In an earlier post on our blog, someone named JT commented that citizens have no legal obligation to file and pay income taxes. He should take a look at the IRS's latest list of frivolous tax arguments and the legal references that refute those arguments. Claims that there is no legal obligation to both file and pay taxes are the first two arguments the list shoots down. Failing to file taxes could get you in a lot of trouble, and employing one of these frivolous arguments could cost you an additional $5,000 fine. The IRS's list was updated in January with over 40 new cases dealt with in 2009.

The Center for Public Integrity has a new report out about the massive transportation lobby seeking federal funding. Some of their findings:

• As lawmakers grappled with renewal of an expiring multi-year transportation law last September, the number of cities and counties lobbying on transportation had grown by 80 percent since the last time a transport bill was about to expire, in the fall of 2003.
• The cities and counties who list transportation as among their priorities spent a total of more than $35 million lobbying Washington through the first three quarters of last year; if even a quarter of that spending was solely devoted to transportation, it totals more than $8 million, a hefty sum for cash-strapped local governments.
• Data from the third quarter of 2009 shows that, on top of the 650 cities and counties, those contracting with lobbyists include more than a dozen states, 90 mass transit agencies, 45 local development authorities, and 25 metropolitan and regional planning organizations.

There is a lot of federal money to chase:

• Last December, Congress passed its appropriations spending for 2010, including more than $52 billion for highways and transit.
• The "stimulus" included $35 billion for highway and transit programs.
• A second so-called "stimulus" passed by the House late last year includes another $35 billion for transportation spending.
• And, Congress is still to consider a multi-year re-authorization of the regular federal transportation legislation.

Under current law, the willful failure to pay taxes is a misdemeanor. You could go to jail for up to a year and pay a maximum fine of $25K (for individuals, $100K for corporations) for each year you fail to file a return. There is a proposal in the new budget to increase the penalty for repeated failure to file a tax return:

Any person who willfully fails to file tax returns in any three years within any five consecutive year period, if the aggregated tax liability for such period is at least $50,000, would be subject to a new aggravated failure to file criminal penalty. The proposal would classify such failure as a felony and, upon conviction, impose a fine of not more than $250,000 ($500,000 in the case of a corporation) or imprisonment for not more than five years, or both.

In President Obama’s State of the Union address he called for a slew of new spending proposals which include taking 30 billion dollars worth of money that banks have paid back to the government and giving it to other banks to make small business loans. I might be taking an unpopular stance on this because everyone wants to help small business these days, but this seems eerily similar to the situation that got us into this mess.

I know its been covered extensively, but I think its important to remember the falling domino which ultimately lead to the recession we’re experiencing. The federal government, over the course of both Republican and Democratic leadership, pushed the banking industry to make loans to people who would otherwise not have qualified for them. It was considered a noble gesture to help Americans get on the path of homeownership. Through government coercion and incentives, the sub-prime mortgage market was created. The government convinced banks to lend to a high risk population and surprise, they defaulted.

Once again, the federal government has stumbled on a population they’d like to “help”. They’re going to give $30 billion (of what is rightfully taxpayer money) to banks to lend out to small businesses who would otherwise not qualify for a loan. Einstein’s quote, “The definition of insanity is doing the same thing over and over again and expecting different results” seems particularly apt here. Currently, with no government intervention, the small business default rate is already up to 12% and those are the enterprises that banks deem worthy enough to bet on with their own money. We don’t have to guess what’s going to happen when they get to gamble with ours.

The IRS posted a request for quotes for the purchase of 60 rifles:

The Internal Revenue Service (IRS) intends to purchase sixty Remington Model 870 Police RAMAC #24587 12 gauge pump-action shotguns for the Criminal Investigation Division. The Remington parkerized shotguns, with fourteen inch barrel, modified choke, Wilson Combat Ghost Ring rear sight and XS4 Contour Bead front sight, Knoxx Reduced Recoil Adjustable Stock, and Speedfeed ribbed black forend, are designated as the only shotguns authorized for IRS duty based on compatibility with IRS existing shotgun inventory, certified armorer and combat training and protocol, maintenance, and parts.

