Category Archives: Federal Budget

Anatomy of a Scam on Taxpayers: Biden Plumps Up IDRs

29 Monday Aug 2022

Posted by in Federal Budget, rent seeking, Student Loans

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In my last post I discussed the difficulty faced by potential challengers to President Biden’s student loan forgiveness program in establishing legal standing in court. I also mentioned an estimate of the cost of the plan to taxpayers of around $600 billion over ten years. That was from the Penn-Wharton Budget Model, but now the model’s estimate ranges to more than $1 trillion! The difference is a reassessment of the changes to increasingly popular income-driven repayment (IDR) plans and uncertainty around behavioral assumptions like plan uptake over the ten-year budget window. The changes to IDRs are separate from the $10,000 – $20,000 short-term loan forgiveness component of Biden’s plan, and they are a perfect basis for a legal scam on taxpayers.

IDRs are not new. Under these plans, a borrower pays 10% of their income toward the outstanding balance of their student loans for a period of 10 to 20 years, depending on the plan, after which any remaining balance is forgiven. This may or may not make sense for borrowers with high student loan payments relative to income. In fact, there are some who warn that IDRs are a ripoff. However, only income above 150% of the poverty line is subject to IDR payments. For some students borrowing heavily, IDRs can make tuition hikes irrelevant beyond a certain loan balance: just borrow it! Living expenses can be borrowed as well! These plans almost completely eliminate price sensitivity among consumers of college educations, and it may make sense for certain students to borrow as much as possible. It’s also a prescription for escalating tuition.

Law graduates who work in the public sector have long received favorable treatment via IDRs: they pay 10% of their discretionary income for only 10 years. The so-called Public Service Loan Forgiveness (PSLF) program is leveraged by law schools, which offer deals for students called Loan Repayment Assistance Programs (LRAP). For an explanation, I’ll defer to Matt Bruenig and his interesting post on the topic (with hat tip to Alex Tabarrok):

“The LRAP schemes work as follows:

  1. The school increases their tuition.
  2. The student takes out federal loans to cover the tuition increase.
  3. The school squirrels away the debt-financed tuition increase into an LRAP fund.
  4. The school disburses money from the LRAP fund to cover PSLF repayments.

Through this roundabout process, the law schools effectively use student debt to pay off student debt and make their schools free or nearly free, at least for these particular students.”

The school knows the student’s debt payments are limited by income. Tuition hikes can be paid with additional loans, and the LRAPs future obligations are limited by the student’s income after graduation. Not only is the tuition hike “free” to the student, but the school might be able to pocket a share of the new loan and invest the whole nut for returns in the interim. That’s the gist of Tabarrok’s simple example. Needless to say, IDRs and PSLF create some very bad incentives! Farewell to cost control!

Biden’s plan extends IDRs in ways that make them far more attractive to students, including undergraduates. Here are the changes, again from Bruenig:

“The IDR changes are four-fold:

  1. Increase the amount of income not subject to IDR from 150 percent of the federal poverty line to 225 percent of the federal poverty line.
  2. Eliminate any accrual of interest on IDR-enrolled loans.
  3. For undergraduate debt, reduce the IDR rate from 10 percent of income beyond the threshold in (1) to 5 percent of income beyond the threshold in (1).
  4. For IDR-enrolled debts with original loan balances below $12,000, reduce the repayment period from 20 years to 10 years.”

Smaller payments and zero interest! This is what led to Penn-Wharton’s revision in the high-side cost estimates of Biden’s student loan forgiveness plan:

“‘Depending on future details of the actual IDR program and concomitant behavioral changes, the IDR program could add another $450 billion or more,’ the analysis found. ‘Thereby raising total plan costs to over $1 trillion.’”

The incentives are for schools to offer LRAPs more broadly, and to abuse them. Rent-seeking vendors have lined up to design and manage these programs. Students and even parents are encouraged to borrow up to the maximum limits, which conceivably allows the loan proceeds to be used outside of the ostensible educational purpose of the loan, potentially for investment gains. See Tabarrok’s post for some links to creative schemes to which part of the loan proceeds might be put by borrowers.

This is a huge scam! It’s hard to square the Administration’s action with any effort to apply economic logic to program design. But that’s not really the point of the student loan forgiveness program. Instead, it’s designed to warm the hearts of Biden’s political base among students and young college graduates. And it will further enrich the heavily endowed universities that can be counted upon to inculcate students with leftist dogma. Apparently, the rest of us, who lack standing to formally challenge these schemes, can just suck it.

