The Money Chronicles, Volume 16, The Trump Chronicles, Volume 87: National Debt vs. Budget Deficit

It strikes me that we’ve been hearing a great deal about President Trump’s promise to cut taxes.  It’s not a new promise, nearly every politician claims this.  I have to confess some amusement that these promises also claim to improve the economy.  In my last post I spoke about the false promise to close loopholes.

Here I want to talk about the difference between the national debt and the budget deficit. Alas, most of the time these two things are talked about as if they were the same thing. They’re not.

By way of explanation let me start with debt and deficit in our own households. Many of us owe money to someone. If you’re making payments on your home, or car, or credit cards, you have debt. You’ve convinced someone to lend you money to pay for something you can’t pay cash for. Your lender (likely a bank) trusts you to pay both the money and interest over time, and if you can’t they can take whatever they financed. Or, if you borrow money on a credit card and can’t pay that back, they can report you to a credit bureau and make it harder to borrow money in the future. The government borrows a lot of money. As I write this the government debt is $20,453,245,142,792.62. If you’re keeping track it’s over $20 trillion.

In other words, our government owes $20 trillion dollars. Fortunately 68% is owned by Americans. Every time you give one of your grandchildren a savings bond you own part of the national debt. You lend the government money and the government pays you back with interest after a fixed time.

That’s the good news. The bad news? While we own 68% of our debt, the rest (32%) is owned by other nations. As I write this, China and Hong Kong own 6.9%. That may not sound like much but 6.9% of $20 trillion dollars translates to $141,127,391,485, or a shade over $141 billion (I hope I have the math right). If they want, they can demand immediate payment and cause a great deal of panic in our markets.

But that’s not what concerns me the most. I’m more concerned over the need to continue to borrow money. Every year the our government spends more money than it collects, we need to borrow money to close the deficit. If we translate this into our household budgets, it’s like going to your bank and telling them that you need a loan because last month you spent beyond your means. Not only that, but you expect to come back next month, and the month after that, and…well you get the point. At some point your bank (or for that matter, your loan shark) will simply refuse to lend you more money, believing eventually you’ll just give up and stop trying to repay your debt. But if you’re the United States you can continue to print savings bonds without limit. Unless something happens to change this trend there will be a limit: there will be a point where people (and nations) will begin to distrust our ability to pay back the loans and will stop lending money.

It doesn’t have to be like this. Many of us have seen our government run budget deficits for so long that it seems like a given. But it’s not. You can read the numbers here but the last few years of the presidency of President Bill Clinton we actually ran a surplus and had the opportunity to pay down the debt.

As I write this President Trump and Congress are rolling out a tax plan that will cut taxes (and revenue) but will likely dramatically increase the deficit and debt.

Since we are currently led by a President who promises America First it’s odd that his tax policy will make us increasingly debtors of other nations.

The Money Chronicles, Volume 15. The Trump Chronicles, Volume 86: Let's Look at Tax Brackets

In my last post I spoke about President Trump’s promise to reform taxes by closing loopholes and make filing your taxes easier, perhaps even on a postcard.

But that part of tax reform matters only to those taxpayers who itemize. If you file a tax return you have the choice of taking the standard deduction or itemizing. Here’s my layman’s explanation: Your employer is required to send you a W2 form that shows how much money they paid you the previous year. That’s your gross income. You now have to choose whether to take the standard deduction or itemize your deductions.

Currently the standard deduction is $6,350 if you are married but filing separately from your spouse. It’s $12,700 if you and your spouse file jointly. If you’re single and head of your household it’s $9,350. You deduct this number from your gross income and it becomes a taxable income. According to the Tax Foundation, 68.5% of filers do this.

But if you’re in the early years of an expensive mortgage, if you donate lots of money to charities, or if you’re eligible for some of the countless other deductions, you may want to itemize. If these deductions total more than your standard deduction it makes sense to itemize. From the Tax Foundation 30.1% of taxpayers do this. OK, if you’re doing the math that leaves 1.6%. Those are taxpayers who don’t make enough money to pay anything in taxes.

