How to become a "Budget Hero"?

Check out the cool game of "Budget Hero" produced by American Public Media.

What is the motivation behind the game? 

-- "Budget Hero seeks to provide a values- and fiscal-based lens for citizens to examine policy debates during this election year. Partisan messages tend to cloud the real issues at play during campaigns, and most candidates are loath to attach detailed financial impacts to solutions which make up their platform. Budget Hero provides an interactive experiences involving policy opinions that have been extensively researched and vetted with nonpartisan government and think tank experts to enable players to objectively evaluate candidates."

David Walker's new positions

With the title of "America's Prophet of Fiscal Doom,"U.S.News (04/11, Pethokoukis) reports an interview with David Walker, who resigned from the high-profile position of U.S. comptroller general, GAO, on March 12th to head the Peter G. Peterson Foundation. Walker explains his leaving for the belief that "we have a closing window of opportunity to make changes in order to avoid a major crisis" and thus he aims to lead the foundation "address key sustainability challenges that threaten the future of Americans."

Laterly, FedSmith.com (04/24) reports that Walker joints the Partnership for Public Service, which has a mission is "to revitalize our federal government by inspiring a new generation to serve and by transforming the way government works."In welcoming Walker to the board, Max Stier, president of the Partnership said: "David Walker represents public service at its best. He's intelligent, tenacious, honest and 100 percent committed to doing right by the American people. I know he will do great things in his new position as the head of the Peter Peterson Foundation, and I am proud to welcome him to the Partnership's board."

Line-item veto for the President?

I came across this webpage on Minnesota Budget Project about a proposal in 2006 to give the President line-item veto. Although it is a bit outdated, the article makes good sense to me.

The line-item veto is the power of an executive to nullify or "cancel" specific provisions of a bill, usually budget appropriations, without vetoing the entire legislative package. This power is held by governors in all but seven US states, albeit with wide variety in its details. Presidents of the US, however, do not have this power except for a very short-period. In 1996, President Clinton was granted this power by the Line Item Veto Act, passed by Congress in order to control "pork barrel spending" that favors a particular region rather than the nation as a whole. The line-item veto power, however, was ruled unconstitutional in 1998. Since then, a constitutional amendment to give the President line item veto power has been considered periodically. This webpage in MPB talks about a recent attempt in 2006, the Gregg bill, initiated during the Bush administration.

Proponents of the bill suggested that giving the President this new authority to single out specific items in appropriations bills would force Congress to become more fiscally disciplined. However, critics pointed out that the Gregg bill had gone well beyond the traditional concept of the line-item veto in the states (such as this recent case in Minnesota) and attempted to grant the President unprecedented authority, for instance, by withholding appropriations even after a line-item veto has been defeated by the Legislature, or by bundling together line-item vetoes from separate appropriations bills in order to make it more difficult for the Legislature to override.

Critics contend that this proposal would provide the President excessive bargaining power well above political considerations [of the Congress] and consider this notion "unsupportable." It would be "an invitation to mischief" and we should find "better ways to achieve accountability" if the goal is indeed to prevent wasteful “pork barrel” spending or to reduce federal budget deficit.

Q&A's interview of David Walker

This is an one-hour video that I often show to students in PA5003. David Walker is the Comptroller General of the Government Accountability Office (GAO), which was previously called General Accounting Office. In this C-Span interview, he talked about the operation of GAO, his position as the Comptroller General, and his deep concerns about US government's financial management in particular the increasing national debt.

IRS filling status: Head of Houseold

Head of Household is a confusing filing status in federal income tax codes. According to IRS Publication 504, you can file as head of household if you meet three criteria:

1. You are unmarried or “considered unmarried” on the last day of the year.

2. You paid more than half the cost of keeping up a home for the year.

3. A “qualifying person” lived with you in the home for more than half the year (except for temporary absences, such as school). However, if the “qualifying person” is your dependent parent, he or she does not have to live with you. (You must be able to claim an exemption for your father or mother. Also, you must pay more than half the cost of keeping up a home that was the main home for the entire year for your father or mother. You are keeping up a main home for your father or mother if you pay more than half the cost of keeping your parent in a rest home or home for the elderly.)
   

If you qualify to file as head of household, your will receive a higher standard deduction than if you file as single or married filing separately, and your tax rate usually will be lower too.

