Coyote Blog

Neither Medicare nor Social Security should be government programs.  The government essentially takes on two roles in these two insurance programs:  1) To subsidize the premiums of low income Americans; and 2) To use its power of coercion to force everyone to participate.  I have no stomach for the latter role and the former could be much more cheaply achieved with some sort of voucher or credit program.

But these programs are not going away.  While both need reform, it may turn out to be politically impossible to even reform them.

But if we take off the table for a moment their existence and their basic structure, there is still an enormous problem we might fix:  pricing.  There is absolutely nothing more deadly to an economy than a false or corrupted pricing signal.  But that is clearly what we have with these two programs.  The Medicare “premium” (tax) taken out of every paycheck is clearly way too small to cover true actuarial costs of this program.  And while Social Security rates may have been set right if the premiums were really being kept in escrow for the future, the fact is that the so-called trust fund has been raided into oblivion by past government spending programs  – Social Security taxes need to be reset to reflect that fact.

The result, of course, will be a substantial increase in both payroll taxes.  I am not a big fan of tax increases, and find taxes on labor to be among the worst.  But as long as we hold on to the collective notion that these are insurance programs and the taxes we pay are premiums, its time to stop fooling Americans into thinking that the premiums they are paying are truly sufficient to fund their benefits.  Maybe after we reprice the “premiums” to their true actuarial value, we can then have a real debate about the structure and existence of these programs.

Every time we enter business in a new state, it is a constant challenge to figure out all the taxes we owe.  In Alabama, for a single campground, we file and pay

• Alabama lodging tax
• Alabama sales tax
• Alabama boat rental tax
• Marshall County lodging tax
• Marshall County property tax
• Marshall County sales tax
• Marshall County occupancy tax
• Marshall County health certification
• Alabama unemployment tax
• Alabama withholding tax
• Alabama personal and corporate income tax

So of course we got billed for a new one today, for the Alabama Business Privilege Tax, apparently a corporate net worth tax.  No forms or notices are sent for this tax until after it is due, when one owes about 80% in penalties.

By the way, pay the government for the “privilege” to conduct commerce is one of those government euphemisms that drive me up a tree.

You decide  (origins and data for chart here)

I am generally opposed to tax increases because they never seem be matched to spending cuts — the tax increases are passed but Congress finds ways to gut the spending cuts.  But I would accept this proposal in a heartbeat:  Return to both Clinton era tax and spending levels.  There, that’s my super committee proposal.   Taxes and spending both targeted at 19% of GDP.    Problem solved.

Yes, its stupid, but perhaps for a different reason than has been mentioned.  The tax is on producers, and is meant to fund a promotion and marketing campaign.  Really.  Because Christian families in the US might forget to buy a tree this year if the government did not remind them.  Seriously, do any of these folks have kids.  ”Dad, can we get the tree today, can we, can we, please?”

By the way, this kind of taxation authority that bypasses Congress is actually fairly often used by the Department of Agriculture.   If you see random TV ads for avocados or almonds, you probably are seeing one of these government marketing forced-cooperatives.

My Forbes column is up this week and it presents some quick reactions to the Obama jobs speech last night.  A brief excerpt:

Overall, I found the package to be an incredible mish-mash of already tried and failed steps to rejuvenate the economy.   Even if I were to buy into the Keynesian stimulus logic, everything in this package is so under-scale as to be rounding errors on the larger economy.  This is basically a smaller version of the last failed stimulus repeated.

This plan is absolutely in the Obama style, offering goodies to many constituencies without a hint of how they will be paid for.  Presidents often offer a chicken in every pot when they are campaigning, but usually are forced into reality once they enter office.  Not Barack Obama.  Time and again, from health care to the most recent budget fight and last night’s speech, Obama wants to be loved for offering perks, and then wants someone else to take the fall for the unpopular steps required to pay for them.  He is like grandma endearing herself to the grandkids by buying them Christmas presents on dad’s maxxed out credit cards, leaving dad to later figure out later how to pay for them or face the ire of the kids by returning the gifts.

Kevin Drum argues that Conservatives have vastly over-estimated the effects of capital gains tax changes on investment.

