I’ve watched this movement, I’ve talked to people within it, I’ve observed.

And now I have to ask the salient question: Where do you actually stand on one important part of the issues facing this nation — and indeed the world?

You need to decide.  And the question being asked here is simple: Do you or do you not accept, and formulate all of your other views and premises, around the following central point — “Government must spend no more than it taxes.”

It’s a yes or no question and no weaseling is allowed.

A “yes” answer means, incidentally, that the government must cut spending by some 45%, raise taxes by 45% of the budget in received funds (not “rates” on some group — incidentally this is pretty close to a 100% tax increase!), or some combination of the two – right now.

Now let me put the gauntlet down in front of you: If you don’t support this, and come out for an immediate cessation of all deficit spending pretty much in the contemporary, immediate format, I cannot support you — and neither can anyone else with any hint of intelligence.

I recognize that “the 99%” believe they got screwed by the banksters (the “1%”, which really ought to be the 0.01%.)  You’re right.  But screwing others will not make you whole.  You cannot become better off economically by taking a dollar from one pocket and putting it in the other.

This means that the “Free $hit” army nonsense has to be eliminated from your ranks, from your speech, from your demands and from your protests.  And it has to happen now.

It should happen because you voluntarily recognize that continuing it is (1) destructive because it is (2) impossible to provide and thus (3) you will contribute to the destruction of this nation and her government if these demands continue.

Note that this does not mean you can’t argue for justice.  Justice occurs when you borrow money and can’t pay — you go bankrupt and lose your “stuff” and your credit rating.  But it also means that the person who loaned the money loses his or her investment at the same time.  That is justice — not getting a “free house” or “free education” because you “deserve” it.

It is the latter half of the check and balance found in justice that hasn’t happened.  It is the frauds involved in making bogus loans, securitizing bogus loans and lying about them, then knowingly selling crap labeled as “Grade A Chocolate”, cost-shifting in the medical system and exempting student loans from bankruptcy that has led to these problems.   Private banks put all this crap together and lobbied for it, getting the ability to steal from the common man in the process because people demanded “free stuff” and to get it government had to deficit spend.  That in turn resulted in the ability to cover up the economic rot caused by offshoring your jobs and destroying our economy — for a while.

The limits of that cycle have been reached.  It thus now will end, not because someone wants it to or doesn’t, but because the math mandates that it cannot continue.

If you continue to press for this destructive cycle to continue the damage that will be done our nation, to you, to your children and grandchildren will go up exponentially.  That damage may reach the level of government and civil society collapse, and if it does odds are that what comes out the other side is much worse than what we have now in terms of corruption and loss of freedom.

In short, we have to be adults and cut that crap out — right now.

So read the question above, debate it and then answer it.  Do so in your General Assemblies, on your mailing lists, in your public pronouncements.  But do it soon, because just as the Tea Party was co-opted by the “Guns, Gays and God” radical right wingnuts I see the same bomb-throwing rhetorical garbage corrupting what you’re trying to do from the radical left.

There is no solution in the GGG radical right wing.  It won’t work because it does not demand the cessation of the theft and fraud, the end of deficit spending right here, right now, today, and the prosecution of those who committed fraud upon the public everywhere we can find it.

But likewise there is no solution in the “bomb-throwing anarchist” left wing or calls for more “free stuff.”  It won’t work for the same reason: It does not demand the cessation of the theft and fraud, the end of deficit spending right here, right now, today, and the prosecution of those who committed fraud upon the public everywhere we can find it.

You must, and only you can, decide.

Is OWS a force for positive change, or have the real and just complaints that led to your formation been co-opted by those who have no solution to offer that can actually work and will advance justice and freedom for everyone in society, just as the Tea Party was co-opted and hi-jacked?

I, and others, are waiting for your answer.

To wit….

“The present government has done absolutely nothing during the last 12 months to speed up privatizations, reduce the public sector or open up closed professions,” (elided), a leading economic analyst, told me recently in an interview. “In these 12 months it has not fired even one civil servant. The only thing it is doing is trying to tax the private sector out of existence. Why should we believe that they will do something different now?”

Oh wait….. we’re not talking about America in this regard, are we….

Oh yes we are.  The same disease infests us as infests Greece.  While Obama prattles on about hiring more cops, hiring more teachers, protecting the civil servants of all stripes — and not only during their tenure, but also in retirement — he at the same time proposes taxing the private sector out of existence.

