Tax Trickery - Tax Reform

In my post on Entitlements, I noted that the government also gives free money to corporations and individuals who did not contribute tax dollars to directly fund the handout. I call these things tax trickery to separate them categorically from entitlements and government-mandated charities (Welfare & Medicaid).

I think that these are even more abhorrent than Entitlements since the giveaways represent government favoritism, they bias the affected markets and they should be eliminated in favor of lower taxes for all.

To focus in on any one of these tax tricks would be like hand-wringing about tornadoes against a backdrop of hurricanes, typhoons, blizzards and tsunamis. They all need to go.

Here's a list of a whole bunch of them and the associated federal tax revenue losses:

The list adds up to $4.122 trillion over 5 years or $824 billion/year. There are also some smaller ones.

Highway subsidies                                                                 $   35 billion/year
Accelerated depreciation                                                       $   24 billion/year

R&D tax credits                                                                    $     7 billion/year
Farm subsidies                                                                      $     6 billion/year
Federal Reserve interest payment to banks on reserves          $     9 billion/year
                                                                                             $  81 billion/year

These bring the total to $905 billion/year but there's more.

These bring the total up to $979 billion/year (above table covers three years).

This doesn't include the 6% dividend that the Federal Reserve pays to member banks; this number was $1.2 billion in 2008 and doubles every 4 years or so.

Related Connecticut state tax trickery of $358 million is quite modest by comparison. Extrapolating by population, this is another $30 billion/year; roughly 1/33rd of trickery at the federal level.

The sum of all this trickery exceeds $1 trillion/year excluding the costs of management. All this favoritism also smacks of backroom deals, campaign contributions and general corruption.

Don't get the idea that I'm arguing for more taxes because I'm not.

However, I do favor getting rid of all of this tomfoolery in exchange for cutting corporate and personal income taxes equivalently.

I would also except income from Social Security since we already pay income taxes on the amounts withheld and taxing it again is double taxation; credit my cousin Suzanne for pointing that out to me.

Reform Details

State
For state tax trickery, most is corporate handouts (see table below) so elimination with a corresponding reduction of the 9% state corporate tax rate should be better than a wash; this stuff invites tax fraud and costs money to implement and verify.

CT Tax Credits 1995-2007

Total corporate tax revenue in Connecticut is about $400 million/year so the average trickery of about $130 million should wash out with a rate reduction to 6% for all corporations.

Federal

Health Insurance
Federally speaking, of all of the tax trickery that goes on, the biggest by far is that employer-provided healthcare is not taxed like wages are; there is no equivalent to a payroll tax. I think this is a subsidy for the biggest, most profitable business on earth. I'd wager that if companies paid tax on it, there'd be a lot more push-back on health care costs by folks with clout; that could not be ignored. Taxing this with FICA (payroll taxes) ought to focus industry on the 30% profits of insurance companies and the 40% profits of hospital conglomerates; at least until Obamacare entices all employers to stop providing $14,000 coverage for all in lieu of the $2,000 tax. When that happens, we'll buy our own and be glad the corporations stepped up to the fight first.

That is the only tax I would add but it is mostly an attention-grabber since I will propose halving corporate taxes as I progress through this mess.

Retirement Savings Deductions
If we look at the Retirement Savings breaks (mostly 401(k) tax deferrals) and the Reduced Capital Gains Rate, getting rid of them in exchange for lowering all tax brackets is basically a wash at the low end and better than a sharp stick in the eye at the high end. The average deduction is $2,733/year so the tax break would be $684 in the 25% bracket so reducing the bracket from 25% to 23.9% makes it neutral. More on Capital gains later.

Social Security savings are taxed, why not this stuff?

Mortgage Interest Deduction
I think the mortgage interest deduction is huge dollar-wise but I think that all it really does is non-linearly inflate the cost of housing; like Medicare and Medicaid inflate the cost of health care; like government funding inflates the cost of education; etc..

Given a debt-to-income recommendation of 36% and the assumption that 85% of debt is for real estate ($1,581/month), the average $62,000 earner can afford a $300,000 home with a 30-year fixed rate of 4.475%. The $10,000 in interest represents a $2,500 tax savings in the 25% bracket, or 4% of gross. Reduce taxes by 4% more and it's a wash.

Children
The Earned Income Tax Credit and the Child Tax Credit are essentially Welfare duplication and should be abolished. They also encourage foster care fraud and cost even more money to implement and verify. If you can't afford kids, I suggest celibacy, condoms or the liberal's favorite; just not on my dime, please.

We already get a deduction for dependents.

State and Local Tax Deductions
State and local tax deductions should also go. Given that, of the 40% paid in taxes 20% is state and local tax (sales tax too), dropping the 25% bracket by another 5% makes it even again.

Capital Gains Rate versus Inheritance & Gift Taxes
Now that the 25% bracket costs just 14.9%, eliminating the preferred Capital Gains rate in favor of the regular tax rate makes the average $62,000 earner tax neutral while the 1-percent group pays 29.8%; better than a sharp stick in the eye and probably what a liberal would call more fair although I'd say anything but a flat tax is unfair.

The trade-off should be the abolishing of the inheritance tax (aka the death tax) and the gift tax; we should be able to do as we please with our earnings.

Tax Deferral on Foreign Subsidiary Income
To fix the problem with this (can you say Apple?), the corporate tax rates need fixing. The chart below shows the magnitude of the problem and would show $1.7 trillion for 2013.

Given the average 17% actually paid in tax by corporations (see chart below) on $2.2 trillion in income, this seems a reasonable compromise; compress the corporate tax brackets so that the top bracket becomes half of what it is now (35% -> 17.5%) and tax this money while allowing no deductions for tax paid abroad; incentive to come home.

Other Corporate Payola
As part of this deal, abolish the deductions for Accelerated Depreciation of Capital and for R & D. Regular people can't depreciate their stuff so businesses shouldn't either; if you need it to turn a profit, why should taxpayers finance it?

