Trump

Sham tax ‘reform’ proves more than ever that isn’t about reform, it’s about money and influence.

Posted on by j.giglio

The imperfect tax bill President Trump signed into law on Dec. 22 is further evidence of the rot in Washington,. The tax bill isn’t about tax reform, it’s about money and influence.

Consider the giveaway known as the carried interest rule. It’s another outrageous example of the powerful getting what they want, as they always do. This will come as no shock to anyone over the age of five.

The term “carried interest” derives from the share of profits that 12th-century ship owners and captains were given as an interest in the cargo they carried, usually a 20 percent commission to provide an incentive to keep an eye on the cargo.

Today carried interest is the 20 percent of profits from their funds with which private equity firms, venture capitalists, and real estate partnerships compensate themselves. These proceeds are taxed at a capital gains rate of 20 percent, about half the top individual income rate, which will fall to 37 percent under the new tax law. Critics argue that this money is effectively income and should be taxed at individual income tax rates. The constituents for the deduction argue that removing the incentive would reduce entrepreneurial risk taking.

The reason for the loophole’s survival comes down to campaign contributions to key lawmakers and intense lobbying to maintain the favorable tax treatment. As Gary D. Cohn, director of the White House National Economic Council said, “The reality of this town is that constituency has a very large presence in the House and the Senate and they have really strong relationships on both sides of the aisle.”

The American Investment Council, a Washington trade association that represents private equity firms, reported some $970,000 in lobbying expenditures for the first three quarters of 2017. This is in addition to the smart investment made by way of campaign contributions targeted to key lawmakers. For example, employees of the private equity firm The Blackstone Group L.P. contributed $212,000 to Senator Majority Leader Mitch McConnell in 2017 alone. In turn, politicians serve their contributors by protecting the carried interest preference.

Private equity firms have the means and vanity to get what they want. It is further proof that money is the mother’s milk of politics and that big money gets its way in Washington, D.C.

During the presidential campaign both President Trump and Secretary Clinton gave a pitch-perfect populist performance, wanting everyone to know that they were militantly opposed to this loophole, a form of welfare for the wealthy. When a politician says something like that, sports fans, try inserting a negative and you are likely to hit pay dirt. Political rhetoric is as unrelated to the truth as an advertising campaign.

The power of money seems eternal. Politicians love it like a child loves Christmas, and all are working hard to avoid reading their own political obituaries. Knowledge that it has always been this way is no consolation.

They tell pro forma lies to the public and the media, and then begin to believe what they read. Not laying blame, just putting truth into words. So House Ways and Means Committee Chair Kevin Brady (R. Texas), with a truly magnificent smile, said on the Morning Joe talk show “carried interest, we can talk about that for the next hour if you like, but for most Americans they could care less about that.”

In its pursuit of a free lunch, the public is often a bit too eager to accept the things they want to hear at face value, even though they should know that truthfulness is not a long (or short) suit for elected officials, who spin untruths with the same gusto young Abraham Lincoln supposedly split logs.

You can’t bring about change by wishing upon a star. You can run with that.

 Originally Published: January 6, 2019

Trade tariff battle will not lead to any long-term damage

Posted on by j.giglio

President Trump’s views on trade have never been a secret. Trump finally delivered on his campaign promises by announcing unilateral tariffs on steel and aluminum imports coupled with the imposition of about $60 billion in new tariffs on China. The moves generated frightening headlines, with experts predicting they will have dire consequences for the global trading system, but such claims are exaggerated.

Trade is a competitive game and every country plays hardball. The Trump policy is supposedly designed to counter a series of unfair Chinese trade practices, such as its longstanding restrictions on American companies, the forced transfer of American intellectual property, and many cases of patent and trademark infringement. The administration has demanded that China shave $100 billion off its record $375 billion trade surplus with the United States.

U.S. firms have been unable to sell advanced goods and services to China’s rapidly expanding middle class. It is widely acknowledged that in many market segments China requires foreign firms to share proprietary technology as a  condition of market access. The firms provide innovation and their Chinese counterparts imitate foreign design.