Isn’t it funny how The Wall Street Journal is all to happy to print that OpEd regarding Greece, but not a word on the same subject in America?

Inquiring minds are digging deep into a 266 page PDF called USA Inc. a basic summary of America’s financial statements.

It is loaded with stunning graphs and charts on Social Security, Medicare, Medicaid, TARP Bailouts, Fannie Mae and Freddie Mac, military spending, tax revenues, and various projections. Here are a few images, but please give the document a closer look when you have a few moments.

Click on any chart to see a sharper image.

Cash Flow

Expenses at a Glance

Unfunded Liabilities

Federal Spending as Percent of GDP

Note this mess started with the creation of the Fed

Growth in Entitlement Spending

Take a step back, and imagine what the founding fathers would think if they saw how our country’s finances have changed. From 1790 to 1930, government spending on average accounted for just 3% of American GDP. Today, government spending absorbs closer to 24% of GDP.

Spending + Interest vs. Revenues

By 2025, entitlements plus net interest payments will absorb all – yes, all – of USA Inc.’s revenue, per CBO.

Less than 15 years from now, in other words, USA Inc. – based on current forecasts for revenue and expenses – would have nothing left over to spend on defense, education, infrastructure, and R&D, which today account for only 32% of USA Inc. spending, down from 69% forty years ago.

This critical juncture is getting ever closer. Just ten years ago, the CBO thought federal revenue would support entitlement spending and interest payments until 2060 – 35 years beyond its current projection.

To 25 Countries in Defense Spending

Entitlement Spending by Household

Medicaid Underfunding

When Medicaid was created in 1965 to provide health insurance to low income Americans, 1 in 50 Americans received Medicaid, now 1 in 6 Americans receives Medicaid.

Healthcare Spending

Social Security Workers vs. Retirees

Social Security Dependents

GSE, Fannie Mae, Freddie Mac Expansion

If that is not a shocking state of affairs, what is? There are lot more charts and graphs in the PDF.

Mike “Mish” Shedlock

Global Economic Analysis

Essex South Register of Deeds John O’Brien announced today that he will be seeking over $22 million from the Mortgage Electronic Registration System, ‘MERS’ which represents several major banking conglomerates.

READ IT HERE

Problem solved.   It’s that simple.

This is what needs to be done, not just in the UK, but all over the world.  The majority of taxpayer money is now going to support the large banks, which are insolvent due to their reckless gambling with the money they made from creating money, charging interest and inflating the prices of things you need to buy.  Well, now governments have made it possible for them to continue gambling, but now, using the money you pay the government in taxes.   Is it little wonder governments are now broke?  All their revenues collected are going to the banks!  Cut entitlements to BANKS and then we can…..

STOP THE LOOTING AND START PROSECUTING!

The man who has rapidly emerged as the most vocal Obama critic, Mort Zuckerman, has just penned his most recent scathing anti-administration missive, this time focusing on the schism in US society between “preferred-status” public and shunned private-sector employees, concluding that “Americans cannot maintain their essential faith in government if there are two Americas, in which the private sector subsidises the disproportionate benefits of this new public sector elite.” Is this most recent split in US society being cultivated to take the place of the Wall Street – Main Street dialectic, which even Obama is now forced to realize is a fight he is set to lose (just imagine how anti-Obama Cramer would get if stocks drop by 0.001% during the teleprompter’s next media appearance)? Certainly, in a society that exists simply on the basis of a simple ongoing “us versus them” distraction, while the true crimes continue unabated behind the scenes, this is not an impossible assumption. Here’s a suggestion to Mort and whoever else wishes to peddle more such diversions: how about framing the next conflict where it rightfully belongs: as that between America’s people and its criminal ruling elite?

Full Op-Ed below:

America’s public servants are now its masters, first published in the Financial Times

by Mort Zuckerman

There really are two Americas, but they are not captured by the standard class warfare speeches that dramatise the gulf between the rich and the poor. Of the new divisions, one is the gap between employed and unemployed that President Barack Obama seeks to close with yet another $50bn stimulus programme. Another is between workers in the private and public sectors. No guesses which are the more protected. A recent study by the Mayo Research Institute found that “private-sector workers were nearly three times more likely to be jobless than public-sector workers”.