Same goes for R & D; innovate or die and don't burden taxpayers with your problem.  

Charitable Deduction 
The deduction for charitable giving should also be abolished in favor of another reduction of 3.75% allowing for the private funding of Welfare, Medicaid and whatever as I suggest at the end of a previous post.

Liberals love to give their money away so confiscation is not needed.

This is promoting the general welfare as intended by the Constitution.

Transportation
Highway Subsidies to states, largely funded by fuel taxes, are the wrong way to go. Taxing fuel is dumb, especially for this purpose. We end up giving lots of it back for the LIHEAP Welfare program as well as taxing farmers, landscapers and boaters for highway improvement. It also raises the cost for home heating.

Given the more than 1.2 trllion ton-miles driven every year, a tax of a 3 cents per ton-mile would produce $36 billion/year. Of the 47,908 interstate miles, Connecticut has only 346 so we'd get $405 million/year from the federal levy; far more than we need. No cabinet department needed, just a ton-mile tax on the interstate operators since large vehicles deliver the most wear and tear to our roads. Every dollar received is automatically distributed to the states by mileage ratio so congress can't touch it.

Do the same with ships and pay to keep the harbors dredged by the Army Corps of Engineers.

Farm Subsidies
This brings us to Farm Subsidies. This is an anachronism from the depression of the 1930's.

Given $440 billion in revenue and the tax reductions proposed herein, this subsidy can go. Additionally, removing fuel taxes will shave production expenses.

The reduced tax burden helps all businesses grow and hire workers.

Preferential Corporate Tax Rates
Similarly, all of the preferred industry rates shown in the third table from the top can go since corporate rates are halved by the tax reductions proposed herein.

The biggest losers (dollar-wise) are Energy, Telecommunications and Information Technology Services (whatever that is); I have no doubt they'll be fine without having me subsidize them.

Summary
I have proposed ending all tax trickery favoring the few with broad tax reductions favoring all. This swap is essentially revenue neutral and causes no pain for the average earner; the middle class.

In reducing the 25% bracket to 11.15%, this plan:

• Makes retirement more affordable while eliminating the 401(k) deduction
• Enables the funding of Welfare and Medicaid outside the auspices of government confiscation while eliminating the charity deduction
• Eliminates the mortgage interest deduction
• Eliminates the state and local tax deduction
• Lays the groundwork for my proposed Grand Bargain.

In chopping the corporate rates in half, this plan:

• Repatriates foreign dollars
• Ends corporate handouts
• Promotes the growth of all businesses
• Adds a wake-up tax on employer-sponsored health insurance; due to Obamacare, companies will soon stop providing this benefit (in lieu of the penalty tax) so using (forcing) the corporate lobby to drive down costs first will be helpful

In eliminating the preferred Capital Gains rate, this plan:

• Reduces the top bracket to 25.75% (same 13.85% reduction as for the 25% bracket)
• Taxes the real source of the 1-percent's income by taking 10.75% more
• Eliminates inheritance and gift taxes

In replacing the fuel tax with a ton-mile tax on heavy vehicles, this plan:

• Taxes the real source of highway wear and tear
• Reduces farm production costs
• Reduces heating oil by about $1/gallon and gasoline by $0.63/gallon in Connecticut
• For me, this is worth nearly $2,000/year
• Funds the Army Corps of Engineers if also applied to ships

Global Economic Model

My old friend Jack, jokingly I think, suggested that I develop a transfer function (model) of the economy. I say jokingly because the world economy is neither linear nor time-invariant. Jack and I are both electrical engineers and I think we'd agree that the world is full of non-linear behavior over virtually any time frame. That said, the concept is still appealing.

How do the powers-that-be prove to themselves that the policies they enact are actually beneficial?

I've been writing about political issues of concern for fiscal conservatives:

• K-12 Education
• Healthcare
• Deficit Spending
• National Debt
• Government Employee Pensions
• Energy
• Government Regulations
• Targeted Taxes
• Debt/GDP Ratios
• The Grand Bargain
• Immigration Reform
• College Education
• Entitlements
• Tax Trickery
• Taxpayer Funded Insurance

Based on what I've learned since I started studying this stuff, it looks pretty clear that the (untrained) social engineers do the same thing self-taught regular engineers do; slap some stuff together and, fingers crossed, head to the lab to see what happens.

Good engineers read specifications, develop architectures to meet requirements, perform detailed design work, build models for simulation, compare simulation results to requirements, build prototypes, develop test plans, integrate smaller pieces of a large design and then have the whole thing independently verified by a disinterested third party.

All of this before releasing the design on an unsuspecting public.

Social engineers say pass this law so wee see what's in it as Nancy Pelosi did with respect to Obamacare. What are these people thinking?

The Congressional Budget Office (CBO) is supposed to score all legislation but the scope is limited to the budget, not the world economy. Take a look at some of these scores and I think you'll agree that it is not terribly useful. In addition, I'm not sure the CBO is a disinterested third party.

Requirements

So, what must such a model entail?

The transfer function must accommodate:

• multiple inputs (wages, tips, loans, imports, labor, materials, energy, etc)
• multiple conversion factors (interest rates, market prices, commodity prices, etc.)
• multiple outputs (bills, taxes, exports, savings, labor, finished goods, etc.) that sum to 100%
• provision for storage (savings and credit)
• provision for time sensitivity since interest rates apply over time.

Analog Model

As a circuit design engineer, I like to think of transfer functions as analog (linear) and analog means amplifiers with feedback paths. These implementations can be simulated with software like pSpice.

However, even the very best amplifiers do not have sufficient dynamic range to handle the scales encompassed by the global economy. We'd need to accurately predict sums from, say, one cent to hundreds of trillions of dollars. This spans more than 16 decimal places and analog circuits simply are not up to it.

