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Originally Published: 3/10/2010


Points of Interest
 By The Issue Wonk

I recently posted the revenues and expenditures for Federal Fiscal Year (FFY) 2009. I get this from the official records of the Congressional Budget Office (CBO). This year the 180-page document contained some information which I thought you might find interesting.

(Chapter 1, pages 6 & 7)

In 2001 defense activities for Afghanistan and other regions totaled $14 billion. By 2009 spending was $155 billion. This included $61 billion for Iraq and $63 billion for Afghanistan for defense activities; $1 billion for Iraq and $6 billion for Afghanistan for “indigenous security forces;” $2 billion for Iraq and $6 billion for “other” for “diplomatic operations and foreign aid.” This includes payments to other countries to help us go to war. The Coalition of the Willing had to be bought. By the end of 2010 the total for all this is estimated to be $1,075 billion. That's $1 trillion, 75 billion.

There's almost $5 billion in 2009, about $40 billion over a 10-year period, that the CBO estimates came out of the Department of Defense (DoD) budget that is not specifically attributed to Iraq and Afghanistan but which they believe was expended for those purposes. So, in a 9-year period we will have spent about $1.1 trillion on Bush's unnecessary wars. Money, I need to add, that we didn't have and that we had to borrow. How much healthcare would that have bought? How much of the national debt could we have paid down? How much of anything could we have done with that money?

(Table 1-3)

You'll notice that revenues from individual income taxes dropped about 20% in 2009. With so many out of work, and even more working only part-time, this is to be expected. What is really curious is that you'd expect corporate income tax to drop proportionately. Not so. Corporate income tax dropped 55% in 2009 from 2008. Does this mean that the corporations are making even less money than the American people are? That hardly seems possible when we have all the reports of huge profits by the financial institutions, health insurance companies, and the defense industries. And there have been no corporate income tax cuts in the last year. I can only assume that more of the money is being sheltered overseas. Just a guess.

Troubled Asset Relief Program
(Chapter 1, pages 30 & 31)

The CBO has the best description of the $699 billion TARP programs I've ever seen. It states that “much has changed” since TARP's inception. “Many institutions have left the program sooner than expected, certain initiatives have gotten off to a slow start or been reduced in scope, and some efforts have been abandoned. As a result, it appears that the costs of the program will be much lower than initially expected.” While this is good news, putting the dollars into perspective with the much-reported bonuses is very interesting.

Capital Purchase Program. This is the big gorilla of TARP. This was cash paid directly to financial institutions to buy preferred stock. $205 billion was spent, but as of the end of 2009, 7 of the 8 recipients had purchased their stock back. The only exception is Citigroup, which converted the preferred stock to common stock. Approximately $85 billion originally appropriated for this purpose was not expended.

Bank of America and Citigroup also received $20 billion each and a commitment to guarantee certain assets. “Both institutions have now repaid the additional funding and terminated the guarantees.”

American International Group (AIG) received lots of money. In November 2008 the Treasury purchased $40 billion in preferred stock. If you remember, much of this money was then passed through to Goldman Sachs. (See The Weekly Wonk, AIG, Goldman Sachs, & Geithner, 1/9/10) In April 2009 the Treasury created a $30 billion line of credit for AIG. Wow, a charge card. I wonder what kind of fees we charge them.

The automotive industry was also a recipient of taxpayer largess. General Motors (GM), GMAC (General Motor's financing arm), Chrysler, Chrysler Financial, and various suppliers got about $81 billion. These funds went out in the form of loans. Chrysler Financial has repaid its debt completely. CBO writes, “[A] small portion of the funding for GM, Chrysler, and the suppliers” has been repaid. A very small portion. In fact, only $2 billion has been repaid.

Term Asset-Backed Securities Loan Facility (TALF) allocated $20 billion to provide financing “to investors who buy highly rated securities backed by assets such as auto loans, credit card loans, student loans, and business loans guaranteed by the Small Business Administration.”

Public-Private Investment Partnership (PPIP) allocated $30 billion of taxpayer money, along with $10 billion from private investors (that's some “partnership,” huh?) “to purchase highly rated commercial mortgage-backed securities (MBSs) as well as residential MBSs not backed by Fannie Mae or Freddie Mac that were issued before 2009.”

Home Affordable Mortgage Program (HAMP) allocated $50 billion for “direct payments to mortgage servicers to help homeowners avoid foreclosure.” As of December 2009 less then $15 billion had been spent to help homeowners.

The good news is that CBO estimates that the total cost for the TARP programs will be only $99 billion (excluding administrative costs) rather than the $699 originally appropriated. Most of that spending will be for the automotive industry, payments for HAMP, and “potential costs for future activities.”

Increasing Revenues
(Table 1-5)

The CBO estimated that if the Economic Growth and Tax Relief Reconciliation Act of 2001, the Jobs and Growth Tax Relief Reconciliation Act of 2003, and the American Recovery and Reinvestment Act of 2009 are allowed to expire, and if Congress restores the estate tax “with a lower effective exemption amount” and raises tax rates on capital gains and dividends, we can increase revenues by $4.5 trillion over the period of 2011-2020. Now, let's see. The tax cuts affected only the top 1% of Americans, “whose incomes average $1.2 million.” (Center on Budget and Policy Priorities) These are the wealthiest of the wealthy. In 2007 only 14,700 filers paid an estate tax – which totaled $21.2 billion. (Tax Policy Center) You do the math. Less than 15,000 filers owing more than $21 billion? How much money are these people worth? Then there's dividends. I'm going to get all logical on you here. If you work for an employer and get paid $50,000 a year, you'll pay 25% of your income to the federal government for your “income” taxes. (Money Chimp) However, if you make $50,000 a year in dividends because you have a boatload of money invested, you'll only pay 15% in “income" tax. (The Phoenix Companies) So, let's face facts. We don't have “income tax” in this country. We have “wage tax.” You pay very little unless you earn your money by hard work. If you're rich, you pay very little. Capital gains are quite different – there's long-term and short-term. Short term are taxed at the normal tax rate. Long-term, however, are given a tax break, which makes sense because it encourages long-term investment. As far as I can see, this is the only thing about these taxes that's actually fair.


