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Tax Expenditures & Cardsharps Deal From Bottom of the Deck

William L. Kovacs

October 2023

Tax Expenditures & Cardsharps Deal From Bottom of the Deck

Without being a card player, it can be difficult to spot a cardsharp who cheats by manipulating cards to serve their own interest. Without being a tax expert and certified accountant, it is difficult to spot how federal tax expenditures manipulate government spending for friends and supporters.

Cardsharps use sleight of hand, false shuffles, and dealing from the bottom of the deck to manipulate the cards to cheat people out of their money. Congress and the White House use the appropriations process and tax code (“tax expenditures”) to cheat taxpayers out of trillions. Tax expenditures reduce federal tax revenue by $1.3 trillion annually. Every tax expenditure (gift) benefits the recipient and punishes the non-recipients who must pay for the lost revenue.

The most recent example is the Inflation Reduction Act (“IRA”) which went into effect January 1, 2023. The Biden administration told the public the new law would reduce inflation and achieve deficit reduction. Staying with the card game analogy, the many types of tax expenditures are merely different types of playing cards.

The various types of tax expenditure cards provide direct subsidies to specific individuals and industries in the form of loans, loan guarantees to keep bankrupt industries operating, tax breaks in the form of deductions, lower marginal rates for specific financial activities, the elimination of fees or penalties and the most dangerous – tax credits.

In the case of the IRA, the federal government gives taxpayers credits against their tax liability if the taxpayers do what the government wants done. The tax credit is an unlimited charge against the federal treasury since anyone who conforms to the government’s desires gets the credit to reduce their income tax. For example, taxpayers purchasing electric vehicles receive up to $7,500 in credits to reduce their federal income taxes by an amount equal to the credit.

The IRA gives the credits for activities that are asserted to reduce emissions causing climate change. Those activities include battery storage, energy efficiency, residential green energy, hydrogen, carbon capture, solar and wind generation, and electric vehicles. The Congressional Budget Office (“CBO”) initially estimated the tax credit would cost the treasury $391 billion between 2022 and 2031.

The IRA tax credits for anything “green” incentivized more pigs to show up at the trough than CBO estimated. Within months after the program started, Goldman Sachs raised its estimated cost of the credits to  $1.2 trillion for the same time period. The original forecast missed the cost of the credits for electric vehicles by $379 billion; energy manufacturing, $156 billion; renewable electricity production, $82 billion; energy efficiency, $42 billion; hydrogen, $36 billion; biofuels, $34 billion; and carbon capture, $31 billion.

Most troublesome is the fact that a trillion-plus dollars of tax credits are creating few jobs.  “Total [cost for every green job it created] range from $ 2 to $ 7 million per job.” Unfortunately, the jobs created will have an average annual wage of $45,000. Where have all the millions gone?

While tax credits are the most abusive form of government gifts, the entire tax code is stuffed with over 2000 subsidy [gift] programs. Every federal tax expenditure, or gift, interferes with the entire market to which it is directed. Companies that receive the gifts are given a competitive advantage over non-recipients in the market. Farming is an excellent example. The federal government distributes $30 billion a year in subsidies to the farm industry. “The largest 15 percent of the farm businesses receive 85 percent of the total farm subsidies.”

Through the aggressive use of tax expenditures, the federal government controls what is manufactured, the energy used in the process, the type of research conducted, what is mined, medical benefits received, deductible building expenses, the cars purchased, the development of communities, and many more. There are so many tax expenditures that the Department of the Treasury catalogs them in large groupings: National Defense, International Affairs, General Science, Space and technology, Energy, Natural Resources & Environment, Agriculture and Housing, Transportation, Community and Regional Development, Education, Training, Employment and Social Sciences, Health, Income Security, Social Security, Veterans Benefits, General Government, Interest on Bonds.

The Center on Budget and Policy Priorities estimates that in 2019 IRS tax expenditures carried a value of $1.3 trillion for the recipients. The top 1% of the income earners received 24.1% of the value, and the top 20% of income earners took 58.8%. The IRA adds another trillion to the free lunch pie.

The most deceitful aspect of tax expenditures is they do not compete for appropriations; they are just taken by whoever is willing to conform their business or lifestyle to the federal government’s wishes. This brings the discussion back to today’s budget fights over how much money to spend or cut. Consider the consequences of exempting the $1.3 trillion in green tax credits from the budget fight. While Congress fights over cutting billions from the deficit, the green industry’s tax credits are exempt from the cuts. The green industry laughs all the way to the bank.

There are a few simple solutions. Over a decade ago, a Missouri State Senator, Emily Kilmer, proposed legislation that would require every state tax credit program in Missouri to be limited to the amount of tax credits authorized by the legislature that fiscal year.

This simple solution would put tax expenditures into the same category as all appropriations, thereby giving the legislature control over all aspects of state spending. True to political form, the Missouri legislature never moved forward with the proposal. This type of law would work very well at the federal level. It would actually make federal appropriators responsible for all their spending. It would make budgeting and appropriations more transparent since anything with budget implications would be on the table for being funded, cut, or eliminated. Every person and interest group would be publicly fighting over the food in the same trough.