Political tension is bound to grow when jobs disappear faster in the private than the public sector, just as compensation in the former is squeezed more. There was a time when government work offered lower salaries than comparable jobs in the private sector, a difference for which the public sector compensated by providing more security and better benefits. No longer. These days, government employees are better off in almost every area: pay, benefits, time off and security, on top of working fewer hours. Public workers have become a privileged class – an elite who live better than their private-sector counterparts. Public servants have become the public’s masters.

Take federal employees. For nine years in a row, they have been awarded bigger average pay and benefit increases than private-sector workers. In 2008, the average wage for 1.9m federal civilian workers was more than $79,000, against an average of about $50,000 for the nation’s 108m private-sector workers, measured in full-time equivalents. Ninety per cent of government employees receive lifetime pension benefits versus 18 per cent of private employees. Public service employees continue to gain annual salary increases; they retire earlier with instant, guaranteed benefits paid for with the taxes of those very same private-sector workers.

More troubling still is the inherent political corruption. Elected officials tend to be accommodating when confronted by powerful constituencies such as the public service unions that agitate for plush benefits and often provide (or deny) a steady flow of cash to election campaign funds. Their successors will have to cope with the inherited debt burden – and ultimately the nation’s taxpayers are stuck with the bill.

As Governor Arnold Schwarzenegger has pointed out, spending on retirement benefits for California’s state employees is growing at three times the rate of state revenues, now exceeding $6bn annually and growing at the rate of 15 per cent a year. In other states, however, the politics of public pensions appear to be changing. In Michigan, Governor Jennifer Granholm, a Democrat, recently enacted a teacher pension reform that should save about $3bn over 10 years by increasing the amount workers must contribute. Illinois raised its retirement age for newly hired public workers from as low as 55 to 67. Chris Christie, the Republican governor of New Jersey, decided that even if it took bruising clashes with public worker unions, public service compensation reform was essential for the fiscal health of the state. His stance surprised many, but it made him a national figure.

There is no quick fix to deal with the billions in unfunded liabilities. Public service employees are almost impossible to fire, except after a long process and only for the most grievous offences. What is more, the courts have ruled in many states that pension increases granted by elected bodies are vested benefits that must be paid no matter what, precluding politicians from going back and changing past agreements.

The only fair solution is to take the politicians out of the equation and have fully independent commissions in charge, fixing the scale of salaries and benefits for public-service workers and establishing an affordable second retirement tier for new employees. More reasonable retirement ages should be in order, such as 65 for general employees and 55 for public safety employees. This would take nothing away from the existing benefits of current employees.

A fundamental rethinking of the public workforce is necessary. Americans cannot maintain their essential faith in government if there are two Americas, in which the private sector subsidises the disproportionate benefits of this new public sector elite.

ZeroHedge

Big states with dismal budget short falls like California and New York have been making the news for the last couple of years.  Yet the problems with state budget deficits go beyond the big and mighty.  The banking system has been stabilized at a very high cost to average Americans but state budget deficits reflect a deeper underlying problem.  States generate revenue through a variety of taxes; these show up through payroll taxes, sales taxes, property taxes, and other fees.  As a metric for the economy, these are a good way of measuring the health of economic activity.  Looking at current massive budget deficits states are mired in expenses with revenues falling.  For the next fiscal year of 2011 states will face a combined $112 billion in budget short falls.  California’s current budget deficit is $19 billion (current plus next fiscal year).  But things can and may get worse.

A recent survey compares this recession with the previous recession:

Source:  CBPP

As of this year we are facing a deeply painful year for states.  This will be the worst on record if 2011 doesn’t come in close contention.  How is it that the rhetoric has shifted to recovery while states are facing deep and pervasive gaps in their funding?  A large part of the so-called recovery has been directed to the banking sector.  That is clear.  Unemployment and underemployment is pervasively high and when we look at the top job sectors, 9 out of 10 are in low paying service sector jobs.  Last month we added over 400,000 jobs but the vast majority were temporary Census positions.  This is not a true recovery and state budgets reflect this.

Why is the above gap occurring?  Take for example the collapse in housing prices.  States adjusted revenue projections to assume higher assessments and thus believed that bubble level prices were the new norm.  Take for example in California where property taxes can range from 1 to 1.5 percent of the assessed value of a home.  We’ll use a $500,000 home as an example.  Initially, this home would bring the state $5,000 per year at the low end in revenue.  The bubble pops and that home now sells for $250,000.  Only $2,500 comes into state coffers yet the state was expecting that funding to come in at a much higher level.  That is one facet of the problem.  Then you throw in pervasive unemployment that is taxing the system and you can see why state budget gaps are so wide and profound.

