions of other small business owners.  Losing it would be offset by putting the corporate rate on pass-through income (e.g. LLCs.)  The ugly side of such a change is that after-tax accounts get hammered on reinvested dividends (you have to pay taxes in the current time on reinvested funds and thus must withdraw the funds to pay the tax, reducing what you can reinvest) where deferred accounts get to reinvest the entire dividend or distributed amount.

  • It's a MONSTROUS windfall for MLPs.  MLPs are one of the things that today are pretty-badly disadvantaged due to them issuing K1s and the tax treatment of that income to the person who owns them.  This disadvantage will go away at the same time the passthrough provisions work for small business turning their distributions into, effectively, corporate earnings even though they go to you as an individual.  Expect a significant move in the share price of these companies, most of which are pipeline operators and similar, if this provision looks to survive. If you want an actionable gamble ("trade") on the plan as-spoken yesterday this is where you find it but you have to gamble before it becomes apparent that the plan will actually pass since the minute that becomes known in the market the price will step-shift upward on these shares.

  • The repatriation "holiday" on corporate funds will do nothing to help economic output.  Sorry, that's the facts folks.  Trump will get a big fat zero out of this because they money will go to buybacks, which produce nothing.  That's the history on this sort of "holiday" provision and there's utterly no reason to believe it will be different this time.  Money is fungible; you cannot prevent this from happening.  For another example of why this is inevitable look at the so-called "benefit" for education out of state-run lotteries; yes, the funds go there but nothing prevents the state from taking other funds they would have spent on schools and reallocating them -- which they do.

All-in, when you get down to it I think Trump's "proposal" has roughly the odds of passage as a snowball does of survival in Hell for more than a few minutes.  The issue simply that the tax "giveaways" in the current code for lower-income people are really big, especially the EITC, and killing them will mean the "negative tax rate mommies" in the cities will have their effective tax rate go to zero from often as much as -30% which is literally taking candy from a baby.  Do not underestimate this; for many of these tax-farm producing women (and poor families) we're talking about anywhere from $3,000-6,000 a year they literally get paid just for being alive and having pumped out the kids.  Those adult children are likely to react very poorly to this, and I suspect you might even get real, no-nonsense riots and mass civil unrest -- never mind the vomit that will come out of the Democrats when they figure this out (and they will.)

All-in I suspect the reality of this "plan" is that it's DOA before it even left Mnuchin's and Trump's lips, although it will certainly be interesting to see how it gets spun and "negotiated" in the coming months.

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2017-04-26 07:48 by Karl Denninger
in Federal Government , 450 references
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You cannot deficit spend your way to prosperity, nor can you print growth.

You can print money.  Deficit spending is printing money.

You cannot print value.

The premise that you will get 3% growth if you deficit spend is the same premise that Obama ran after 2008.  He and his advisers believed that if the government spent trillions that it did not have that we would see higher economic growth and over the space of a decade or so this would pay for the deficit through increased tax revenues.

It didn't happen.

It didn't happen because it can't happen; it was nothing more than a scheme to "print value", which is always and forever a fraud.

Now Trump and Mnuchin are going to attempt the same thing from the other side of the aisle.

It won't work any better coming from this side than it did coming from the other and what's worse is that it will meaningfully accelerate the wall that we are headed for at 90mph when it comes to Medicare and Medicaid spending.

GDP "growth" in nominal terms can be whatever you wish but in real terms it will be negative within three to four years and when it is along with the Medicare and Medicaid spend going up by another $600 billion a year the government's funding capacity and the economy will both collapse.

Obama was a piker compared against this garbage.

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2017-04-17 05:00 by Karl Denninger
in Federal Government , 983 references
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I claim no special power here, nor any inside information.  This is simply arithmetic coupled with logic.  I'll give you a "decision tree" sort of format with the critical points outlined.

Note that if you're going to mitigate any of what I see coming around the bend you need to do it right damn now, not wait.  By the time you get to those critical points it's too late.  For many people it's already too late, but if you're not in that batch then you need to make your lifestyle changes today.

