This essay first appeared on the digital edition of the Claremont Review of Books.
The Willful Blindness of an IRS Sycophant
July 24, 2015 by Dan Mitchell
Remember Sleepless in Seattle, the 1993 romantic comedy starring Tom Hanks and Meg Ryan?
Well, there should be a remake of that film entitled Clueless in Washington. But it wouldn’t be romantic and it wouldn’t be a comedy.
Though there would be a laughable aspect to this film, because it would be about an editorial writer at the Washington Post trying to convince people to feel sorry for the IRS. Here’s some of what Stephen Stromberg wrote on Wednesday.
Congress has done some dumb things. One of the dumbest is the GOP’s penny-wise-pound-foolish campaign to defund the Internal Revenue Service. …its mindless tantrum against the IRS has produced for taxpayers: a tax season that was “by far the worst in memory,” according to the Taxpayer Advocate Service, an agency watchdog.
Before I share any more of the article, I should point out that the “Taxpayer Advocate Service” isn’t a watchdog. It should be renamed the “Government Advocate Service” since its main goal is to increase the IRS’s budget.
But I’m digressing. Let’s continue with Mr. Stromberg’s love letter to tax collectors.
The underlying problem is that Congress has asked the IRS to do a lot more, such as administering a critical piece of Obamacare, but the GOP Congress won’t give the agency the funding it needs to do its work. …But good luck convincing Republicans to fix the IRS’s entirely predictable and avoidable problems. Not when that would mean restraining the impulse to act on anti-tax orthodoxy, blind populist anger and scandal-mongering about the IRS mistreating conservatives. In fact, Republicans want to double down on their nonsense budgeting, proposing deep cuts to the IRS last month.
Oops, time for another correction.
Stromberg is cherry picking data to imply that the IRS budget has been savaged.
If you look at the long-run data, however, you’ll see that the IRS now has almost twice as much money to run its operations as it did a few decades ago.
And that’s based on inflation-adjusted dollars, so we have a very fair apples-to-apples comparison.
Stromberg also wants us to sympathize with the bureaucrats because the tax code has been made more complex.
The underlying irrationality is the same: The IRS doesn’t write the tax code or health-care law, but the agency must apply these policies and engage with people affected by them, so it is an easy scapegoat.
Part of this passage is correct, and I’ve specifically pointed out that the tax code is mind-numbingly complex and that politicians deserve an overwhelming share of the blame for this sorry state of affairs.
That being said, the IRS goes beyond the law to make the system worse, as we saw when it imposed a regulation that put foreign tax law above American tax law. And when it arbitrarily rewrote the Obamacare legislation to enable additional subsidies.
In other words, it deserves to be scapegoated.
But there’s a bigger issue, one that Stromberg never even addresses. Why should we give more money to a bureaucracy that manages to find plenty of resources to do bad things?
And then awarded bonuses to itself for this corrupt behavior!
Even more outrageous, the Washington Examiner reports today that the IRS still hasn’t cleaned up its act.
A series of new revelations Wednesday and Thursday put the Internal Revenue Service back under fire for its alleged efforts to curtail…conservative nonprofits. …the Government Accountability Office uncovered evidence that holes in the tax agency’s procedure for selecting nonprofit groups to be audited could allow bias to seep into the process. …lawmakers exposed the lack of safeguards that could prevent IRS officials from going after groups with which they disagreed. Meanwhile, the conservative watchdog Judicial Watch released documents Wednesday that suggested the IRS targeted the donors of certain tax-exempt organizations.
Does this sound like a bureaucracy that deserves more of our money?
If you’re still not sure how to answer, consider the fact that the IRS also somehow has enough money in its budget to engage in the disgusting “asset forfeiture” racket.
The Wall Street Journal recently opined on this scandal.
