Leeds on Finance

Here are a few things I learned this week…

Mediocre employment report.  The jobs report showed 80K more jobs in October.  September’s jobs were revised upward to 158K.  August was also revised up.  The unemployment rate dropped slightly – to 9%.  In December 2007, it was 4.6%.  Overall, the report was okay news.  But remember, we’re going to have to start producing 300K jobs / month if we want to start to see a meaningful change in the unemployment rate.  We have 14 million unemployed people.

The average length of time that people have been unemployed is 39.4 weeks.  The all-time high was in September (40.5 weeks).

Fed becoming more pessimistic.  The Fed said that they expect unemployment to end 2012 around 8.6%.  It was just June when they were predicting that unemployment would be around 8% at the end of 2012.

The Fed also lowered their growth forecasts.  They now expect growth of 2.5% to 2.9% in 2012.  In June, they had been predicting 3.3% to 3.7%.

Large companies matter.  According to 2006 census data, 61% of companies have fewer than four workers.  But, more than 2/3 of the American work force is employed by companies with more than 100 workers.  Half of American workers are employed by companies with more than 500 people.  These large companies pay 57% of total payroll.  Small businesses (with income between $10K and $10 million) account for 99% of all businesses, but only account for 17% of income and only 23% of them pay any wages at all.  (Source: Op-ed by Jared Bernstein, published in NY Times)

Italy’s problems.  As I mentioned last week, Italy’s cost of debt is increasing.  Their cost of debt is higher than any time since they’ve been a member of the EU.  Their ten-year debt is above 6%.  One analyst suggested that when Greece, Ireland and Portugal saw their cost of debt go above 7%, it never came back below that level.  (The recovery rate on Greek debt may end up below that level…) (Source: NY Times)

Italy has agreed to allow the IMF to scrutinize their books every three months to ensure that they are carrying out their $75 billion austerity package.  (Source: NY Times)

The Debt Commission.  Everyone’s attention is going to turn to the debt commission soon.  They’re supposed to have a proposal by November 23^rd.  We’re hearing all different things.  Many stories have argued that there has been no progress.  But, late Friday, Bloomberg published an article arguing that a $4 trillion deal was possible.  Remember that the Simpson-Bowles plan cut $3.9 trillion.  (This was $2.2 trillion in spending cuts, $673 billion in reduced interest payments and $1 trillion in tax increases.)  (Source: Bloomberg)

A group of 40 House Republicans and 60 Democrats signed a letter encouraging the debt committee to explore new revenue as part of the deal and saying that they should also consider entitlement cuts.  Several of the Republican Congressmen had previously signed a pledge saying that they would not support a net tax increase.  Several of the Democrats had previously opposed any cuts to entitlements.  While it’s nice to see the some bipartisan behavior, it’s unclear what it means.  Several of the Republican signers said that they were not endorsing a tax increase, but rather they want to see the tax code rewritten to close loopholes and lower rates.  (Source: Washington Post)

The whole world is getting old.  The fertility rate in Germany, Italy, Spain, Greece and many other nations is less than 1.5 children per woman.  This is significantly lower than the replacement rate of 2.1 children (some children don’t make it to adulthood).  Japan has a 1.4 rate and is the oldest country in the history of the world.  South Korea is not far behind at 1.2.  China is at 1.5.  The US is aging, but our fertility rate is near the replacement rate.  People will have to work longer and we may start competing for immigrants.  (source: Washington Post)

The poorest of the poor.  Approximately 20.5 million Americans (6.7% of the population) make up the poorest poor – defined as those at 50% or less of the official poverty level.   In 2010, this meant that the poorest poor had income of $5,570 or less (for an individual) or $11,157 for a family of four.  This group comprises approximately 44% of those in poverty.  The 6.7% share is the highest in the 35 years that the Census Bureau has maintained these records.  (Source: CBS News)

A chip off the old block.  By the number of emails in my inbox on Friday morning, I was shocked at the number of LSU subscribers to my blog.  It left me wondering, “who reads this to them?”  Okay, that was just a plain ugly comment from a bitter Alabama fan.  Saturday night hurt.  A lot.