Moonshiners, beware!

The government is heavily involved in lending (through both direct loans and taxpayer-backed guarantees) via education, housing, and dozens of other programs.

The good news is that the subsidy rate for defaults is relatively low (although I would like to see how this compares to private lenders): for FY 2009 the government's total direct loan write-off and guaranteed loan termination subsidy rate is 1.3 percent.

The bad news is that this rate will rise to 1.48 percent in FY 2010 and 2.57 percent in FY 2011.

And worse, although these percentages are small, they represent a lot of money. In FY09 taxpayers ate $30.6 billion in loans and guarantees, and the new budget estimates dollar losses of $38.8 billion in FY10 and $68.9 billion in FY11.

One of NTU’s members alerted us to an upcoming event in the DC-area featuring Gary Johnson, the former Governor of New Mexico and successful climber of Mt. Everest!. The two-term governor of New Mexico is an entrepreneur and former owner of a New Mexican construction company. He had a long list of taxpayer-friendly accomplishments while in office, and now he’ll be in Annandale, Virginia to discuss a task far more difficult: reforming our government through the “Our America Initiative.” This event is an opportunity for you to hear more about the initiative, which looks to be an interesting amalgamation of fiscal conservatism and libertarianism. If nothing else, it’ll give you an opportunity to ask him what the view was like from 29,000 feet!

Details:

Thursday, February 11, 2010 6:30pm
Northern Virginia Community College - Annandale Campus
ERNST Community Center
833 Little River Turnpike
Annandale, VA 22003

For more information about the event, visit: http://OurAmericaInitiative.eventbrite.com.

After President Obama released his $3,800,000,000,000 budget yesterday, analysts with our Foundation plowed through and found some things that should keep taxpayers awake at night. They are...

- - - - - - -

1) Debts Arrive Sooner. Last year’s budget projected that Gross Federal Debt would hit 100 percent of Gross Domestic Product (GDP) in 2017. This year’s budget now predicts the mark will be reached in 2012.

2) Budget Restraint: More Like a Toothpick than a Hatchet or a Scalpel. Outlays as a percentage of GDP are estimated to reach 25.1 percent in 2011, a slight improvement from 25.4 percent in 2010. The last two years when outlays as a percentage of GDP were higher than 25 percent in two successive years were 1944 and 1945; by 1950, it had dropped to 15.6 percent. By 2015, outlays are still forecast to reach 22.9 percent.

3) Recycled Program Cuts. The budget lists cuts and reductions to 78 discretionary programs totaling $10.3 billion annually. Of these, 24 items (representing $4.5 billion in savings) were also included in last year’s list of savings and terminations, which means they’ve already been rejected by Congress. Twenty-five mandatory program changes are proposed, 15 of which were lifted straight out of last year’s budget. New cuts range from the commendable – $3.5 billion for NASA – to the paltry: $5 million by cutting grants to worsted wool manufacturers.

4) Tax Hikes Masquerading as Spending Cuts. Of the 25 mandatory program changes mentioned above, claiming a “savings” of $47.2 billion over five years, $19.2 billion of the total comes from the repeal of 12 energy-related tax credits. These are more properly classified as revenue increases. Of the remaining actual cuts to mandatory outlays, about 90 percent of the savings ($25.1 billion) are attributable to one proposal: termination of lender subsidies in the Federal Family Education Loan Program, itself a holdover item from last year’s budget.

5) Spending Hikes Masquerading as Tax Cuts. The budget shows that federal outlays will increase by $67.5 billion over 2011-2015 strictly because of proposed changes in tax policy (as opposed to foregone revenues). This includes $13.8 billion to “reform and extend Build America bonds” and $547 million to “extend COBRA health insurance premium assistance.” The rest is for “refundable” (i.e., in excess of an individual’s actual tax liability) credits. The largest share of this is $22.0 billion to extend “Making Work Pay” tax credit in 2011. The long- term costs could rise significantly if this “temporary” tax credit is extended in future years.