Many of the president’s media antagonists say these actions threaten to unleash a trade war; that the  moves appease the resident’s Rust Belt constituency but are unlikely to end America’s trade deficits or bring back manufacturing jobs. They also warn of rising consumer prices and are convinced that the U.S. would lose a trade war with the emerging market giant.

Yet it is unclear whether the president and the economic  nationalists in his administration will govern as tough as they talk. It is quite possible that actual tariffs will fall short of  the threats. For example, the tensions with American allies generated by the steel and aluminum tariffs are likely to be resolved through cometic concessions.

Following the president’s tariff announcement, China initially targeted tit-for-tat tariffs to put pressure on politically sensitive states that voted for Trump, hitting him where it hurts the most ahead of mid-term elections later this year. China’s Ministry of Commerce quickly said that it would impose a 15 percent tariff on $3 billion worth of American fruit, pork, wine, seamless steel pipes and more than 100 other products that represent about 2 percent of total American exports to China.

But soon after all this huffing and puffing, China’s Premier Li Keqiang, at a conference that included global chief executive officers at the Great Hall of the People in Beijing, pledged to open markets to avert a trade war with the United States and to ease access for American businesses. Also, China offered to buy more American made semiconductors and allow foreign financial firms to take majority stakes in Chinese securities firms.

Then on April 1, the Chinese Finance Ministry said the previously announced tariffs will take effect immediately.

China is reliant on foreign trade for growth and job creation and needs to retain access to the U.S. market. The country certainly doesn’t want to engage in a trade  war with its best customer. China’s exports to the U.S. are equal to about 4.5 percent of its GDP. In contrast, U.S. exports to China are equal to about two-thirds of 1 percent of GDP. Although less important to the economy than it was, trade accounts for almost 40 percent of Chinese GDP versus less than 30 percent in the U.S.

America’s decline relative to other countries is an old story. First the Russians were going to leave the U.S. in the dust, then the Japanese. But consider the strong and intrinsic advantages America enjoys. They include being functionally energy and agriculturally independent, having more favorable demographics and a consensual society. Drug dealers still prefer suitcases full of dollars, not yuan, and global investors still seek Treasury bonds as a safe haven in times of crisis.

President Trump’s trade moves may temporarily roil U.S. markets, but there is no need to panic or bet against the United States.

Originally Published: Apr 7, 2018

Sham tax ‘reform’ proves more than ever that money talks

Posted on by j.giglio

The imperfect tax bill President Trump signed into law on Dec. 22 is further evidence of the rot in Washington,. The tax bill isn’t about tax reform, it’s about money and influence.

Consider the giveaway known as the carried interest rule. It’s another outrageous example of the powerful getting what they want, as they always do. This will come as no shock to anyone over the age of five.

The term “carried interest” derives from the share of profits that 12th-century ship owners and captains were given as an interest in the cargo they carried, usually a 20 percent commission to provide an incentive to keep an eye on the cargo.

Today carried interest is the 20 percent of profits from their funds with which private equity firms, venture capitalists, and real estate partnerships compensate themselves. These proceeds are taxed at a capital gains rate of 20 percent, about half the top individual income rate, which will fall to 37 percent under the new tax law. Critics argue that this money is effectively income and should be taxed at individual income tax rates. The constituents for the deduction argue that removing the incentive would reduce entrepreneurial risk taking.

The reason for the loophole’s survival comes down to campaign contributions to key lawmakers and intense lobbying to maintain the favorable tax treatment. As Gary D. Cohn, director of the White House National Economic Council said, “The reality of this town is that constituency has a very large presence in the House and the Senate and they have really strong relationships on both sides of the aisle.”

The American Investment Council, a Washington trade association that represents private equity firms, reported some $970,000 in lobbying expenditures for the first three quarters of 2017. This is in addition to the smart investment made by way of campaign contributions targeted to key lawmakers. For example, employees of the private equity firm The Blackstone Group L.P. contributed $212,000 to Senator Majority Leader Mitch McConnell in 2017 alone. In turn, politicians serve their contributors by protecting the carried interest preference.