I am operating on the premise that the rank corruption that I outlined in the Ticker here will not be addressed.  It will not be addressed for the same reason the 17th Amendment will be cited as the reason the American political experiment failed when the book on America is finally closed, as that Amendment permanently removed the ability of the States to call a hard-stop on any expansion of Federal Power they did not consent to.  That was designed in to our government by the founders and it was removed intentionally by the 17th Amendment.  That balance of power can never be restored absent a Revolution because to do so The Senate would have to literally vote themselves out of a job at a supermajority level which they will never do and there is no means to compel them to do so.

For the same reason the 30-year trend in Medicare and Medicaid spending will not be stopped.  It may be tinkered with around the edges but it won't be stopped because to stop it without literally throwing people into the street and letting them die you have to break the medical monopolies and in doing so you will inevitably (1) destroy the graft machine that drives a huge part of DC and at least half of the jobs inside the Beltway, along with the asset values they support, (2) create an immediate and deep (15% of GDP, but temporary) recession on purpose which neither Congress or Trump will ever voluntarily initiate as it would cause a guaranteed 70% stock market crash along with the immediate detonation of about 1/3rd of all in-debt corporations in the United States and (3) expose the outrageous theft of trillions of dollars from taxpayers over the last several decades to fund the medical scam machine at all levels.

The latter is perhaps the most-serious of all since were the people to experience still having health care at 10% of what they were spending before without health insurance and also without the $12,000+ a year they were spending on that worthless "insurance" there is a very real risk that they might lynch the entire set of 535 + 9 + 1 inside the Beltway and all of their associates as the only form of justice for the theft of their funds over the last 30 years that they are able to exact.

Congress knows all of the above.  Trump knows too.  So does the Supreme Court; after all, Roberts not only rewrote Obamacare (which he had no authority to do) twice but did so into a blatantly unconstitutional format which, incidentally, Congress knew they couldn't do and thus evaded in the first instance (an unapportioned direct tax, which is directly unconstitutional.)

The only reason they would ever take this issue on is if it was their only alternative -- if the risk of not doing so was higher.  Since it's literally impossible to get as few as a hundred people to show up in DC and raise hell for a single day on bank bailouts, say much less the medical scams, there is exactly zero risk to Congress, Trump and the rest of the Government from sticking up the middle finger to the American public on the issue of true Health Reform -- as they have been doing for the last 30+ years.

Therefore, on the math, we have roughly 5 years before the US Federal Government will attempt to spend $2 trillion a year between Medicare and Medicaid annually, $600 billion more on a yearly basis than it spends now.  It may try to forcibly shift some of the Medicaid spending to the States (as the AHCA did) but the bottom line will continue to expand at its ~9% annualized rate.

That cannot be financed.

It is mathematically impossible to do so, and thus it will not happen.

If the government tries to "print" it (via Fed machinations) doing so will further depress productivity which will go negative from its already-suppressed levels (as a result of the last ten years of deficit spending) and at that point GDP collapses and so do asset prices and tax revenue.

So they won't do that either because unlike in 2007 when the total between those two programs was $830 billion they can't get away with it at nearly three times the price.

What they'll probably do instead, therefore, is unilaterally and sadistically cut people off.

If you're one of them you will either suffer, die or (probably) both and they'll target those who are both fat and sick figuring, quite properly, that you'll be physically unable to do anything about it.

The low-hanging fruit, where a full 25% of the spending happens today, is on Type II diabetes.

If you're Type II diabetic you're ****ed, in short.  You better fix that if you can, right now.

If you're overweight and especially if you're obese you had better fix that too, right now, because that has a very high probability of leading to Type II diabetes.

It is my prediction that this is where they'll target first.

Fortunately, if you do it before you get abruptly cut off you probably can either massively mitigate the care you require as a result of that condition or regain sufficient blood sugar control to not be diabetic at all, and you do so at zero cost.  Right here, right now.

But most of Americans won't.

Within a couple of years of the cutoff 10 million Americans will die as a result of their refusal to act today.