My nine-year-old is a huge Tide fan (he also likes Texas).  Saturday is our college football day.  On Saturday nights, he and I actually sleep in our tv room, falling asleep to the late games.  He stayed up for the entire Alabama game…until we didn’t score in OT.  It was clear that we were going to lose.  He simply said, “good night” and he got off the couch and into his sleeping bag.

It was hilarious to see how angry he was.  The great thing was that he forgot his pillow.  So, his face was flat on the carpet.  It couldn’t have been comfortable.  “John, don’t you want your pillow?”  All I got was a stern, “no.”  You could tell what he was thinking – we lost and I don’t want to be comfortable.  Ah, the pride in seeing that your son is just as bad of a sport as you are.  (I did get his pillow and I stuck it under his angry little head.)

Have a great week.

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A few quotes and stats that I came across during the past week and found interesting…

The other 12%?  According to the Americans for Secure Retirement, 88% of surveyed Americans said that they are concerned about their ability to maintain a comfortable standard of living throughout their retirement years.  One year ago, the number was 73%.

Unfunded liabilities.  Actuarial firm Milliman Inc. says that traditional defined benefit pension plans are only 72.8% funded.  This is the second worst quarterly result in their index’s 11 year history.

Democrats on the hot seat.   In the 2012 elections, there will be 33 Senate seats up for grabs.  Democrats control 23 of them and Republicans only 10.

Romney – so close, yet so far.  A recent Iowa poll showed Romney trailing Cain 23% to 22%.  But, here’s the more interesting number…in the survey, they asked respondents if they were likely to participate in the caucus.  Of those respondents who definitely intend to caucus (38 percent of those polled), Romney is the first choice of only 10 percent of them. Cain has 27% of this group’s vote.  This probably makes sense – the more conservative Republicans are more likely to caucus and they don’t like Romney.

We hate everyone.  Former Republican Senator Pete Domenici, said lawmakers who refuse to consider tax increases, as well as those who rule out cutting safety-net programs, “are both complicit in letting America destroy itself.”

A few great quotes from Dallas Fed President Richard Fisher. (Here’s the link  to the speech.)

1. I am going to do just that: I am going to suggest that our nation has a crying need for public leadership to correct what is wrong with our economy; that the Federal Reserve has provided the leadership required of it; that monetary policy cannot do it alone and must be complemented by responsible fiscal policy—policy that is exclusively the responsibility of those whom we elect to represent us in Washington; that rather than posturing for political expediency and positioning for victory at the polls in November 2012, our nation’s political leaders need to actually “buy a ticket” and put themselves at risk, right now and without delay. Each passing day they fail to do so further jeopardizes our economic stability and our nation’s future.

2. The parties involved must stop the hemorrhaging without inducing cardiac arrest; they must solve the long-run debt and deficit problem without, in the short run, pushing the economy back into recession, creating still more unemployment. And they not only must confront their addiction to debt and spending beyond their means, but also reorganize the tax system, redirect the money they spend and rewrite the regulations they create so as to be competitive in a world that wants to beat us at our own game.

3. I personally don’t care which party is in the White House or controls Congress. All I know is that the “honorable” members of Congress, Republicans and Democrats alike, have conspired over time, however unwittingly, to drive fiscal policy into the ditch. They purchased their elections and reelections with popular programs so poorly funded that they now threaten the economic well-being of our children and our children’s children. Instead of passing the torch on to the successor generation of Americans, the Congress is simply passing them the bill. This is the opposite of honorable, and it must stop.

What I’m thinking about.  Finally, as we head to the weekend, one final quote from me…ROLL TIDE!!!

Have a great weekend.

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There was a really interesting op-ed piece published in The NY Times about ten days ago.  It was written by Joel E. Cohen, a mathematical biologist who heads the Laboratory of Populations at Rockefeller University and Columbia University.  The piece was titled, “Seven Billion.”   Here’s the link.   Here are some of the really interesting numbers.

The UN estimates that our world population reached seven billion at the end of October.

Our world population has doubled in the past 50 years.  We had three billion in 1959, four billion in 1974, five billion in 1987 and six billion in 1998.

The UN anticipates 8 billion people by 2025, 9 billion by 2043 and 10 billion by 2083.  India will have more people than China shortly after 2020.  Before 2040, sub-Saharan Africa will have more people than India.