In addition, the analog model has no notion of time; everything happens more or less instantaneously.

That said, the arithmetic is an important part of the model and it can be performed flawlessly in the digital domain with computers and software. In the digital domain, we can also introduce the notion of time by sampling the mathematical result after it is calculated and before applying the previous result as the new stimulus to the model.

I'm not sure about software simulators since I'm a hardware guy but I know that we often develop hardware with a language called VHDL and I know that the simulators for that work quite well.

Of course, some will argue that this is an expensive approach. I can state categorically that it is cheaper than the method currently in use; throw it against the wall and see what sticks (according to someone with a vested interest in the result).

Digital Model

The digital model can have as much dynamic range as is required. Today's 32-bit computers have a virtually unlimited dynamic range with double-precision floating-point format.

Every economic object (wage earner, bank account, security (stocks and/or bonds), company, factory, farm, government, country, etc.) can be represented by a generic function with multiple inputs, multiple conversion factors, a storage mechanism (essentially an accumulator) and multiple outputs that represent the combined and converted value of all inputs at their prevailing rates of gain or loss at any instant in time.

All outputs of all economic objects (EO) can be sampled simultaneously, each sample being modified with newly prevailing rates as it is fed back to all objects to produce new outputs. And so on...

This is the description of the classic finite state machine. More specifically, a Mealy Machine.

The INPUTS are either independent sources (of money, material, labor, etc.), the fed-back samples of any/all other economic objects' output states, prevailing rates (interest rates, commodity prices), conversion factors ($/hour, $/ton, $/barrel, $/Euro, etc.) or output percentages for complex objects that provide output streams to multiple other objects like employees but whose totals must sum to 100%.

The State Transition Conditions (STC) effectively comprise the mathematical operations (mostly arithmetic but with some algebra and calculus) and conversions between input values and some common standard like money (US dollars, for example) in the previous section. The STC might also comprise an accumulation (essentially the integration function of calculus) of money like a bank account or an accumulation of goods like a warehouse.

The OUTPUTS are the simultaneous samples of all of the output states of all economic objects. These are fed back to the input side of the economic objects simultaneously with new (or unchanged) prevailing rates and independent sources to produce new output states for successive samples. There may be many outputs of various types; a person might output both man-hours to an employer and money to a grocery store but the man-hours must limit to 24/day and the money must limit to total liquidity. Outputs can change between samples; for example, after a layoff, many outputs from a company may disappear.

Successive samples produce an economic history or model of the system at hand.

Example Economic Object

The most obvious example of an EO is a taxpaying member of the US workforce.

I have long used Quicken (tm) software for my personal economic model so I know that I have lots of inputs and outputs; my itemized payee list has hundreds of entries but sadly, there are far fewer inputs. I'll choose a few representative ones for the example because the reality is too tedious.

Inputs

• Paycheck
• Tax Return (Federal)
• Tax Return (State)
• Checking Account
• Landscaper (contract labor)
• Food
• Electricity
• Heating Oil
• Satellite TV

State Transition Conditions

• FICA rate
• Federal Income Tax rate
• State Income Tax rate
• Real estate property tax rate
• Auto property tax rate
• Savings rate
• Landscaper ($/week)
• Grocery bills ($/week)
• Electricity bills ($/month)
• Heating oil (contract $/month)
• Satellite TV (contract $/month)
• Health Insurance ($/month)

Outputs

• Checking account (savings)
• 401k (savings)
• US Treasury (FICA plus withholding)
• Connecticut Treasury (state withholding)
• City of Shelton (real estate plus property tax)
• Landscaper
• Stop & Shop
• United Illumination
• Sippin Energy
• DirecTV
• United Healthcare
• Man-hours to employer

Of course, I'm retired so I don't get a paycheck and I don't give any man-hours to an employer but these are common inputs and outputs for most of us and they're listed for informative purposes.

Scale

For small-scale models this could easily be implemented with a spreadsheet program like Excel.

However, for a global model with literally billions of economic objects, Excel is not up to it. As analog computation had issues with dynamic range, spreadsheets have issues with scale. In addition, spreadsheets are rarely subject to any sort of authentication protocol; for example, the President's budget was clearly developed on a spreadsheet but the formulas in the cells (and the data leading to the formulas) were not published for peer (or public) review.

In addition, a model with billions of EOs and hundreds or thousands of STC calculations per EO will not run effectively on a personal computer; I'm thinking supercomputer.

Comparison with Reality

So, how well might this model correlate with the real world?

One obvious advantage is what I think interested Jack; everything is considered as a whole. This is completely different from the manner in which national and global economic information is usually presented to us by the politicos and the media; they prefer to treat everything as though it has no relationship with everything else. They ignore chaos as exemplified by the Butterfly Effect.

A possible disadvantage is that, in the model, everything is sampled at the same time whereas in the real world, everything is asynchronous; securities markets open and close at different times, people get raises and pink slips seemingly at random, people are born and people die. Some things appear to be synchronized to the rotation of the Earth, others appear to be synchronized to its orbit while others appear to synchronized to the orbit of the moon. Sometimes, shit just happens!

The disadvantage can be partially overcome by increasing the sampling rate and drawing the conversion factors from live feeds over the Internet. The model can also be verified by providing inputs like natural disasters into the model and observing the behavior of the EO outputs with time for correlation with similar results from the past.

Usefulness

What, you might ask, is useful about this model?

I can promote the company (founded by my brother and his wife) that has developed sophisticated financial modeling software for businesses and institutions; in fact, I will admit to a bit of plagiarism with respect to the notion of objects. This product has been developed to use GAAP for the creation of Income Statements, Balance Sheets and Cash Flow Analysis. It can perform any number of "what if" analyses including full Monte Carlo simulations. Perfect for business modeling but with intentional limitations for those purposes and probably unsuitable for the requirements at hand due to scale.