This brings us to the end of part 1: determining your taxable income. Part 2 determines how much tax we pay on this income. But what percentage do we pay? When the government began collecting income taxes in 1913 it was determined that the wealthy would pay a higher percentage of their income than poor people: they created tax brackets. They specifically did not institute a flat tax (where everyone would pay the same percentage of income), arguing that those with higher incomes could afford to pay a higher percentage than those with lower incomes. From time to time politicians suggest a flat tax and I wrote about it in 2011.

Currently we have 7 tax brackets, and those in the highest bracket (39.6%) report a taxable income of $418,400 or higher. President Trump proposes only 3 brackets, and lowers the highest rate from 39.6% to 35%. And yet he claims this won’t benefit him or the rest of the 1%.

Simply put, it’s not true. In my last post I argued that his promise to close loopholes won’t happen and in this post I’m claiming that lowering the tax rate for the wealthiest will benefit only themselves.

More later.

The Trump Chronicles, Volume 85. The Money Chronicles, Volume 14: Let's Look At Tax Reform

While on the campaign trail President Trump spoke often about the need for tax reform. He promised lower our taxes.

From our earliest days we Americans have yearned for tax relief. Benjamin Franklin (1706-1790) is widely believed to claim that the only things we can’t avoid are death and taxes.

As a hospice chaplain I tell you how hard we try to avoid both. I’m not normally a fan of the “good old days” but there was a time when many Americans saw paying taxes as a form of patriotism. You can see a funny Donald Duck video from 1943 that tied taxes into support for World War II.

But the IRS 1040 form from 1943 was only 4 pages long. In fairness, the 1040 from 2016 is only 2 pages long, but the instruction book for the 1040 is 106 pages long. Clearly paying taxes has become much more complicated.

Republicans promise to reduce our tax returns to a postcard. But here’s the thing: it’s already easy if you don’t care how much you pay. Filing taxes requires to do two things: finding the difference between gross income and taxable income, and finding out how much we owe based on our taxable income.

Most of us (myself included) hire someone to do our taxes (and if you live in San Diego I strongly recommend Mark Young). But we need to hire someone to find the difference between gross income and taxable income. We can deduct from our gross income the money we spend on charitable donations, interest on home loans, and countless other things. Simply put, the government uses deductions to encourage certain behaviors. The government wants us to donate money, purchase homes, etc, and they encourage us to do these things by giving us a tax break.

But if you don’t care about this, all you need to do is declare your gross income as your taxable income. If you do this, all you need to do is look on a simple table to see how much you owe and pay it. This would take less than a minute.

And when politicians promise to “close loopholes” they are promising to eliminate deductions and make your gross income closer to your taxable income. But every loophole has a lobbyist whose salary depends on keeping that same deduction. Do you want to eliminate the home mortgage interest deduction? Good luck. You’ve declared war on the National Association of Realtors. Do you happily donate money to your local charity? Good luck. Expect pushback from your church, the Salvation Army, the Red Cross, the San Diego Blood Bank, and well, you get the point.

In fairness President Trump has promised to keep deductions for mortgage interest rates and charities. But look over your last tax return and see how many deductions you were able to take. If the only difference between your gross income and taxable income came from these two places, how much more is there? Are you willing to lose those deductions?

I don’t think so and I don’t think President Trump can pull this off.

There’s much more to this and I’ll be writing more. Stay tuned.

The Justice Chronicles, Volume 28. The Money Chronicles, Volume 13: At Last Kansas Can Begin Its Recovery

On October 31, 2014 I blogged about how Kansas Governor Sam Brownback signed into law a massive state tax cut. In that post I spoke about how Governor Brownback (and many others) hitched their wagon to “supply side economics.” Simply put, he claimed that if he made massive tax cuts (for both individuals and business) they would put massive amounts of money “back in the pockets” of individuals and businesses. They would then spend that money and so stimulate the economy that even reduced tax rates would bring in more money and put the state on Easy Street.

Unfortunately, supply side economics behaves much like the Atkins Diet: it appeals not because it works, but because it sounds good. Telling overweight people that they can eat bacon omelettes and still lose weight feels just too good to pass up. And telling Americans that they can pay less in taxes and live on Easy Street does the same thing.

OK, did it work? The Kansas Legislature didn’t think so. This week they passed a bill to repeal the tax cuts, and overrode the Governor’s veto. Interestingly enough the legislature is controlled by Republicans.