In 1950, there were nearly three times as many Europeans as sub-Saharan Africans.  By 2010, there were 16% more sub-Saharan Africans than Europeans.  By 2100, there will be nearly five sub-Saharan Africans for every European.

Life expectancy is now 70.  The average number of children per woman fell worldwide to 2.5.  It was five in 1950.  The world’s population is growing at 1.1% per year, half the peak rate in the 1960s.

In 1950, for each person 65 and older, there were more than six children under 15.  By 2070, elderly people will outnumber children under 15 and there will be only three people of working age (15 to 64) for every two people under 15 or 65 and older.  We will have intense pressure to extend the working age beyond 65.

Nearly half the world lives on $2 per day or less.  In China, the figure is 36%; in India it’s 76%.

Approximately 850 million to 925 million people experience food insecurity or chronic undernourishment.  In much of Africa and South Asia, more than half the children are stunted (low height for their age) as a result of chronic hunger.

The world produced 2.3 billion metric tons of cereal grains in 2009-10.  This is enough calories to sustain nine to eleven billion people.  BUT…only 46% of the grain went into human mouths.  Domestic animals got 34% of the crop and 19% went to industrial uses like biofuels, starches and plastics.

Human demands on the earth have grown enormously.  (Unfortunately, the atmosphere, the oceans and the continents have stayed the same size.)  Already, more than a billion people live without an adequate, renewable supply of fresh water.

About two-thirds of fresh water is used for agriculture.

We’re going to see huge shifts in the geopolitical balance of numbers, further declines in the number of children per woman, smaller but more numerous households, an increasingly elderly population, and growing and more numerous cities.

Growth in households can be even more important than pure population growth.  Each household has energy demands.

___________

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This week, I plan on posting a few short blogs.  They’re already (mostly) written, so I actually feel some confidence that this will happen.  On to today’s thought…

Greece, Italy and the United States

Current estimates are that Greece’s debt-to-GDP ratio is around 160%.  The goal is for this to be 120% in 2020.  Currently, Italy’s ratio is 120%.  Reinhart and Rogoff have shown that economic growth starts to slow when the debt-to-GDP ratio of a country exceeds 90%.

You don’t need to know anything about economics to do some basic math.  Here it is…lets imagine a country with debt-to-GDP of 120%.  Lets also imagine that the country pays interest of 6% (that’s what Italy is currently paying; Greece is paying much more).  If that’s the case, you’re paying interest that is equivalent to 7.2% of GDP.  (That’s 120% x 6%.)

Italy’s tax revenue is around 22% of GDP.  If one-third of their tax revenue is needed to pay interest, the numbers don’t work out.

Of course, this same math is true for the United States.  Our debt level is not that high yet (our publicly held debt is above 60% of GDP and our total debt is above 90% of GDP).  In addition, our interest rates are very low.   But, if interest rates ever increase, the math will work the same for us as it does for Italy and Greece.

One other random thought…I don’t understand why anyone would buy a credit default swap on a sovereign debt.  If Greece’s bailout can be fashioned as a “non-default” (when private investors will “voluntarily” take a 50% haircut), it’s hard to imagine what type of restructuring would actually be considered to be a default.

Have a great week.

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Three stories this week…

Follow-Up to Cain’s 9-9-9 Plan

Last week’s blog was based on simple intuition: if we’re going to raise the same amount of tax revenue, that means we’re simply shifting the burden.  My belief is that lower-income people will pay more if they pay a 9% income tax and a 9% sales tax.  We already know that half of workers only pay 7.65%.

Cain has been under a lot of pressure from both Republicans and Democrats.  Now, he’s changing his plan.  Here’s a quote from the Associated Press:

“Cain’s shift on zero exemptions comes after an independent analysis showed his tax plan would raise taxes on 84 percent of U.S. households. The Tax Policy Center, a Washington think tank, said low- and middle-income families would be hit hardest, with households making between $10,000 and $20,000 seeing their taxes increase by nearly 950 percent.

Households with the highest incomes, however, would get big tax cuts. Those making more than $1 million a year would see their taxes cut almost in half, on average, according to the analysis.”