The useful characteristic of my proposed model is also that of prediction but on a grand scale; global. Many small- and specific-case economic models have been developed to help predict the likely outcomes of specific plans or policies but none for the big picture. My model, if fully or only partially populated with EO data and the underlying network of connections, could be used to predict global economic outcomes; within reason.

I say "within reason" because most EOs are people or are led by people and people don't always behave reasonably. Conversely, what some consider to be reasonable is thought of as crazy by others.

For example, Texas Governor Rick Perry recently came to Connecticut to entice manufacturers to relocate to his state to take advantage of the low tax, low regulation business environment there. Instead of considering ideas to level the playing field, there was a lot of angst and cries for federal laws to prevent poaching. Ah, the joys of being liberal and clueless; feeling entitled to unconstitutionally restrict the freedom of others to compensate for you own failed policies.

As another example of reasonableness, let's talk about the availability of EO data for the model. The basic problem is that this is private information and most if not all EOs will not share it for obvious reasons; economic life is a competition.

People compete for jobs, companies compete for business and countries compete for export markets.

Unless you're President of the US with the access and willingness to use the country's formidable electronic hacking, spying and eavesdropping capabilities on both your own citizens and others around the world, good luck.

Oh wait, we do do that. So why do our policies produce such consistently poor results? 

As I said, good engineers read specifications, develop architectures to meet requirements, perform detailed design work, build models for simulation, compare simulation results to requirements, build prototypes, develop test plans, integrate smaller pieces of a large design and then have the whole thing independently verified by a disinterested third party.

All of this before releasing the design on an unsuspecting public.

Ask questions.

Taxpayer Funded Insurance

I had been thinking about writing a post about FICA (Social Security and Medicare). The idea had been to show how, even though it has some good attributes, it is too big a temptation for spendthrift legislators.

The temptation lies in the fact that any premium revenue is spent immediately not for the intended purpose but, more often than not, for totally unrelated purposes. Then, when claims are made, government must borrow the money to pay them; and pay interest on both the debt and the misappropriated premium monies.

This is quite obviously a bad thing but then I thought, this problem is much more extensive than FICA.

FICA is an acronym for the Federal Insurance Contributions Act tax and this got me thinking about government-funded (taxpayer-funded) insurance in general. There are lots of taxpayer-funded insurance plans beyond FICA.

• Welfare/Medicaid/Obamacare
• Unemployment Insurance
• Flood Insurance
• Bank Deposit Insurance (FDIC)
• Crop Insurance
• Worker's Compensation Insurance
• Life Insurance (for government employees)
• Federal Pensions
• Military Pensions
• State Pensions

One third of the national debt, about $5 trillion, is from raids on the premium trust funds.

Distribution of $5 Trillion US Owes Itself 

More than three fourths (76%) of Connecticut state debt is from raids on (or non-payment of) trusts.

State Debt

I started with the idea of FICA, Social Security in particular, because people talk about it going bankrupt as if it wasn't already bankrupt. They talk about the Social Security trust fund as if it actually had some money in it; it doesn't, it only has IOUs from Uncle Sam. The trouble is that Uncle Sam is us; we pay the premiums, we pay the interest on the IOUs and we also pay the interest on the bonds we sell to pay claims.

Raise your hand if you think this is bad practice.

Of course, bankrupt is the wrong word since the federal government is forbidden by law to borrow money to pay FICA benefits (claims). We must have really good lawyers since the government borrows money to pay FICA benefits every week.

With the Boomers retiring, fewer taxpayers will have to support more retirees and benefits will decrease; I think that's why we still make pennies.

Since this is nothing to be pleased about, it's difficult to explain the congratulatory demeanor of our liberal leaders; all handshakes and smiles about mismanagement that makes Detroit look good.

So, how do we fix it?

FICA (Social Security and Medicare)

By the time most of us retire at 65, we have about 15 years left. With an average working life of about 45 years, we need to put away about one third of our earnings to make sure we don't go broke.

In my plan, I suggest continuing FICA as-is for those aged 45 and older. The idea is to keep the promise of these programs for those 45 and up since it's too late to play catch-up. Those folks will continue to pay FICA as will their employers (7.65% each to fund Social Security and Medicare...aka Payroll Tax); these are the maximum earning years for most of us.

For those below 45, they will no longer pay FICA although their employers will. Thus, the net program loss of revenue will be small since these are the lesser earning years. The average 44-year old earner (salary average in US is $62,000) can save well over $300,000 in 20 years starting with 7.65% of pay (the amount no longer paid in FICA) in a safe 3% government bond along with another 10% of wages. These monies can be directly deposited in individual trust accounts.

Saving 17.65% of $62,000 in a 3% Bond for 20 Years

The point is that this will pay the same as the current Social Security payout ($1,250/month including $50/month for a catastrophic health insurance policy) over 20 years and still have $119,000 left. This is living
on $15,000/year but it doesn't count what that person may have already saved.

Since the government spends 40% of our earnings, we must save about 20% and live on 40%. For the average income of $62,000, this means living on $24,800/year. So hopefully, there is additional savings because this will only last 12 years withdrawing at $24,800/year.

Withdrawal @ $24,800/Year

A 22-year old has much more potential; starting at minimum wage and working up to a $62,000 salary (or more with college degree) will net more than a half-million dollars toward retirement.

Any money left after death can be passed to heirs, unlike Social Security.

With Social Security, if you live beyond expectations, the rest of us pay. Of course, when Social Security began, there was no life expectancy after age 62.

Welfare/Medicaid/Obamacare
Welfare and Medicaid aren't really insurance since no premiums are paid. This is really taxpayer-funded charity.

Medicaid is so inefficient it makes me ill; no pun intended.

Obamacare makes Medicaid appear reasonable because it currently expected to be just as bad and everyone except the liberals (and some of them too) know it will get worse.

Do as I suggest and get the government out and the costs will drop.