Private equity firms have the means and vanity to get what they want. It is further proof that money is the mother’s milk of politics and that big money gets its way in Washington, D.C.

During the presidential campaign both President Trump and Secretary Clinton gave a pitch-perfect populist performance, wanting everyone to know that they were militantly opposed to this loophole, a form of welfare for the wealthy. When a politician says something like that, sports fans, try inserting a negative and you are likely to hit pay dirt. Political rhetoric is as unrelated to the truth as an advertising campaign.

The power of money seems eternal. Politicians love it like a child loves Christmas, and all are working hard to avoid reading their own political obituaries. Knowledge that it has always been this way is no consolation.

They tell pro forma lies to the public and the media, and then begin to believe what they read. Not laying blame, just putting truth into words. So House Ways and Means Committee Chair Kevin Brady (R. Texas), with a truly magnificent smile, said on the Morning Joe talk show “carried interest, we can talk about that for the next hour if you like, but for most Americans they could care less about that.”

In its pursuit of a free lunch, the public is often a bit too eager to accept the things they want to hear at face value, even though they should know that truthfulness is not a long (or short) suit for elected officials, who spin untruths with the same gusto young Abraham Lincoln supposedly split logs.

You can’t bring about change by wishing upon a star. You can run with that.

Originally Published: January 6, 2018

 

Hero CEOs need to look in the mirror about economic inequality

Posted on by j.giglio

In a strong rebuke to President Trump’s response to the recent violence in Charlottesville, Virginia, a chorus of masters of the universe, titans of industry, and corporate rock stars lined up like soldiers to take head shots at the president, criticizing him by name for his handling of the violence.

Many were so appalled by what the president did and did not say that they resigned from his business advisory councils. The media certainly milked it for all it was worth, some characterizing senior executives as heroes for speaking truth to power.

Nothing stokes cable ratings like a sustained campaign of outrage that feeds into the attention deficit disorder of the American news cycle. But perhaps some of that outrage should be directed at the crusading corporate giants themselves.

Perhaps it is only a matter of time before chief executive officers show the same passion and anger when it comes to speaking out against the economic inequality that has risen so sharply since the mid-1970s. For example, CEOs could voluntarily take less compensation and use their concentrated political and economic power to support a national living wage.

After all, the Gods of Fortune have continued to smile down upon corporate executives with outsized payoffs. The average CEO earns something close to 300 times the pay of the median American worker, whose real wages have been stagnant for decades. This ratio is up from roughly 40 to 1 in 1980. In contrast to this growing gulf between the haves and the have-nots, the ratio of CEO to average worker pay in Japan is 16 to 1. In Denmark, it is 48 to 1 and in the United Kingdom 84 to 1.

CEOs do not have to worry about saving for retirement or their children’s college education as they enjoy expensive perquisites from country club membership to second homes a little smaller than Rhode Island, to the personal use of corporate jets.

Is it any wonder that the public is mad as hell? They make the connection between business executive pay and growing economic inequality.

A few decades ago, executives were paid mostly in cash. Much of the story of executive compensation in recent decades comes down to two words: stock options.

To align incentives between shareholders and management, boards of directors use equity compensation by granting stock options. Today, they comprise two thirds of the typical executive’s pay.

Stock options give the executive the right to buy a company’s stock at a predetermined price sometime in the future. If share prices rise above the negotiated strike price, the executive stands to reap significant gains. If the options become worthless, the CEO breaks even, having paid nothing for them.

The result is a win-win for executives, especially when supplemented through the use of stock buy backs and the labyrinthine of accounting shenanigans such as excluding depreciation and amortization in calculating earnings for performance based compensation.

