Budget Buster: Pentagon Unable to Account for Trillions in Spending

They Don't Even Know How Much US Government Debt "We" Owe

How Much US Government Debt Do We Owe?

The United States military budget accounts for over 40% of the world’s annual military expenditures and, at around $700 billion per year, more than 20% of the federal budget. The Federal government wants to curb that spending as part of deficit reduction.

Last week’s deficit deal calls for up to $350 billion in cuts over the next decade on the departments of Defense, State, Homeland Security and Veterans Affairs, among others. And, if the debt “super-committee” fails to reach a deal on $1.2 trillion in budget cuts, it will automatically trigger an additional $500 billion in cuts over the next decade.

Cutting in a bureaucracy as large and convoluted as the Pentagon is no easy task, but Stephen Glain author of State vs. Defense: The Battle to Define America’s Empire says there are three issues at the heart of their spending problem.

Growing obligations: Much like other public sector groups, the Pentagon has growing liabilities coming from pension and medical insurance plans. It’s “very much a microcosm” of the problems facing the country, says Glain. The Pentagon’s liability for civilian employees is currently $60 billion and the “rate of growth is enormous,” says Glain. The figure was $15 billion a decade ago.

Accounting Problems: You think Enron’s accounting was troubled? The Pentagon has very little accountability when it comes to its books. Since first submitting financial accounts in 1991, the Pentagon “has been unable to account for trillions of dollars, well over almost $10 trillion by my own account,” says Glain. Conspiracy theorists suggest this is CIA money being laundered through the Pentagon, a claim Glain has some sympathy for.

Ending the Wars: Ending operations in Iraq and Afghanistan will instantly save the defense department $180 billion per year. According to Joseph Stiglitz the wars have cost the government $3 trillion and counting.

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Value-Added Tax (VAT) – What You Need to Know

Hey – you know we have a debt crisis, right?

A VAT could reduce the deficit and its announcement would signal to foreign investors that we’re serious about deficit reduction, reducing our long-term interest rates and making it easier to borrow.

a VAT is Coming Soon

President Barack Obama’s bipartisan commission to fix our long-term deficit crisis held its first meeting on April 27. But a couple of weeks ago, the Senate overwhelmingly passed a symbolic measure rejecting an important tool to restore fiscal sanity to the budget: the value-added tax. To which you might respond: a what?

Americans like to think of our country as exceptional. Our tax system certainly is. The United States is the world’s only developed nation without a national broad-based consumption tax. As a result, our taxes hit income harder than most countries. Nearly 38 percent of our overall tax take comes from the individual income tax. The OECD average is 25 percent.

As our gaping deficit commands more attention in Washington, some lawmakers and policy gurus are talking about making America a little less exceptional by creating a national consumption tax. That sounds scary. So let’s back up and explain some things about a value-added tax, or VAT: why we might need it, how it would work, and what liberals and conservatives are saying about it.

Here’s why we need it: If you think the deficit looks bad now, wait a few years. Rising health care costs for retired baby boomers will push U.S. debt levels past their World War II-levels. But whereas WWII ended and we owed that debt to ourselves, our entitlement system is woven into American life and we owe half the resulting debt to foreign countries. Approaching this challenge will require some combination of robust growth, spending cuts, entitlement reform and more tax revenue.

Where should this tax revenue come from? There are three reasonable sources. First, some revenue should come from cleaning out the underbrush of special interest deductions and exemptions that hide hundreds of billions of dollars from taxes. But every tax code in the world molds to the interests of the public, and dramatically reducing these carve-outs is unlikely. Second, some revenue should come from higher income taxes on the rich, whose total tax rates have fallen consistently over the last 40 years — while spending grew. But higher taxes on the rich alone won’t close the deficit. That brings us to revenue-source number three: we will have to raise taxes on lower- and middle-class families, and the VAT is probably the most efficient, most equitable, and most non-distortionary way to do it.

So what is a value-added tax, anyway? What it sounds like: a consumption tax on the “value added” at each stage of production. Here’s how that works: Imagine a $1 loaf of bread you buy from the supermarket with a VAT of 10%. You’ve got a farmer, a baker, and a supermarket in the production chain. The farmer grows the wheat and sells it to the baker. The baker makes a loaf, sells it to the supermarket. The supermarket sells the loaf to me. Each link on the production chain pays the government 10% of the price of its product minus 10% of the price it paid for the goods to make that product. Ultimately, the government collects a total of 10 cents on the $1 loaf. At the supermarket, I pay the bread price plus the VAT: $1.10.