The tax cuts did nothing except bleed the state dry. Hardest his were Kansas’ 286 school districts. The Kansas State Court of Appeals demanded that the state provide adequate funds for public schools last March.

Even conservative Republicans recognized they needed to bring in more money to educate their children and grandchildren. Even they knew that Kansas’ future depends on an educated citizenry.

I’m writing this because I care about children in Kansas, but I also care about children in all of America. President Trump has proposed a tax plan that also massively cuts taxes and revenues.

I guess he thinks he can do the same thing and get a different result. The rest of us call this dysfunctional thinking.

I pray Congress don’t make the same mistake Kansas made.

The Money Chronicles Volume 12: Managed Care is Often Unmanageable

Last month Nancy’s father suffered a stroke. He’s 96 and in otherwise remarkable health and his recovery is optimistic. It’s been an emotional roller coaster that happens to nearly every family at one time or another, and God knows I’ve been witness to it thousands of times in my role as a hospice chaplain.

In the last four weeks I’ve also found there is a learning roller coaster to this. We purchase insurance for all sorts of things: our life, our homes, our cars. But we also buy insurance for our health and that’s an entirely different equation.

We buy car insurance in the hope that we’ll never need it. In the off chance we do need it, we’re pretty certain what it will do. If we wreck the car our insurance will fix or replace it. Case closed. Same with homeowner’s insurance.

But health insurance is a different animal altogether. It’s fairly expensive and most of us don’t pay the entire premium ourselves. Because of a series of random events, we expect our employers to pay the lion’s share and they do. Before the passage of the Affordable Care Act millions of Americans could not afford health insurance. If they got sick or injured they showed up in a hospital emergency room and made a horrible bargain: fix me and hope I can repay you.

If you couldn’t, it was a lose/lose situation. The hospital wouldn’t get reimbursed for the care they provided and sued the patient. The patient, who couldn’t pay, filed for bankruptcy and destroyed their ability to ever borrow money again. Result: the hospital needed to find another way to achieve financial solvency and the patient spent his life stuck in a cycle of poverty.

Bottom line: if you didn’t have insurance you owed whatever the hospital claimed you owed with almost no ability to negotiate.

But if you did have insurance you were gold. Your insurance company would pay for whatever happened to you. You may have a small copay but it’s at best a small percentage of the cost of caring for you.

And here’s what you didn’t know: your insurance company has the ability to negotiate how much they pay. They will pay less than the cost of caring for you because the hospital can recoup the difference with the individuals who can’t negotiate.

I’ve written this article because we received a bill from Scripps Memorial Hospital for Al’s stay there. He suffered his stroke on the evening of Saturday, April 18th. We brought him to the emergency room that evening where they admitted him. He stayed there until the afternoon of Wednesday, April 22nd.

We were pleased with his health and pleased with the staff and have nothing but nice things to say about the staff at Scripps Memorial. We weren’t sure how much it would cost but we all agreed it was worth it.

A few days ago we got the total. The total cost for his stay was $49,773.00 and the copay was $700.00. Truthfully, that seemed like a good deal for us. The copay was 1.4% of the bill. We were pleased with the insurance.

But there was another line in the bill. Turns out the insurance company didn’t pay $49,073.00. They paid $11,536.56. They have enough patients that they can play hardball with the hospital and negotiate a reduced rate.

In the end it pays off for everyone. The hospital is able to be profitable receiving $11,536.56 from the insurance company and $700.00 from Al (for a total of $12,236.56). Truthfully it’s a win/win/win. The hospital can live with a reimbursement of $12,236.56, the insurance company can afford to pay $11,536.56, and Al can afford to pay $700.00.

But for someone in the exact same position without insurance, they don’t have the option of paying $12,236.56. Their bill is $49,073.00 and the hospital expects every dime. If it’s not paid right away it goes to a collection agency. These patients and families are in an untenable situation: they are willing to pay whatever they can but they just can’t pay enough.

The passage of the Affordable Care Act provides health insurance for many who had been left outside. There are still those who gamble against needing health insurance but that number is much lower. To the extent that many candidates for the Republican nomination promise to repeal the Affordable Care Act, we can assume that they choose loose/loose over win/win/win.

As Al’s son in law I’m grateful to be part of the win/win/win.