I can’t agree with parts of the article that seem to argue that all taxes have limited effects on behavior (this is easily disproved, just look at what the tax code does for preferences of issuing debt vs. equity, or even look at the mortgage market).  But I have always suspected that the political focus on the capital gains tax represents another piece of evidence that financial players (Wall Street, banks) dominate much of economic regulation.

All things being equal, a low capital gains tax is fine.  If I sell some stock, its nice to pay a lower tax on the profits, particularly since at some level those profits have already been taxed once at the corporate level.  Financial players who buy and sell securities live and die by the capital gains tax, and I suppose for businesses there is some advantage in that it perhaps reduces the cost of debt and equity.

But as a business person with my own company, that capital gains tax is largely irrelevant to my investment decisions.   That is because all my investments are made to generate cash flow, and thus the regular tax rate is the ordinary income tax rate.  Perhaps one time in my life, if ever, the capital gains tax will be hugely relevant when I sell my business, but that is at some time in the future so nebulous that it does not affect my behavior.   Other than the double taxation argument, I have never understood why those who take their investment gains in asset value appreciation rather than in income should get different tax treatments.

I agree with this assessment but did not expect to see it coming from Kevin Drum’s keyboard

Contrary to his reputation, Bush mostly succeeded by pressing a moderate, and sometimes even liberal, agenda. Tax cuts aside, which he passed solely primarily with Republican support

He goes on to point out that a lot of Bush’s domestic legislation was really liberal (NCLB, Medicare part D).  I agree.

But I think this is related to where Democrats go off track in understanding Tea Party and libertarian spending anger.  Their rejoinder tends to be “much of current spending is Bush’s fault.”  Leave aside the absurd implicit assumption in this that once a spending level is achieved, no president later has any ability to ratchet it back down.  No, what they really miss is that I think the Tea party would agree.    They are just as angry about Bush’s spending and expansion of government, so the “Republicans started it” playground argument does not really get much traction.  The best analog would probably be expansion of Executive power.  Drum is not OK (I am pretty sure) with the notion that the President can have any American he chooses summarily executed in the war on terrorism, and isn’t likely to change his mind if reminded that “his guy” Obama invented the power.

Kevin Drum, referencing an article by Christopher Caldwell, says

What is Amazon.com’s biggest advantage over its competition? One-click ordering? The ability to go shopping in your pajamas? Its enormous selection? Those all play a role, but Christopher Caldwell thinks the real answer is the fact that Amazon’s customers mostly don’t have to pay state sales tax…

The latest state to insist that Amazon collect state sales taxes is California. Amazon’s response? As in Illinois, they summarily severed the contracts of every one of its affiliates in the Golden State. But that’s not all. Like mafia goons going to the mattresses in a gang war, Amazon immediately announced that it would spend millions of dollars to place a referendum on the ballot to nullify the new California law. And in the meantime? Law or no law, they won’t be collecting sales tax in California, and that’s that.

Amazon customers do have to pay sales taxes, or the substitute in states called a use tax.  So the wording in the post in technically incorrect.  The correct statement is that Amazon does not have to collect the taxes as an agent of the state.

Both Mr. Drum and Mr. Caldwell are likely required by their state to report out of state purchases from online suppliers and pay taxes on these purchases.  Most people don’t do it, and I would bet that both Drum and Caldwell do not.  If I am wrong, Mr. Drum is welcome to post a copy of his return.  Otherwise, he and Caldwell are the ones illegally evading taxes, not Amazon.

Clarification: I personally couldn’t give a rip about these gentlemen evading taxes the government chooses not to enforce.  Join the ranks of tax protesters, guys!  The point of the post is hypocrisy.

Via SB7

The US Federal expenditures for 2007 were a total of $2.8 trillion. The US Federal expenditures for 2010 were $3.55 trillion. This is a more than 25% increase. Where has all of this increased spending gone, and why are the programs it went to fund so critical that cutting them is not a serious option? It’s not like 2007 was the dark day of anarchy, lawlessness, and starving seniors. Originally the increase was ‘stimulus spending’ of various kinds, but it seems to have morphed from ‘temporary increase’ into ‘permanent budget baseline,’ and any talk of serious cutting is treated as beyond the pale by the media and the Democrats alike.

I’m of the opinion that going back to the 2007 budget (adjusted to account for population growth) should be a viable option, and would save something like $5-6 trillion over 10 years. It sounds (to me) both simple and feasible. What am I missing?”