Here's what a Nobel Peace Prize winner thought about entitlements like this:

We all know of course that we cannot abolish all the evils in this world by statute or by the enforcement of statutes, nor can we prevent the inexorable law of nature which decrees that suffering shall follow vice, and all the evil passions and folly of mankind. Law cannot give to depravity the rewards of virtue, to indolence the rewards of industry, to indifference the rewards of ambition, or to ignorance the rewards of learning.

Root, Elihu (2003-12-01). Experiments in Government and the Essentials of the Constitution

Unemployment Insurance
This stuff is great when you need it but it can be a drag on a state's economic growth since the premiums are paid by employers; new companies will likely look elsewhere if rates are too high.

There is also tax trickery here; new employers get preferential treatment. This generally means that long-term employers pick up the tab when the new guys leave town for greener pastures.

Personally, I'd rather have the Connecticut employer pay me directly. If not, I'd rather attract more industry with lower taxes, er, premiums so I'd have more options after a layoff.

Extending it with the funds provided by good employers or worse, taxpayers, after the financiers loot the market is the wrong way to go; I say we should jail the wrongdoers, confiscate their ill-gotten gains and fund the unemployed with the proceeds for as long as possible.

Flood Insurance

I wrote to the local paper to express my outrage over the federal government's need to borrow the money to pay flood insurance claims. We charge about $3.4 billion a year in premiums, but just Katrina and Sandy cost over $140 billion in eight years.

Worse, if the predictions made by the global warming crowd are right, it will only get worse. I think they're right, regardless of the causes.

Having grown up on the water, I can appreciate the desire to live on the water despite the risks. But insurance premiums need to go up by a factor of 10 or more to cover the damage. Taxpayers should not subsidize questionable decision making by homeowners, businesses and utilities.

Bank Deposit Insurance (FDIC)

In light of apparent systemic risks facing the banking system, the adequacy of FDIC's financial backing has come into question. Beyond the funds in the Deposit Insurance Fund (DIF, a single-digit percentage of deposits paid as premiums by the banks) and the FDIC's power to charge insurance premiums, FDIC insurance is additionally assured by the Federal government.

I don't like this one bit.

According to the FDIC.gov website (as of March 2013), "FDIC deposit insurance is backed by the full faith and credit of the United States government". This means that the resources of the United States government stand behind FDIC-insured depositors." The statutory basis for this claim is less than clear.

I like that the banks pay for the DIF but given that the Federal Reserve Bank was required to pay commercial banks 6% interest on their reserves as a part of the 2008 Emergency Economic Stabilization Act, this seems wrong; I think the depositors are insuring themselves against risky bank behavior.

The Federal reserve has to stop paying the banks anything and the DIF has to get funded by the banks to an amount at least sufficient to cover a failure of the largest megabank.

Crop Insurance
Between 1980 and 2005, the Federal Crop Insurance Corporation (FCIC) recorded $43.6 billion in total claims, averaging approximately $1.7 billion in losses per year. Three-quarters of FCIC claims result from three weather-related disasters –drought, excess moisture, and hail – with the remaining claims divided among 27 different causes, including crop-damaging frost and tornadoes.

Taxpayers pay about 62 percent of the insurance premiums which are set to cost more than $94 billion over the next 10 years, according to the Congressional Budget Office. The policies are sold by 15 private insurance companies, which receive about $1.3 billion annually in total from the government. The government also backs the companies against losses.

These subsidies drive up the cost of the program, with farmers buying higher levels of coverage than they otherwise would. Without the subsidies, crop insurance payouts during last year’s drought for the two largest crops, corn and soybeans, would have been just over $6 billion, about half of the $12 billion that the government actually paid.

This is a leftover from the dust-bowl days of the depression. Farmers’ net income for 2012 is expected to be $114 billion, down 3 percent from 2011 but still the second highest in 30 years. Let them pay for their own insurance.

Government Employee Unions
Before talking about the other taxpayer-funded insurance plans, this needs to be addressed.

I am opposed to unionization of government workers; in the private sector they make sense as protection against evil capitalists but in the public sector, they are the protectors. I think it's a conflict of interest; imagine if the armed forces were unionized and you'll see my point.

The full-time pay of all Connecticut state employees is $4.2 billion and they're unionized; this, without counting the teachers who are also unionized and receive $2.8 billion in salary. They also provide heavy financial support to politicians affiliated with the democrat party; spendthrift liberals who love big government. My point should be coming clearer.

In the private sector, workers represented by a third party are called contractors, not employees. Contractors are paid under IRS Form 1099 and they receive wages only; no benefits.

Being provided wages and benefits as a contractor is like having your cake and eating it too.

I was a contract engineer for many years. I bought my own insurance, paid both sides of FICA (15.3%), had unpaid vacation and no holidays to speak of.

Nearly 36 percent of public-sector employees are union members, while only 6.6 percent of private-sector employees are part of a collective-bargaining group. Local government workers unionize at a higher rate than federal employees, with rates of around 42 percent and 27 percent, respectively.

Worker's Compensation Insurance
This is essentially disability insurance except that its primary purpose is to shield employers from litigation.

Be that as it may, I'm a big fan of disability insurance; everyone should have it. The difference here is that the insurance premiums do not all get paid to the government; it's mostly private and the employers pay the premiums.

The exception, as usual, is for government workers and it's expensive with outlays in 2004 in Connecticut of $18 million/year and the state is self-insured.

Since there are unions, the unions are essentially the employers so the union should pay the tab (0.4% of all wages), not the taxpayers.

To make matters worse, the state Worker's Compensation commission costs $3 million/year. The unions should pay for this function too.

There were constitutional challenges with respect to the 14th amendment (due process) but, in the end, it was determined not to deny due process. If the unions have skin in thee game, they'll find the right balance of process!

The rates are risk-based with forestry and contact sports being the most costly followed by police and firefighters.