The state budget gaps are largely a reflection of a struggling working and middle class.  Sales taxes have fallen in many states as people have cut back and started applying a level of austerity to their lives.  Less spending obviously means less money coming in.  To show how widespread this problem is, all but four states with small populations have budget gaps:

Now I know some will only see the gaps and talk about closing them at any cost.  Yet some forget what this will mean to the overall economy and the so-called recovery.  At this point, take for example the mortgage market, 95+ percent of all mortgages originated are government backed.  The last month of employment gains were largely all (90+ percent) from government hiring.  The current economy is largely supported by massive government spending.  The problem is how we allocated the money.  We have funneled too much money to the banking sector with little tangible results outside of Wall Street.  As states cut deeper into their budgets, federal support is lagging and focusing more on helping out Wall Street.  What this will mean is larger cuts and a drag on the overall economy going forward.

Going forward we know that there are only two ways to balance the gaps.  More cuts or higher taxes and both hurt the economy.  The issue so far is that states have gone after low hanging fruit.  There are hundreds of state workers making high six-figures with fantastic pension plans and lifelong employment with little economic yield and these are not the people losing their jobs.  They are going after janitors, repair workers, young teachers, and other easy targets that do little to balance the bigger line items.  Penny wise but absolutely pound foolish.  Below is from the CBPP:

“Expenditure cuts are problematic policies during an economic downturn because they reduce overall demand and can make the downturn deeper. When states cut spending, they lay off employees, cancel contracts with vendors, eliminate or lower payments to businesses and nonprofit organizations that provide direct services, and cut benefit payments to individuals. In all of these circumstances, the companies and organizations that would have received government payments have less money to spend on salaries and supplies, and individuals who would have received salaries or benefits have less money for consumption. This directly removes demand from the economy.

Tax increases also remove demand from the economy by reducing the amount of money people have to spend — though to the extent these increases are on upper-income residents, that effect is minimized because much of the money comes from savings and so does not diminish economic activity. At the state level, a balanced approach to closing deficits — raising taxes along with enacting budget cuts — is needed to close state budget gaps in order to maintain important services while minimizing harmful effects on the economy.”

Even after the Recovery Act, large budget deficits will remain:

So combining budget gaps for 2011 and 2012 will result in budget shortfalls of $260 billion combined.  This is an incredible amount of money.  Even a modest recovery will have a hard time making that up and we have yet to see a recovery for working and middle class Americans.  The recovery to many is largely lost in the trillions of dollars funneled to a banking sector that is merely concerned about shoring up their balance sheets.

If we look at a map of state tax collections, 34 states saw declines in the first quarter of 2010:

Source:  Rockefeller Institute of Government

What this means is there are two recoveries going on.  A real one for Wall Street and the investment banks and a phantom one for working and middle class Americans.  I wouldn’t even call it a recovery for the investment banks since they are simply stealing taxpayer money and calling it turning a profit.  State budget gaps are merely a reflection of what we already know and that is the economy has yet to actually recover.

My Budget360

Is the US Facing a Cash Crunch?

By Gordon T. Long

The US cash-management challenge is significant, and any surprises or further delays in economic rebound will likely trigger serious market reactions.

Editor’s Note: Gordon Long is a former senior group executive with IBM and Motorola, a principal in a high tech public start-up, and founder of a private venture capital fund. He is presently involved in private equity placements internationally along with proprietary trading involving the development and application of Chaos Theory and Mandelbrot Generator algorithms. For the full version of this article, click here.

The US government is caught in a cash vise and is being squeezed between too slow a rebound in tax revenues and the limitations on how quickly it can realistically take its funding requirements to the US Treasury auction. The US Treasury was saved in March by what the government reports as “proprietary receipts.” Those receipts require an explanation that isn’t well publicized since it begs the question of what happens next month without the $117 billion journal entry.

The March cash management numbers from the US Treasury’s Financial Management Service are alarming and in my estimation have become perilous. The economy is simply taking much too long to recover, which is affecting urgently required tax receipts.