Several blogs have pointed out this February editorial in the USA Today by Jacob Lew, head of Obama’s OMB.  In February he told us, no, in true Obama Administration fashion, he lectured us like little kids that:

Social Security benefits are entirely self-financing. They are paid for with payroll taxes collected from workers and their employers throughout their careers. These taxes are placed in a trust fund dedicated to paying benefits owed to current and future beneficiaries.

When more taxes are collected than are needed to pay benefits, funds are converted to Treasury bonds — backed with the full faith and credit of the U.S. government — and are held in reserve for when revenue collected is not enough to pay the benefits due. We have just as much obligation to pay back those bonds with interest as we do to any other bondholders. The trust fund is the backbone of an important compact: that a lifetime of work will ensure dignity in retirement.

According to the most recent report of the independent Social Security Trustees, the trust fund is currently in surplus and growing. Even though Social Security began collecting less in taxes than it paid in benefits in 2010, the trust fund will continue to accrue interest and grow until 2025, and will have adequate resources to pay full benefits for the next 26 years.

As many have pointed out this week, if this is the case, why does the debt limit even affect the ability to pay or not pay Social Security to grandma?  Because Lew was spouting complete BS.  Social Security has generated surpluses in the past, but these have been spent and replaced with IOU’s.  And we are finding out right now how much those IOU’s are worth – zero.

From our President

“The American people are sold,” President Obama said.

“The American people are sold, I just want to repeat that.”

“You have 80% of the American people who support a balanced approach. 80% of the American people support an approach that includes revenues and includes cuts. So the notion that somehow the American people aren’t sold is not the problem. The problem is members of Congress are dug in ideologically.”

The point he is trying to make is that 80% of the people in the US support higher taxes as part of the deficit reduction package.  Not sure I have seen a poll number this high, but let’s assume our dear leader would not lie to us.  But let’s be clear on what this means – 80% of the people in the US support higher taxes on other people.

Apparently the newest pro-tax meme out of the Left is that millions of dumb Americans don’t already know that they are benefactors of social spending programs and that if they understood this, they would surely support government expansion.  Such programs they highlight include:

• 529 or Coverdell savings deduction
• mortgage interest deduction
• hope or lifetime learning tax credit
• student loans
• child and dependent tax care credit

etc. etc.  Whole list here.  I don’t want to spend too much time on this silliness, but two immediate responses come to mind

1. If tax credits, ie the ability to keep more of your money and be taxed less, is a government social program, then the implication is that all your money belongs to the government, and the very fact you keep any of it is a gift or benefaction of the government for which you should be grateful.  The fact the Left cannot understand the simple difference between, on the one hand, keeping more of your own money, and on the other, getting money that has been taken by force from others, explains a lot about the current budget fight.
2. In many cases, Americans “benefit” from government programs because the government does not allow any alternative.  Or, if it allows an alternative, the government provides heavily subsidized services or pre-paid services (e.g. public education which you pay for whether you use it or not) that crowd out private alternatives.  Just because roads and schools and home loans have heavy government involvement does not mean that they require that government involvement to exist.

More analysis here.

I have often described this statist feedback loop:

• Create government program
• Government programs messes up certain aspects of the market
• Blame such messes on “failure of markets” or capitalism or even the rich, rather than the government program
• Create new government program to fix problem created by last program
• Repeat

Obama’s new political strategy seems to be even more brazen

• Democrats pass new program over Republican objections
• New program has unseemly subsidies for rich people
• Blame subsidies on Republicans, to the point of using subsidies as example of bankruptcy of Republican party

Specifically, tax breaks for corporate jets:

The chief economic culprit of President Obama’s Wednesday press conference was undoubtedly “corporate jets.” He mentioned them on at least six occasions, each time offering their owners as an example of a group that should be paying more in taxes.

“I think it’s only fair to ask an oil company or a corporate jet owner that has done so well,” the president stated at one point, “to give up that tax break that no other business enjoys.”

But the corporate jet tax break to which Obama was referring – called “accelerated depreciation,” and a popular Democratic foil of late – was created by his own stimulus package.

Which is not to say that the losers in the Republican party would not likely have supported the same plan had it been their idea.