…a pair of new horror stories show why Americans dread any interaction with the vindictive tax man. Khalid Quran owns a small business in Greenville, North Carolina. He emigrated to the U.S. in 1997, opened a convenience store near a local airport, and worked long hours to give his four children more opportunity. After nearly two decades, Mr. Quran had saved $150,000 for retirement. Then in 2014 the IRS seized his bank account because he had made withdrawals that raised red flags under “structuring” laws that require banks to report transactions of more than $10,000. Mr. Quran had made transactions below that limit.
So even though Mr. Quran did nothing illegal and even though it’s legal to make deposits of less than $10,000, the IRS stole his money.
Just like money was stolen from the Dehko family.
Here’s the other example from the WSJ.
Maryland dairy farmer Randy Sowers…had $62,936.04 seized from his bank account because of the pattern of his deposits, though the money was all legally earned. …Mr. Sowers told his story to a local newspaper…a lawyer for Mr. Sowers asked…“why he is being treated differently.” Mr. Cassella replied that the other forfeiture target “did not give an interview to the press.” So much for equal treatment under the law.
Yes, you read correctly. If you have the temerity to expose the IRS’s reprehensible actions, the government will try to punish you more severely.
Even though the only wrongdoing that ever happened was the IRS’s confiscation of money in the first place!
So let’s celebrate the fact that the IRS is being subjected to some modest but long-overdue belt-tightening.
Notwithstanding Mr. Stromberg’s column, the IRS is not a praiseworthy organization. And many of the bureaucrats at the agency deserve our disdain.
- It has thieving employees.
- It has incompetent employees.
- It has thuggish employees.
- It has brainless employees.
- It has protectionist employees.
- It has wasteful employees.
- And it has victimizing employees.
The bottom line is that IRS budget cuts show that Republicans sometimes do the right thing.
And maybe if there are continued cuts and the current tax system actually does become unenforceable at some point, maybe politicians could be convinced to replace the corrupt internal revenue code with a simple and fair flat tax.
This is the first of “How Big a Life Do You Want” articles.
No One Can Give You What is Already Yours.
Rights. A lot is said about rights. Not all everything called rights have anything to do with what essential rights are. If one were to get down to the root of the matter – rights are first and foremost unalienable, inherent, part and parcel of your very being. If at any moment the idea is accepted that rights are anything but unalienable, part of your very existence, then what you think you have is no longer a right but a decree, edict, endowment or some specific benefit bestowed by some higher authority, usually some form of government or ruler.
In the first case, your rights are the basis of law; in the latter, laws define your rights. Further, if rights are inherent, unalienable then no person, entity or governing body can be said to have jurisdiction over your rights. This is because the rights of every individual emanate from each and every individual’s very existence; this bundle of rights exist a priori, proceeding any law or government.
This is precisely what was meant by that portion of the Declaration of Independence which reads:
“We hold these truths to be self-evident, that all men are created equal, that they are endowed, by their Creator, with certain unalienable Rights, that among these are Life, Liberty, and the pursuit of Happiness.”
Frédéric Bastiat in “The Law” says it this way:
We hold from God the gift which includes all others. This gift is life—physical, intellectual, and moral life.
But life cannot maintain itself alone. The Creator of life has entrusted us with the responsibility of preserving, developing, and perfecting it. In order that we may accomplish this, He has provided us with a collection of marvelous faculties. And He has put us in the midst of a variety of natural resources. By the application of our faculties to these natural resources we convert them into products, and use them. This process is necessary in order that life may run its appointed course.
Life, faculties, production–in other words, individuality, liberty, property—this is man. And in spite of the cunning of artful political leaders, these three gifts from God precede all human legislation, and are superior to it.
Life, liberty, and property do not exist because men have made laws. On the contrary, it was the fact that life, liberty, and property existed beforehand that caused men to make laws in the first place.¹
This cannot be understated: whether you believe in a God or not, if your rights begin and end with a governing entity, then you do not possess unalterable, unalienable, inherent rights. What you would have were little more than someone giving you at their discretion what they deem you should have. Their presumption is that they have the right and therefore the authority to decree as they see fit. How do they have such authority? Did you give it to them? By what right do they claim such power? Birth? Privilege? A superior intellect? Some high moral character that sets them apart and above the rest of humanity? Or is it mere political power?