We don’t know exactly what his new plan is.  But, based on what I’ve read, here’s what it sounds like to me…different tax brackets (based on income levels) with virtually no deductions, credits or exclusions.

Now what are my thoughts…this is exactly what I said (in last week’s blog) I could love.  If you give me progressive taxation and eliminate all of our tax expenditures, that’s awesome.  We could (potentially) put together fair tax brackets (where we don’t increase the taxes of the poor) and we simplify the tax code.

While we could do this (and I love a plan that would do this), what are the chances of this actually happening?  I’d put them at 0-0-0.  We’d be taking away all of the power of the politicians.  It’s not going to happen.  But, it’s worth talking about.

I’m not going to be someone who votes for Herman Cain, but if he gets his plan to a progressive tax with no tax expenditures, it’s a great thing.  If he gets our country actually thinking about this type of issue, he’s done something great for our nation.

How to End the Deficit by Buffett

Warren Buffett said the following:
“I could end the deficit in 5 minutes.  You just pass a law that says that anytime there is a deficit of more than 3% of GDP, all sitting members of Congress are ineligible for re-election.”

I’d probably take it a bit further and say that if the deficit is greater than 3% of GDP, sitting politicians are not allowed to receive or spend campaign funds.  Buffett is right – we have to give people the incentive to do the right thing.  Right now, the only incentive that politicians have is to spend more money and bring home the pork to their district.

If you want to see Buffett make this comment, here’s the link.  It’s right after the five minute mark on the video.

Where’s the Money?

What do you think is the wealthiest metropolitan area?  Would you guess New York, Chicago or San Francisco?  Maybe the plastic surgeons have pushed LA to the top?  Oh, I’ve got it…Silicon Valley!  Did you think that?  Well, if you did, you’re so “last year.”  They were number one in 2009.  In 2010, Silicon Valley came in second to Washington D.C.  The average household income in DC is $84,523.  The median household income for the US was $50,046.  This should make you feel good.  We want our politicians, government employees, lobbyists and lawyers to be taken care of.   Here’s the link  to the story.

I remember the days when being a government employee meant a lower salary and better benefits.  Now, it seems to mean a better salary and better benefits.  Of course, I’m old and I remember when stock options were used by start-up companies to compensate employees for below-market salaries.  Of course, then we found out that options were something that some companies used to re-price or backdate in a way to shift wealth from shareholders to management.

If your eyeballs haven’t popped out or your head hasn’t exploded yet, here’s another great number (from the same story).  Last year, $3.51 billion was spent on lobbying.

Have a great week.

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NOTE: this post has been edited from when it originally was posted.  When I originally posted it, I left out the 1.45% Medicare tax that the employees pay.  For those who don’t pay any income tax, this brings their total payroll tax to 7.65%.

I have received many emails in the past two weeks asking me to write about Herman Cain’s 9-9-9 tax plan.  So, I’m going to violate my own rule and write a longer blog today.  Also, commenting on tax policies brings a flood of responses to my email box (mostly hate mail)…I’ll read it all, but (unfortunately) I won’t be able to respond.

The Plan

Republican Presidential candidate, Herman Cain, has proposed completely scrapping our tax code and simplifying it with a 9-9-9 tax policy.  He would tax all personal income at 9%, all corporate income at 9% and he would impose a 9% federal sales tax.  The plan would eliminate the payroll tax (for Social Security and Medicare) that is separate from the income tax.  In other words, there would just be one big pool of tax money (rather than separate pools which are ultimately combined and spent).

He asserts that this will be “revenue neutral” – meaning that it will bring in as much tax revenue as we currently do.  Some commentators have argued that this is not true (and that we will need a higher, “less catchy number” than 9-9-9).  I’m going to assume that this plan will be revenue neutral.  (It doesn’t change my view.)

Background That You Need to Know

To participate in this debate, you need to understand where our tax revenue comes from.  Here are 2011 estimates:

Individual Income Taxes — $956 billion

Payroll Taxes —                       $807 billion

Corporate Income Taxes — $198 billion

Excise Taxes —                           $74 billion

Other Taxes —                          $138 billion

The Joint Committee on Taxation recently said that 51% of Americans pay payroll taxes but not income taxes (based on the 2009 tax year).  This angers many people.  (Some of that 51% even receive money back from the government.)