In a couple more that count will be 30 million.

And all of them will die horribly.

Along with them will go the housing markets and credit related to it as population shrinks for the first time in American history and massive oversupply rears its head.

Right behind that will be the rest of asset prices.

This will be the "dip" that won't come back.

The worst part of it is that this doesn't end the problem, it only delays the worst of it by another 3 or 4 years.  Market recognition of that, when it occurs, will finish the economy and asset prices off.

And maybe our form of government.

You're welcome -- now are you going to do what you can to stop being one of the dead?

That is the only remaining question because we've already answered whether or not you'll do whatever is necessary to stop the corruption in DC generally and in the medical field specifically -- and that answer is no.

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Why aren't we talking about this?

 DatePublic DebtIntergovernmentalTotal
-09/30/201513,123,847,198,347.81 5,026,770,468,136.52 18,150,617,666,484.33
Purchasing Destruction 1,049,576,318,548.01373,250,728,904.451,422,827,047,452.46

Remember, the actual "public" deficit is the difference in borrowing between the end of the fiscal year and the beginning in debt held by the public.  The total increase in debt, including intergovernmental (mostly Social Security and Medicare) is the actual deficit and is exactly equal, on an arithmetic basis, to the destruction in your personal purchasing power that the government causes (or gain if the government runs a surplus.)

The actual deficit -- that is, the destruction in purchasing power the federal government caused last year, is the percentage of 1.423 trillion .vs. the total GDP of 18.450 trillion or approximately 7.7%.

That's right -- the government intentionally destroyed almost 8% of your paycheck and your savings last year, running a $1.423 trillion dollar budget deficit, which is roughly equal to the worst of the "great recession" when tax revenues went through the floor.

Today there is no such "tax shortfall" excuse. 

The breakdown of exactly where the ugly is coming from will be published next week.  I already know what is in there because I've been following the monthly treasury statements all fiscal year, but wish to report final "as tallied" facts -- and thus will have another post at that time.

Let me be clear: On the arithmetic if we do not stop this now within the next 4-5 years -- that is, within the next Presidential term -- our government will collapse, our economy will collapse, our health care system will collapse and both the stock and housing markets will collapse.  This is not politics, it's arithmetic.  And the worst part of it is that I am utterly certain that the "references" count, along with the "views" count on this article will both be a fraction of the politically-oriented articles I've recently posted.  That the real end of our way of life in America, a threat that is obvious, mathematically certain, not very far in the future and yet avoidable if we act now fails to garner any sort of serious attention is the real outrage folks.

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A bit of the piece I wrote before got my mind going..... I hadn't actually sat down to think about this much (other than when Bill Still was running for the Libertarian ticket), and I bet you haven't either.

But we should.

I'm going to take just our Federal budget and break it down into the following general categories for Fiscal 2013, a year for which we have the Federal Treasury Statement:

Social Security: $870 billion

Medicare and Medicaid (All): $1,113 billion

Children and Families (TANF, Energy, Children and Family Services, Adoption, etc): $50 billion

HUD (Rent, projects, operating funds, etc) + "Community Planning": $45 billion

SNAP/WIC/Etc (Food Stamps & "Free" School Lunches): $109 billion

Veterans Affairs: $143 billion, of which about $52 billion is medically-related.  The rest is (mostly) pensions and readjustment benefits.

Ok, now let's add all this up, with one exception -- Military Pensions.

I get $2,239 billion, or $2.2 trillion dollars, out of a total as spent of $4.058 trillion -- roughly 54%.

Note that the deficit was $680 billion, or one third of that spending.

So let's just take our $2,239 billion and see what we could do with it, assuming we didn't have these programs at all. In other words, let's make a few assumptions:

  • Families in the lowest quintile of income (under $27,794) pay an effective tax rate of zero.  That is, their income (all sources, including benefit checks from the government) is all theirs to spend.

  • Families in the second quintile of income ($49,788) pay few taxes, with an effective rate under 20%. That is, if we remove the taxes the gross amount they'd have to "make" would rise by about $10,000 (what they pay in taxes.)