The Special Olympics and Tax-Funded Philanthropy

30 Saturday Mar 2019

Posted by in Big Government, Education, Federal Budget

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The federal government’s contribution to funding the Special Olympics (SO) illustrates the widespread view of government as a limitless font of subsidies for appealing causes. People were up in arms over the elimination of $17.6 million dollars in federal grants for the SO in President Trump’s budget proposal. Granted, that’s a pittance as budget items go. Later, Trump promised to restore the funding. That is, of course, in addition to the millions in federal tax subsidies already granted on private gifts to the SO.  As Nick Gillespie explains, SO funding is like so many other things people want from government that government has no business doing. Why, exactly, should the federal government, or any level of government, fund the SO? It is a wonderful program, but it simply does not have the character of a public good, nor is it a safety net issue.

The SO certainly benefits the athletes and families that take part, but those benefits are strictly private. Perhaps the larger population of disabled individuals takes inspiration from watching the SO, along with good-hearted people everywhere. Most everyone is happy to know that the SO happen, but those are no more public benefits than the good vibes you get from viewing an inspirational film or theatrical production. For that matter, sports fans and patriots are inspired by great efforts on the part of the U.S. Olympic team, but the federal government does not fund the U.S. Olympic Committee. It’s therefore absurd to assert that the public bears an obligation to pay for the most athletic of disabled individuals to have opportunities to compete and win medals just like Olympic athletes.

Gillespie explains a little about the history and funding of the SO:

“Founded in 1968 by Eunice Kennedy Shriver, the Special Olympics is a 501(c)3 nonprofit, meaning that deductions to it are tax deductible. According to its 2017 financials (the most-recent available on the web), the organization had total revenues of about $149 million, including $15.5 million in federal grants. It’s not a stretch to assume that if federal funding disappears, the resulting outcry would lead to record donations.”

And again, let’s not forget that corporate gifts to the SO are tax deductible up to certain limits. Gillespie also quotes Secretary of Education Betsy DeVos:

“There are dozens of worthy nonprofits that support students and adults with disabilities that don’t get a dime of federal grant money. But given our current budget realities, the federal government cannot fund every worthy program, particularly ones that enjoy robust support from private donations.”

Families with disabled children have extraordinary needs. It’s probably better to think of federal support for those needs as a safety net issue, a form of social insurance. There are several federal programs that provide funds to support low-income families with disabled kids. And while the cut to SO funding was in the budget originally submitted by Secretary DeVos, Gillespie notes that the DOE’s budget “allocates over $32 billion for ‘high-need students,’ which includes intellectually disabled students.” 

DeVos was widely criticized for her budget, but as Gillespie says, she sets a fine example for anyone in a position to help rein in the growth of federal spending and ultimately the federal budget deficit. Given the DOE’s track record of poor programmatic guidance (Common Core), counter-productive school disciplinary mandates, and it’s complete lack of impact on educational outcomes after 40 years of existence and many billions of dollars spent, the continued existence of the DOE is difficult to rationalize.

Once a program appears in the federal budget, no matter how inappropriate as a public priority, and no matter how ineffective, its constituency will always defend its funding with rabid enthusiasm. That defense is multiplied by a chorus of statists in the media and elsewhere who, in their benevolent intentions for the taxes paid by others, can be counted upon to call out the “cruelty” of any proposed cuts, or even mere cuts in a program’s projected growth. The Special Olympics episode, and the DOE, are cases in point.

Federal Unaccountability Beyond My Wildest Dreams

06 Friday Apr 2018

Posted by in Big Government, Federal Budget

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In December, Laurence Kotlikoff wrote in Forbes about large chunks of federal spending over many years that have not been reconciled with known accounting transactions. (The link is to a cached version of Kotlikoff’s article because Forbes blocks its site to those using adblockers). I first learned of these massive discrepancies at The Solari Report, which covered the issue in February. At first, I was so dumbfounded by the numbers that I thought it might have been a joke, or worse: fake news on Solari? But the story is real and it is shocking: $21 TRILLION of spending that cannot be explained, spanning the years 1998-2015! That’s more than five times the level of federal spending in 2017. It’s also shocking that the gap has gone almost unnoticed by the news media, though a few specifics have garnered attention at different stages of the disgorgement, as demonstrated by the various links provided in the Solari article.