Maybe that sounds complicated. But it’s actually much easier to collect VAT than a national retail sales tax because there is a counterparty to every transaction. The baker can try to avoid paying her share of VAT. But the government will see that the supermarket reported the purchase of her bread, and it can go to the baker and say “you forgot to report your sales.” With the individual income tax, we ask the IRS to police tax evaders. With a VAT, the production chain helps to police itself.

For most Americans, this is all happening under the hood. All we would see are higher prices and less overall consumption. Who could want such a thing?

Maybe all of us. Remember that debt crisis? A VAT could reduce the deficit and its announcement would signal to foreign investors that we’re serious about deficit reduction, reducing our long-term interest rates and making it easier to borrow. What’s more, if a tax on consumption discourages some consumption, it might encourage Americans to save more, which might not be such a bad thing considering an avalanche of consumer debt added to the last recession.

Finally, the politics. Conservatives and liberals have different objections to the VAT, but many of them are misguided. Conservatives don’t like the VAT because it’s an efficient, invisible tax — a “money machine.” But one look at our deficit projections is enough to tell you that we need a money machine, as Reagan economic adviser Bruce Bartlett wrote. Conservatives also worry that “invisible” taxes like a VAT would enable the government to grow bigger. The evidence does not agree. “Tax visibility is empirically unrelated to the amount of taxation and government spending,” economist Casey Mulligan concluded.

On the other side, liberals worry that a tax on consumption will hit the poorest the hardest, because lower-income Americans spend more of what they make. But policy makers could solve this regressivity in many ways. Most simply, pairing the VAT with a tax credit for poorer families could actually make the tax progressive. They could also spare some common products from the VAT (indeed, no country’s VAT extends over the entire economy, and realistically an American VAT would probably hit only about a third of GDP). Lawmakers would also probably introduce a VAT in exchange for some combination of cuts to income, payroll, or corporate taxes.

Of course, a VAT could take years to set up and special interests would carve it up with exemptions, just as they have for the rest of the tax system. But there are reasons for both liberals and conservatives to support the VAT. Conservatives want a tax system with a broader base and lower marginal rates. Liberals want to protect programs like Medicare and education spending with new taxes that don’t overburden lower-income families. A VAT would serve both interests.

by Derek Thompson
Tuesday, April 27, 2010

We Have A Few Years To Get Our Fiscal House In Order Or We Go Into A Depression

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Americans’ Mistrust of Govt. Is Rational and Warranted, But Also Dangerous”

The United States invariably does the right thing, after having exhausted every other alternative,” Winston Churchill once said.The problem is “we’re in the process of exhausting all the alternatives pretty quickly,” says William Galston, a senior fellow at the Brookings Institution.A recent CBS/NY Times poll showed only 19% of respondents say they trust the government “to do what is right all or most of the time,” while 78% believed the government is run by special interests, not for the benefit of the people.”If current levels of trust don’t improve, I don’t see how Americans can be persuaded to make sacrifices now for a better future,” says Galston, a former adviser to President Bill Clinton. “We have a few years to get our fiscal house in order before things really get out of control in ways that will be hard to reel back – the early signs are not encouraging.”With public deficits soaring and stratospheric bailouts for banks and automakers,Galston isn’t saying mistrust of government is irrational or unwarranted, but it is dangerous for society.”Unless it’s corrected we’re going to have a very hard time doing what needs to be done in the next decade or two,” he said. “So I hope we’re on the threshold of doing the right thing, not because we want to but because we have to. “

Gary Shilling: Higher Government Pay Will “Likely Lead to a Tax Revolt”