6) Hidden Tax Increases on Consumers and Workers. Perhaps the hardest-hit sector in Obama’s budget is oil and gas – one of the few areas of the economy with decent short-term employment and growth prospects. Between the clawback of tax credits, repeal of deductions for domestic production available to others, and punitive changes in reporting rules, taxes on U.S. oil and gas producers will rise by $40 billion – which will ultimately be passed on to consumers.

Meanwhile new fees for spectrum licenses (over and above auctions) as well as higher agricultural inspection charges could burden telecom customers and air travelers, respectively. The Administration is also planning on making a supposedly temporary 33 percent increase in the Federal Unemployment Tax permanent, making it costlier to hire new workers.

7) Rosy Revenue Projections, Especially for Corporate Filers. Between 2010 and 2012, the Administration hopes that its personal income tax increases on upper brackets, combined with cuts for lower ones, will still lead to a 42 percent increase in individual income tax revenue. Over that same period, its business tax changes, consisting primarily of punitive, uncompetitive policies on U.S. firms’ earnings abroad, are supposed to lead to a 133 percent increase in corporation income tax revenue. Such a huge jump would be unprecedented in peacetime. The last time corporate income tax revenues increased by anywhere near this amount (111 percent) in any given three-year period was between 2003 and 2005 – during the Bush tax cuts!

8) Stimulus Officially a Bust. In last year’s budget, unemployment at the end of President Obama’s first term was projected at 6.0 percent, assuming enactment of the so-called “stimulus” bill. The current budget puts the 2012 rate at 8.2 percent.

9) More Bailouts for the Politically Connected. The Obama Administration proposes a new tax on financial institutions, in part to supposedly recover Troubled Asset Relief Program (TARP) funds for taxpayers. While the White House projects a drawdown in TARP equity fund purchases, from $106 billion in 2010 to $13 billion in 2020, Uncle Sam will own huge amounts of preferred stock from Government-Sponsored Enterprises like Fannie Mae and Freddie Mac in seeming perpetuity – climbing from $102 billion in 2010 to $115 billion in 2011, and remaining at that level through 2020. State governments, which have lobbied Washington hard for more cash, would win big under Obama’s budget: $25.5 billion for a six-month extension of relief from Medicaid’s joint federal-state program payments.

10) Rhetoric vs. Reality. Despite pledges to bring troops home from overseas, defense outlays would rise by 3.4 percent next year, and even that assumes Congress will approve controversial reductions in programs such as the C-17 cargo aircraft. The Administration also recommends abandoning the Yucca Mountain nuclear waste repository, even as the Energy Department continues to pursue a license for the plan.

Discretionary Cuts
The White House's Terminations, Reductions, and Savings in the FY 2011 Budget lists cuts and reductions to 78 discretionary programs totaling $10.27 billion. 24 of these items (representing $4.477 billion in savings) were also included in last year's list of savings and terminations, which means they were rejected by Congress (6 of these were also proposed in President Bush's 2009 budget). The largest of the repeat savings were for the cancellation of the C–17 Transport Aircraft Production ($2.5 billion), cancellation of the the Joint Strike Fighter Alternate Engine ($465 million), and reductions in health care facilities and construction funding in the Department of Health and Human Services ($338 million). Smaller cuts appearing again include: $1 million each for the Harry S. Truman Scholarship Foundation and the Christopher Columbus Fellowship Foundation, and $3 million for Anthrax vaccine research.

New discretionary cut proposals:
Constellation Systems Program, National Aeronautics and Space Administration: $3.466 billion
New Construction for Housing for the Elderly: $551 million
New Construction for Housing for the Disabled: $210 million
HOME Investment Partnerships Program: $175 million

Mandatory Proposals
The document listed 25 mandatory proposals claiming a "savings" of $47.177 billion over five years. 15 of these, worth $46.05 billion, are repeated from last year.