Surely the ridiculousness of this notion can be see for what it is. If what you cling to as “rights” under this scenario can be dismissed at the whim and leisure of a ruling individual or group, then rights do not exist; only authority and political power. If rights are believed to be endowed by authority, and not inherent, unalienable, political structure doesn’t matter – it can be a true dictatorship, an oligarchy or a democracy (which is little more than soft tyranny of the majority).
Are you comfortable with the idea that what you believe you have as a right is nothing more than what another deems it to be? Or does it make more sense that rights are truly part and parcel of your being and the being of every individual? If these essential rights are inherently yours, then they are not and cannot be given to you.
No one can give you what is already yours: Life, Liberty, Property. Everything else grows out of this basic concept. Rights either are inherent and unalienable or law is based upon who rules at the time. The choice should be obvious.
Life, Liberty, Property – these are the essential rights each of us possess. You cannot have one without the other two. The existence of these carries with it your right to hold and enjoy these and to defend them, to keep them from being take from you.
This right of defense (to hold and enjoy one’s basic rights freely) is the foundation of all law. So, the purpose of Law is to protect the inherent and unalienable rights of every individual. Laws or legislation that violate anyone’s essential rights would then be contrary to the purpose of Law Theft and fraud are the taking of your property by force or coercion. Murder is the taking of another’s life. Slavery is the taking of one’s freedom and property. It is lawful to prevent theft, fraud, murder and slavery precisely because they take or attempt to destroy the essential rights of an individual or another group of individuals by another individual or group of individuals.
A characteristic of rights is that one’s possession and exercise of that right does not take from another. Your thinking, your speaking, your breathing, your own efforts do not directly cause the loss of the things in anyone else. Your Property, which begins initially with your own body, is not another person’s, nor does your mere existence, put an end to another individual’s having a body. Your right to maintain and improve your own existence does not preclude another person’s right to do so.
This may seem ridiculous to cover, but over the years so many assumptions have glossed over the basic concepts and observations of our own humanity and our relationships, they have to be mentioned. These are what make a truly free society possible,. Precisely because these are presumptive they are often overlooked and forgotten.
So what happens when the co-equal and inalienable rights of two individuals cross paths? Shall one merely use force to take what they want or need from the other? Or shall a mutually agreeable exchange be made to the basic satisfaction of both parties? Which of these choices would be the more civil and respectful? Which action represents freedom and tolerance?
I ask then, just how big a life do you want?
“The Law” by Frédéric Bastiat can be found in several places (it’s a mere 75 pages):
Senator Rand Paul’s Very Good Tax Plan Needs One Important Tweak
June 18, 2015 by Dan Mitchell
Our nation very much needs fundamental tax reform, so it’s welcome news that major public figures – including presidential candidates – are proposing to gut the internal revenue code and replace it with plans that collect revenue in less-destructive ways.
A few months ago, I wrote about a sweeping proposal by Senator Marco Rubio of Florida.
Today, let’s look at the plan that Senator Rand Paul has put forward in a Wall Street Journal column.
He has some great info on why the current tax system is a corrupt mess.
From 2001 until 2010, there were at least 4,430 changes to tax laws—an average of one “fix” a day—always promising more fairness, more simplicity or more growth stimulants. And every year the Internal Revenue Code grows absurdly more incomprehensible, as if it were designed as a jobs program for accountants, IRS agents and tax attorneys.
And he explains that punitive tax policy helps explain why our economy has been under-performing.
…redistribution policies have led to rising income inequality and negative income gains for families. …We are already at least $2 trillion behind where we should be with a normal recovery; the growth gap widens every month.
So what’s his proposal?