Another option is to repeal the 8-million-word tax code and replace it with the 1913- four-page Form 1040. It had few deductions and low rates but required everyone to pay some tax. Another benefit of this simple approach is it captures a greater amount of tax owed by closing the “Tax Gap.”  The IRS defines the tax gap as the difference between true taxes owed for a given tax year and the amount that is paid. The gap is caused by the under-reporting of income, non-filing, and tax evasion. While the exact amount is unknown, the IRS estimates it to range from $574 to $700 billion annually. A complex tax code invites under-reporting and manipulation, whereas a simple tax code fosters greater participation and prevents large-scale manipulation due to its transparency.

By requiring tax expenditures to be subject to the same rules as all appropriations and closing the tax gap, the federal government could achieve savings of well over a trillion dollars annually. It’s time for the federal government to stop dealing from the bottom of the deck and start fair dealing with its citizens.

 

 

 

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  • House Republicans: Up the Ante in the Student Loan Poker Game

House Republicans: Up the Ante in the Student Loan Poker Game

William L. Kovacs

July 2023

House Republicans: Up the Ante in the Student Loan Poker Game

Within hours after the U.S. Supreme Court held Biden’s student loan forgiveness program unconstitutional, the Biden administration issued an already prepared Plan B that would serve the same loan forgiveness purpose as his unconstitutional Plan A. The substantive change from Plan A to Plan B was merely relying on a different statute, the Higher Education Act of 1965, rather than the HEROES Act, an emergency act passed during the pandemic. The administration boasts Plan B is the most affordable repayment plan in history. Moreover, in customary high schoolish swagger, Biden states he, Harris, and Cardona will not stop fighting for borrowers.

The timing is proof that Biden knew all along that his loan forgiveness program was unconstitutional. The timing also revealed that Biden is playing a poker game. He is betting that he can buy the votes of the 38.6 million students wanting someone other than themselves to pay off their debt. The House Republicans need to raise the stakes by informing the president that if he persists with his unconstitutional actions, the House will refuse to fund the entire Department of Education.

So far, however, the Republican House members complain on Fox News about Biden’s unconstitutional acts but look like the proverbial deer in the headlights when it comes to action. Indecision gives Biden the advantage since the student debtors, with little understanding of the Constitution, view him as their champion.

Biden’s bravado gives the House Republicans the opportunity to address one of their top election issues, the nation’s failing education system. By calling Biden’s bluff, Republicans will reestablish that only Congress has the power to appropriate money, not the Executive branch. All the House needs do is to refuse to appropriate any money for the Department of Education.

This big bet puts all the chips on the table, debt forgiveness vs. defunding the Department of Education. It will be one of the few times in history that one House of Congress effectively limited the powers of the Executive without having to pass a law. House Republicans have the power to spend or not spend money. The Constitution is clear, “No money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law….” Spending money requires the agreement of both Houses of Congress. If One House refuses to spend money, then money cannot be spent. One House of Congress that says “No” to spending cuts off the money for Executive activities.

A refusal to spend money on the Department of Education allows a majority of one House of Congress to the power shrink the federal government without the difficulty of passing a new law.

Biden has placed the Department of Education at the center of the loan forgiveness conflict. It is Biden’s most prized possession since it is owned and operated by his most significant political supporters, the teachers’ unions. The teachers’ unions donated $43 million to liberal groups in the 2020 election cycle. The possibility of Biden losing his key supporters’ most valuable asset will likely persuade him to drop his unconstitutional nonsense that the Executive has the power to appropriate money.

The Department of Education has a $ 96 billion discretionary budget. It is the third largest of all Executive departments, behind Defense and Health and Human Services. Since its creation, the U.S. has spent trillions of dollars on an educational bureaucracy that has made little or no impact on education. The most recent  National Assessment of Education Progress report card found the biggest drop in test scores in its thirty-year history of the test.

There are many examples of the Department of Education’s 42 years of failure.

  1. The Programme for International Student Assessment (“PISA”) found that among the 35 members of the Organization for Economic Cooperation and Development, the U.S. ranked 30th in math and 18th in science.
  2. The same PISA study found that U.S. millennials in the workforce were tied for last on mathematics and problem-solving tests among the millennials in all the industrial countries tested.
  3. In 2022, the average total SAT score was 1050, the lowest since the test changed format in 2016.

It is very unlikely that Congress could get the votes to abolish this failed agency in the normal budget process. In the present situation, however, Biden’s refusal to obey the Supreme Court’s ruling gives the House the justification it needs to defend the Constitution by permanently limiting Biden’s unconstitutional spending.

By playing poker to win, the Republican House may save the country’s educational system from an education department whose loyalty is to the Teachers Union that ensures a failed educational system.

This article was first published in The Thinking Conservative.