The stock buyback binge of $4 trillion since 2008, much of it with borrowed money thanks to low interest rates since the Great Recession, has resulted in firms reducing the number of outstanding shares by which profits have to be divided. So the share repurchases lift per-share earnings, improving a key metric for determining CEO compensation.

Solutions to the CEO compensation issue include tightening the cap on tax deductibility of CEO pay and disallowing deductions for excess salary, stock options, and perks. Fat chance, these reforms will happen when the positions of too many politicians closely reflect those of their big money donors.

Cynicism about those in positions of power seems to be confirmed afresh each day by the latest tweets, pandering, and headlines. As a general rule, assume the worst about elected officials and the thinly veiled plutocracy. That way you will not be disappointed.

Originally published: September 12, 2017

Tax code needs lower rates, broader base

Posted on by j.giglio

Washington is again engaged in a tax debate. Each year, lobbyists and political contributors persuade politicians to insert new loopholes. As a result, the four million-word, 74,000-page Internal Revenue tax code is riddled with special interest provisions.

The mind-boggling complexity of the tax code is a money machine for lawyers, accountants, and huge corporations. Americans spend six billion hours and $10 billion annually preparing and filing their income tax returns.

This is the exact opposite of the broad tax base with low rates that would best serve the American people. A broad-based income tax is one in which whatever you earn is taxable. Taxpayers lose their deductions but get a simpler and fairer code, and much lower rates. If the tax rate is low, economic decisions will be based on business and personal considerations, not tax implications.

In April, the Trump administration released a broad outline of proposed tax changes that would reduce the corporate tax rate from 35 percent to 15 percent and include a one-time tax of 10 percent on overseas profits designed to bring the estimated $2.6 trillion stashed abroad back to be invested in the United States.

The plan cuts individual tax rates and reduces seven brackets to three. The top rate falls to 35 percent from 39.6 percent and the lowest rate starts at 10 percent. The plan also doubles standard deductions. It does not specify to which income levels each bracket would apply. It also eliminates the federal income tax deduction for state and local taxes, except for mortgage interest and charitable contributions.

The Trump administration promises that 3 percent annual GDP growth would make up for potential revenue losses. On the other side, Democrats argue that the White House and Republicans would exacerbate income and wealth inequalities by throwing money at the rich at the expense of the middle class.

Republican deficit hawks argue the plan will add trillions to the national debt over the next decade. They argue that deficit-financed tax cuts usually impede growth. For example, increased government borrowing drives up interest rates and reduces the financing available to the private sector. They want revenue neutral reform under which tax cuts are offset by closing loopholes.

Among the risks is that Americans will not spend the money they get from tax breaks, instead saving it or using it to pay down debt. Corporations could also decide to use the money to increase dividends, juice up executive pay and generate a fresh wave of mergers and acquisitions. 

Tax cuts are often confused with tax reform, which restructures the code to make it simpler, fairer, and more efficient. Cuts are easier than reform, which is a tough sell because there are winners and losers.

The United States needs a completely new tax code; one that reduces rates; broadens the tax base; and eliminates back door spending in the form of exemptions, exclusions and tax credits.

This kind of reform was accomplished in the Tax Reform Act of 1986, which reduced the top marginal rate for individual taxpayers from 50 percent to 28 percent, eliminated about $100 billion in loopholes, and taxed labor and capital at the same rate. It also cut the basic corporate tax rate from 48 percent to 34 percent and eliminated many corporate deductions.

But since then lobbyists and political contributors have succeeded at restoring tax breaks, which narrowed the base. As a result, rates had to increase to generate the same amount of revenue.

What needs to happen is clear, but don’t hold your breath waiting for it to pass. Congress and the White House are distracted by the investigation into possible ties between former Trump aides and Russia, and the Senate healthcare debate could drag on through the summer.

Meanwhile, momentum for major tax cuts or major infrastructure investments has stalled. This time next year, leaders in Washington will likely still be arguing about tax reform.