$19.187 of the total "savings" would result from the repeal of 12 energy-related tax credits - these will increase revenues to the Treasury. The remaining $27.746 billion is from changes to outlays. 90 percent of the spending cuts come from the termination of lender subsidies in the Federal Family Education Loan Program ($25.092 billion over five years), a holdover item from last year's budget.

New mandatory outlay cut proposals:
Commodity storage payments: $2 million
Grants to Manufacturers of Worsted Wool: -$5 million annually
Telecommunications Development Fund: $7 million annually
Uniform Criteria for Special Monthly Pension (Veterans Administration): -$10 million annually

Other Savings
Other savings include administrative reforms that would save $272.686 million from 2010-2014. The largest savings ($117.8 million over five years) is projected to result from a Department of Veterans Affairs (VA) award of an Oracle Enterprise Licensing Agreement, meaning Oracle will have an exclusive contract to supply and support all VA software and data architecture. The next largest savings ($32.484 million) would result from improved use of electric power-management of VA's 300,000 PCs. Other savings are expected to occur from cutting travel budgets in executive departments, and increased use of teleconferencing.

Program Integrity Savings
There are 3 program integrity proposals that would increase tax receipts by $14.916 billion over five years, mostly through increased enforcement efforts at the IRS, and 6 that would reduce outlays due to waste and fraud in programs including Medicare, Medicaid, and Unemployment Insurance by $27.282 billion over five years.

The program integrity improvements will require additional federal resources to investigate fraud and implement reforms. The budget calls for $16.247 billion in discretionary allocation adjustments over five-years to fund these efforts.

Net 5-year outlay savings for program integrity (including the discretionary allocation adjustments): $11.035 billion

Annualized Outlay Savings (in millions)
Discretionary: $10,270
Mandatory: $5,549
Administrative: $55
Program Integrity: $2,207
Total: $18,081

Ever wondered exactly how many of your tax dollars go to which programs? Sure, there are any number of sources that can give you a vague idea of the answer, but the USA Today has a terrific visualization today that allows you to enter your income and generate a detailed "report" right before your eyes.

For example, let's say that you earned an income of $30,000. Among the interesting tidbits from your estimated tax burden of $4,983 is the fact that you would pay roughly twice as much toward Social Security as national defense ($1,860 and $941, respectively). Also fascinating: that you'd pay nearly as much just for interest on the national debt as for Medicare ($401 and $435, respectively).

For someone making $60,000 per year, the total burden comes to $13,453, including $3,103 for national defense, $3,720 for Social Security, $1,321 on interest on the debt, and $870 on Medicare.

In typically brilliant fashion, our friend Matthias (better known as the "10,000 pennies guy") lets you visualize just exactly what President Obama's spending freeze would do to the budget in context...



While we should all be applauding President Obama for this first step towards reining in a federal budget that is wildly out of control, the overall context is nonetheless very important.

I'm glad that he showed what canceling the stimulus would do, but it would have been great to show the effect of canceling TARP to the video as well. The savings for eliminating the Wall Street bailout fund would be roughly similar to that of ending the stimulus (upwards of $300 billion), so you could essentially add another four "frozen spending" cups to the pile, AKA money that taxpayers would NOT have taken out of their paychecks in the future.

When the failing Merrill Lynch’s new CEO John Thaine remodeled his office he was publicly excoriated. He spent 1.22 million dollars by the time he was done on such things as the famous designer Michael Smith and a 19th century credenza. CNBC, CNN, and the blogosphere picked up the story as a classic example of corporate greed. Even the Obama administration picked up on it as Robert Gibbs said, “The American people need to be greatly assured that their hard-earned money is not going to the bonuses or the remodeling of an office at a bank that’s in trouble".