…repeal the entire IRS tax code—more than 70,000 pages—and replace it with a low, broad-based tax of 14.5% on individuals and businesses. I would eliminate nearly every special-interest loophole. The plan also eliminates the payroll tax on workers and several federal taxes outright, including gift and estate taxes, telephone taxes, and all duties and tariffs. I call this “The Fair and Flat Tax.” …establish a 14.5% flat-rate tax applied equally to all personal income, including wages, salaries, dividends, capital gains, rents and interest. All deductions except for a mortgage and charities would be eliminated. The first $50,000 of income for a family of four would not be taxed. For low-income working families, the plan would retain the earned-income tax credit.
Kudos to Senator Paul. This type of tax system would be far less destructive than the current system.
That being said, it’s not perfect. Here are three things I don’t like.
- The Social Security payroll tax already is a flat tax, so it’s unclear why it should be wrapped into reform of the income tax, particularly if that change complicates the possibility of shifting to a system of personal retirement accounts.
- There would still be some double taxation of dividends, capital gains, and interest, though the destructive impact of that policy would be mitigated because of the low 14.5 percent rate.
- The earned-income credit (a spending program embedded in the tax code) should be eliminated as part of a plan to shift all means-tested programs back to the states.
But it’s important not to make the perfect the enemy of the good, particularly since the debate in Washington so often is about bad ideas and worse ideas.
So the aforementioned three complaints don’t cause me much heartburn.
But there’s another part of the Paul plan that does give me gastro-intestinal discomfort. Here’s a final excerpt from his column.
I would also apply this uniform 14.5% business-activity tax on all companies…. This tax would be levied on revenues minus allowable expenses, such as the purchase of parts, computers and office equipment. All capital purchases would be immediately expensed, ending complicated depreciation schedules.
You may be wondering why this passage is worrisome. After all, it’s great news that the very high corporate tax rate is being replaced by a low-rate system. Replacing depreciation with expensing also is a huge step in the right direction.
So what’s not to like?
The answer is that Senator Paul’s “business-activity tax” doesn’t allow a deduction for wages and salaries. This means, for all intents and purposes, that he is turning the corporate income tax into a value-added tax (VAT).
In theory, this is a good step. After all, the VAT is a consumption-based tax which does far less damage to the economy, on a per-dollar-collected basis, than the corporate income tax.
But theoretical appeal isn’t the same as real-world impact.
Simply stated, the VAT is a money machine for big government.
- The VAT helped finance the giant expansion of the welfare state in Europe.
- And the VAT is now being used to enable ever-bigger government in Japan.
- Heck, even the IMF has provided evidence (albeit inadvertently) that the VAT is a money machine.
All of which helps to explain why it would be a big mistake to give politicians this new source of revenue.
Indeed, this is why I was critical of Herman Cain’s 9-9-9 plan four years ago.
It’s why I’ve been leery of Congressman Paul Ryan’s otherwise very admirable Roadmap plan.
And it’s one of the reasons why I feared Mitt Romney’s policies would have facilitated a larger burden of government.
These politicians may have had their hearts in the right place and wanted to use the VAT to finance pro-growth tax reforms. But I can’t stop worrying about what happens when politicians with bad motives get control.
Particularly when there are safer ways of achieving the same objectives.
Here’s some of what I wrote last year on this exact topic.
…the corporate income tax is a self-inflicted wound to American prosperity, but allow me to point out that incremental reform is a far simpler – and far safer – way of dealing with the biggest warts plaguing the current system.
Lower the corporate tax rate.
Replace depreciation with expensing.
Replace worldwide taxation with territorial taxation.
So here’s the bottom line. If there’s enough support in Congress to get rid of the corporate income tax and impose a VAT, that means there’s also enough support to implement these incremental reforms.
There’s a risk, to be sure, that future politicians will undo these reforms. But the adverse consequences of that outcome are far lower than the catastrophic consequences of future politicians using a VAT to turn America into France.
To wrap things up, there’s no doubt that Senator Paul has a very good proposal. And I know his heart is in the right place.
But watch this video to understand why his proposal has a very big wart that needs to be excised.
For what it’s worth, I’m mystified why pro-growth policy makers don’t simply latch onto an unadulterated flat tax.
That plan has all the good features needed for tax reform without any of the dangers associated with a VAT.