The discrepancies are concentrated mainly in two departments of the federal government: Defense (DOD) and Housing and Urban Development (HUD). Kotlikoff quotes a description of the “accounting adjustments” from the Comptroller General of the General Accounting Office (GAO). These adjustments are akin to the entries people make in their checkbook registers when the balance can’t be reconciled to their bank statement:

“‘Journal vouchers are summary-level accounting adjustments made when balances between systems cannot be reconciled. Often these journal vouchers are unsupported, meaning they lack supporting documentation to justify the adjustment or are not tied to specific accounting transactions…. For an auditor, journal vouchers are a red flag for transactions not being captured, reported, or summarized correctly.'”

The article at Solari makes the following observations:

“There appear to be at least five possibilities: 1-The missing money was spent appropriately, but existing accounting infrastructure is incapable of tracking it. 2-The money was “wasted,” i.e. spent unwisely. 3-The money was directed into black projects and Special Access Programs in massive amounts outside the Constitutional appropriations process, and therefore without the knowledge of Congress and the citizenry, for purposes unknown. 4-The money was used to manipulate markets to maintain the reserve status of the dollar. 5-The money is being stolen by fraud and collusion between government and private interests. Or perhaps a combination of all of these.“

All five explanations represent a form of failure of governance or government administration. Some are more nefarious than others. While #1 might seem fairly innocuous, it nevertheless would demonstrate a slovenly approach to record-keeping and accountability as well as a ripe temptation to anyone seeking opportunities for graft. Furthermore, one cannot trust that #1 is the full explanation. The amounts are so massive that they far exceed the waste in government that even I thought possible. And no one in the federal agencies seems to have an explanation. Mark Skidmore, a Michigan State University economist who has studied the issue and made inquiries with these agencies, describes what sounds like a runaround. In December, however, the DOD announced a positive step: it’s first-ever department-wide independent audit. The Office of the Inspector General (OIG), the Congressional Budget Office, and the General Accounting Office are certainly aware of the discrepancies. Links to supporting documentation at the OIG and DOD web sites appear in both the Solari and Kotlikoff articles.

If these funds have been wasted or misused, taxpayers are the victims, of course. There are a few well-known examples of private and even public companies that have victimized investors to perhaps a similar (proportionate) extent over the years. Bernie Madoff and Exxon come to mind. But in general, public companies cannot escape demands that their books be in order and that they produce value over time. The federal government, however, has received a pass for this fecklessness over many years. Perhaps it’s because the public has such low expectations for the government’s effective use of tax dollars. Federal agencies such as HUD and DOD seem almost as budgetary “black holes” into which tax dollars are sucked, with an apparent lack of scrutiny.

Kotlikoff closes by urging a thorough investigation into the government’s cockeyed accounts:

“Taken together these reports point to a failure to comply with basic Constitutional and legislative requirements for spending and disclosure. We urge the House and Senate Budget Committee to initiate immediate investigations of unaccounted federal expenditures as well as the source of their payment.”

The Solari piece is no less emphatic in demanding a full probe of the causes of the budgetary discrepancies:

“We must recognize the possibility that massive fraud is being perpetrated against the American people. If that is not the case, it would take relatively little effort and expense to put that concern to rest. On the other hand, what malfeasance might investigation reveal, and who might be responsible?

At the very least, we should be asking the secretaries of DOD, HUD, and the Treasury, the chairman of the Federal Reserve, and the President of the NY Fed what they know, and we need independent audits of all those entities plus the Exchange Stabilization Fund. Anything less will be to acquiesce in an ongoing financial coup d’état.“

Progressives: Paul Doesn’t Want Peter’s Money? What a Hypocrite!

08 Thursday Feb 2018

Posted by in Big Government, Federal Budget

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Red & Blue States

I’ve heard the following assertion over and over: blue states are “doners” of federal tax revenue and red states are donees. In other words, states dominated by Democrats contribute more than they take from the federal budget, while Republican states take more than they contribute. But the facts are somewhat ambiguous. And to the extent that it is true, policies that would improve the net position of blue states would be very unpopular with the progressive Left. Furthermore, progressives expose their confusion regarding the ethics of sound governance by calling the red state opposition to an expansive  federal government “hypocritical”.

