Tuesday, June 20, 2017

Student Debt and Defaults Soar as Colleges and Students Saddle the Taxpayer

Over the last 10 years, U.S. student debt has ballooned by 164%, or almost five times the growth of the overall economy. These "loans," which now amount to $1.4 trillion, or $33,000 for each of the 44 million student borrowers, have enabled colleges to raise tuition at a rate almost three times that of overall consumer prices over the same 10-year period.

But, shed no tears for the student borrower for ultimately there are three avenues for the student to foist these loans on to U.S. taxpayer's shoulders:

First, students are increasingly defaulting on these loans. Over the past 10 years, the number of student loan defaults has skyrocketed 400% to 4.7 million and the number of loans more than 90 days delinquent has soared by 250%. Furthermore, nearly one in three borrowers who exited defaults through rehabilitation defaulted for a second time within 24 months, and more than 40% of borrowers defaulted again within three years.

Second, programs of loan forgiveness and income-driven payment plans have proliferated. In 2007, President Bush signed a bill that subsidized student loan borrowers who took jobs in the public or non-profit sectors upon graduation. Student loan debt left over after 10 years of payments would be forgiven. Beginning in 2014, President Obama capped borrowers' monthly payments at 10% of their income, extended the repayment period from 10 to as long as 25 years, and offered to forgive any remaining balances when that time is up. The Government Accountability Office calculated that the government will lose $21 for every $100 in student loans issued to someone who takes advantage of an income-driven repayment plan.

Third, a federal student loan can be discharged in the event that the federal loan was used toward the cost of enrollment at an institution that closed due to loss of accreditation, loss of a majority of academic programs, or because the school violated state or federal law.

With U.S. worker wages growing less than 3% annually, workers can ill-afford the $10,000 per worker burden of student debt which has underpinned college overspending and student wastefulness. Ernie Goss

Wednesday, May 17, 2017

U.S. Incentives for Not Working Expand 3 Times That of Incentives to Work

Despite earning $5,000 per month, Chris Jones, a single father of two children under 10 years of age, living and working in Santa Fe, New Mexico, quit his tech support job at IT Solutions on September 1, 2016. It was a good financial move.

By quitting early Jones qualified for the earned income tax credit (EITC) and a host of other government support payments unavailable to him if he had worked the full year and earned $60,000.

By leaving the labor market, he now qualified for 2016 benefits of food stamps or SNAP of $2,044, EITC of $974, and New Mexico rental assistance of $1,636. Additionally had Jones continued to work, he would have paid an additional $3,120 in federal income taxes, $980 in state income taxes, $1,200 in social security taxes, after-school day care of $3,852, and family health insurance of $1,200.

In total, assuming a 40-hour work week, Jones would have earned a paltry net $9.60 per hour for the remaining four months of 2016 compared to his $31.25 per hour for the first 8 months of 2016.

Given the myriad of economic incentives for not working, it is not surprising that in 2016, the percentage of the population over age 15 in the labor force dropped to its lowest level since 1976.

As in the case of Jones, one of the chief reasons is that the financial incentives for not working, furnished by federal, state and local governments has soared. Meanwhile the economic inducements for working provided by business enterprises has expanded at a more modest pace.

Between 1990 and 2015, U.S. wages and salaries per worker advanced by 126.6%. Whereas, government transfer payments, including SNAP, Medicaid, EITC, and rent assistance provided to non-workers, or workers with a soft linkage to the labor market, more than tripled at 358.6% per capita. One of the goals of any 2016 tax reform coming from Washington should be closing this gap between the growth in wages and that of transfer payments.
Ernie Goss.

Thursday, April 13, 2017

Corporate Tax Reform: An Easy Win-Win One-Time Tax Cut on Repatriated Earnings

Last month in a pessimistic tone, House Speaker Paul Ryan announced that tax reform would take longer than repealing and replacing Obamacare. But with Republicans and Democrats holding enough votes to thwart most efforts, comprehensive tax reform represents a fool's errand.

Instead, Congress should pass tax reform in digestible portions. For example, cutting tax rates on earnings of U.S. corporations held abroad is a win-win that would find acceptance by even the most hardened DC taxer/spender.

The United States has the third highest corporate income tax rate in the world, at 39.1% when state taxes are included. It is exceeded only by Chad and the United Arab Emirates.

