Paul Ryan's Budget Arithmetic Makes no Sense

Leaving aside for the moment the petty let's be children and see if we can grind the government to a halt game going on amongst parties and sub-parties, and the fact that both parties blessed every single debt cap increase placed before them in equal measure over the past decade of Bush *2 + Obama * 1/2,

I just want to focus on House Budget Chairman, Paul Ryan's, corporate tax decrease proposal for a second - because the math is so bizarre.

Looking at 2010 - the Federal government took in about $2.1 trillion worth of tax revenues, 8.9% of those came from corporate taxes, or about $187 billion. That left individuals footing 41.5% of the bill through individual income tax and another 40% through social security and retirement taxes (get it - we do pay into the system, $840 billion dollars in 2010 to be exact), with the remainder of tax receipts coming from excise and 'other' sources. (The percentage of federal tax revenues that corporations paid in 2009 was 6.6% - the lowest on record.)

The notion that slicing the corporate tax rate from 35% to 25% would spur large corporations to either:

a) fire their accounting staffs and do their returns on Turbo Tax 

b) willfully bring all their relevant earnings onshore

c) engage in major hiring sprees or

d) pay rank-and-file workers proportionately more and CEOs proportionately less  than in the past 

is obviously ludicrous, though not to Ryan or the GOP or apparently, the portion of the Dems that aren't spitting at them with their calculators. 

Besides that, it's not supported by fact. To the contrary, since the 1930s, each year in which corporations paid less than 10% of the overall federal tax receipts, coincided with recession and unemployment spikes. The last time that the overall percentage of corporate tax receipts was greater than that of individual ones was in 1943. In other words, when things are shaky for the overall economy, corporations bear a proportionately lower share of tax revenues than individuals. This is not exclusively, but certainly probably, due to their ability to move stuff around their books and hire scores of CPA's to help.

During the 1920s, Treasury Secretary, Andrew Mellon substantially hacked tax rates for companies and the general public under the premise that a magical 20% tax rate would discourage the rich and the corporate from seeking off-shore tax havens and on-shore loopholes. Though Mellon did manage to balance the budget after World War I, the tax practice led to an over-bloated and over-leveraged financial economy during the 1920s followed by the Great Depression. It didn't make charities out of companies. Even though it was more progressive than what we have today.

Sure, the budget stands a bloated mess. But the revenue side and mechanism is far more broken than the spending side, which itself grew due to the cost of wars, weapons and financial subsidies to the nation's richest people and corporations (especially the Wall Street ones). Lowering the corporate tax rate would merely reduce the share of corporate taxes getting to the federal till even further. 

Companies like GE may operate under a 35% tax rate in theory, but in practice that rate could be 50% or 0% and the result would be the same, not only because of the complexity of the loopholes in the corporate tax code, but also because there is no wherewithal in the government, or the Treasury department to do anything about it. Hell, the Treasury Department assisted GE Capital, GE's financial, er - hedge fund - arm, when it needed a 'crisis' bailout. The FDIC stepped in with a $140 billion guarantee for their debt in 2008 and 2009. Not only didn't GE pay any taxes during those years, but for 2010, the company managed to manufacture its largest tax refund - $4.1 billion.

How is lowering the corporate tax rate going to change that exactly? Uh, it's not. What it would do, is create a wider budget gap and send more politicians scratching their heads over why. So, it's really just a super-bad and dumb idea.

Treasury's Titillation over TARP and budget increase

The Treasury department spends an awful lot of PR time extolling the success of the TARP program (and never mentioning any of the other myriad of bank subsidies and guarantees provided outside the realm of Congressional approval that rendered the $700 billion program a small percentage of the financial aid package to Wall Street or a peep about the $4.1 trillion of debt it issued since the fall of 2008, $ 1 trillion of which rotated through banks and into historically high excess reserves at the Fed).

Good for them.  Today, Geithner spewed another projectile of self-pride over the $24 billion profit we taxpayers are gonna reap from his stellar investment in reckless banks and risky assets. This silenced the critics, as one commentary pointed out. Sure, cutting us a check wasn't the point - I mean, if it was successful betting he was going for, the $700 billion of TARP money put into say, silver , would have bagged us $2.1 trillion.  