Why it Matters that the United States Is (Supposed to Be) a Republic, not a Democracy
June 13, 2015 by Dan Mitchell
If you want to go to a Presbyterian church instead of a Baptist church, should the government be able to interfere with that choice? Even if, for some bizarre reason, 95 percent of the population doesn’t like Presbyterians?
If you want to march up and down the sidewalk in front of City Hall with a sign that says the Mayor is an idiot, should the government be able to throw you in jail? Even if 95 percent of the population somehow has decided the Mayor is a genius?
Most Americans instinctively understand that the answer to all these question is no. Not just no, a big emphatic NO!
And that’s what makes us a republic rather than a democracy.
But the bad news is that many of our rights in the Constitution no longer are protected.
For instance, Article I, Section 8, specifically enumerates (what are supposed to be) the very limited powers of Congress.
Our Founding Fathers thought it was okay for Congress to have the power to create courts, to coin money, to fund an army, and to have the authority to do a few other things.
But here are some things that are not on that list of enumerated powers (and certainly not included in the list of presidential powers either):
- Department of Agriculture
- Department of Housing and Urban Development
- Department of Education
- Department of Transportation
- Social Security
- Food Stamps
- Transportation Security Administration
- Export-Import Bank
And the list could go on for several pages. The point is that the entire modern Washington-based welfare state, with all its redistribution and so-called social insurance, is inconsistent with the limited-government republic created by America’s Founders.
These programs exist today because the Supreme Court put ideology above the Constitution during the New Deal and, at least in the economic sphere, turned the nation from a constitutional republic into a democracy based on unconstrained majoritarianism.
Here’s some of Walter Williams wrote on the topic.
Like the founders of our nation, I find democracy and majority rule a contemptible form of government. …James Madison, in Federalist Paper No. 10, said that in a pure democracy, “there is nothing to check the inducement to sacrifice the weaker party or the obnoxious individual.” …John Adams said, “Remember, democracy never lasts long. It soon wastes, exhausts, and murders itself. There was never a democracy yet that did not commit suicide.” …The word “democracy” appears nowhere in the two most fundamental documents of our nation — the Declaration of Independence and the U.S. Constitution. …the Constitution’s First Amendment doesn’t say Congress shall grant us freedom of speech, the press and religion. It says, “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press…” …In a democracy, the majority rules either directly or through its elected representatives. …Laws do not represent reason. They represent force. The restraint is upon the individual instead of government. Unlike that envisioned under a republican form of government, rights are seen as privileges and permissions that are granted by government and can be rescinded by government. …ask yourself how many decisions in your life would you like to be made democratically. How about what car you drive, where you live, whom you marry, whether you have turkey or ham for Thanksgiving dinner?
And click here for a video that explains in greater detail why majoritarianism is a bad idea.
But perhaps these cartoons will make it even easier to understand why 51 percent of the population shouldn’t be allowed to rape and pillage 49 percent of the population.
We’ll start with this depiction of modern elections, which was featured on a friend’s Facebook page.
And here’s one that I’ve shared before.
It highlights the dangers of majoritarianism, particularly if you happen to be a minority.
P.S. George Will has explained that the Supreme Court’s job is to protect Americans from democracy.
P.P.S. Here’s more analysis of the issue from Walter Williams.
P.P.P.S. Some leftists are totally oblivious about America’s system of government.
P.P.P.P.S. Though Republicans also don’t really understand what the Constitution requires.
P.P.P.P.P.S. Looking at the mess in the Middle East, I’ve argued we would be in much better shape if we promoted liberty instead of democracy.
Even the IRS Admits that the Tax Code Is Very Biased against Successful Taxpayers
May 29, 2015 by Dan Mitchell
When I debate class warfare issues, here’s something that happens with depressing regularity.
I’ll cite research from a group like the Tax Foundation on how an overwhelming share of the income tax is borne by upper-income taxpayers.
The statist I’m arguing with will then scoff and say the Tax Foundation is biased, thus implying that I’m sharing bogus data.