Life Insurance for Government Employees
In fiscal year 2010, the total amount of Federal Employees Group Life Insurance (FEGLI) coverage in force was $824 billion, and the balance in the plan’s financial fund totaled approximately $38 billion. In addition, throughout 2010, FEGLI paid out approximately $2.6 billion in insurance claims to beneficiaries of federal employees. The program also involves substantial premium costs to enrolled federal employees, who pay two-thirds of the premium for an initial amount of Basic life insurance.

Of course, the FEGLI fund contains nothing but IOUs.

The rate paid by all 4 million covered employees, regardless of age, for each $1,000 of Basic insurance is $0.150 bi-weekly or $0.325 monthly; so, for the average federal salary of $66,667, the premium is $260/year. This amounts to about $1 billion leaving taxpayers on the hook for $1.6 billion/year. Raise the premium to $0.845 and stop the subsidy.

States have similar programs and their unions should be paying for this too.

Federal Pensions

I've already covered this in another post. I'm concerned that the payout is one third of the Social Security for one sixth of the number of beneficiaries: it pays out nearly 100% more per person. What a racket!

Use my plan.

Military Pensions
See entry above for federal pensions.

You know what, I'm OK with that for the military or anyone routinely in harm's way and not a union member. The whole idea of government pensions goes back to the Revolutionary War and the gratitude the new nation felt toward it's liberators. They deserved it then and they still do.

State Pensions

I'm not OK with the state and local pensioners taking an average of $26,860 in yearly retirement benefits; Social Security pays an average of $15,000.

State and local governments employ 14.4 million people full-time and 4.8 million people part time for wages of $840 billion ($768 billion for full-time). This gives an average full-time wage of $53,334 so pensioners are pulling down a bit over 50% in retirement.

In addition this represents nearly 14% of the entire workforce. Government is essentially management so why is it 14% when, in the private sector, it's 4.28%? Think about it.

While I'll admit the average wage here is 14% lower than the average wage in America, I don't think it justifies the higher retirement benefits. See Fact #2 here.

Some local governments are allowing themselves to be bankrupted by these ridiculous retirement benefits; this is childish behavior since everyone suffers for the benefit of a few. Some state and local governments are changing their laws to deal with the reality of the fact that these benefits are simply not sustainable without increasing government spending beyond the existing 40% outlined in the preface of this blog.

Use my plan.

Social Engineering Design Dilemmas

Having worked thirty-something years as a design engineer, I have plenty of experience with design dilemmas. A design dilemma typically occurs when the project specification has conflicting requirements.

It is fairly typical for individual design requirements to be in conflict with each other; size, weight and power consumption are readily recognizable ones for today's electronic gadgets but the options are limited only by imagination.

As a simple example, a new cell phone design might have the most popular features, fit in the pocket and be light as a feather but the battery life is only 30 minutes and the requirement was for 12 hours. Since the design does not meet the battery life requirement, the phone would be considered to be of poor quality.

Quality is essentially the degree to which something meets requirements.

One of the most notable things I learned as a designer is that a good specification is hard to get. This is often the result of ambiguity, poor writing skills, lack of market understanding, wishful thinking and/or plain old stupidity. The results are both predictable and well represented. I read last week of a submarine design that weighed so much, it was feared that if it submerged then it would never come back up. Since it was designed to carry people, I think we'd all agree that the design was of poor quality.

Thankfully, the flaw was revealed before testing.

In my last post on Compassionate Conservatism, I took a detailed look at the fiscal cost of several social issues in the news and saw a Social Engineering dilemma with Welfare and Medicaid.

Rather than discuss it in that post, I felt it was worthy of a separate discussion.

Social Engineering 
Just as with what I'd call regular engineering, social engineering is not immune to design dilemmas. In fact, I'd say that social engineering is much more susceptible to them because, unlike regular engineering which is based on immutable physical laws, social engineering is based on people; people are unpredictable and may or may not even obey their own laws at any given moment. In addition, their (our) laws are constantly subject to change, repeal and/or conflict with the new laws written every day.

Finally, these laws usually deal with money, a very sensitive subject. Social Engineering is the politically correct term for using the government to redistribute wealth. It used to be called Socialism but that term has earned bad connotations.

Just in the City of Chicago, 150 new laws were put into effect this year! The most onerous ones are to increase taxes to pay for unfunded pensions for government workers; said funding having already been spent by the social engineers on unrelated items.

If regular engineering had this characteristic, my head would have exploded long ago.

Thank God that the Social Engineering graduates from Wossamotta U are able to digest and understand the interrelationships between these constantly changing laws!

But seriously, there is no such thing as a degree in Social Engineering; and that is a telling fact. Instead we have things like Political Scientists, Psychologists, Sociologists and Lawyers but, with all due respect, none of these would be called hard science; inferring methodological rigor.

This gets back to the problem of getting a good specification; a specification is a set of requirements. A basic tenet of a good specification is that each requirement must be succinct, unambiguous and testable. However, the process for writing Social Engineering requirements (laws) rarely, if ever, produces this result.

I've heard it said that you never want to see the processes for making either laws or sausages.

Here's the lawmaking process: an idea erupts in someone's head, a meeting is called, a draft is written and then all hell breaks loose before the committee report is written. Amendments that have nothing to do with the originally good idea are added because either the amendments would never be accepted alone or they are so heinous that they serve to kill the original idea. Then the report goes to the other house of Congress (or state legislature) for a repeat performance with a different cast. Then both houses try to find agreement while totally obscuring the original intent. If, by some miracle, agreement is found then the process repeats a third time at the executive level.

There's a derogatory phrase engineers use to describe a product that is a total piece of crap; we say it must have been designed by committee.