If the US Treasury issues even higher debt supply to the market too fast, it threatens driving up interest rates prematurely and thereby elevating already strained government financing costs despite already increased supply. Since the US government has steadily reduced maturity duration over the last few years to obfuscate a growing debt problem, the issue is compounded by the rapidly increasing levels of rollover funding now additionally being required.

It’s a tricky balance between gauging how fast tax receipts will return and what supply the monthly Treasury auction is able to absorb. Cash flow is the primary reason small businesses fail unexpectedly. This is also why sovereign governments fail abruptly.

We witnessed in Greece what happens when investors get nervous. Yields not only spike but typically move to even higher levels than most originally thought possible.

US Treasury Cash Requirements

On April 14 the Financial Management Service, a bureau of the US Department of the Treasury, released its Monthly Treasury Statement for March 2010. I was waiting for it because of what I saw in February: The gap between receipts and outlays was widening disturbingly.

I knew the US Treasury was going to have to pull a rabbit out of a hat, or we might see a similar scare in the US Treasury auction, with a spike in treasury yields that occurred in Greece. What was reported was a mystery and for those that read Extend & Pretend: Gaming the US Tax Payer, I’ll call this Suspicious Clue #8.

Suspicious Clue #8

The report shows US Treasury receipts were down disturbingly and almost all government outlays were up. I personally have had Profit & Loss responsibility on numerous occasions during my career and I would have been apprehensive facing the auditors or board of directors with such a blatant example of mismanagement. Absolutely no cuts in expenses, with falling revenues, all made to marginally appear better than the February report by a single line item called “other.” Executives get fired for such a report but governments just carry on until the inevitable crisis event finally occurs. Then the traditional blame game begins, blame is assigned and belated and poorly formulated policy responses are enacted.

So what is this “other”? When you examine the Outlay Ledger of the Department of the Treasury for March 2010 (below), you see it to be a one-time item classified as a negative outlay. For the non accountants, this is a government receipt that is placed in the outlays as a negative amount, thereby showing government outlays to be smaller than they otherwise would have been. Though this is acceptable accounting, it would lead to the wrong conclusions, unless you read the details buried in the back pages. This “other” is referred to as a “Proprietary Receipt from the Public.”

An IRS document explains just what that means in an accounting context (source: 04-13-10 The Incredible Shrinking Deficit Salon.com):
 

Proprietary Receipts from the Public are collections from outside the Government that are deposited in receipt accounts that arise as a result of the Government’s business-type or market-oriented activities. Among these are interest received, proceeds from the sale of property and products, charges for non-regulatory services, and rents and royalties.

This is a $117.3 billion amount! The total 2010 US tax receipts for US corporations is only budgeted to be $157 billion!

My investigations suggest that it’s likely TARP (Troubled Asset Relief Program) money being returned to the US Treasury, along with a slowdown in TARP issuance versus budget. Assuming this is the case, and not simply an aircraft carrier or two we’ve sold and are now leasing back like California is doing with all state-owned buildings, we still have a major problem. What happens next month? The TARP fund returns will stop or we will run out of aircraft carriers. Is unemployment going to surge or are corporate tax receipts going to expand by over $117 billion next month?

Timothy Geithner and the US Treasury somehow dodged the bullet because of “other” this month. How does it look for next month for cash management? Let’s consider tax receipts to see if there is a possible rabbit in the hat there.

Tax Receipts

You personally met your April 15 tax filing deadline and you likely took some consolation in your tax frustrations by knowing you weren’t alone. The quiet truth is you’re becoming more alone each year if you haven’t understood the new realities of the US tax game. Forty-seven percent of Americans (source: Nearly Half of US Households Escape Fed Income Tax – AP) and two-thirds of US corporations (source: 04-11-04 Most US Firms Paid No Income Taxes in ’90s – Boston Globe) will pay no taxes in 2010. Where do you fit? These are pretty startling revelations to most of us and don’t bode well to fixing the monthly Treasury cash requirements quickly, especially with unemployment still stubbornly elevated.

Personal Income Tax

The Associated Press reported on April 7, 2010:

About 47 percent will pay no federal income taxes at all for 2009. Either their incomes were too low, or they qualified for enough credits, deductions and exemptions to eliminate their liability. That’s according to projections by the Tax Policy Center, a Washington research organization.