The Money Chronicles Volume 11: Was This a Scam?

Nancy and I each drive a Toyota Prius. I bought mine in 2006 and she bought hers in 2011. A few days ago I got a call from Toyota asking if we wanted to trade in Nancy’s car. The teaser was this: they would sell us a comparable 2014 Prius at about the same monthly payment and we would get a car 3 years newer. I declined because Nancy is happy with her car and we’re looking forward to paying it off. But it got me wondering if this is a good deal or not.

This is where the math nerd in me kicks in. In the days following this I began to wonder if this would have been a good deal for us. Truth be told I’m a child of parents who grew up in the Great Depression and I still think of debt as a necessary evil. I’d be most happy if I didn’t have to pay off our home or our cars. Still I found it a fascinating question and I tried to crunch the numbers. It wasn’t easy because the auto world changes dramatically. The hot new feature of a few years ago is standard now. Think of anti-lock brakes and airbags.

Still, I started looking into the numbers. When we bought Nancy’s car in March of 2011 we paid $33,070.20 and financed the whole cost at 2.9% interest (her old car was so old we donated it to the San Diego Zoo). It was a five year loan with a monthly payment of $550.52.

Had we taken the offer we would get a comparable Prius for $30,930. It’s essentially a wash as the cost increased by only a little over $200. Interestingly enough the interest rate has decreased from 2.9% to 0.9%. Had we done this our payment would have been $527.42, a savings of $23.10 per month. At face value that sounds like a good idea: We pay less money each month for a newer car.

But wait: If we keep Nancy’s car we can pay it off in March 2016. But if we get this newer car we’ll be paying it until October 2019. That’s 3 1/2 years longer to have a car payment (assuming Nancy’s car lasts that long, and since my car is 8 1/2 years old and has nearly 189,000 miles on it, we can). What if we sell Nancy’s car now and use that money for a down payment on a 2014?

Glad you asked. The current blue book value of Nancy’s car is a little over $17,000. Let’s use that as a benchmark. OK, we sell Nancy’s car and use that as a down payment on a 2014. We still owe $9144 so we’ll need to deduct this. Our downpayment goes down to $7,856. If the car is $30,930 and we put down $7,856, the finance price goes down to $23,074. I’m not sure Toyota will finance this, but my Credit Union will finance the car for 1.99%. On a five year loan that makes our payment $404.34. By the way, if we did get the 0.99% rate from Toyota, our payment would decrease to $394.30

Thanks Toyota, but we think we’ll pass.

The Justice Chronicles Volume 14, The Money Chronicles Volume 10: Happy Birthday Federal Reserve

Hallmark missed this, but yesterday was the 100th anniversary of the founding of the Federal Reserve, sometimes abbreviated as the Fed. The Federal Reserve is a confederation of 12 banks located around the country, and they are “the banks of last resort.” In other words, during times when the economy is in recession or doing poorly, banks can borrow money from the Federal Reserve to stay solvent.

This didn’t come out of nowhere. There’s an excellent article at NPR’s Planet Money blog. The article begins with the San Francisco Earthquake of 1906. Insurance companies in England were paying huge claims and so much money was leaving English banks that they clamped down the money flow to American banks. This led to some American banks failing, or not being able to pay their bills. Since there was no FDIC or bank insurance, any money deposited in those banks was lost.

If this wasn’t bad enough, people who had their money in safe banks began to panic and tried to withdraw all their money. This led to bank runs, and eventually to the Panic of 1907. The federal government had no power to do anything, and the panic was ended only when J.P. Morgan gathered other wealthy bankers and put up the money to keep the American economy going.

Senator Nelson Aldrich (R-RI) saw this and realized that panics were become too frequent and we could not depend on the wealthiest people to bail out the entire country. He introduced legislation that year to create the Federal Reserve. It took a while to pass both houses of Congress, but it did and on December 23, 1913 President Wilson signed it into law.

In addition to being the bank of last resort for troubled banks, the Fed also set the interest rate at which they will lend, and this sets the standard for the interest rate banks lend to other banks. During times of inflation the Fed will increase the interest rate to “tighten up” the money supply. During times of recession (as happened in 2008) they will lower interest rates to encourage borrowing.