But, TARP only appears to have worked if you ignore the shell-game that surrounded it. Without the amount of collective federal support, including the lavishing of guarantees, toxic asset purchases that remain on federal books, the abolition of accounting requirements that would force banks to reveal the real risk in their existing loan portfolios, the cheapening of money to historically low levels by the Fed's QEX efforts, and the very notion that the Treasury department was the banks' financial cushion,  banks would have not been able to repay the isolated TARP handouts with interest. They wouldn't have had the money from other avenues to use. It's meaningless to consider this a savior type of economic strategy. Aside from which, the CBO tallied the budget cost of TARP at $25 billion, so at best, the shell-game paused at a wash.

On a separate note, if TARP was so successful, why is Geithner requesting a 14.2% budget increase for the Office of Inspector General. It may be small potatoes after his $24 billion windfall to quibble over a $5 million dollar hike, but  given the noise about the program winding down in this time of budget banter in Washington, and unless the next SIGTARP stepping into Neil Barofsky's shoes is getting a $5 million raise,it seems excessive. Just saying.

More Spin and Geithner Gobbledygook

On the right hand side of the Treasury Department website homepage, under the subheading Wall Street Reform, is the following lofty statement: 

"It is time to restore responsibility and accountability to our financial system."

That's the spin. Now, it's been spinning there awhile, so it's not exactly news.

But today, in complete contrast to the meaning of that statement, Geithner suggested backing a 'risk-retention' proposal that excludes banks that meet high underwriting standards (probably those that got high marks on the latest Fed stress tests for which the Fed isn't releasing any details) from having to retain portions of the deals they securitize, you know, of having to maintain a stake in the outcome of those deals and the performance and integrity of their underlying loans.

To recap, as a result of the 2008 debacle, banks that passed their stress tests, effectively borrow money at next to zero percent. The aftermath of the financial crisis is the loosest monetary policy in our nation's history. Even with all that help, banks don't want to be bothered holding anything that could screw around with their capital ratios. Of course.

The watery and verbose Dodd-Frank bill did very little to change the banking landscape (okay less than nothing, big banks got bigger, Glass-Steagall wasn't resurrected, rating agencies remain in control of rubber stamping deals and debt, funky derivatives are excluded from exchanges, etc.) But it did manage to churn out some language that suggested banks keep some 'skin in the game' and retain up to 5% of each securitized deal they manufacture. 

Today, Geithner reconfirmed that any potentially useful pieces of that bill (and you have to look really hard for them to begin with) would be rendered impotent or be axed. Shocking. So comforting he's leading the super-spin systemic-risk-reducing-but-not-really, taxpayer funded Financial Stability Oversight Council Board.

It's no surprise that the banks that received trillions of dollars of federal backing don't want to hold more of their concocted crap in the future. That would mean holding more capital behind the crap too. That would mean not being able to use that capital to create new crap. 

But it's not just them. It's the regulators that manufacture their future employees too. Having apparently forgotten everything that happened in the last few years, the FDIC voted 5-0 to consider this proposal. The SEC's going to have a think about it later this week. How about - no that's a dumb ass proposal that flies against everything we've been babbling about when we talk about containing systemic risk?  Course not.

It'll happen. The most powerful banks will be deemed the highest quality issuers and nothing will have changed - again. And what's the likelihood that JPM Chase, for example, is the first exemption? High.

What's the likelihood that the collateral underlying their loan portfolios retains the same value it had when those loans were contracted? Zero.  If that were the case, then only in JPM Chase land, for example, would the value of homes not have deteriorated. Which isn't reality. But that doesn't matter. Because they, and every other bank, can continue to pretend that until a default happens or a foreclosure is completed, there's no need to re-evaluate any of their loan portfolios because they are under-collateralized on every single loan, or admit their true risk. Certainly no accounting rule is going to make them.

Yep, banks know enough to lobby against retaining a higher stake of risk in those loans and their related deals. Which tells us something about how weak and shady the banking system remains and how strong the Treasury, Federal Reserve, Regulatory and Congressional spin to the contrary is.