Originally published: June 10, 2017

Rich getting richer is no accident

Posted on by j.giglio

The upward redistribution of income in the United States over the last four decades has been well documented. Many argue there is little we can do about forces like globalization, accelerating technological change, the transformation to a service economy, taxes and government programs that have put downward pressure on wages for the ordinary American worker, but there are steps government could take to address these changes.

Economic inequality is the result of conscious policy choices. This issue is especially relevant in light of President Trump’s new tax blueprint and the health care overhaul recently passed by the House of Representatives.

From the 1950s to the mid-1980s, the richest 1 percent of Americans earned a touch under a 10 percent share of the national income. By 2012, that number was about 20 percent.

Overall wealth is even more concentrated than income. In 2012, the top 1 percent of the population controlled about 42 percent of the wealth.

The promises many politicians make about material comforts are duplicitous, since only a small minority have access to such comforts and they come at great expense to the majority. Working-class Americans feel left behind, stewing in their resentment of economic hardships and being forced to make daily choices between things like buying gas or putting food on the table.

They have come to believe government is run by and for the rich, who are used to getting their own way and face none of the daily struggles they do. Much of the American working class lives in a provisional world where making it to the next day is a victory.

Average Americans were cut adrift from their former lives, given little help to build new ones and disparaged as a basket of deplorables. All this was largely happening outside the view of the media and the political class.

You don’t have to have the psychological acuity of a self-important academic to understand the ironclad rage of the working class, which is proving to have the shelf life of radioactive waste. Is it any surprise that when powerless to determine their own destinies and achieve the American Dream, they backslide into anger and resentment?

This was not supposed to happen. In the optimistic period after the fall of the Berlin Wall in 1989 and the collapse of the Soviet Union in 1992, free-market capitalism, with its invisible hand miraculously transforming selfishness into common good, was seen as the way to usher in a period of prosperity and peace.

More recently, one event after another has exposed this utopian narrative. The 2008 financial earthquake revealed fault lines running through the economic system that cost millions of Americans their jobs, homes, life savings and hopes for decent retirements. It unraveled communities, especially those where manufacturing jobs have disappeared and the well being of the working class has been marginalized by circumstances beyond their control. It was a cataclysm far worse than any natural disaster.

Troubling results from growing inequality include dampened economic growth, reduced social mobility, and a corrosive impact on democratic institutions. Another important consequence is weak consumer demand to support the economy.

It would be wise to recall how Henry Ford simultaneously created transportation for the masses and drove economic growth. He furnished consumers with reasonably priced cars while raising wages for his own workers to make the car affordable to them.

Rather than raising the federal minimum wage, a modern version of Ford’s approach would be to expand the earned income tax credit to supplement low-wage workers’ incomes, which would mean the government paying Americans whose earnings are below a certain level. The program was started under President Ford in 1975, expanded once by President Reagan and again by President Clinton.

President Trump has proposed expanding the earned income tax credit beyond the 27 million working families who currently benefit from it. Such a move would increase demand and economic growth by providing working class Americans with the living wage they deserve.

Originally Published: May 13, 2017

Private firms offer a route to financing infrastructure

Posted on by j.giglio

President Trump and his advisors have identified recruiting private firms as active participants as one solution to the choking shortage of money to finance critical infrastructure needs. He’s right, but maximizing the private sector’s impact will require the administration to think outside the box.

If properly structured, public-private partnerships could tap into billions of dollars of private capital hungering for low-risk investment opportunities that offer decent returns. Piles of dough would be deposited on the front steps of city halls and state houses with the steely hand of the private sector at the tiller, minimizing the need for scarce taxpayer dollars to get infrastructure projects underway.

This means designing such partnerships as overtly commercial enterprises able to demonstrate reasonable prospects for earning reliable income streams large enough to pay consistent returns to their private investors. Not a simple challenge to be sure. But scarcely one that’s beyond the capabilities of Wall Street’s more innovative investment bankers.

Making this work on a sufficiently large scale would require significant rethinking of how government deals with private firms (which may be overdue anyway), since some of these partnerships may require user charges to generate the necessary income streams. If approached creatively, this could actually enhance the likelihood that the activities of these partnerships would meet environmental goals and other regulatory mandates that serve the public interest.