As an enlightening example, the US Constitution had 4,543 words in it's original form and has had 27 changes over the course of 226 years, the first 10 (the Bill of Rights) all at once. By way of comparison, the Federal Tax law contains nearly 4,000,000 words and changes more than once per day on average; and that's just one law! This fact gives me a new appreciation for the brilliance of the founding fathers and shines an unflattering light on how ineffective and inefficient today's social engineers really are.

I think I've made my point about the inherent dangers of Social Engineering so I'll move on to the case at hand; Welfare and Medicaid.

Recap
In my last post, I noted that about half of the country leans left so there are about 70 million liberals in the workforce. Given 23.05% in new discretionary income (from my plan) on the average wage of $62,000/year from 70 million liberals, this yields a fund of about $1 trillion/year to relieve poverty for 47 million, or about $21,276 each. Adding $345 billion in private charity (after an estimated 33% overhead on $516 billion) gives $28,600 each; roughly the same as my estimate for current government funding. The poverty level for 2012 was set at $23,050 (total yearly income) for a family of four. This gives that family $112,000.

Crazy but true I said. I said this because the result seemed completely out of touch with any requirements I could imagine. This got me thinking; what are the requirements?

Some research showed that Welfare (started by FDR along with Social Security) has been controlled by the States since the reforms of the Clinton administration; one of the main reasons he had a momentarily balanced federal budget. Medicaid is still a joint federal-state program although its origin, along with Medicare, is from the Great Society program of LBJ; probably the only socialist from Texas in America's history. Welfare comprises various sub-programs and these are discussed below. 


However, hours of research revealed no overarching principles, no financial goals (like maximum benefits or efficiency of delivery) and most importantly, no testing or exit strategies. This was both good and bad.

My plan has the exit strategy but more is needed to regain control.


Welfare Programs

Cash allowance benefits for financial assistance are state regulated and allowances paid will also vary based on different criteria. However, an average expectation can be placed on a family of 4 receiving up to $900 for their TANF (Temporary Assistance for Needy Families) allowance. A single person household can expect an average of up to $300. This is a 33% incentive for being single so it represents a conflict regarding single parenthood.

I found that a basic guideline for the food stamp program (now called SNAP) is that an average family of 4 can expect an amount up to $500 per month for food stamps. This figure will greatly vary based on the age of the family members and medical needs. A single person household will show an expected average of up to $200 per month. Again, these figures are averages and not state specific but the arithmetic suggests a 60% incentive for being single; also not a great way to reduce single parenthood so this would be called a conflict too.

There is also a supplemental food program for women, infants & children (WIC) that provides $30.8 million to 58,108 participants in Connecticut. Hopefully, this program is administrated by the same people as SNAP and school lunches but I doubt it; this is a likely conflict with the notion of efficiency.

Child care benefits for Connecticut's 150,000 working poor max out at about $140 million/year; $933/year each. This includes Head Start, after-school programs and other programs. It seems to me that this stuff sounds like school so why is it a separate function? Conflict.

Utility assistance (LIHEAP) benefits in Connecticut max out at $575/year. This one looks to be in direct conflict with the federal and state fuel tax laws; one hand giveth while the other taketh away. This is a silly conflict since the fuel tax is about transportation and this is about staying warm in winter. Replace fuel taxes with mileage taxes and this benefit becomes needless since the cost of diesel (same as heating oil) drops by about $1/gallon (half a buck each for federal & state).

Housing subsidies (Section 8) in Connecticut this year for 1,000 families totaled $20 million. Meanwhile, the Federal Reserve is buying about $40 billion of distressed mortgages every month. This sure seems like a conflict but leaves me apoplectic since championing mortgage loans for unqualified buyers caused the mortgage distress and increased homelessness in the first place. This doesn't include the $13 trillion cratering of the real estate market that threatened to move a big chunk of the middle class into poverty.

Medicaid

Medicaid/CHIP benefits for Connecticut's 700,000 beneficiaries was $5.5 billion/year in 2010. I've already written that government has no right to be here as it is a conflict with the US Constitution. 

In fact, the Constitution disallows all of this.

Tallying the Benefits
One problem I had in researching this is that the documents don't refer to individuals; clients and beneficiaries are the nebulous terms used so it's hard to find the average taxpayer spending per person as in $1.35 trillion for 47 million Americans.

I'll add it all up using the reported benefits.

Benefit            Total                Beneficiaries
SNAP          $201 million            33,531 families
WIC            $   31 million           58,108 women, infants and children
TANF          $362 million            33,531 families
Child Care    $  18 million          150,000 children
Utilities         $ 115 million          120,000 families
Housing        $   20 million          1,000 families
Medicaid      $ 5.5  billion          700,000 people

Total            $ 6.24 billion

A couple of things leap off the page:

• Medicaid dwarfs everything else at 88%
• The total is far less than the total in the state budget (see below)
• The national figure of $1.35 trillion adjusted by population should be $15 billion

The other thing is that the number of Medicaid recipients is about 180,000 higher than the expected number of poor people for our population; further research reveals that most of these are folks with disabilities (10 to 13% in Connecticut).

This is a useful result because it explains the seemingly unchanging 13% poverty rate that I discussed in my last post; people are not really poor as much as they have a disability!

It is also fairly shocking to me. I obviously know that disability happens, I just never knew the extent. The numbers are similar around the world, it's not just Americans feeling entitled. We are a much more fragile species than I had ever imagined; easy pickings for you Darwinists.

I think that even the mean-spirited conservatives might be more willing to support this stuff if it was marketed that way; a sick child or Grandmother in a nursing home will gather much more support than the proverbial welfare Mom; why did I have to expend so much effort to discover this?

Enlightenment
The theme of this post was supposed to be: how do we reconcile the current $28,723/person taxpayer spending on poor people ($1.35 trillion divided by 47 million people) with the wages of the neighbors that subsidize them.

More to the point; how do we get societal harmony when a family of four, subsidized with $114,893, lives next door to the average Joe Taxpayer who makes $62,000 but essentially pays a subsidy of more than $14,000 (23.05%) to them?