By the way, this is nearly exactly what Obama has been doing with those so-called special subsidies for oil companies.  This subsidies are in fact the identical tax breaks that all manufacturers receive that allow them to accelerate expensing of capital investment.  This is a tax policy that has enjoyed bipartisan support and no one is suggesting should be eliminated in general — just eliminated for industries that have bad PR.

Wal-Mart’s profit to shareholders is about 3.6% of sales.   This means that for the majority of the country, on the items you buy at Wal-Mart, they are earning less than half of what the government takes in sales tax on the same item.

It is folks like this who continue to want to score the stimulus solely based on employment created by stimulus projects, without considering the fact that someone was using the money for some productive purpose before the government took or borrowed it.

David Brin at the Daily Kos via the South Bend Seven

There is nothing on Earth like the US tax code. It is an extremely complex system that nobody understands well. But it is unique among all the complex things in the world, in that it’s complexity is perfectly replicated by the MATHEMATICAL MODEL of the system. Because the mathematical model is the system.

Hence, one could put the entire US tax code into a spare computer somewhere, try a myriad inputs, outputs… and tweak every parameter to see how outputs change. There are agencies who already do this, daily, in response to congressional queries. Alterations of the model must be tested under a wide range of boundary conditions (sample taxpayers.) But if you are thorough, the results of the model will be the results of the system.

Now. I’m told (by some people who know about such things) that it should be easy enough to create a program that will take the tax code and cybernetically experiment with zeroing-out dozens, hundreds of provisions while sliding others upward and then showing, on a spreadsheet, how these simplifications would affect, say, one-hundred representative types of taxpayers.

South Bend Seven have a number of pointed comments, but I will just offer the obvious:  Only half of the tax calculation is rates and formulas.  The other half is the underlying economic activity (such as income) to which the taxes are applied.  Brin’s thesis falls apart for the simple reason that economic activity, and particularly income, are not variables independent of the tax code.  In fact, economic activity can be extremely sensitive to changes in the tax code.

The examples are all around us — the 1990 luxury tax tanked high end boat sales.  The leveraged buyout craze of the 80′s and housing bubble of the 00′s are both arguably fed in part by the tax code’s preference for debt.  The entire existence of employer-paid (rather than individual-paid) health insurance is likely a result of the tax code.  And of course there are all the supply-side and incentives effects that Kos readers likely don’t accept but exist none-the-less.

From Dan Mitchell

Called a “debt failsafe trigger,” Obama’s scheme would automatically raise taxes if politicians spend too much. According to the talking points distributed by the White House, the automatic tax increase would take effect “if, by 2014, the projected ratio of debt-to-GDP is not stabilized and declining toward the end of the decade.”

Pretty good evidence that the default mentality in Washington is that “all your money are belong to us” and whatever is leftover that the government does not happen to spend, you are welcome to use for yourself.

My column this week in Forbes is a response to yesterday’s Presidential budget speech.  An excerpt:

President Obama is working from the assumption that the political leader who suggests painful but necessary budget cuts first, loses.   He had every opportunity to propose and pass a budget when he had Democratic majorities in Congress.   But Democrats feared that showing leadership on the hard budget choices they faced would hurt them in the November election, so they punted.

Even when Obama did produce a budget, it was the closest thing to a non-entity as could be imagined.   A budget that doubles government debt over 10 years and raises interest costs (under optimistic assumptions) to a trillion dollars a year would likely be controversial in any year, but is a non-starter given fresh memories of debt crises in Greece, Ireland and a number of other countries.

Of course there is an 800-lb gorilla in the room that no one wants to acknowledge:  Three programs —  Social Security, Medicare, and Medicaid — grow in the next 10 years under current rules to at least $2.7 trillion dollars a year.  Recognize that this figure excludes all the other so-called non-discretionary payments (unemployment, food stamps, etc.) as well as everything else the government does including the military and Obamacare. The 2021 spending on just those three programs is 25% higher than the total revenue of the federal government from all sources in 2011.

Later in the article, I suggest ten principles that should be the foundation of a budget deal.

No, Mr. Obama, the fecklessness of politicians does not obligate me to send more of my money to the government.

Three times in my life I have lent money to people in serious financial straits.  In every case, they came back to me for more.  ”X more dollars and I will be home free and can pay you back.”  In a few cases I came up with a second infusion and in one case I (embarrassingly) actually gave money a third time.   In no case was I ever paid back.    I haven’t heard this phrase in years, but when I was young stock investors had a saying — “your first loss is your best loss.”  This was just another way of saying don’t throw good money after bad.