What’s GREAT About Cain’s Proposal

1. It’s simple.  Our tax code is too complex and this complexity works to the advantage of the politicians.  We have no idea what they’re doing.

2. It eliminates virtually all deductions, credits, tax expenditures, etc.  In other words, it eliminates the power of the lobbyists.  It also simplifies tax reporting.

3. By having one tax on personal income (rather than an income tax plus a payroll tax), we are all simply paying the same tax.  You no longer have the issue (and anger) that some people don’t pay income tax.

4. There are plenty of other things that people like, such as eliminating taxes on capital gains and dividends (and hopefully further encouraging investment).

What’s TERRIBLE About the Proposal

If the plan is revenue neutral, this simply means that we’re changing who is paying.  This plan is a huge tax increase on the poor.  Think about this using simple intuition.  You all know (as described above) that many American workers only pay payroll taxes (they don’t pay income taxes).  So, that means that they pay a tax equal to 7.65% of their income (the payroll tax).  Now, they’ll be paying a flat 9%.  Right away, we know that those people are paying more.

Then, add on 9% sales tax on almost everything we buy.  Most people who aren’t paying income tax (because of a lower salary) spend the majority of what they earn.  As a result, they will be paying an additional 9% tax on what they earn.  So in aggregate, you can think of this as paying 18% tax on income.

Use some common sense here.  If the lower-income people are paying more (paying close to 18% when they are currently paying 7.65%) and we’re taking in the same amount of money (“revenue neutral”), I’m pretty sure that this means that someone is paying less.  Oh, I figured it out…it’s the higher-income people.

Another way you know that we’re shifting tax from the high-income to the low-income is that we’re eliminating capital gains tax and dividend tax.  Hopefully we can all agree that the wealthier parts of society are the ones that own stocks and bonds.  So if they’re not paying taxes and we’re revenue neutral, who must be paying more?

We can also agree that the elderly own more stocks and bonds than the young.  So, we’re shifting the tax burden from the older generation to the younger.  That’s great because it will prepare the young people for what we’re going to do to them with Social Security.

So here’s the tax plan that Americans are getting so excited about – lets tax the poor more and lets tax the wealthy less.  To me, that doesn’t sound good.  But, 9-9-9 is catchy.  Of course, “Cain is Insane” is also catchy.

A Few More Thoughts About This

1. Our tax code is a disaster.  But Americans have had a long belief in progressive taxation.  The problem is all of the deductions, credits and exclusions.  It’s not the fact that I’m in a higher tax bracket if I earn more money.

2. I might not have a problem with this plan if we adjusted it in some way.  For example, if the plan was for a 15% flat tax on all income above $50,000 (and I’m just making these numbers up), that would work better for me.  (I’m not going to go for the sales tax proposal.)  BUT, if we did this, we’d still need a payroll tax – otherwise, lower income people would be paying zero (rather than their current 7.65%).

3. This proposal would NEVER pass.  The lobbyists are too strong.  Do you think that the homebuilder industry will let the mortgage interest deduction go away?  Do you think the health insurers will allow us to start including the employer portion of our health insurance premium as income?  The lobbyists own the government.  As an aside, if we did the flat tax, it would eliminate tax advantages like the one that Cain garnered for the pizza industry (when he was President of their association).

4. In addition to the frustration that we all have with politicians and the tax code, the popularity of 9-9-9 is telling us something more.  It’s telling us that Republicans just aren’t happy with Mitt Romney (who will probably be their nominee).  They’re searching for someone to love.  Herman Cain has a great life story that really represents the American dream.  It’s a story we can all love.  But, I don’t think 9-9-9 is something that we should love.  I don’t even think it’s consistent with our American ideals.

Have a great week.

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I want to tell you a quick story about my teaching.  Each semester, I normally give a midterm exam, a final exam and a project.  Students can turn in their project on either September 15^th, October 15^th, November 15^th or December 15^th.

Sometimes during the fall semester, somewhere around Thanksgiving, I feel charitable.  (It’s normally a fleeting emotion.)  I send out an email and I tell the students that if they haven’t already submitted the project on one of the prior due dates, they don’t need to do it.  All is forgiven.