I’ll then respond that the group has a very good reputation and that their analysis is directly based on IRS data, but I may as well be talking to a brick wall. It seems leftists immediately close their minds if information doesn’t come directly from a group that they like.
So I was rather happy to see that the Internal Revenue Service, in the Spring 2015 Statistics of Income Bulletin, published a bunch of data on how much of the income tax is paid by different types of taxpayers.
I’ll be very curious to see how they respond when I point out that their favorite government agency admits that the bottom 50 percent of earners only pay 2.8 percent of all income tax. And I’ll be every more curious to see how they react when I point out that more than half of all income taxes are paid by the top 3 percent of taxpayers.
There’s a famous saying, generally attributed to Daniel Patrick Moynihan, that “Everyone is entitled to his own opinion, but not his own facts.”
With this in mind, I’m hoping that this data from the IRS will finally put to rest the silly leftist talking point that the “rich” don’t pay their “fair share.”
This doesn’t mean, by the way, that the debate about policy will be settled.
Getting statists to accept certain facts is just the first step.
But once that happens, we can at least hope that their minds will be opened to subsequent steps, such as understanding the economic impact of punitive tax rates, recognizing that high tax rates won’t necessarily collect more revenue, or realizing that ordinary workers suffer when harsh tax policies reduce economic vitality.
Though I’m not holding my breath and expecting miracles. After all, some leftists openly state that they don’t care if the economic damage of high tax rates is so significant that government doesn’t collect any tax revenue.
You can see an example of one of these spite-motivated people at the 4:20 mark of the video I narrated on class-warfare taxation.
P.S. Shifting to another tax topic, some of you may have heard about the massive data breach at the IRS. Here’s some of what CNN is reporting.
The Internal Revenue Service believes that a major cyber breach that allowed criminals to steal the tax returns of more than 100,000 people originated in Russia, Rep. Peter Roskam confirmed to CNN on Thursday. …The IRS announced Tuesday that organized crime syndicates used personal data obtained elsewhere to access tax information, which they then used to file $50 million in fraudulent tax refunds.
I suppose I could use this opportunity to take a few potshots at the IRS, but there’s a far more important issue to raise.
I’m guessing the IRS probably has the best computer security of any tax bureaucracy in the world. Yet even all the IRS’s expertise couldn’t stop hackers from obtaining sensitive information.
Now let’s contemplate something truly frightening. The Obama Administration wants the United States to be part of an OECD pact that obligates participating nations to promiscuously share information with dozens of other governments, including untrustworthy, hostile, and/or corrupt regimes such as Russia and China, not to mention make information available to jurisdictions that presumably will have very little technical capacity to guard data from hackers and identity thieves. Here’s the list of participating nations on the OECD website, and it includes Azerbaijan, Cameroon, Greece, Indonesia, Mexico, Nigeria, Romania, Saudi Arabia, and Ukraine.
Yet none of this reckless endangerment would be an issue if we had a simple territorial tax system like the flat tax. Under such a simple and fair system, only income inside America’s borders would be taxed (unlike the wretched system of worldwide taxation we have now), so there would be no need to have risky information-swapping deals with dodgy foreign governments.
P.P.S. Senator Rand Paul is one of the few lawmakers fighting to protect Americans from having their information shared with foreign governments.
P.P.P.S. Shifting back to the original topic of class-warfare taxation, here’s a lesson on the Laffer Curve I offered to President Obama.
The Ticking Fiscal Time Bomb of Social Security
May 11, 2015 by Dan Mitchell
So when I wrote last month about proposals by some Democrats to expand Social Security, I was less than enthusiastic.
…demographic changes and ill-designed programs will combine to dramatically expand the size of the public sector over the next few decades. So it’s really amazing that some politicians, led by the clownish Elizabeth Warren, want to dig the hole deeper. …I’m surprised demagogues such as Elizabeth Warren haven’t rallied behind a plan to simply add a bunch of zeroes to the IOUs already sitting in the so-called Social Security Trust Fund. …If Hillary winds up endorsing Warren’s reckless plan, it will give us another data point for our I-can’t-believe-she-said-that collection.