Obama and Bush (I haven’t forgotten your culpability in all this George) sold the country, or at least Congress, on emergency spending for wars and bailouts and stimulus.  This was supposedly one-time spending only for the duration of the emergency.  But now Democrats and Obama are treating the peak of this emergency spending as the new baseline, from which cuts are impossible.

This lack of desire to cut spending and a resetting of norms as to “what is normal” is not just a government problem, it is endemic to every organization.  Private organizations face this problem all the time.  The difference is that when times go bad, private organizations do not have fiat taxation power, so that when they are underwater, they must cut bloated budgets or die.  Either way, the problem goes away.  Private companies differ from government not in that they don’t have problems with beauracracy and risk aversion and deadwood and bloat and bad incentives – because they do.  The difference is that private companies cannot get away with allowing this stuff to linger forever, and governments can.

Government will never, ever, ever, ever cut spending unless all hope of new taxes is removed, and even then they will likely try to cut spending on the most, rather than the least, popular programs to build public support for more taxes.

In the early 90′s, after the fall of the Soviet Union, we talked about a peace dividend from reductions in military spending.  I want a sanity dividend.

Postscript: We like to think that financial problems are due to bad luck, but they usually are due to poor management.  The guy I lost the most money with was producing a really interesting boat concept, basically as fun and lithe and fast as a jetski but enclosed so boaters who were less daring would not actually be in contact with the water.  I wanted a bunch for rental service at our marinas.  But he kept asking for money, saying that he had bad luck with this supplier or that supplier.  Eventually, I found out he was in this incredibly expensive commercial lease, and was burning all the money I lent him on useless rent payments.  Stupid.

After I graduated from college, I cashed in about $7000 in savings bonds I had accumulated.  I was going to make a fortune in the market.  After three years I had lost almost all of it — right in the heart of one of the greatest bull markets in history!  A few years later, I was in a situation where I could have really used this money.  This was not bad luck or circumstances, I did stupid things.  I recognized something that many dentists and doctors never learn – it was possible to be a smart guy who sucked at investing.  I was one of them.  My investing has been in index funds ever since.

It looks like the simply awful 1099 provision from Obamacare will be repealed.

Via Megan McArdle

A New York court ruled last month that all income earned by a New Canaan, Conn., couple is subject to New York state taxes because they own a summer home on Long Island they used only a few times a year. They have been hit with an additional tax bill of $1.06 million.Tax experts and real estate brokers say this ruling could boost the tax bill for thousands of business executives who own New York City apartments they use only occasionally. It could also hurt sales in the Hamptons and New York’s other vacation-home communities.

“People will think twice about spending any summer time in New York,” says Robert Willens, a New York-based tax consultant. “The amount of tax they could be subjected to is likely to outweigh the benefit.”…

Judge Joseph Pinto, a New York administrative law judge, made the novel ruling in a 2009 case that was affirmed last month on appeal by the New York state tax appeals tribunal. Mr. Pinto seized on what is meant by a permanent residence, which is the benchmark for whether all, or just the in-state portion, of an individual’s income is subject to New York state tax.

Mr. Pinto ruled that the couple’s Long Island vacation home qualifies under the law as a permanent abode because it was suitable for living year-round–whether or not the couple actually stayed in the home wasn’t relevant. Under the ruling, if an owner doesn’t spend a single a day in a home it could still count toward a permanent residence.

I didn’t really need a reason to not buy a home in the Hamptons, but just in case I were tempted, this would pretty much kill any such desire.  This, however, strikes me as one of those games (like trade wars) that New York has not thought out well before starting.  My admittedly uneducated guess from knowing some New Yorkers is that more New Yorkers own 2nd homes in Connecticut than vice versa.  If New York state is going to lose a tit for tat tax war if this is the case.

I had a real zoo of a week last week – one of those stretches I have every once in a while in business where new items were being tossed into my queue far faster than I could take care of them.