Of course, after doing this a few times, I’ve noticed that behavior has changed.  No one submits their project in September, October or November.  Everyone waits…hoping for a reprieve.

This pretty much sums up my view on the repatriation of foreign income.  If we’re going to have an occasional tax holiday, I feel pretty confident that I know how any rational company will behave.

Below, you will see two interesting slides.  Both come from the United States Senate Permanent Subcommittee on Investigations’ report, “Repatriating Offshore Funds: 2004 Tax Windfall for Select Multinationals.”  This report was released on Tuesday — here’s the link. This is actually the “Majority Staff Report” which means that it’s the Democrats’ argument against repatriation.  (There are five Democrats and four Republicans on the Subcommittee.)  We can all argue about the conclusions in the report (they assert that no jobs were created, money was used for share repurchases and executive compensation, etc.).  Those are difficult things to prove and that’s not my concern today.  I think that we can all agree that we have a completely dysfunctional tax system (regardless of whether you believe or don’t believe that we should have a tax holiday).

The first slide shows the amount of funds that the top 10 repatriating companies actually repatriated during the last tax holiday (most did this in 2005) and the amount of overseas income that they are holding right now.  Once a company gets used to an occasional tax holiday, they plan on receiving it again.  See below.

Next, you will see a slide that lists the seven firms that repatriated the most earnings during the last holiday.  Here’s what’s interesting…you’ll see that the vast majority of these earnings were repatriated from tax havens (including the Bahamas, Bermuda, the British Virgin Islands, Cayman Islands, Costa Rica, Hong Kong, Ireland, Luxembourg, Netherlands Antilles, Panama, Singapore and Switzerland).  In other words, earnings are being directed to low-tax countries (tax havens).  This is not where the money is actually earned.  This is what happens when we have a dysfunctional tax system.  See slide below.

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Here’s an amazing stat: the median household income (in real terms) has dropped more since the recession ended than it did during the recession.

Real median household income fell 3.2% (from $55,309 to $53,518) from December 2007 through June 2009. During the “recovery” (June 2009 – June 2011), real household income fell an additional 6.7%!

If you want to see the research, here’s the link (from Sentier Research). They’ve started a new index and you can see the drop in household income below. See chart:

Ask yourself this…how fast can GDP grow when when household income is shrinking and people are deleveraging?

____________________

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IMPORTANT: if you don’t receive the email in step 3 or you don’t click on the link, you won’t be on the list.  Sometimes, people who use corporate emails get blocked (it’s probably 50% of the time).  So if you don’t get the email, you know you need to use a personal email.

Boston Fed President Rosengren doesn’t give as many presentations as some of the other Federal Reserve Bank Presidents, but he gave two significant speeches last week (in Sweden).  I want to share some of his comments and slides from “Housing and Economic Recovery.”

While residential investment is only 2.2% of GDP, he discussed several reasons why housing problems have had a disproportionate impact on economic performance and on the recovery of growth and employment:

1.  Housing is a small part of GDP, but it’s volatile.  It normally has an outsized proportion on growth during the first two years of recovery.  It is normally very responsive to monetary policy.  In this recovery, housing has not had a positive impact.

2.  Since most US homes are financed by 30-year fixed-rate mortgages, a drop in long-term rates really only affects existing homeowners to the extent that they refinance.  So, we get less impact from changes in monetary policy than countries where the majority of loans are floating rate.  CoreLogic estimates that 75% of “underwater” homeowners are paying “above-market” interest rates and slightly more than half of “positive-equity” owners are doing the same.

3. Many US financial institutions have significant exposure to real estate, either through direct lending or through the purchase of mortgage-backed securities.  Therefore, real estate prices impact their capital and this impacts their ability to finance both the housing sector and other parts of the economy.

4. Falling home prices have disrupted the transmission of monetary policy.  Falling prices have resulted in the availability of credit becoming more important than the cost of credit.  Rates may be lower, but credit might not be available because the value of your home has dropped.  Or, even if the value of your home has not dropped, lenders perceive greater risk in the economy and in the value of collateral.

Below, you will find some of his charts:

1.  Housing has not provided economic recovery as it has in the past.

2. Net worth dropped from 2005 – 2009.  This impacts consumption (which is 70% of GDP) and the ability to fund new businesses.