14.8 million Americans are currently out of work and looking for a job, according to a report released today by the Bureaus of Labor Statistics. Even if you do have a job, wages have not increased substantially over the last ten years, with one exception: government workers.Thanks to generous health-care benefits and pensions, it pays – more than ever – to work in the public sector. Economist Gary Shilling fears dubious consequences if state and local workers continue to make more money and at the same time governments raise taxes and cut services.”In good times, nobody really cares that much but now we’re not in good times,” says the President of A. Gary Shilling & Co. “The basic problem is pay differential, as I see it, and that I think is likely to lead to a taxpayer revolt.”Shilling’s point about pay is illustrated well in this recent research by Dr. Mark J. Perry, professor of economics and finance in the School of Management at the Flint campus of the University of Michigan.According to a December report from the BLS, state and local government employers spent an average of $39.83 per hour worked ($26.24 for wages and $13.60 for benefits) for total employee compensation in September 2009. Total employer compensation costs for private industry workers averaged $27.49 per hour ($19.45 for wages and $8.05 for benefits). In other words, government employees make 45% more on average than private sector employees.According to another BLS report, compensation for private industry workers has increased by 6.9% between December 2006 and December 2009, compared to a 9.8% increase for government workers (state and local) over the same period.If that’s not enough, the trend will lead to a lowering of our standard of living, even for the highest paid workers on Wall Street, Shilling tells Henry in the accompanying clip. If reforms like the Volcker Rule take hold, Shilling’s “not sure Wall Street (will be) permanently bidding up the prices of Manhattan real estate and vacation homes in the Hamptons.”

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Elizabeth Warren says, Housing Market Getting Worse

Home Foreclosures Will Last For Years

10 to 12 million U.S. Homes Could Ultimately Go Into Foreclosure

There’s been a lot of talk lately about a recovery in the housing market – even reports of bubbles re-inflating in certain markets. Elizabeth Warren, chair of the Congressional Oversight Panel, isn’t buying it. “We see things getting worse in the housing market,” Warren says, citing the pernicious effects of foreclosures, which rose 5% in the third quarter to a total of 937,840, according to RealtyTrac. “The long-term impact of high foreclosure rates on our housing market and overall economy would be disastrous,” Warren warns, citing estimates that 10 to 12 million U.S. homes could ultimately go into foreclosure. “We have to get foreclosures under control. “Why the sense of urgency?

A single foreclosure property brings prices down an average of $5000 for every house in a two-block radius and costs investors an average of $120,000, she says. In its most recent report, Warren’s panel criticized the Treasury’s foreclosure modification efforts as “inadequate” and “targeted at the housing crisis as it existed six months ago, rather than as it exits right now. “Specifically, the Treasury program is targeted at subprime borrowers hit with ballooning mortgage payments vs. prime borrowers hit by job losses.  As for the “morality question” of whether the government should be bailing out homeowners, Warren says “I’m passed that,” noting “there’s plenty of unfairness to go around.”More importantly, “ultimately the American taxpayer — thanks to Fannie, Freddie and FHA — is going to stand behind many of these mortgage,” she says. “We need to be thinking more globally what is cheapest possible way to bring this crisis to an end. “One solution: Force investors holders these mortgages who may be betting on a government bailout to take a haircut, as occurred with GM and Chrysler creditors. “That’s why they call it investing,” Warren says. “You make profits in good times, take losses in bad times. That’s the fundamental part of this [modification effort] that’s missing.”

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How a Very Pessimistic Ron Paul Would Fix the Economy: Tech Ticker, Yahoo! Finance

Congressman Ron Paul is “very pessimistic” about the state of the economy, largely because – from his view – the Obama Administration “continues to do the things that created the problem in the first place.”Long a proponent of small government and a staunch opponent of the Federal Reserve system, Paul’s main point is that increased spending and higher deficits are not the solution to our problems, but their cause.”You can take care of people, but never with a deficit, never by expanding the spending,” the Texas Republican says in this exclusive video interview, taped in the Capitol Hill Rotunda in Washington D.C. “The more we do to interfere with the correction – the longer it lasts.”Had he been elected, Paul said he would be doing “a lot less” than President Obama and blames Keynesian economics – which advocates increased government borrowing and spending during times of duress — for our nation’s current ills.While admitting a transition to what he views an “ideal society” won’t be quick or simple, Paul’s economic prescription includes: * Allowing bankruptcies to occur vs. rewarding failure with bailouts. * Stop inflation by dismantling the Fed and returning to the gold standard. * Encourage savings and liquidate debt. * Deregulate. * Give tax credits to those who take care of themselves, or the doctors who provide their care. * Cut government spending, especially on international endeavors. “We spend hundreds of billions of maintaining our empire around the world. Let’s bring that money home,” he says.These recommendations will be familiar to anyone who followed (or supported) Paul’s run for the Presidency in 2008. Given all that’s transpired in the past year, one suspects he’d be getting a lot more votes if the campaign were happening today.

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The Gov’s Tax Revenues are down 25% – They will Tax You!

The government is “doing as much possible to increase amount of taxes it receives,”. “It will increase revenues, any way they can – starting from all business and then the consumers. We are in a massive tax and spend environment.

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