Due to U.S. high corporate tax rates, many U.S. corporations squirrel the profits in off-shore accounts or invest the cash in plant, equipment and technology among America's competing nations, rather than bringing profits home from abroad. Worse still, some U.S. companies engage in inversions, whereby a U.S. company moves its headquarters to low tax nations, such as Ireland with its 12.5% tax rate.

Congress and the Trump Administration should take action that would increase tax collections, reduce tax inversion deals and boost U.S. corporate investment. Currently, it is estimated that U.S. firms hold as much as $3 trillion abroad.

Assuming a one-time corporate tax rate of 10% on repatriated earnings of $2 trillion, 2017 tax collections would climb by $200 billion. The remaining $1.8 trillion of repatriated earnings could be used for (desirable to less desirable):
1) investment in plant, equipment and technology;
2) dividends to investors;
3) stock repurchases; and
4) salaries to employees.

Both Democrats and Republicans can and would sign on to this winning tax reform in a speedy fashion.

Ernie Goss

Sunday, March 19, 2017

Property Taxes Expand as Farm Income Plummets

The U.S. Department of Agriculture estimates that 2017 net farm income will fall 8.7% from 2016 levels, thus marking the fourth straight year of sinking agriculture income. As a result, states that depend heavily on farming have experienced significant shortfalls in tax collections producing economic stress, particularly for rural areas of agriculturally dependent states.

Even with sharply lower agriculture income, local taxing bodies have continued to raise property taxes on farmland. For example, between 2013 and 2014, assessed values of farmland for the 10-state Rural Mainstreet region actually expanded by an incredible 11.4% as farm earnings fell by 18.0%. Over that same period, local governments across the 10-state region increased elementary-secondary school spending per student by a median 3.3%. Not surprisingly, the percent change in property taxes for 2013-14 for the ten states were: NE 7.3%, SD 6.7%, CO 3.1%, KS 2.6%, IA 2.0%, ND 0.9%, IL 0.7%, MO -0.1%, WY -3.6% and MN at -5.6%.

While more recent data are not available, anecdotal evidence indicates this same pattern has continued with lower farm income, higher K-12 education spending, and ballooning property tax burdens on farmland with significantly lower, and even negative net farm income.

In order to avoid strangling the economic viability of farmers in the region, several solutions should be advanced, evaluated and potentially adopted:
1. Slow the growth in K-12 education spending;
2. Base property taxes on the income of the farmer rather than estimated or historical farmland values;
3. Change the state aid to education formulas to be more transparent and less detrimental to rural residents; and
4. Allow counties to collect local option sales taxes to support local spending.

Shifting the property tax burden to state sales and income taxes via state aid to local units has not and will not work. Historical evidence shows that cutting property taxes lasts for only two or three years and that it is followed by excessive property tax growth plus higher income and/or state sales taxes.

Ernie Goss.

Wednesday, February 15, 2017

Paying for Trump's Federal Income Tax Cut: Eliminate State & Local Income Tax Deductibility

Newly elected President Trump has called for collapsing the current federal income tax brackets from seven to three: 12%, 25% and 33%. According to the Tax Foundation, this change would cost the U.S. Treasury $1.1 trillion to $2.5 trillion in tax collections over 10 years.

Congressional representatives argue that adding this to the current federal debt of almost $20 trillion is irresponsible and instead must be "paid for" by eliminating deductions. One of those deductions is state and local income taxes.
According to my calculations, jettisoning this deduction would add almost $60 billion to U.S. Treasury coffers yearly. Of course, high income tax states would bear the brunt of the cost.

Taxpayers suffering the biggest burden of the change would be Californian's paying $14.1 billion, New Yorkers losing $9.8 billion, and New Jersey residents forking over an additional $3.2 billion--all three states' electoral votes captured by Clinton. In fact, the median individual income tax rate for states won by Clinton was almost 20% higher than that for states secured by Trump. In terms of shifting individual tax burdens, this change would cost taxpayers with incomes over $200,000 an average of approximately $7,000, but an average of only $100 for taxpayers making less than $200,000.

From the Trump standpoint, abolishing this deduction would produce greater tax transparency, reduce the incentives for state and local governments to raise taxes, tend to benefit states that Trump carried in the election and cost states that Clinton captured.