3. Much of the drop in net worth came from housing.

4.  We haven’t had a recovery in construction jobs.  Other industries are also impacted by this.

5.  Delinquency rates are still high.

6. Housing affordability is very positive.  We have low prices and low mortgage rates.

7.  The population is growing and household formation is also growing (but household formation appears to be growing at a slower rate).

Rosengren’s Final Conclusions

1. Our economy would be helped if we could find a way to help homeowners refinance into lower rate loans (even if they are underwater).

2. We need to help responsible investors purchase vacant homes and convert them into rental properties.

3. We need to provide certainty with respect to government policy in the housing market in the future.

4. We need a quicker way (in the future) of resolving delinquent mortgages.

Have a great week.

If you enjoy this blog, please forward it to others who may be interested.

If you want to receive these emails, here’s how:

1. click on this link  (or type www.leedsonfinance.com into your browser)
2. toward the top right corner is a place to click on for email service — click and enter your email address
3. you will receive an email which will require you to click on a link to confirm that you want to be on the list

IMPORTANT: if you don’t receive the email in step 3 or you don’t click on the link, you won’t be on the list.  Sometimes, people who use corporate emails get blocked (it’s probably 50% of the time).  So if you don’t get the email, you know you need to use a personal email.

Imagine being a member of Congress.  (Get your mind out of the gutter –  I’m asking you to imagine your role as a policymaker.)  You have an idea for a big new program – one that will cost lots of money, but it will also bring in lots of contributions in the future.  So here’s the problem – you’ll be seen as one of those crazy liberal spendthrifts.  That’s not going to help you get re-elected.

Don’t worry…I have a solution.  What if you could start that new program AND also call yourself a “tax cutter”?  Ah…political nirvana.  I can please everyone – Democrats can start new programs and Republicans can lower taxes.  The solution is referred to as a tax expenditure.  Congress gives a tax break (a deduction, a credit or an exclusion) while promoting a particular activity.

There are approximately 200 tax expenditures in our tax code.  See the chart below.  This chart is from a great (recent) paper on tax expenditures, titled “Tax Expenditures, The Size and Efficiency of Government, and Implications for Budget Reform” by Leonard E. Burman and Marvin Phaup.  (A couple of years ago, I wrote about Professor Burman’s Congressional testimony on this subject.)

Here are two more scary numbers (the point being that tax expenditures are a HUGE part of our tax policy):

1. the dollar value of tax expenditures is as large as the amount that we take in from income taxes (not including payroll taxes)

2. the dollar value of tax expenditures is approximately 8% of GDP; total tax revenue (including income, payroll and all taxes) is normally around 18% of GDP

What do you think the largest tax expenditure is?  Think about it.  I’ll be that most of you would have guessed the mortgage interest deduction.  That’s what I would have guessed if I weren’t as smart as I am.  Just kidding.  That’s what I would have guessed.  But, the largest tax expenditure is the exclusion of employer-supplied health insurance.  In other words, I don’t consider my employer’s $10,000 contribution for my health insurance premium as income.  Of course, this leads to lots of issues – and I’ll blog about those on a different day.

See the chart below with the largest tax expenditures.  The source is the same paper as above.  One thing to note: the cost of the tax expenditures (in the chart) are misleadingly low – they only include lost income from the income tax; they don’t include lost income from the payroll tax.

Finally, think about one last problem with tax expenditures.  We don’t see them on a regular basis and once they’re in the code, they’re very difficult to remove.  If you did remove one, you’d be one of those crazy liberals who likes to raise taxes.

Have a great week.

If you enjoy this blog, please forward it to others who may be interested.

If you want to receive these emails, here’s how:

1. click on this  link (or type www.leedsonfinance.com into your browser)
2. toward the top right corner is a place to click on for email service — click and enter your email address
3. you will receive an email which will require you to click on a link to confirm that you want to be on the list

IMPORTANT: if you don’t receive the email in step 3 or you don’t click on the link, you won’t be on the list.  Sometimes, people who use corporate emails get blocked (it’s probably 50% of the time).  So if you don’t get the email, you know you need to use a personal email.