William L. Kovacs has served as senior vice president for the U.S. Chamber of Commerce, chief counsel to a congressional committee, and a partner in law D.C. law firms. His book Reform the Kakistocracy is the winner of the 2021 Independent Press Award for Political/Social Change. He can be contacted at [email protected]

 

 

 

 

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  • Congress: An Institution in Need of Political Rehab

Congress: An Institution in Need of Political Rehab

William L. Kovacs

March 2023

Congress: An Institution in Need of Political Rehab

The 118Th Congress has been in session for several months and again proves it is as irrelevant as it has been for the last few decades. It argues over the debt ceiling but does not identify specific spending cuts to negotiate with the administration. The Biden administration still routinely stiff-arms Congress by refusing to provide substantive information on national security matters such as the infamous “Chinese weather balloon” that toured the nation taking photographs of military installations. Witnesses refuse to provide Congress the information it needs at hearings, but Congress never withholds money from non-cooperating agencies.

Congress holds a public approval rating of 21%.

To reclaim its dignity, members of Congress must understand and implement their constitutional duties as the nation’s primary lawmakers and budget managers. Similar to Alcoholics Anonymous, members of Congress need to go through a “psychic change” that results in a mental, emotional, and spiritual shift in its perception of how to spend and delegate power.

Fortunately, political rehabilitation is only a three-step plan.

Step 1: Members of Congress must admit that uncontrolled spending has made the nation unmanageable.

Congress has one power that no other branch of government can interfere with – it is the power to spend or not spend money. The Constitution is clear, “No money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law….”

Congress has failed to control spending for decades. It cannot even follow its own rules and pass the twelve appropriations bills by the October 1 start of the fiscal year. The last time Congress passed all twelve appropriations as separate bills was in 1996. Generally, Congress keeps the government running with 4000-page Continuing Resolutions or Omnibus appropriations that fund the government by denying legislators insufficient time to read the text of what they are voting on.

The historical view of congressional power is that Congress appropriates money by passing a bill in the House and Senate and sending it to the president for the usual signature. Under this approach, the federal government grows in cost, size, and mandates.

But Congress does not have to be a Spendaholic. A majority of one House of Congress can shrink the federal government by refusing to pass an appropriations bill. Reducing the size of the government, its bloated budgets, and massive debt is as easy as “Just saying no!”

Step 2. Congress must believe the Constitution is a greater power than the President, and by following the Constitution, it can restore sanity to governing.

Nothing in our Constitution can be more explicit in intent than “All legislative Powers herein granted shall be vested in a Congress of the United States.  By granting emergency powers to the Executive, Congress authorizes the Executive broad authority to act in lieu of Congress. Once presidents hold such power, they are unlikely to relinquish it easily.

Historically, emergency powers were limited to wartime and natural disasters. Today, however, Congress authorizes non-war-time presidents the right to exercise war-time emergency powers to control citizens in a domestic setting. The Covid pandemic highlights how emergency powers can be used by a president to rule without Congress.

Biden has aggressively relied on emergency public health powers to enact new laws, mandating the 84 million Americans subject to the Occupational Safety and Health Act to be vaccinated or tested weekly. He even tried to forgive $600 billion of student loan debt, a clear exercise of congressional appropriating power.

There are ninety-six laws passed by Congress authorizing the President to use so-called “national emergency powers” with nothing more than the signature on an emergency proclamation.

Other presidential emergency powers authorized by Congress include the ability to control airports, industrial facilities, and our communications system. The authority most used is the International Emergency Economic Powers Act (“IEEPA”). It authorizes the president to invoke emergency powers relating to U.S. national security, foreign policy, or the economy, including financial and commercial transactions. Sanctions can be imposed on individuals as well as countries, including the freezing of bank accounts and the seizure of assets. The IEEPA has been invoked 55 times.

Step 3. Every member of Congress must make a searching and fearless moral decision to solemnly guard its power to declare war.

The United States is in perpetual war; Ukraine, Afghanistan, Iraq, Viet Nam, and Syria, to name a few. Yet, Congress never declares war as required by our Constitution. While the president is the commander-in-chief of the armies, only Congress has the power… “To declare War.” By allowing the nation to fight many undeclared wars, Congress abdicates this sacred constitutional duty of determining when to send the nation to war.

As a nation, we are 234 years from the ratification of the Constitution. Within this time period, the U.S. has been at war for 138 years. Only five wars, totaling 32 years of war, were fought under a congressional declaration of war – the War of 1812, the Mexican War, the Spanish-American War, and World Wars I and II.

While in political rehab, Congress must reflect upon its lack of character, courage, and moral strength by abdicating its responsibility for deciding when the nation goes to war.

If Congress is to obey and defend the Constitution, it must acknowledge its flaws, gain control of spending, reclaim all emergency powers granted to the president, and transform itself into the primary lawmaker of the nation. This transformation will require moral strength, but Congress will be restored to glory if it successfully re-claims its constitutional duties.

William L. Kovacs, author of Reform the Kakistocracy, winner of the 2021 Independent Press Award for Political/Social Change, and former senior vice president at the U.S. Chamber of Commerce.