In many jurisdictions, the public may not sit still for turning over the responsibility to operate an infrastructure project to the private sector because they know a business’ natural instinct is to maximize profits. Government could set up some sort of regulatory commission to oversee the project like they do for utility companies. But a better approach might be to set up an independent commercial corporation fully funded by user fees to build, own, and operate the infrastructure asset so taxpayers can participate in any upside from the project.

The state or local government could solicit bids from private investors to buy shares of equity ownership in return for annual dividends paid by the corporation. That brings private equity capital to the corporate balance sheet, reducing the amount of debt capital it has to issue.

In theory, government’s incentive is to offer the most service for the lowest cost. Private investors, on the other hand, have the opposite incentive: to charge the highest user fees the market can bear while providing the least service it can get away with.

But a second class of private investors would likely purchase equity shares in the enterprise mainly because they have a vested interest in assuring better roadways or other transportation infrastructure in the area. These investors might be private utility companies, local banks, and other local firms whose future revenue growth depends heavily on rising levels of economic activity. This class of owners would push for user fees that make sense from a financial standpoint and service levels that meet public needs in a financially responsible manner.

This model may be a reliable way to ensure that, for example, the original cost of every facility is evaluated on a lifecycle basis so customers and operators alike don’t wind up being confronted by expensive ongoing maintenance nightmares. There would also be the certainty of long-term financial commitments so taxpayers never have to deal with orphaned facilities displaced by disruptive technologies such as autonomous ride sharing vehicles.

This model holds owners responsible for sound asset management in a clear and unambiguous way. Opportunities for abuse by limited-life warranties, guarantees written by “paper companies” that melt into the woodwork when push comes to shove, and the kind of multi-party finger pointing that only ends up enriching the legal profession would be minimized. These realities are unlikely to be lost on the relevant parties.

Alternative models based on elaborate legislative mandates might accomplish the same thing. That is, if you believe the necessary legislation could be passed without being riddled with compromises, trade-offs, escape clauses and weasel language.

originally published: April 15, 2017

Weighing the risks in responding to North Korea

Posted on by j.giglio

The Korean peninsula has been divided since the 1953 Armistice Agreement that ended the Korean War. South Korea has always faced a hostile, antidemocratic, heavily armed, nation just an hour’s drive from the capital of Seoul. Now North Korea’s pursuit of a functional warhead that can reach American shores is a major security threat to the United States.

North Korea is a highly centralized communist state with about 25 million people and almost no real GDP growth. According to the State Department, the North’s annual military expenditures average about $4 billion, which accounts for around a quarter of the country’s average $17 billion gross domestic product. China is North Korea’s most important ally, biggest trading partner and main source of food and energy.

Take away North Korea’s nuclear weapons and it would be regarded as a failed state. In contrast, South Korea is a high-tech, industrialized economic power fully integrated into the global economy.

North Korea’s nuclear threat to its neighbors, America’s interests, and the rest of the world has escalated. Earlier this month it fired four ballistic missiles into the sea off Japan’s northwest coast, provocatively landing about 200 miles from the mainland. The country’s missile program has progressed from tactical rockets in the 1960s and 70s to short-range and medium-range ballistic missiles in the 1980s and 90s.

The launches violate multiple UN Security Council resolutions and represent a direct challenge to the international community. The test launch apparently was a response to annual United States and South Korea military exercises that the North regards as a rehearsal for an invasion.

North Korea said its launches were training for a strike on U.S. bases in Japan. It appears that North Korea is on a trajectory to launch an intercontinental ballistic missile capable of reaching the continental United States, something President Trump has vowed would not happen.

The day after North Korea launched the ballistic missiles toward Japan, the United States deployed missile launchers and other military hardware needed to create an anti-missile defense system in South Korea to intercept and destroy short- and medium-range ballistic missiles.