There are those who oppose the Fed and they do this for two reason. First, they say that the board of governors (who govern the Fed) have too much power. Since they essentially set interest rates for much of the money flow in the country they control too much of what happens in the economy. They also believe that since banks know they will be bailed out, they can be irresponsible. If the banks keep all their profits and don’t have to worry about their losses, they have no reason to be careful.

I understand both of these arguments but in the final analysis I think we’re better off giving the government the flexibility to guide the economy.

The Money Chronicles Volume 9: Whatever Time Warner Calls It, It's Not Customer Service

Like many households, we get our TV content through cable, namely Time Warner Cable. We’ve been a customer of Time Warner for about 20 years. About 14 years ago we upgraded to a larger channel package, and about 10 years ago we added high speed internet. During that time the price has gone up, but we’ve made no changes in our plan in 10 years.

Last week got a letter that said our “special promotional rate” is ending and our rates will go up about 28%. But…the good news is that because we’ve been such good customers, our increase will be only 21%.

As they say on ESPN, “C’mon man!” Do they really think this is anything more than a 21% increase in our cable bill? Do they really think I’ve been enjoying a temporary promotional rate for 10 years?

We have several options other than Time Warner Cable, but I like the high speed internet and want to keep our email addresses. So the other night I did a live chat. I’m posting it here:

Nyla> Thank you for contacting Time Warner Cable. At the end of our chat you will be given the option of taking a brief sturvey. My name is Nyla and I would be happy to help you. Hi Tom! Let me access your account detaills for the same. Please allow me a moment.

Tom> Thank you Nyla. I currently get both my cable TV and my internet through Time Warner Cable. Right now I pay $96.00 per month for both. If I cancel my TV but keep the high speed internet, how much would that be?

Nyla> I understand your concern. Please allow me a moment. I see that you are having the bundled service at the discounted rates and you are planning to switch to Internet only plan in the near future. I am afraid as I do not see any new offer that can be set up on your account at his moment. However, I found a good deal of $99.99/mo for 12 months promotion. It includes all the three services as of now. I am afraid, I do not have the code to add that promotion and therefore, I am unable to confirm whether your account is eligible for this promotion. If you want I can provide you the phone number to check the eligibility and check other details available for you. Also, please note that currently your account is on extended promotion.

Tom> Yeah, that doesn’t really answer my question. How much would it be for me to get only the high speed internet access and nothing else?

Nyla> The normal rates for this bundled services are $105.99 and you are getting that at a discount of $26.00 effectively making it $79.99. As your services are bundled I cannot get the actual rates.

Tom> Why not?

Nyla> However, you are having the Standard Internet on your account. The normal rates for that alone currently are $54.99. As two services are bundled and therefore they are at discounted rates. I cannot unbundle them to see the individual charges for each.

Tom> Does that mean that if I cancel my TV cable and keep internet access, my monthly bill from you is $54.99?

Nyla> I can help you with the number to see what you might be eligible for. No.

Tom> OK, then what does it mean?

Nyla> I cannot unbundle the services to get just the Internet prices for you. There are different types of bundles available for different areas, different customers according to different plans. Due to restricted system access, I am unable to do that.

Tom> Can you connect me with someone who can?

Nyla> I request you to call the Customer Service at 1-888-892-2253. Sure. Sorry for the typo.

Tom> I’m talking with you from La Jolla, California. Just out of curiosity, where are you?

Nyla> Tom you have to call the above provided number. We are located in Western India.

Tom> OK Nyla, thank you for your time.

Nyla> Again, my name is Nyla. Thank you for chatting with Time Warner Cable. We value you as a customer and are here to assist you 24 hours a day, 7 days a week. If you would like to take a brief survey, please click on “Close” and the survey will load.

Does it appear to anyone else that Nyla isn’t really customer service, but a salesperson?

Direct TV, expect a call from me.

The Money Chronicles, Volume 8: Reflections on Black Friday

Today is the day after Thanksgiving, commonly known as “Black Friday.” It’s an important day for many retailers and it’s called Black Friday because it’s the first day of the year many businesses go from being “in the red” (debt) to being “in the black” (profit). It’s no understatement to recognize how much energy they put into making sure as many of us spend as much money as we can.