While I don’t condone Thaine’s spending or actions, it does seem curious that the mainstream media hasn’t picked up on another story. Roughly six months after the Thaine story broke, the Obama administration approved 1.4 million dollars of taxpayer money to remodel a 7^th floor judge’s office in Tampa, FL. It seems spending is evil if you’re a corporate executive, but if you’re in the executive branch of government its patriotic. If you’d care to visit these glorious judge’s chambers feel free, after all you paid for them. The address is: 801 N. Florida Ave 7th Floor, Tampa, Florida 33602.

Finally, as a side note, if you’re wondering what became of the expensive designer Michael Smith, he was subsequently hired by the Obamas to spruce up the white house.

Rhode Island Governor Donald Carcieri plans to revive the state’s economy through tax credits rather than tax increases and by continuing to cut government spending. Two of his priorities include balancing the budget with less revenue and job creation.

Utah Governor Gary Herbert called on lawmakers in his state to exercise fiscal restraint and not raise taxes (without cutting education funding). He criticized the ever-growing involvement of the federal government in private industry. Herbert recognized that times are tough but for the first time in three years, Utah expects an increase in revenue in the upcoming fiscal year.

Ohio Governor Ted Strickland’s top priority is the state’s green energy production followed by job creation programs. Strickland plans to take $30 million in federal stimulus funds and $10 million in state funds to invest in fuel cells and clean energy storage. He also pressed the legislature to eliminate the state’s personal property tax on energy generation for new wind and solar facilities.

Hawaii Governor Linda Lingle proposed tax creates to stimulate clean energy jobs and creating a budget stabilization fund to help protect the state’s finances. The address was filled with specific plans to help the state recover from its worst economic downturn. The state is struggling to close its budget shortall because its economy is so dependent on tourism. To do so, the government will need to be downsized because it cannot continue spending at a rate that exceeds revenue.

Alaska Governor Sean Parnell focused his address on education and called for merit scholarships to Alaska universities. He also called for a two-year suspension of the state’s gas tax. The state can afford to suspend the gas tax because oil taxes have given Alaska large enough budget reserves to last the next 10 years.

Virginia Governor Robert McDonnell plans to rely on spending cuts and not on tax increases to get the state through this tough financial environment. To create jobs and expand Virginia’s economy, he would like to increase the money for tourism and economic development. McDonnell pledged during his campaign this fall that he would not raise taxes if elected. The address reiterated his promise but clearly stating that if the legislature passes a bill that includes tax increases that he will veto it. While the governor did not say where he would trim the state government, he did say that he would privatize the state-owned liquor stores saving the state an estimated $500 million.

Stay tuned for Part III

Russ Roberts, Professor of Economics at George Mason University, released the first of several videos planned for EconStories.TV. This creative video features two of the great economists of the 20th century, John Maynard Keynes and F.A. Hayek, break out in a rap – “Fear the Boom and Bust.” While it scores high on the entertainment factor, it also brings to light why there is a “boom and bust” cycle and what it does to the economy.

In a surprising move, President Obama made a pitch for nuclear energy in his State of the Union address:

"[T]o create more of these clean energy jobs, we need more production, more efficiency, more incentives. That means building a new generation of safe, clean nuclear power plants in this country.”

In NTU Foundation's line-by-line analysis of the spending proposals in the SOTU, this issue was listed with an unknown cost. More information is available today from Bloomberg News:

For the 2011 budget, the department will add $36 billion to the $18.5 billion already approved for nuclear-power plant loan guarantees, according to the people, who asked not to be identified because the budget hasn't been released.

The cost to taxpayers won't be the full $36 billion for the guarantees, but for the percentage of loans that default. In 2003, S. 14 (108th Congress) contained a provision to furnish federal loan guarantees for the construction of the next generation of nuclear power plants. CBO estimated "that the net present value of amounts recovered by the government on its loan guarantee from continued plant operations following a default and the project's technical and regulatory risk would result in a subsidy cost of 30 percent ... ." Applying that subsidy rate, the President's proposal could cost $10.8 billion, $2.16 billion annually over a five year period.

This new data brings the tab for the new spending proposed by the President to $72.6 billion annually.