In recent years, credits for low- and middle-income families have grown so much that a family of four making as much as $50,000 will owe no federal income tax for 2009, as long as there are two children younger than 17, according to a separate analysis by the consulting firm Deloitte Tax.

Tax cuts enacted in the past decade have been generous to wealthy taxpayers, too, making them a target for President Barack Obama and Democrats in Congress. Less noticed were tax cuts for low- and middle-income families, which were expanded when Obama signed the massive economic recovery package last year.

The result is a tax system that exempts almost half the country from paying for programs that benefit everyone, including national defense, public safety, infrastructure and education. It is a system in which the top 10 percent of earners — households making an average of $366,400 in 2006 — paid about 73 percent of the income taxes collected by the federal government.

Example

The family was entitled to a standard deduction of $11,400 and four personal exemptions of $3,650 apiece, leaving a taxable income of $24,000. The federal income tax on $24,000 is $2,769. With two children younger than 17, the family qualified for two $1,000 child tax credits. Its Making Work Pay credit was $800 because the parents were married filing jointly. The $2,800 in credits exceeds the $2,769 in taxes, so the family makes a $31 profit from the federal income tax. That ought to take the sting out of April 15.

With the government presently talking about once again extending unemployment benefits, it appears we have more downside than upside on the income tax revenue receipt line item going forward.

Corporate Tax

The Center for American Progress reported in 2004, while fighting President George W Bush’s further cuts in corporate taxation:
 

The news that more than 60 percent of US corporations failed to pay any federal taxes from 1996 through 2000 when corporate profits were soaring and that corporate tax receipts had fallen to just 7.4 percent of overall federal tax revenue in 2003 — the lowest since 1983 and the second-lowest rate since 1934 — is an outrage. But it should come as no surprise to anyone who has been paying attention to national tax policy over the past few years. The General Accounting Office (GAO) report also found that an astonishing 94 percent of corporations reported tax liability of less than 5 percent of their total income during the same time period.

The last special General Accounting Office (GAO) study concerning corporate taxation was in 2004 and it showed:

The corporate income tax rate is ostensibly 35 percent, but companies are able to reduce their effective burden by claiming various deductions and credits. US companies paid an average of $11.88 (1.19 percent) in corporate taxes for every $1,000 in gross receipts, the study said.

Foreign-owned companies fared better in some respects than their US-based competitors. The report found that 71 percent of foreign-controlled corporations paid no taxes on their US income, while 89 percent had liabilities of less than 5 percent of their income.

The GAO didn’t attempt to determine why so many companies were able to avoid paying taxes. It said possible explanations included legitimate deductions for current-year operating losses, losses carried forward from previous years, and sufficient credits to offset any tax liabilities. In addition, it said improper pricing of transactions between US and foreign operations could contribute to tax avoidance.

The percentage of federal tax collections paid by corporations has tumbled from a high of 39.8 percent in 1943 to a low of 7.4 percent last year. It ranged from 10 percent to 11 percent in 1996-2000, the period studied by the GAO. (Boston Globe 04-11-04)

In 2005 the GAO issued another report. The Washington Post’s analysis in “Many Firms Didn’t Pay Taxes” highlighted:
 

About two-thirds of corporations operating in the United States did not pay taxes annually from 1998 to 2005. In 2005, after collectively making $2.5 trillion in sales, corporations gave a variety of reasons on their tax returns to account for the absence of taxable revenue. The most frequently listed included the cost of producing their goods, salary expenses and interest payments on their debt, the report said. The GAO did not analyze whether the firms had profits that should have been taxed.

Sen. Byron L. Dorgan (D-N.D.) called the findings “a shocking indictment of the current tax system.”

“It’s shameful that so many corporations make big profits and pay nothing to support our country,” he said. “The tax system that allows this wholesale tax avoidance is an embarrassment and unfair to hardworking Americans who pay their fair share of taxes. We need to plug these tax loopholes and put these corporations back on the tax rolls.”

Eric Toder, a senior fellow at the Urban Institute, said the vast majority of corporations are small businesses and start-ups that have adopted a corporate structure that allows them to lower their tax bills.

“I’m not trying to imply that there aren’t tax-compliance issues among small corporations,” he said. “But when you are talking about businesses that size, I would suspect the norm would be to not pay taxes, and there’s nothing nefarious about that.” Toder had not yet seen the GAO study.