The North’s nuclear weapons and long-range missile development and testing program pose a security threat to the region and the global order. Decades of economic sanctions, diplomacy, and sweet words have failed to topple the neo-Stalinist hermit kingdom or force a rollback of its nuclear and missile programs.

The underlying assumption behind economic sanctions is that North Korea’s leaders care about their country’s economy and the deprivations endured by their civilian population. They understand that in chess, the pawns are always sacrificed first.

Tightening the economic noose around North Korea bought time without using American muscle, but at the cost of delaying hard decisions and creating an unacceptable risk to America’s national security. In turn, the breathing space gave North Korea time to develop its weapons program. It’s wise to remember soft power is irrelevant unless underwritten by hard power.

The North Korean mess is another example of U.S. administrations kicking the can down the road, then discovering at the 11th hour that they have run out of road. President Trump is dealing with a more dangerous North Korea than did any of his predecessors and has little room to navigate.

His options are limited and all involve risks, trade-offs and hard choices. They include continuing to increase the use of sanctions and hoping the cumulative effect will work, engaging in high-pressure diplomacy with China to rein in its client state, or cutting a deal directly with North Korea. All should be weighed against the risk of a nuclear-armed North Korea.

Then there is the high-risk military option: a limited surprise attack on this rogue state. Or even allowing South Korea and Japan to develop weapons of mass destruction.

Sadly, the most likely outcome may be learning to live with a clear and present danger to the United States and its allies in northeast Asia

Originally Published: March 18, 2017

Put a money-back guarantee on infrastructure work

Posted on by j.giglio

Americans are told that the most serious problem facing the nation’s transportation infrastructure is a lack of money. Perhaps people would be willing to pay more if they receive a money-back guarantee in return.

Today’s roadway funding depends primarily on motor-vehicle fuel taxes and state and local appropriations. But federal fuel tax revenues no longer keep pace with needs because of the self-serving assumption that it’s become politically impossible to “raise taxes.” Everyone wants better roads and bridges, but almost no one wants to pay for them.

All this makes finding adequate funding to rehabilitate the nation’s highway system, add new lanes and highway corridors a major challenge. Between 2005 and 2015, there were two five-year federal surface transportation reauthorization bills and 34 short-term funding extensions. To maintain the committed level of funding, the federal government was forced to raid the General Fund for an average of $10 billion per year to supplement the dwindling Highway Trust Fund

Even so, Congress struggled to find the revenues to support a long-term bill without increasing the fuel tax, which has remained at 18.4 cents per gallon for cars since 1991. Congressmen have moved in unison to avoid dealing with an increase in the federal fuel tax.

In real terms, fuel tax revenue is actually projected to decline as the nation’s motor vehicle fleet becomes more fuel efficient. It is safe to say that the fuel tax is like a marriage that dies long before divorce papers are filed.

At the same time, state and local government budgets are increasingly burdened with funding demands for education, fighting crime, better security against terrorist threats and a host of other deserving services. Roadway funding inevitability gets shortchanged which is relatively easy to do, since it takes a while for the impact to become apparent.

A new U.S. Department of Transportation “conditions and performance” report estimates that there is a $926 billion backlog of needed highway and transit infrastructure projects, and that many more billions more will be needed to keep up with demand over the next 20 years. The congressionally mandated biennial report identifies an $836 billion highway and bridge backlog.

The public can quibble about the size of these numbers, just as maritime historians do about the size of the iceberg that sank the Titanic. But their magnitude is so enormous that it scarcely matters whether the estimates are off by 5 or 10 percent. What matters is that the needs are enormous, and the longer you wait to address them, the worse they become.

Senate Democrats just unveiled a 10-year, $1 trillion infrastructure plan that includes $210 billion to repair “crumbling” roads and bridges, but they are vague about how to finance it other than through direct federal spending. During the campaign, President Trump also called for a $1 trillion infrastructure investment that proposed leveraging new revenues and using public-private partnerships to incentivize investment and spare taxpayers from bearing the burden.