The relative positions of red and blue states in terms of federal dollars is the topic of an excellent article by Megan McArdle, whom I haven’t featured on this blog for a while. Originally, the claim that blue states “gave” to red states via the federal budget was based on data from 2005, but a lot of fiscal water has passed under (and over) the bridge since then. Also, the original presentation used state totals of federal outlays minus revenues without accounting for differences in the size of state populations. Many blue states are relatively populous, so some the state rankings may shift when expressed on a per capita basis. McArdle reproduces a chart from a report by the New York State Comptroller using 2013 data:

“… deep-blue New Jersey is the biggest donor state. But red-blooded Wyoming is the next biggest, and North Dakota makes the list too. There is certainly a preponderance of blue states at that end of the spectrum, but it’s not a clear ‘Donor states are blue’ story. And if we match the 2013 data to the closest election (2012) we find that New Mexico, the biggest net recipient, went for Obama in 2012, as did Virginia, Maryland, Maine and Hawaii. What’s driving the net subsidies isn’t anything as simple as political identification.“

Wyoming and North Dakota contributed lots of federal revenue from taxes arising from the fracking boom.

McArdle goes on to consider policies that would reduce the flow of budget dollars to donee states:

“Most of the transfers do not come from ‘red state welfare’ like agricultural subsidies. They derive from Social Security, Medicare, Medicaid, unemployment insurance, food stamps, welfare, the maintenance of the national highway system, the purchase of goods and services for the federal government, and the operation of federal facilities and lands.

If blue state liberals consider this out of whack, what do they want to change?

  • Do they want to move toward a flatter, less progressive federal tax code?
  • Do they want to cut Social Security, Medicare and Medicaid?
  • Do they want to return unemployment insurance and similar entitlement programs entirely to the states?
  • Do they want to hand over the national parks to the states, or privatize them?
  • Would they like to downsize the federal workforce?
  • Should we redistribute military bases from red states to blue? (Those relocations might meaningfully alter the state electorate, making it easier for Republicans to get elected. …)“

Of course not! But like McArdle, I’m of the opinion that many of the policy changes on that list, or at least reforms of existing policies, are in order. Perhaps the allure of steeply progressive federal taxes has faded for blue state Democrats with the new reality of the Tax Cuts and Jobs Act. The law restricts deductions for mortgage interest, a hit on those borrowing against high-end homes. It also limits deductions for state and local taxes, eliminating a federal tax subsidy to high-earners living in states with high taxes. State and local politicians who support high taxes will no longer receive a “discount”, courtesy of taxpayers in  other states, on the natural political liability of high taxes.

The categorization of blue states and red states as federal donors and donees is not quite as unambiguous as most Leftists imagine. Be that as it may, the flows of revenue and spending between the federal government and states is a consequence of demographics, regional business environments, and many other factors, but most of all the set of policies promulgated over the years in Washington DC. An objective assessment of the federal government’s largess indicates that most of those policies are in need of drastic reform, yet statists resist, demand more, and act as if “red states rubes” should be grateful for the dysfunction and the federal cash it brings. To progressives, it is hypocritical to oppose an expansive federal government on this basis. The absurdity of that claim is self-evident, but such is the confused state of progressive discourse. Perhaps a better adjective for red state opposition to federal profligacy would be “principled”.

 

Trump Budget Facts and Falsehoods

02 Friday Jun 2017

Posted by in Federal Budget, Government, Trump Administration

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The innumerate left is unhappy over cuts in various categories of spending in the budget proposal submitted by the Trump Administration last week. However, they have adopted “talking points” that are incorrect in an effort to rail against the budget. There is no reduction in overall spending in the proposal. Instead, there is a reduction in the growth of total spending. Ryan McMaken calls the mistaken assertions about spending “the media version of ‘cuts’“. The budget plan calls for an increase in total spending of 41% ($1.7 trillion) by 2027, versus 63% ($2.6 trillion) under the baseline (based on current law). Many of the actual cuts and growth reductions are in so-called discretionary spending. However, in one key mandatory component, Medicaid, spending increases by 39% under the plan, or $146 billion, versus 82% under the baseline. That is not a spending cut.