  • There are an average of 3.12 persons per family.  Since the US population is approximately 330 million, there are approximately 100 million family units ranging from a single person to five (where the bell curve flattens to near-zero) persons.  As these are quintiles this happens to divide out nicely; there are approximately 20 million families in each quintile.

Ok, so we're going to do this instead of the programs we have now:

  • We're going to enforce the Sherman and Clayton Acts vigorously against all in the medical field.  This will result in the cost of medical care plummeting by approximately 80%.  Doubt me?  Go price procedures and drugs in Japan, India and other nations where you can get first world, cash care.  Or, for that matter, price a procedure at The Surgery Center of Oklahoma.

  • We're going to delete all of these programs and benefits outlined above.

  • For the 20 million family units in the second quintile, we're going to give each a tax credit amounting to the 1/5th of the ratable difference between their family income and the $49,788 threshold.  There is an approximately $22,000 range in this quintile so the average household will receive $2,000. That will cost $40 billion a year.
  • For the 40 million family units in the first and second quintile we're going to give each a further refundable tax credit amounting to 100% of the funds necessary to reach the 1st quintile threshold (average for the first quintile is $14,000 @ 20 million people) plus, for those under $40,000, another $5,000.  This will cost (20 million * 14,000) + (35 million * 5,000) or $455 billion more a year.

Note that these two direct refundable tax credit disbursements result in nobody having a family income of less than approximately $32,000 after tax.  We spent $495 billion doing it.

Bluntly: If we do this there are no more poor citizens in America unless you care to argue that a $32,000 household income is "poor."  If you do then I'll preempt your statement by telling you that you're stupid and ought to go find a high building and jump, you ****er.

End of discussion.

We started with $2,239 billion that we whacked out of the budget and have spent $495 billion of that eliminating, on a permanent basis, poverty in America.

We have left $1,744 billion each and every year.  We will not run a deficit ($680 billion) any more, and in fact will run a $400 billion surplus on purpose to start paying down the debt.  We now have $764 billion left each and every year.

That $764 billion is roughly 40% of the remaining federal budget.  We therefore will cut all taxes, income FICA, Medicare, everything -- by 30% so as to bring receipts in line with actual spending.

The result of this is:

  • A balanced Federal Budget right now and, over the space of a few decades, a zeroed Federal debt.
  • I did not touch the military budget, nor any of the other departments.
  • Those who are in the lowest quintile of American life suddenly and permanently have a reasonably middle-class lifestyle.  There is no longer any argument over whether someone will starve irrespective of their economic circumstance, other than by choice.  There are no more poor citizens in America.
  • I have permanently stopped all fiscally-driven inflation, and thus destruction of purchasing power, since there are no longer deficits being run.  In fact we now see purchasing power increases over time of about 2.3% annually.

  • Those who are in the second quintile will see their after tax income effectively rise to their pre-tax income.

  • And everyone, from poor on up, will see a 30% reduction in all federal taxes and fees.

Note that I left a hell of a lot of Socialism in the Federal Government due to handing out money to the lowest two quintiles.  However, I got rid of all of the government waste and corruption at once in social programs by doing it this way, and as a result what has happened is that the people in the lower economic strata got all the money instead of a quarter of it with the various scam artists in and around the government stealing the rest.

I also broke the Medical Monopolies -- everyone can now afford to pay cash for their medical care.

And, I did it while cutting taxes across-the-board by 30% while not only balancing the budget immediately, not in 10 or 20 years in some phantasm of lies and fraud, but also while putting $400 billion a year toward retiring the debt.

We're not short on money in this country, nor on taxation.

We're short on integrity and people who argue otherwise are liars.

Argue with my math; if I missed something or made an error, show me where.

PS: Before the criticism commences, let me point out that I'm well-aware of adverse selection and the arguments that can be raised in support of it, including the fact that were we to do this we might end up with a lot of people in that first quintile by choice!  After all, $32,000 as a guaranteed household income is pretty good for doing nothing!

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