One of the most amazing was courtesy of the state of Florida.  Almost exactly a year ago, I submitted some backup data on my Florida revenues in 2006 to an auditor for sales taxes.  Such audits are entirely usual and routine (if irritating) and come up with some regularity.  There was no way the auditor could have figured out my tax submission from what I initially sent him – I would have to spend time explaining what different categories in my revenue reports and GL meant.  Further, I had data on seven locations which are divided in the tax reports into two county reports, but he did not have the data for which should go to which.

Well, I never heard from the guy for a whole year to clarify these issues.  Not sure what he was doing, but he was probably screwing up somehow, because on Friday his supervisor called me and told me that the statute of limitations was almost up on 2006 and they needed to complete the audit.  To this end, the auditor had submitted to her some mess of a set of numbers (see my comments above, he couldn’t have done a correct job no matter how competent he was since he never asked me for all the information he needed).  I can see the guy rushing around trying to cover his ass having probably forgotten about it for a year.  Anyway, I told the lady that the statute of limitations was her problem, not mine, because her employee initially contacted me a year ago and had been sitting on the case all that time.

Well, I guess I was naive.  It turns out the statute of limitations is in fact my problem in the power imbalance that exists between me and the state of Florida.  She told me that, admitting she had no basis for doing so, she was going to file a lien against me for $40,000 in unpaid taxes as a “placeholder” to get in under the statute of limitations.  Yes, this would trash my credit and my legal standing and cause me no end of problems having a government lien on my company, but it would circumvent the horrible situation that when they actually did the work they should have done a year ago, I might owe taxes they could not collect.

Of course I told her this was BS and of course that got me about nowhere.  After a lot of time, I got one concession.  If I could prove I was clean by Monday, they would not issue the lien.  Well I spent all Friday, Friday night, and Saturday working up the analysis that is supposed to be their job, working on a 1 business day deadline because they had pissed away 250 business days sitting on my case file.  Completing the analysis, I calculated I under-paid taxes by just under $7.  We will see on Monday if I am able to battle back against this absurd thuggery.  By the way, we are being audited everywhere by local governments hoping to dredge up a few pennies from the couch cushions.  It is taking so much of my time that I actually chose to back off of bidding on a couple of new projects — no time to spare.  So much for stimulus.

On the bright side, I have a lot of good stuff saved up to blog but I did not feel like it on Sunday.  Instead, I spent some time soldering switches and other trackwork on my n-scale railroad.  Made good progress, only about 3 more switches left to build on this module (the switches below are obviously before painting and adding wood ties.  Examples of finished work is here).

Update: By the way, I operate in red states and blue states and cannot detect any real difference in how arbitrarily I am treated by the state bureaucracy (with the exception of California, which stands alone at the top of the list of state bureaucracies that are a pain to deal with).  They differ in laws and tax rates, that often make red states more hospitable, but their bureaucrats are all about the same.

The Senate will take a vote today to repeal the hugely onerous 1099 provision from the Obamacare legislation.   Good news, though Obama is opposed to the repeal as he feels (probably correctly) that it will open the floodgates to further repeals and amendments.  Which is pretty disingenuous, as one of the soothing memes he handed out when the legislation was being rushed through Congress was that there was plenty of time to amend and fix its rough edges.  How he needs to decide if he was lying about that, as Congress addresses a rough edge that had nothing to do with health care but created a huge and largely useless burden on businesses.  I know that this provision would really kneecap my business.

Meanwhile, small businesses are staring in horror toward 2013, when the 1099 mandate will hit more than 30 million of them. Currently businesses only have to tell the IRS the value of services they purchase from vendors and the like. Under the new rules, they’ll have to report the value of goods and merchandise they purchase as well, adding vast accounting and paperwork costs.

Think about a midsized trucking company. The back office would have to collect hundreds of thousands of receipts from every gas station where its drivers filled up and figure out where it spent more than $600 that year. Then it would also need to match those payments to the stations’ corporate parents.

Most Democrats now claim they were blindsided and didn’t understand the implications of the 1099 provision—which is typical of the slapdash, destructive way the bill was written and passed. As the critics claimed, most Members had no idea what they were voting on.

Democrats are trying to water down this repeal:

Yesterday the White House endorsed a competing proposal from Florida Democrat Bill Nelson that would increase the 1099 threshold to $5,000 and exempt businesses with fewer than 25 workers. Yet this is little more than a rearguard action in favor of the status quo; the Nelson amendment leaves the basic architecture unchanged while making the problem more complex.