But now I know there are really two camps of poor people; poor people and poor people with disabilities. I was under the impression that Medicare covered disability and it does, but not the long term care that some require. Isn't this yet another conflict since Medicare is for older citizens and long term care is a part of that?

It's hard to tell from the benefit distribution but it looks like Connecticut has about 216,000 poor people and about 484,000 people with disabilities, 38.5% of whom are employed and 6% of whom require long term care and consume roughly twelve times as much as those who don't require such care ($43,296 versus $3,694). This is quite different from the assumption of $28,723 each. It also represents a greater population of those in poverty than the national figure of 47 million suggests even though we are said to be one of the richest states.

Those are the raw nuumbers, now look at the social engineering portions of the state budget.

From the state budget:

Economic Development              $    129 million
Developmental Services              $ 1,105
Mental Health & Addiction         $    875
Social Services                           $ 6,447
DCF                                          $    973 

Total                                          $ 9,529 million

The names used in the table above are the budget line items that cover the Social Engineering benefits described above; they were identified mostly by a process of elimination. The names are obscured; they don't make it easy to trace the money and you'll see why.

This says that it costs $9.52 billion to deliver $6.24 billion, a 53% overhead. To me, this indicates poor quality in the administration of these programs.

By the way, $9.52 billion is just shy of half of the entire state budget of $20 billion. We also put $7.4 billion in education, $2 billion in debt payments and the rest for actual government in addition to an unhealthy amount of borrowing.

More importantly, $6.24 billion is 2.48% of state GDP; so why do we spend 9% of national GDP on it? This suggests that even though Connecticut, one of the worst-managed states, delivers its version of social engineering with an embarrassing 53% overhead, the nation delivers with a 263% overhead; talk about poor quality!

Given Connecticut's 3.5 million residents and assuming its workforce is similar to the US workforce overall at about 44% of population (138/311 = 44.4%), the state has 1.6 million workers. Given total workforce compensation of about $8 trillion, the average income is $57,971. I have used $62,000 up until now because, at one point, the employment rate was a bit lower. It's higher now but I'm using the same compensation for lack of newer compensation data.

Assuming as before that half are liberals and my plan puts 23.05% back in their pockets, this gives a fund of 800,000 workers times $57,971/worker times 23.05% or $10.69 billion. Since this is $4.47 billion more than current benefit spending in Connecticut, the liberals can keep 9.63% more of their gross incomes even if they pick up the whole tab.

However, given an influx of $3.88 billion from private charity (Connecticut's share, adjusted for population and a 33% overhead on $516 billion), the liberals really only have to shell out $2.34 billion so they can keep 18% more of their gross incomes if they pick up the whole tab.

Interestingly and importantly, if the charitable donations could be delivered without overhead, they would cover 93% of the whole thing!

This brings up the important point about testing. The Medicare program is frequently praised by liberals for its efficiency; it delivers with a 1-4% overhead. If they understand the idea of efficiency, how can they fail to measure the horrific inefficiency of these programs?

How to Fix Poverty Outside of Government
So, we now know that it really takes just 2.48% of GDP to cover the current (and apparently, forever) costs of poverty.

The big problems are:

• How do we deliver the cash with less than, say, 1% overhead?
• How do we verify that the beneficiaries are eligible?
• How do we verify that the charges of service providers are valid?
• How do we keep the government's hands off the cash?
• How do we protect the personal information of the beneficiaries?

The Treasury already knows who the poor people and service providers are and its all set to accept and deliver cash by Social Security number or Vendor ID so that takes care of the first two problems.

Medicaid (through Medicare) already has a list of acceptable charges for services and the state rules for Welfare benefits are written down; use them (after fixing conflicts) to develop and test an automated process and require validation by the recipients over the Internet with DoD-level encryption. That would address the third and fifth problems.

The cash could be donated to a blind trust accessible by only a program proxy at the Treasury, only for this purpose and only by the verified automated process. That would address the fourth problem.

Taxpayers could enable the IRS to deliver a taxpayer-selected percentage of their income to the fund via an entry on the tax return; I would happily donate 2.5% in exchange for the 9% I currently pay.

Summary of Solution
Poverty programs are unconstitutional but are still beneficial to society as a whole.

Of course, eliminating these programs will put hundreds of thousands of state and federal employees out of work. However, freeing up $795 billion in inefficiency should have the effect of reabsorbing them quickly in the private sector since this move puts 9% more (of the 23.05% total) of everyone's gross income back in their pockets; about $6,000 per average worker. $795 billion funds a lot of average jobs and augments a lot of people's retirement plans.

It is probably true that most of the preexisting charity is for things unrelated to poverty abatement. However, if folks are already giving 6.4% of their gross incomes (16.1% of net income), I have little doubt that they'd be willing to part with 2.8% more given the nearly 10% windfall this idea produces.

Administrating these programs outside of government has several side benefits:

• Government administration is obviously, by the foregoing arguments, inefficient.
• The programs are unconstitutional though still good.
• The programs lend themselves to automation; fraud and abuse notwithstanding.
• Running them outside of government obviates political dissent and improves societal harmony.
• Running them outside of government reduces the cost of government by $1.35 trillion (22%).
• Running them outside of government reduces the cost to society by $795 billion/year.
• Running them outside of government reduces election-year shenanigans.
• Reducing the cost of government reduces government corruption; less money to covet.
• Eliminating them from government is a big step toward simplifying the tax code.

In Memorial

I lost an old friend, Ed Thompson, today. We'd been friends for nearly 30 years. Ed was the father of my wife's dearest friend, Brenda Berigan, Grandfather to Brenda's twin daughters Kim and Erin and Great Grandfather to Kim's son, Lucas. Ed also served as proxy for my father-in-law, Tony, at our wedding.

Ed was one of the nicest guys anyone could ever hope to meet. I'll miss him.

Rest in peace.