A greater proportion of large corporations pay taxes, according to the GAO. In 2005, about 28 percent of large corporations paid no taxes. Of the 1.3 million corporations included in the study, 998 were categorized as “large.”

Dorgan and Sen. Carl M. Levin (D-Mich.) requested the report out of concern that some corporations were using “transfer pricing” to reduce their tax bills. The practice allows multi-national companies to transfer goods and assets between internal divisions so they can record income in a jurisdiction with low tax rates.

The GAO said data on transfer pricing were scarce. Instead, it compared the percentages of foreign- and U.S.-controlled corporations that are paying taxes.

In general, the GAO found that slightly more foreign firms paid no taxes. From 1998 to 2005, 68 percent of foreign-controlled corporations sent nothing to the Internal Revenue Service, compared with 66 percent of U.S. companies. The report noted in an opening paragraph, however, that the GAO did not study whether the foreign companies were using transfer pricing.

Still, Levin said: “This report makes clear that too many corporations are using tax trickery to send their profits overseas and avoid paying their fair share in the United States.”

It’s only become worse, with President George W. Bush tax cuts and corporate-friendly tax policy. President Barack Obama has been too preoccupied with spending to consider revenue receipts as a priority.

Additionally, offshore tax accounting is completely un-policed and highly secretive with approximately 30 countries serving as tax havens to help corporations avoid taxes. The addition of $605 trillion derivatives market now makes it almost impossible to police global corporations from tax avoidance.

Below is the current Federal Reserve’s Tax Receipts on Corporate Income where I have added the budget expectation for 2010 of $156.7B. As you have already seen, we are presently falling behind last year’s rate of tax receipts.

When we compare corporate tax receipts to Nominal GDP we see huge disparities that are now built into the US Corporate Taxation policy. When GDP was growing, US Taxation wasn’t. The effective rates after loopholes and offshore accounting created the following results.

A Horrific Chart

This alarming chart suggests one or more of three possibilities:

1. There’s no relationship between corporate taxes and GDP.

2. Corporate pretax profits have seen near exponential growth over the last 30 years without being reflected in US taxes receipts.

3. Pretax corporate profits have become more and more an offshore phenomenon.
 

In an analysis of taxes paid by 275 of the largest U.S. corporations, the liberal watchdog group Citizens for Tax Justice found that effective corporate tax rates have fallen by 20 percent since 2001, even as pretax profits jumped 26 percent. Between 2001 and 2003, the 275 companies paid taxes totaling 18.4 percent on their total profits, about half the 35 percent corporate income tax rate. Of the 275, 82 either paid no taxes or received large refunds in at least one of the past three years. (The Washington Post 12-26-04)

Investors are operating under the notion that an improvement in the economy and employment will alleviate the pressures on the Treasury auction. This notion I believe is misplaced. Though I’m skeptical about significant improvements in either the economy or employment, this view is moot in comparison to what will actually be required to make a material difference to tax receipts. The problems described above are intractable without major congressional policy initiatives. Congress is presently doing nothing to address them. In fact they’re headed in absolutely the opposite direction.

Corporate and personal taxes aren’t going to materially fix the US cash crunch short-term.

So the question is even more difficult to answer. Where will tax receipts come from to keep the US Treasury from being forced to place accelerating supply on the monthly Treasury auction?

Debt Issuance

I know many of you are saying we’ll just be forced to place more supply on the Treasury auction and accept higher rates. As I mentioned earlier, the US has already moved down the duration curve steadily over the last few years to make increasing debt levels less onerous. It obviously comes with huge risk, considering interest rates are at all-time historic lows.

If we were forced to refinance the national debt at 5.5% versus the present average maturity of just over 2%, we’d have a serious problem. We need to place corporate tax receipts versus interest payment rate charges in perspective.

This is too far out to be critical to our monthly cash management concerns, but is still a major strategic consideration affecting short-term US Treasury auction options. Closer in however, the US Treasury is obviously caught in a vise about not pushing rates up any faster than absolutely necessary for concern that in the not-too-distant future the very existence of the US and its ability to service its debt may be at stake.

Conclusion

The US cash-management challenge is significant. Taking out this month’s “plug” number, any surprises or further delays in economic rebound will likely trigger serious market reactions.

“This story is not going to stop at the end of the year. There is inertia in the deterioration of credit metrics.”
– Moody’s Investor Services

Posted by Karl Denninger