But it turns out I may have been too nice in my analysis.
As reported by USA Today, independent researchers have discovered that Social Security is even more bankrupt than suggested by official estimates.
New studies from Harvard and Dartmouth researchers find that the SSA’s actuarial forecasts have been consistently overstating the financial health of the program’s trust funds since 2000. “These biases are getting bigger and they are substantial,” said Gary King, co-author of the studies and director of Harvard’s Institute for Quantitative Social Science. “[Social Security] is going to be insolvent before everyone thinks.” …Once the trust funds are drained, annual revenues from payroll tax would be projected to cover only three-quarters of scheduled Social Security benefits through 2088.
By the way, I’m not overly enamored with this analysis since it is based on the assumption that the Social Security Trust Fund is real when it’s really nothing but a collection of IOUs.
But if you don’t believe me, perhaps you’ll believe the Clinton Administration, which admitted back in 1999 (see page 337) that the Trust Fund is just a bookkeeping gimmick.
These balances are available to finance future benefit payments and other trust fund expenditures–but only in a bookkeeping sense. …They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury, that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.
In other words, what really matters is that Social Security spending is climbing too fast and consuming an ever-larger share of economic output.
And when I write “more and more money,” that’s not a throwaway statement.
Returning to the USA Today report, academic experts warn that the long-term shortfall in the program is understated because it is based on 75-year estimates even though the program doesn’t have an expiration date.
The bigger problem with the Social Security Administration is not disclosure, it’s accounting, said Laurence Kotlikoff, a Boston University professor of economics… Kotlikoff…wants the agency to calculate its liabilities using fiscal gap accounting, which considers the difference between the government’s projected financial obligations and the present value of all projected future tax and other revenue. …Under this accounting system, SSA’s projected unfunded liabilities would be $24.9 trillion (instead of the $10.6 trillion projected in 2088). …17 Nobel Prize-winning economists have endorsed Kotlikoff’s push for the SSA and other government agencies to use the fiscal gap accounting method more broadly. “We have a situation that is like Enron accounting,” Kotlikoff said. “And the public doesn’t want to hear about it.”
At the risk of being pedantic, I’m also not enamored with either approach mentioned in the above passage.
Sure, we should acknowledge all expenses and not arbitrarily assume the program disappears after 75 years, but the approach used to calculate “unfunded liabilities” is artificial since it is based on how much money would need to be invested today to finance future promised benefits (whether for 75 years or forever).
Needless to say, governments don’t budget by setting aside trillions of dollars to meet future expenses. Social Security, like other programs, is funded on a pay-as-you-go basis.
That’s why the most appropriate way to measure the shortfall is to take all projected future deficits, adjust them for inflation, and calculate the total. When you do that, the Social Security shortfall is a staggering $40 trillion.
And that’s based on just a 75-year estimate, so the real number is much higher.
Though keep in mind that this is just an estimate of the fiscal shortfall. What really matters is the total level of spending, not how much is financed with red ink.
Which is why the only real answer is genuine reform.
For further information, here’s the video I narrated for the Center for Freedom and Prosperity on the need to modernize the system with personal retirement accounts.
But if you prefer to trust politicians, you can always support the left’s favored solution.
P.P.S. The “Trust Fund” is real only in the sense that the government’s legal authority to pay benefits will be constrained when the IOUs are used up. That’s why the USA Today article says that the government at that point would be able to pay only about 3/4ths of promised benefits (though one imagines that future politicians will simply override that technical provision and require full payments).
P.P.P.P.S. Because of lower life expectancies, African-Americans are very disadvantaged by the Social Security system. A system of personal accounts presumably wouldn’t help them live longer, but at least they would have a nest egg to pass on to their kids.
P.P.P.P.P.S. And don’t fall for the false argument that financial markets are too unstable for personal retirement accounts
For additional information regarding Social Security: http://www.justfacts.com/socialsecurity.asp
Definition of a Ponzi scheme