Businesses would still have to track all purchases, not knowing in advance which contractors will exceed $5,000 at the end of the year. It also creates a marginal barrier to job creation—for a smaller firm, hiring a 26th employee would be extremely costly. The Nelson amendment also includes new taxes on domestic oil production, as every Democratic bill now seems to do.

This analysis is dead on — our company generally cannot predict exactly how much we will purchase from a specific vendor in a year, so we would still have to collect tax ID’s from every single vendor, not knowing which would cross the hurdle.

From Kevin Drum

Bob Somerby is following the latest Social Security chatter and hopes that Paul Krugman can explain how the trust fund works in an understandable way:

The trust fund is just an accounting fiction — a pile of worthless IOUs! Generations of voters have been misled by such skillfully-wrought presentations.

….Krugman is our most valuable player by far — our only player at the top of the press corps. Can he disentangle the trust fund scam in a way average people will understand? We don’t know, and it isn’t his job; no player should be expected to carry the ball on every play from scrimmage. Tomorrow, we’ll offer our own ideas at how the “there-is-no-trust-fund nonsense” might best be approached, in a way average people can follow.

Well, hell, I’ll take a crack at it. Here’s the simple version.

In 1983, when we last reformed Social Security, we made an implicit deal between two groups of American taxpayers. Call them Groups A and B. For about 30 years, Group A would pay higher taxes than necessary, thus allowing Group B to reduce their tax rates. Then, for about 30 years after that, Group A would pay lower taxes than necessary and Group B would make up for this with higher tax rates.

This might have been a squirrelly deal to make. But it doesn’t matter. It’s the deal we made. And it’s obviously unfair to change it halfway through.

This is an incredible fantasy.  Absolutely no one thirty years ago (Drum dates the “deal” to 1983) explicitly or even secretly crafted any such deal.  Seriously, is Drum really positing that a Democrat-dominated Congress led by for-god-sakes Tip O’Neil really said “lets have poor people pay some of rich people’s taxes for thirty years?”  Just last night I was reading a quote from Hitler late in WWII that asserted he actually let the British escape from Dunkirk on purpose because he wanted the British to know he had no real quarrel with them.  While it certainly is true Hitler never really wanted a war with Britain, this is just a self-serving rewrite of history.  Drum is doing the same thing.  Its amazing to me that an obviously intelligent person can convince himself of this.

Here is the real, simple explanation of the Social Security trust fund:  Social Security was spinning off huge piles of money and no Congress person of either the Coke or the Pepsi party could resist grabbing it and spending it in a way that would support their reelection.  They ended up spending it all.  Every bit of it, all gone.  The Social Security trust fund is the Enron 401K plan stuffed with Enron stock.

Drum gets to his bizarre theory because he believes the fiscal discipline problem over the last 30 years was all due to tax cuts rather than spending, and that all these tax cuts were for rich people.   Of course, throughout the last 30 years, the share of taxes paid for by the rich have steadily risen, so the claim is absurd on its face, but the false assumptions it is built on are ones that every progressive accept as holy writ.

This paragraph is particularly a howler:

The physical embodiment of this deal is the Social Security trust fund. Group A overpaid and built up a pile of bonds in the trust fund. Those bonds are a promise by Group B to repay the money. That promise is going to start coming due in a few years, and it’s hardly surprising that Group B isn’t as excited about the deal now as it was in 1983. It’s never as much fun paying off a loan as it is to spend the money in the first place.

It would be some exercise to try to define groups A and B in a non-overlapping manner.  The fact is everyone is in group A, as almost everyone overpays into Social Security on a return on capital basis — the retirement income most people get represents generally a negative net ROI on the “premiums” paid.  And it is amazing to me that I have never heard that we now have government bonds that must be paid back only by a specific sub-section of the population.  It may very well have been a progressive assumption that only rich people would be on the hook for every dollar of government debt run up over the last 30 years, but that fact will likely be a surprise to just about everyone else in the country.  Here is his conclusion:

But pay it off they must. The rich have been getting a loan from the middle class for decades…

Delusional.

…is my corporate Federal and multi-state tax return.

The enterprise-killing nature of taxes isn’t just the money.

I offer as the irritating story of the day, this one on sales tax audits of restaurants in New York.

