Tax Due Date Change

In case you haven't heard the news, the IRS announced on January 4  that taxpayers have until April 17, 2012, to file their tax returns. Don't know about you, but I appreciate the two extra days.  The IRS also encouraged taxpayers to e-file as it's the best way to ensure accurate tax returns and get faster refunds.

Way To Go

The U. S. Congress sets a federal budget every year in the trillions of dollars.  Few people know how much money that is so here is a breakdown of the 2011 budget:

 U.S. income:            $2,170,000,000,000
 Federal budget:       $3,820,000,000,000
 New debt:                 $1,650,000,000,000
 National debt:        $14,271,000,000,000
 Recent budget cut:       $ 38,500,000,000      (about 1 percent of the budget)

It's easy to get lost with the big numbers so let's remove eight zeros from these numbers and pretend this is the household budget for the fictitious Jones family.
 Total Jones family income                                     $21,700

Amount of money the Jones family spent:             $38,200
Amount of new debt added to the credit card:     $16,500
Outstanding balance on the credit card:             $142,710
Amount cut from the budget:                                       $385

Hope that this helps put all of the White House and Congress' hard work into perspective. 

Today's BLS Unemployment Report

Years ago, while an undergraduate accounting student, I read a cartoon that has stuck with me all these years.  A corporate controller was standing the president’s office.  The president had just asked, “What is net income going to be this year?”  The controller responded, “Well sir, what would you like it to be?”

I was reminded of that cartoon while analyzing the latest job report this morning.  The Bureau of Labor Statistics BLS press release stated:  "Total nonfarm payroll employment rose by 117,000 in July, and the unemployment rate was little changed at 9.1 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in health care, retail trade, manufacturing, and mining. Government employment continued to trend down.

So I decided to dig a little deeper.  First, I wanted to know Now, how we got to a  9.1% unemployment level with 117,000 jobs being added.  The  first apparent statistical sleight of hand was a reduction in  workforce number by 193,000  http://www.bls.gov/news.release/empsit.a.htm.  Clearly, without that reduction in the workforce number the  unemployment rate would have gone the wrong way.

When you read down to line 4 (Table A) again, you see the absolute number of people working was down a further 38,000 for the month.  Those people must be missing in action. 

The CES Birth/Death Model for July showed a decrease of 18,000 jobs (try to mentally reconcile that with the 117,000 job gain in the BLS press release), including 10,000 more manufacturing jobs lost and 15,000 in trader, transportation, and utilities.  You will find that table at http://www.bls.gov/web/empsit/cesbd.htm.   Look at the “2011 Net Birth/Death Adjustment, not seasonally adjusted (in thousands)” table, July column, last row)

I still stick with www.shadowstats.com when I want to know that the real unemployment rate is.  The Shadow Statistics unemployment rate is at about 22%.  Look around you.  Do a reality check.  What seems more real the 9.1% unemployment rate reported by the BLS or Shadow Statistics 22%?

I always tell my students to do reality checks on their numbers.  Do they feel right?  Do they past the sniff test?  If they smell like crap then they probably are, no matter what the person trying to sell you the numbers says.

California Tax Amnesty

Back in March the California legislature passed a law giving taxpayers who underreported their California income tax liabilities through the use of abusive tax avoidance transactions (ATAT) or offshore financial arrangements (OFA) the ability to obtain a waiver of most penalties if they amend their returns for 2010 and all prior years in which there is underreported income. Taxpayers will be required to pay all tax and interest that is owed.

The Voluntary Compliance Initiative 2 (VCI 2) (http://www.ftb.ca.gov/Voluntary_Compliance_Initiative_2/index.shtml) program will be available to taxpayers with California liabilities from August 1 through October 31, 2011. After October 31, taxpayers who are found to have unreported liabilities through the use of ATAT or OFA will face the full range of penalties and interest, and may be subject to criminal prosecution. Furthermore, the eight-year statute of limitations will be extended to 12 years for assessing additional tax and penalties.

If you are a California taxpayers and you wish to take advantage of the penalty waiver then you must :

1.    Sign a participation agreement.

2.    Complete and sign an amended return reversing the ATAT or including the income from the OFA.

3.    Pay all tax and interest.

4.    Submit all of the above to the Franchise Tax Board (FTB) by October 31.

The participation agreement will be available on the FTB's web site on August 1. All other required forms are currently available.

Senator Sanders and the Fed Audit

Senator Bernie Sanders (thank you Vermont) has issued a major statement on how the Federal Reserve Bank engineered $16 trillion to bail out U. S. banks and also foreign banks.  You can see his full report at http://tiny.cc/40u57 .

Senator Sanders writes, "The first top-to-bottom audit of the Federal Reserve uncovered eye-popping new details about how the U.S. provided a whopping $16 trillion in secret loans to bail out American and foreign banks and businesses during the worst economic crisis since the Great Depression. An amendment by Sen. Bernie Sanders to the Wall Street reform law passed one year ago this week directed the Government Accountability Office to conduct the study.

He further writes that, "As a result of this audit, we now know that the Federal Reserve provided more than $16 trillion in total financial assistance to some of the largest financial institutions and corporations in the United States and throughout the world,"  He notes that, "This is a clear case of socialism for the rich and rugged, you're-on-your-own individualism for everyone else."  (emphasis mine).

According to the GAO report  the Federal Reserve Bank unilaterally provided trillions of dollars in financial assistance to foreign banks and corporations from South Korea to Scotland.  Sanders comments that,  "No agency of the United States government should be allowed to bailout a foreign bank or corporation without the direct approval of Congress and the president".