Obama's proposal of "National Infrastructure Bank"

The Chicago Sun-Times (Pallasch, 02/13) quotes Obama's big spending plans:

“I’m proposing a National Infrastructure Reinvestment Bank that will invest $60 billion over 10 years,” Obama said. “This investment will multiply into almost half a trillion dollars of additional infrastructure spending and generate nearly two million new jobs — many of them in the construction industry that’s been hard hit by this housing crisis.”

For more about the proposal, see the post on professor David Levinson's The Transportationist.

It is good to know that the proposed "Infrastructure Reinvestment Bank" will inject additional funding (through bonds) to the much-needed transportation improvements. The key question, however, is about "the repayment of those bonds."

Although the plan claims to "align the financing of infrastructure investments with the benefits they create," but it is not truly a "bank" that can be "self-financing" through market mechanisms. Instead, the financing package will be "backed by the full faith and credit of the Federal Government" -- so it is essentially a general-obligation bond to be paid back from the general fund budget. Financially, it is equivalent for the federal government to incur yet an additional amount of $60 billion deficit that is guaranteed to be balanced in 50 years. The fact that the repayment would be in the format of "tax credits" rather than interests does not make any true difference for both investors (govt bond interests are tax exempt anyway) or the federal government (tax credit is simply a different form of expenditure like interest payment).

Some may like the proposal as it moves from pay-as-you-go financing to debt-financing and become a de facto national capital infrastructure budget. But the arguable merit of a national capital budget is further complicated by the incontrollable federal deficit that looks to go worse in the foreseeable future.

Mike Huckabee's "Fair Tax" proposal

Presidential candidate Mike Huckabee proposes a "fair tax" plan that would eliminate all federal income and payroll taxes, shut down the Internal Revenue Services, and then replace with a national sales tax. He claims that the plan would be fair, revenue-neutral, and economically efficient.

But could the plan really work? Listen to the NPR story.

AMT for personal income tax

Alternative Minimum Tax (AMT) is part of the federal income tax system. There are AMTs for both personal income tax and corporate income tax. The focus here is the AMT for personal income tax, which has received increased attention in recent years.

The regular way of federal tax calculation allows for many "tax preference items" to reduce personal tax liabilities. These items include long-term capital gains, accelerated depreciation, certain medical expenses, percentage depletion, certain tax-exempt income, certain credits, personal exemptions and the standard deduction. It has been long noted that people with extremely higher income get disproportional benefits to evade tax burden because they have more access to these "loopholes." The alternative minimum tax (AMT) was thus created by the Tax Reform Act of 1969 to ensure that anyone who benefits from these tax advantages pays at least a minimum amount of tax. (For more details of AMT calculation, see here.)

When the AMT first became effective, it was intended to target [only!] 155 high-income households that had been eligible for so many tax benefits that they owed little or no income tax under the tax code of the time. However, as it was not indexed to inflation and recent tax cuts, an increasing number of upper-middle-income taxpayers have been finding themselves subject to this tax. According to a brief issued by the Congressional Budget Office (CBO) (No. 4, April 15, 2004), "In 2010, if nothing is changed, one in five taxpayers will have AMT liability and nearly every married taxpayer with income between $100,000 and $500,000 will owe the alternative tax. Rather than affecting only high-income taxpayers who would otherwise pay no tax, the AMT has extended its reach to many upper-middle-income households." (Curious abou how you may avoid the AMT? Click here.)

In recent years, pressure to reduce or eliminate the tax is growing as an increasing number of taxpayers incur the AMT. Yet no formal approach has been taken to repeal the tax code. For years, Congress has passed one-year patches aimed at minimizing the impact of the tax. The future of AMT remains unclear, as policy analysts are divided over the best way to address the criticisms.

Federal budget deficit (1961-2007)

See the figure for federal budget deficit from 1961 to 2007. (http://www.uuforum.org/Images/deficit.gif)

Bush describes a "good, solid" budget

On 02/04, President Bush just submitted his proposed budget, one that he described as a "good, solid budget" and one he claims that puts the federal government on the path to balancing its budget in the very near future -- by 2012.

Chicago Daily Observer (Martire, 02/11), however, finds that "the only verifiable good thing about it [the proposal] is the president's description." Likewise, Investment News (02/11) sees the budget proposal "just plain dishonest."

The proposal will increase the "acknowledged" federal deficit from $162 billion in FY2007 to $410 billion in FY2008. Then the proposal suggests that it may drop marginally in FY2009 to $407 billion -- that is what the president claims "on the path of balancing its budget."