A 10-Year Perspective


I got curious about the changes that occurred since 2000. So here it is in a nutshell.

In 2000 Individual Tax Revenues were $1,004.5. That's a little over $1 trillion. By 2009 Individual Tax Revenues were $915 billion. That's a 9% decrease. Considering that most of the decrease occurred in 2009, it may be logical to assume that the decrease is primarily due to lower income from the recession rather than any tax cuts.

In 2000 Corporate Tax Revenues were $207.3 billion. By 2009 Corporate Tax Revenues were $138 billion. That's more than a 33% decrease, most of which occurred in 2009. I looked at the highest point over the past 10 years for Corporate Tax Revenues. It was in 2007 when Corporate Tax Revenues hit $370 billion, the last year before the bottom fell out of the economy.

And what about all those nasty little entitlement programs that everyone complains about? Social Security outlays increased from $491.5 billion in 2000 to $612.0 billion in 2009, less than 25%. But remember, the Baby Boomers haven't hit the system yet. Medicare increased from $297.2 billion to $455 billion, an increase of 53%, and Medicaid, the health insurance for the poor, went from $176.2 billion to $201 billion, a 14% increase. Now, while Social Security and Medicare age requirements are different, you still expect the increases to be similar – but they're hugely different, a clear indication that something else is going on rather than just increased rolls. Well, duh! It's the increased costs for health care. Medicaid data is very interesting. Changes over the past 10 years range from a decrease of .39% in 2006 to an increase of 13.99% in 2002. The other increases range from 3.12% to 9.75%. So, other than the large increase in 2002, it appears that states have been doing a pretty good job keeping Medicaid costs stable. That is until this year. In 2009 Medicaid costs increased 24.88%. Yeah. It's the economy, Stupid.

And what about defense spending? Remember, the cost of the wars in Iraq and Afghanistan are not in these numbers. In 2000 we spent $454.1 billion. By 2009 we spent $613 billion, a 35% increase. Tell me, what was that increase for if spending for the wars isn't included?

The DoD defense spending accounted for about 19% of 2009 spending. Defense and non-defense (but non-domestic) spending accounted for 35% of total spending. And the total defense budget accounted for 59% of total revenues. Think about that. More than half of our revenues go to the DoD. “The United States spends more than the next 45 highest spending countries in the world combined. The United States accounts for 48% of the world's total military spending. The United States spends on its military 5.8 times more than China, 10.2 times more than Russia, and 98.6 times more than Iran. The United States and its strongest allies (the NATO countries, Japan, South Korea, and Australia) spend $1.1 trillion on their militaries combined, representing 72% of the world's total.” (The Center for Arms Control and Non-Proliferation) Think maybe we could maintain our standing in the world and cut our defense spending a bit?

Financial Reports
The Government Accountability Office (GAO) recently issued a press release about its opinion of the consolidated financial statements of the federal government. As those of you in the business world know, these kinds of statements are done for businesses every year. However, for the federal government, no opinion could be made “because of widespread material internal control weaknesses and other limitations.” The press release said that Gene L. Dodaro, Acting Comptroller General of the United States reported:

While financial management has improved significantly since the government began preparing consolidated financial statements, for the 13th year in a row now shortcomings in 3 areas again prevented us from expressing an opinion. I'm referring to serious financial management problems at the Department of Defense (DOD), the federal government's inability to adequately account for and reconcile intragovernmental activity and balances between agencies, and the ineffective process the federal government uses to prepare the consolidated financial statements.”

Dodaro also cited material weaknesses involving improper payments estimated to be at least $98 billion, information security across government, and tax collection activities. He noted that 4 major agencies – DOD, the Department of Homeland Security, the Department of State, and NASA – did not get clean opinions.

. . .

Long term, the federal government faces huge structural deficits driven by rising health care costs and demographics. Focused attention from Congress and the administration is needed to address these problems and put the government on a more sustainable path,” Dodaro said.

. . .

He also singled out meaningful financial regulatory reform as especially urgent. “Problems in the nation's financial sector have exposed major weaknesses in the current U.S. financial regulatory system. If those weaknesses are not adequately addressed, we could see similar or even worse crises in the future,” Dodaro cautioned.

I thought these were some interesting things to point out to you. At the start of the so-called Bipartisan Healthcare Summit on February 25, 2010, President Obama said that the increases in Medicare and Medicaid spending were the biggest contributors to our annual deficit. Not exactly. As you can see, the primary increase in Medicaid is due to the economy, but that does not exclude the possibility of huge increases if costs are not held down. Medicare is a significant increase and, as the baby boomers hit the system, it'll get worse. But look at defense spending. This is truly discretionary. Reducing increases in the Pentagon's budget could go a long way to reducing the deficits. Or, if you want to get moral about it, what would you rather spend your money on? Health care for Gramma or a new stealth fighter jet that the Pentagon says it doesn't even want? Yes, it's time we made some hard decisions.


© The Issue Wonk, 2010


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