Ernie Goss

Thursday, January 19, 2017

Trump Landslide Victory Among Counties: Unmarried Mothers, College Educated and Foreign Born Support Clinton

The 2016 U.S. presidential elections shamed pollsters and pundits and once again validated the split in the American electorate. Clinton won the popular vote taking 48% of ballots compared to Trump's 46.0%. However, Trump won a landslide of counties taking 85% of the nation's 3,142 counties.

Digging beneath the surface, voting behavior provides a distinct profile of the two camps. For example, single mothers with children, college graduates, welfare recipients, and foreign born were more likely to support Clinton. On the other the hand, married voters, high school graduates, and those living in a different state in 2015 were more likely to vote for Trump.

The most important factor explaining Clinton vote totals was the share of the county with a bachelor's degree or above. The most significant characteristic explaining Trump county wins was the percentage of the county that was married.

Holmes County, Ohio with $392 per capita welfare benefits, 70% married, 4% unmarried mothers, 1% foreign born and 7.8% college graduates was the county with the population profile least likely to support Clinton. New York County, New York with $1,300 per capita welfare benefits, 26% married, 12% unmarried mothers, 29% foreign born, and 60% college graduates was the county with the population profile least likely to vote for Trump.

American writer, Gore Vidal once said, "Half of the American people have never read a newspaper. Half never voted for President. One hopes it is the same half."

Ernie Goss

Monday, December 26, 2016

From Truman to Obama: Presidential Economics

From George Washington to Barrick Obama, U.S. presidents sell their administration’s economic accomplishments normally striking a tone somewhere between Arthur Miller’s Willie Loman and Meredith Wilson’s Harold Hill. For example, just this year President Obama claimed that, “Anybody who says we are not absolutely better off today than we were just seven years ago, they’re not leveling with you. They’re not telling the truth.”

The question is not whether Americans are better off, it is how much better off are they after recovering from the 2008-09 recession? In the accompanying table, economic progress during every economic recovery since 1947 is compared for each U.S. president. As presented, despite a $900 billion stimulus package in 2009, record low interest rates. and continuing annual deficit spending above $500 billion, President Obama has presided over the weakest economic recovery since the Truman Administration.

What accounts for the poor economic performance in the current recovery? More and more evidence point to rising regulations as the economic culprit. At the current pace of rulemaking, the American Action Forum estimates the Obama Administration will issue a total of 641 major rules before the president leaves office, bringing the nation's regulatory bill to $813 billion. By contrast, President George W. Bush issued 426 major rules during his tenure in the White House. According to the Wall Street Journal, the Obama Administration is responsible for six of the top seven years of red-tape creation in the nation’s history. Under George Bush Jr. we had “no child left behind,” but under Barrack Obama we have gotten “no economist or lawyer left behind.”

Two of Obama’s legislative/regulatory programs demonstrate the negative impact of expanding regulations. First, the Affordable Care Act (ACA) signed into law in 2010 demands that companies with more than 49 workers either provide health insurance to employees working 30 hours or more weekly, or pay a stiff fine. Not surprisingly since January of this year, Americans working part-time due to business conditions has risen at more than twice the pace of overall employment growth.

A second, major economic growth killer is the Dodd-Frank Act. Said the U.S. Chamber’s David Hirschmann, president of the Center for Capital Markets Competitiveness, "It (Dodd-Frank) increased uncertainty for American businesses and hindered their ability to promote economic growth and create jobs." Since passage in July 2010, commercial banks have shed 2.7 percent of their employees in contrast to firms outside of commercial banking that expanded their jobs by almost eleven percent during the same time period.

In Creighton’s monthly survey of bank CEOs in rural areas of ten states, bankers indicated that rising regulation was, and would be, the number one factor threatening their bank’s growth prospects. In our October 2016 survey, 27.3 percent of bankers indicated that rising regulation represented in their bank’s greatest economic challenge over the next five years.

Even with the onslaught of regulation at the national level, I expect the national economy to continue to grow by 2.3 percent in 2017 even as rural areas of the nation heavily dependent on agriculture and energy experience flat to slightly negative growth for the first half of 2017. U.S. businesses and consumers are riding a thoroughbred economy, but with the reins tightened by federal regulatory bodies. It is time to “let the big horse run.”
Ernie Goss