At one end of the funding spectrum are people who think the public should pay for it via tolls. At the other end are those who argue that the benefits transportation infrastructure provides aren’t confined to users, so society as a whole should pay out of general tax revenues. Between these extremes lies a range of payment mechanisms.

But for a plan to be accepted by American motorists, it must be perceived to deliver superior travel service with appropriate regard for equity and environmental considerations. One thought is to pair any increase in taxes or user fees with a money-back performance guarantee so customers can rest assure that they will get guaranteed travel-time savings in return for paying for access to surface transportation such as highways. This gives the travelling public confidence that they are getting their money’s worth.

The rapid introduction of intelligent transportation technologies facilitates an efficient way to implement a money-back guarantee. The result would be a dramatically transformed approach to transportation infrastructure.

originally published: February 4, 2017

Make High Earners Save Social Security

Posted on by j.giglio

In these days of presidential interregnum, the American public has seen newspapers and digital media filled with discussions of tax cuts, increased military and infrastructure spending, economic growth proposals, regulatory relief, immigration reform, repealing Obamacare, reducing the national debt, keeping deficits on a short leash, draining the swamp of political and economic favoritism and other domestic traumas.

Social Security, however, has received little attention. How the new administration will accomplish all these promises without yielding to the temptation to cut programs like Social Security is an open question. President-elect Trump, who enjoyed the support of working class Americans, promised during the campaign not to cut Social Security. Speaker Paul Ryan said he has no plans to change Social Security, although he has been outspoken on the need for entitlement reform.

Funny how a politician can forget campaign promises after election day. Loyalty appears to be paramount for these folks until all of a sudden it isn’t. Politicians all too frequently forget, to put it in the cant language of the ‘hood, that a deal is a deal.

Social Security is a promise to all eligible Americans that they will not live in abject poverty if they become disabled or when they get old, but the Social Security 2015 Trust report finds that the fund has enough money to pay full benefits until 2034. After that it will collect only enough in taxes to pay 79 percent of benefits.

With the number of workers available to pay for Social Security benefits falling rapidly, there will inevitably be calls for benefit cuts, higher taxes or both. But there is a better way.

Social Securityis not an entitlement program; it is a “pay-as-you-go” system funded by the payroll tax. Companies and nearly 168 million working people pay into it to provide benefits to about 60 million retirees. Each generation pays for current retirees in return for a commitment that the next generation will do the same.

It is the backbone of retirement planning for millions of Americans. Almost a third of retirees receive practically all their retirement income from the system and about two thirds receive the majority of their retirement income from Social Security.

The top 100 CEOs, in contrast, have platinum pension plans. On average, their massive next eggs are large enough to generate about $253,000 in monthly retirement payments for the rest of their lives. Heaven for them, hell for the ordinary American worker.

Dealing with the coming Social Security funding crisis by raising the payroll tax places a significant burden on low-wage workers, especially when the Federal Reserve has kept interest rates so low that their saving accounts are yielding next to nothing, forcing baby boomers to work longer and retirees to rely even more on Social Security income.

An alternative that merits serious consideration is to increase the ceiling on annual wages subject to Social Security payroll taxes, which is currently at $118,500. All annual income above that amount is exempt from the tax, meaning that 94 percent of Americans pay Social Security tax on all their income but the wealthiest 6 percent do not.

Expanding the payroll tax to all earnings above $118,500 would wipe out funding issues. According to Social Security actuaries, it would keep the Trust solvent for the next 45 years.

Since Social Security began, the need for retirement income has risen as life expectancy has increased by 17 years. This is particularly true for top earners who need Social Security the least and whose jobs are less physically demanding than those of construction workers, janitors, etc.

Political leaders have time to decide how to address Social Security’s long-term funding problems. As they contemplate potential solutions, they should consider expanding the payroll tax to include all earnings. It’s a fair way to rescue the program from financial limbo and provide lasting stability without taking draconian measures that would harm tens of millions of hard-working Americans.

Originally Published: December 23, 2016