Another issue over which the Trump budget has been attacked is the so-called “math error,” or “double counting” of economic growth, to which former Treasury Secretary Lawrence Summers alluded with apparent delight. The gist of it is that the proposal somehow double-counted the salutary effects of growth in eliminating the projected deficit over the next ten years. In other words, the tax cuts proposed by Trump would be not just revenue-neutral due to stronger growth; they would result in an increase in tax revenue sufficient to eliminate the deficit by 2027.

Thus far, the Trump tax reform plan has been revealed in only a one-page summary released in late April. In static terms, it implied a loss of revenue of $5 trillion over ten years, though the summary left many features unclear. There could be additional provisions to broaden the tax base that might bring the ten-year static revenue loss down to somewhere between $3 and $4 trillion. In dynamic terms, however, the impact of the tax cuts would be smaller. The cuts would stimulate the economy (yes, they would!), but the precise impact on growth is unknown. In the budget, economic growth is assumed to increase from 1.8% to 3.0% annually over most of the ten year period. That has been criticized as unrealistic, but such a boost would likely be enough to make the tax cuts revenue neutral.

Here is a summary of the budget from the Office of Management and Budget (OMB). The tables at the back of the document, on pages 27 and 29, provide enough information on the cumulative ten-year changes to evaluate Summers’ double-counting claim. Keep in mind that his claim applies to changes expressed relative to a baseline. The proposed budget shows a total ten-year deficit projection of $3.2 trillion, compared to baseline of $6.7 trillion. So the deficits are reduced by a total of $3.5 trillion over the full ten years.

Individual and corporate income tax receipts are virtually unchanged over the ten-year period. There’s our revenue neutrality. Other receipts are down by $0.9 trillion, however. Most of that decline is attributed to a $1 trillion “allowance for repeal and replacement of Obamacare”, presumably elimination of taxes on such things as medical devices, Cadillac insurance policies, and fines for failing to comply with insurance mandates. So increased tax revenues do not account for the decline in the budget deficit.

Total cumulative outlays are reduced by $4.6 trillion in the budget proposal relative to the baseline. That more than accounts for the ten-year deficit reduction. Like the policies or not, the decline in spending is sufficient, relative to the baseline, to fully explain the deficit reduction. Yes, the budget assumes that some of the spending reductions are afforded by the faster assumed rate of economic growth, such as welfare payments, but that is not double-counting.

Revenue neutrality of the tax cuts is certainly an assumption worth questioning, especially because the summary of the tax plan gave every impression of abandoning neutrality. Neutrality was probably imposed on the budget plan as a matter of convenience. In a sense, it made the job of presenting the Administration’s spending priorities (like them or not) a cleaner exercise. For another, while budget reconciliation rules do not require the tax plan to be revenue neutral, Senate leaders have stated their strong desire for neutrality. The Trump budget proposal thereby allows Congress’ budget process to get underway while deferring the introduction of a more detailed and potentially controversial tax plan, one that is obviously still in flux and is likely to involve a loss of revenue, even in a dynamic sense.

The assumed change in economic growth is not solely attributable to tax effects, however. It would be reasonable to expect some growth to be driven by deregulation and the “deconstruction of the administrative state“, as Steve Bannon described so eloquently. This intention is embodied in the budget proposal. In that sense, it was unnecessary for OMB to impose revenue neutrality of the tax plan to eliminate the budget deficit over ten years. The economic growth spurred by deregulation would generate some of the extra growth in tax revenue.

I happen to like many of the priorities expressed in the proposed budget, despite the document’s lack of specificity. This includes the deregulatory initiatives, Obamacare repeal and replacement (we’re waiting…), and some of the welfare reform proposals. I am not happy about the scale of the shift toward defense, and I am not happy that government continues to grow in the aggregate. And as for the still-incubating tax reform plan, I like many of the features originally described, though not all.

Many believe that the Administration’s economic growth assumptions are unrealistic, and many dislike the spending priorities. Those cannot be used as excuses for mischaracterizing the proposal, however. Reductions in some spending categories occur only relative to the baseline growth path. They are not real cuts in spending. Likewise, Summers’ double-counting allegation is false. The recovery of tax revenue via economic growth is not double counted, and there is no “math error”. The proposed reductions in spending relative to the baseline more than account for the deficit reduction. I suspect that Summers’ motives were strictly polemic and not grounded in a careful examination of the budget proposal. He is not innumerate. What’s worse, a number of economists swallowed the “double-counting” story hook, line, and sinker.