The GAO also determined that the Federal Reserve Bank lacks a comprehensive system to deal with conflicts of interest, despite the serious potential for abuse. Not only that but,  according to the report, the Fed provided conflict of interest waivers to employees and private contractors so they could keep investments in the same financial institutions and corporations that received emergency loans.

One potential conflict of interest examples was  the CEO of JP Morgan Chase who served on the New York Fed's Board of Directors at the same time that his bank received more than $390 billion in financial assistance from the Fed.  That’s over a third of a trillion dollars!  In addition JP Morgan Chase served as one of the clearing banks for the Fed's emergency lending programs.

The GAO report noted that that on September 19, 2008, William Dudley, who is now the New York Fed president, was granted a waiver to let him keep investments in AIG and General Electric at the same time AIG and GE were given bailout funds.  Just another disturbing finding.

According to the GAP audit one reason the Fed did not make Dudley sell his holdings was that it might have created the appearance of a conflict of interest.  Really?  Senator Sanders concludes that,  "No one who works for a firm receiving direct financial assistance from the Fed should be allowed to sit on the Fed's board of directors or be employed by the Fed.”

The GAO report suggests that “. . . opportunities exist to strengthen polices and processes to manage emergency assistance . . ."  What an understatement.

I expect that Congress, ever on the corporate dole, will find a ways to weasel and waffle its way out of accepting any responsibility for the findings in the GAO report.  In addition the Federal Reserve Bank, which is not Federal at all but is privately owned, has no real responsibility to the American public will most likely ignore the findings of the report.  Nevertheless, I thought that you should know . . .

Time to Cut My Budget

I'm going to cut my spending  . . . I hope you will participate and do your part too.

With all the concern about the Federal debt limit, spending cuts, and tax increases I got to thinking and remembered that back in April of 2009 the President ordered the Cabinet to cut $100 million from the $3.5 trillion federal budget.  I felt bad because I hadn’t done my part.  I’ve been spending at my normal level ever since he made the request.

I was so impressed by this requested sacrifice that I have decided to stop sitting around and do the same thing with my personal budget.  Shared sacrifice is the current buzz word.   I spend about $2000 a month on groceries, household expenses, medicine, utilities, etc, but it's time to get out the budget-cutting axe, go through my expenses, and cut back.

I decided to cut my spending at exactly the same ratio, 1/35,000 of my total budget.  That’s the least that I can do.  After doing the math, it looks like instead of spending $2000 a month; I'm going to have to cut that number by six cents. Yes, I'm going to have to get by with $1999.94, but that's what sacrifice is all about. I'll just have to do without some things that are, frankly, luxuries.

I hope that you will do your part too.

What's With the Federal Debt?

Will the U.S. default on the national debt?  All of the political hype and spin may have left you spinning, wondering about what is going to happen to the U.S. if (when) we default on the national debt.  Not to worry.  In spite of what you may have heard the Federal debt really isn’t a big problem.

First, a couple of definitions.  The national debt represents the money that the government has borrowed and upon which it must make interest payments.  The deficit is the difference between what the government spends and what it takes in.   You borrow money to buy a car . . . the loan is debt.  You spend more than you make . . . that’s a deficit.  The Federal debt is about $14.3 trillion.  The Federal deficit was $1.4 trillion last year[i]

Defaulting on the national debt would mean that we quit making interest payments on the bonds that have been sold to the investors in U.S. debt.  The bond holders include pension funds, individual investors and countries like China.  China, incidentally, has been the largest investor in U.S. bonds for some time.  More about that in another blog.

According to the U.S. Department of Treasury the average monthly interest payment on the Federal debt over the last fiscal year has been about $22.9 billion[ii]  .  That seems like a lot of money.  However, that is a drop in the bucket compared to the revenue received by the Federal government. 

Total Federal revenue for 2011 is expected to be about $2.2 trillion or $180 billion per month (and most of that comes from you and me . . . individual taxpayers)[iii].  So do the math.  If the government takes in $180 billion per month and spends $22.9 million on interest payments on the debt, then it only has $157.1 billion left (or $1.9 trillion annually) to cover other operating expenses.  We ought be able to get by on $1,900,000,000,000. 

The Federal government easily has sufficient funds to cover the Federal debt . . . there is no danger of technical default on the debt.  The hype about raising the debt ceiling isn’t about covering the debt, it’s a cover story to provide an excuse to raise taxes and rake in more money to fund run-away Federal spending.  So what is the problem?  Spending.

Is raising taxes on the “rich” a viable solution?  Will it solve the “debt crisis”.  Assume that rather than taxing the “rich” the government decided to take all of the wealth of the American billionaires.  Sounds like a plan, no?  That would bring in about $1.3 trillion[iv].  Sorry, even if the government took all of their wealth, not just a tax on their annual income, it wouldn’t come close to eliminating the Federal debt.

The problem is easy to identify, and so is the solution.  It’s just that no one in Washington really wants to talk about it.  The problem:  as a country we spend more than we make.  The solution:  spend less.  Families have to do that.  Why shouldn’t we expect our government to do the same?

Just my opinion.

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[i] http://www.washingtonpost.com/wp-dyn/content/article/2010/07/23/AR2010072304101.html

[ii] http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm

[iii] http://www.usgovernmentrevenue.com/#usgs302a

[iv] http://www.moneycontrol.com/news/business/interesting-numbers-forbes-rich-list_446045.html