The state also recently started using desk audits, in which they use third-party information to scrutinize whether businesses may be making more money than they’re reporting. For example, the state can look at how many pizza boxes a vendor has sold to a pizzeria and if the number of boxes is more than the number of pizzas the company said it sold, the state can look closer to find whether tax evasion is the source of the discrepancy.

“If the state went through a normal audit process and determined that we owed money, we wouldn’t fight it. We’re not opposed to paying taxes,” said Panaro.

Instead, he said he was told all of his paperwork checked out, but he didn’t meet the state’s standards for keeping “adequate records.” The restaurant had failed to keep every paper copy of each guest’s order receipt for the entire three-year period. That opened the door for the auditor to use “indirect audit methods” to estimate what he thought the restaurant owed.

The method of estimation the state used was to observe the restaurant’s sales for a day, then compare it with the same date on a previous year. The previous year’s reported sales were 25 percent lower, so the auditor took that percentage and multiplied it over each day’s sales of the three-year period, deciding the restaurant did enough unreported business to owe an additional $330,000 in sales tax….

Joe Giafaglione, owner of Bar Bill Tavern in East Aurora, has been audited twice in the past four years. His purchase of ground hamburger raised suspicion when it was found there were no hamburgers on the menu (it was being used as an ingredient in chili).

“It’s totally ridiculous the way they come up with figures without any evidence,” said Giafaglione. “They say they need 20 [documents], so you give them 19 and they say, “Ah, you don’t have that? Well, now we’ll have to estimate.’‚”

A similar situation occurred with our company a number of years ago on a contract where some of the work had to be done using Davis-Bacon type mandated wage rates.  These rates, for those who have never seen them, come in two parts.  They might say, for example, that the minimum for such and such a job is $12.10 per hour plus $3.07 per hour cash instead of fringe benefits for a total of $15.17.

Using these figures, we gave folks an offer letter saying you will be paid $12.10 base pay plus $3.07 fringe for a total of $15.17 an hour.  Then on the paycheck, they just got one line for their total hours times $15.17.  Well, said the Department of Labor in an audit, you are not paying them the fringe, you are just paying the base pay — we only see one number on the pay check.  So you owe $3.07 times 20,000 or so hours, pay up.

Well, I was pretty surprised.  I said it was pretty clear I was paying the fringe – why in the heck else would I pay someone an oddball wage like $15.17 that just so happened to be equal to the sum of base plus fringe.  You can see the calculation in each offer letter.  No dice, they said, the law requires that the payments have to be broken out on the pay stub.

This was back in my younger, naive days, when I thought the “expert” auditors actually knew the law.  Now I know they are sometimes just making stuff up, but I was smart enough at the time to ask them to show me the legal requirement that these two payments be broken out on the pay stub — show me something in writing.  Nothing was forthcoming.   My attorney later educated me that there is hierarchy of quality to what might be in writing:

This is where I began to learn about the hierarchy of labor law. As I understand it (and remember, I am not a lawyer) it is something like this, from strongest to weakest:

1. The actual statute as written by Congress, e.g. the Fair Labor Standards Act
2. Court rulings and precedents
3. Approved regulations what have been through the public comment and approval process
4. Formal DOL rulings
5. Internal DOL guidelines and manuals
6. Informal DOL rules of thumb

Numbers 1, 2, and 3 have a lot of legal force. Five and six may or may not – they represent the DOL’s opinion, but that opinion has not been vetted by a regulatory hearing or court decision. These get overturned by courts all the time.

When the DOL tells you can or can’t do something, they likely will say it with equal authority if it comes from 1 or 6. For example, in this case, the DOL said with total authority that the wage and fringe have to be split on the paycheck.

Anyway, I read the actual law myself.  The only mention of anything even related to this was the need for adequate record-keeping to prove we had foll0wed the rules.  I searched as far as I could through labor department regulations online and found no more detail.  So I argued that unless they could produce something different, my position was that the offer letter plus the pay stub was adequate record keeping.

Eventually, the DOL let the issue drop – petulantly, they never actually dropped the claim, just told me they were choosing not to go to court against me at that time.  Of course I am only a glutton for so much punishment, so in the future we split the payments out on the pay stub.  It creates more work doing payroll, but what is government for, after all?

PS, if its helpful, I have a three part series on my interactions with the Department of Labor beginning here.