They use a number of strategies, some obvious, some not so obvious. We’re all familiar with two of them: discounts and expanded hours. If you were willing to get in line early enough you can save money.

But it’s the less than obvious strategies that interest me and they are right under our noses. Some of the media is picking up on this, but at least a few major retailers inflate the price and then discount it to give the appearance of savings. If a flat screen TV set was $300 but today is discounted to $200, was it really ever $300? I think most consumers are so wowed by the idea of saving $100 that they don’t look to see the actual retail price.

In seeing the ads, do you ever notice the phrase “While Supplies Last?” It’s the reason people are willing to stand in line for hours. A limited supply creates several advantages for retailers and I’m amazed at how many of us fall for it. It creates a frenzy that shouts out the voice that asks “Do I really need this?” Instead we wait in line, race down the isle, and grab it before someone else does. We’re already seeing news stories about fistfights in stores as otherwise smart and well meaning people turn into crazed lunatics. And for the people who didn’t get in line early enough and missed out? The retailers know that we aren’t willing to come home empty handed and they have lots of other (and more expensive) merchandise for us to purchase.

A few years ago one on Nancy’s colleagues told me that all conflicts come down to three categories: resources, feelings, and values. These conflicts are born out of scarce (and intentionally created) resources. By telling us that there are only a few products available, they tell us that we have to throw caution and good sense to the wind, and get it now.

So let’s not do that. Let’s do exactly what they don’t want us to do: take a breath, pause, and ask: Is this really worth all the frenzy? Will this make as much sense next June as it does now? Is it possible to be happy by wanting less than having more?

I think it is.

The Money Chronicles, Volume 7: Reflections on the 47% vs. the 53%

Last week a video surfaced of Governor Romney speaking at a recent private fundraiser. This is what he said:

There are 47 percent of the people who will vote for the president no matter what. All right, there are 47 percent who are with him, who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it. That that’s an entitlement. And the government should give it to them. And they will vote for this president no matter what. … These are people who pay no income tax. My job is is not to worry about those people. I’ll never convince them they should take personal responsibility and care for their lives.

I lifted this quotation from Yahoo; please tell me if it’s not accurate.

Several things trouble me about this quotation, and I’ll list a few here (and perhaps add to it as I think more about it).

  • Governor Romney was speaking at an event where he assumed everyone there supported him and he didn’t think it was being taped. It’s an old adage that character is developed when we think nobody is watching us. This quotation is dramatically different from what he says in public and it tells us a great deal about his character.
  • The 47% draw from a large and diverse group of people, and Governor Romney wants to put them all in one camp: they are dependent on the government, they believe they are victims, they believe someone else is responsible for their care, and they are entitled to health care, food, and housing. The meaning is clear: they are doing nothing productive and expect the 53% (of whom I belong) to care for them.
  • They believe that they only way they can keep this cushy arrangement is to vote for the President and nothing will convince them to take responsibility for their lives.
  • Lastly, it is not his job to to worry about these people.

OK, so who are these 47%? Good question. Governor Romney acquired this number from the Tax Policy Center; there are those who think it has a liberal bias, but Governor Romney must not as he quotes them. They describe the 47% here:

  • The poor: In 2011 if a family of four made $26,400 or less, their income was too low to pay taxes. To be fair, I can’t imagine them putting food on the table, let alone paying taxes. They don’t sound like freeloaders to me, and I’d guess they’d give anything to make enough money to pay taxes. They are half of the 47%: I’m guessing they’re not heartened to learn that Governor Romney’s job is to not worry about them because they are freeloaders.
  • The elderly: If you and your spouse receive less than $32,000 in Social Security benefits ($2666.67 per month) or other income, you don’t pay taxes. If you live on that much money and pay taxes, you have a point. Otherwise, move on because these are people who worked hard for their entire career, paid into Social Security, and don’t have pensions, 401(k)’s, or 403(b)’s and they are not freeloaders.
  • The disabled: Again, if you are disabled and poor, you don’t pay federal taxes. Think this is a free ride? Talk to someone who depends on this. Ask him or her if he or she would rather be able to work and pay taxes. Nearly 100% would like to be productive.

You can’t read this blog without knowing my political views. But let’s face it: Mitt is choosing the path of pandering to the wealthy. Vote for him at your own risk.