Note that the talk is about the "acknowledged" deficit, which is the number after the surplus in Social Security has been borrowed by the administration. While the "acknowledged" deficit is $401 billion, the actual budget deficit is a whopping $602 billion, after spending $192 billion Social Security surplus on current operations (CDO).

Even worse is the fact that both the $410 billion "acknowledged" deficit in FY2008 and the $407 billion in FY2009 may have been severely underestimated. On the revenue side:

• The revenue growth for the coming two years has been "certainly overstated" with the current economic slowdown being simply ignored;
• The proposal assumes no change in the Alternative Minimum Tax (AMT), which is "most likely" to be fixed by a Democratic Congress and the cost may be another "$20--$100 billion annually in lost revenue" (CDO).
  

On the spending side there are even more unrealistic assumptions:

• The budget proposes only about $70 billion for the war in Iraq and Afghanistan, while the true costs are likely to be "more than double that figure" (IN);
• The budget projects cuts in Medicare spending of $12.2 billion in FY2009, which may be unlikely to pass Congress.

How high could it be?

Currently the top marginal rate of federal income tax is 35%, which means that Bill Gates pay 35 cents for the last dollar that he earns every year. Does it sound high or low? That is your personal call.

Let's just put it in historical perspective (See the graph to the right). It is shocking to know that there were 14 years that we have the top marginal rate over 90%. The record high was 94% during 1944-1945, at the end of WWII. Yet the high rate was not due to the war itself. It was a little peak among a half-decade long period of 70% or above, from 1930s to 1980s.

Top US Marginal Income Tax Rates (1913-2003)

Taxing the tall

One of the 70 ideas covered by The New York Times Magazine "Year In Ideas" is Mankiw & Weinzierl’s intentionally quirky proposal of taxing tall people, based on the empirical distribution of height and wages.

The topic has attracted lots of attention from some famous bloggers, including tall political scientist David Park, tall economist Robin Hansen, and not-so-tall political scientists/statistician Andrew Gelman.

All share the same opinion that the tax is “wacky,” but Andrew’s argument is most interesting to me. In the first place, he points out that height isn't actually correlated very much with income -- together, height and sex predict earnings with an R-squared of only 9%. More importantly, however, it is the big “Huh?” that he makes towards Mankiw and Weinzierl’s argument that height should not be taxed as it is a ‘justly acquired endowment.’

“... who ever said that you can only tax something that was ‘unjustly wrestled from someone else’?” Even if we can imagine a society with on unjust wrestling at all, the tax money needs to come from somewhere, he argues.

The concluding remarks: “Maybe this is a difference between how economists and political scientists view the world. Mankiw and Weinzierl seem to view taxes as a way to punish people, whereas I see taxes as a way to raise money?”

Federal tax policy in Presidential Candidates' Agenda

"Democracy in America" in the Economist' Podcast is a weekly conversation about the issues at stake in the 2008 Presidential race. The Podcast on Dec. 6th is an interview with Dr. Leonard Burman of the Tax Policy Center and Dr JD Foster of the Heritage Foundation.

How do Presidential candidates talk about future tax changes? Are their ideas considerable, reasonable, or workable? How are these issues perceived by professional tax experts with different political identifies?

If you are interested, listen to the Podcast on Tax Policy.

Social Security to become key issue

Just a recap of some simple facts:

• The Social Security trust fund will have annual shortage beginning in 2017. By 2041, the funds would run dry of its surplus reserve that has accumulated throughout the years (and has been borrow by the Federal government to fund budget deficits). Under current law, an automatic benefit cut would follow thereafter.
  
• In 2005, Bush urged Congress to reduce promised benefits for future upper-income retirees. In addition, he called for creation of private accounts funded with a portion of workers' payroll taxes. The plan went nowhere.
  
• Sens. Hillary Clintan was criticized of ducking the issues or being inconsistent of her opinion. She had declined to state a position on higher taxes in an earlier debate but then told an Iowa voter she would consider them.
  
• Barack Obama said over the summer, "we don't need to cut benefits or raise the retirement age," a position that flatly rules out neither approach.
• In general, Democrats objected to the "privatization" of Social Security and many of them talk favorably about raising payroll taxes for upper-income wage earners. For instance, some argued that the tax should be restored for money income above $200,000, after the waiver gap between &97,500 and about $200,000.
  
• Among Republicans, higher taxes is a non-starter. Mike Huckabee advocates giving an option of declining retirees' benefits, and instead have Social Security issue a lamp sum payment at their death, with the money going to their children or grandchildren. [Sound a weird idea to me.]
  

For more information, read the news report below:

Social Security to become key issue