What Do We Get For Our Taxes: Our Diminished Return On Investment For Our Taxes: Reprint Of June 21, 2011, Blog Post

Below is a reprint of my June 21, 2011, blog post, "Our Diminished Return On Investment For Our Taxes:"

Tuesday, June 21, 2011

Our Diminished Return On Investment For Our Taxes

Posted By Milton Recht

In The New York Times Blog, Enonomix, "Are Taxes High or Low? A Further Look" Bruce Bartlett writes:

Nevertheless, it is clear that federal taxes have not been rising and are, at least in historical terms, lower for most taxpayers than they have been since the 1960s. Those who assert that taxes are rising or are at confiscatory levels simply do not know what they are talking about.

I find it startling that economists and the media in their discussions about tax rates fail to consider and discuss what the tax paying public gets in return for its payments to and investments in government and whether the return on our taxes has decreased, increased or remain the same over the years.

In the years after WWII, our taxes invested in a strong and well-equipped armed forces for our perceived protection against a WWIII. American's taxes built an interstate highway system and supported scientific research, including manned and unmanned space satellites and a man on the moon. Taxes funded the GI Bill for veteran's college education and business start-ups. Additionally, our money funded college and technical school loans and scholarships for anyone who enrolled.

The government used our money to attempt to eradicate poverty, child malnutrition, to provide free and affordable healthcare for the poor, for children and for seniors, and to provide a quality k-12 education for all children.

Tax paying Americans saw their taxes as investments in America's future and prosperity.

What Do We Get For Our Taxes Now

We have a military that is in distant parts of the world with unclear objectives and unclear links to America's safety. We have an armed forces that we fund that is doing the work that Europeans and others should be doing and paying for themselves.

Our government run k-12 school system is atrocious, expensive and unaccountable to anyone.

Government healthcare costs have exploded to the point where the continue viability of Medicare and other government health programs are uncertain. Uncontrolled, above inflation rates, cost increases are one of the major reasons.

The US infrastructure, its roads, tunnels and bridges, are rapidly deteriorating, and major new projects are just dreams on drawing boards and in politicians' speeches.

For a while in the 1950s and the decades after, American's perceived and were promised a decent return for their money paid into government through taxes and fees.

Today, more people probably see government spending and its necessary taxes as incapable of providing a positive and fair investment value to the country. People see how government education has failed, how government reimbursed health care costs have spiraled out of control. Most people would say education and other government services are inferior today than they were decades ago.

Need A Benchmark Of The Value Of Government Benefits And Services.

To have a sensible discussion about tax rates and tax levels, we need a measure of the value of the return the public gets for its tax dollars.

If I spent $2 in inflation adjusted dollars for a pint, 16 ounces, of ice cream 20 years ago, and today, I spend the same amount, $2 in inflation adjusted dollars, but get 12 ounces instead of the previous 16 ounces, is it useful to look only at what I spent? Don't we have to also consider what I get back for my money? The same is true for taxes. Looking at only the amount of tax, rates or revenue, without considering what the country and its residents get for that money is an incomplete and thoroughly misleading analysis.

Until there is a measure of the value of government services, benefits, and spending to use to judge the value and benefit of taxes, discussions about tax rates are incomplete.

If part of the public perceives it will get back benefits of lower value than it used to from government tax dollars, that part of the public will be against tax increases. Likewise, if part of the public sees value to government spending, that part of the public will favor more taxes.

It would be extremely helpful for discussions about tax rates to have some objective measure of the value of the return that US residents get for their tax dollars.

Get Them Or Let Them Attitudes: Prosecutorial Discretion Is A Huge Unregulated Threat To Civil Liberties: Reprint Of My 2013 Blog Post

Reprint of my Tuesday, January 22, 2013, blog post, "Prosecutorial Discretion Is A Huge Unregulated Threat To Civil Liberties: The Lesson Of Aaron Swartz And David Gregory." 

Tuesday, January 22, 2013

Prosecutorial Discretion Is A Huge Unregulated Threat To Civil Liberties: The Lesson Of Aaron Swartz And David Gregory

Posted By Milton Recht

Posted by Milton Recht:

From the academic paper, "Ham Sandwich Nation: Due Process When Everything Is A Crime" by Glenn Harlan Reynolds, Beauchamp Brogan Distinguished Professor of Law, University of Tennessee. J.D. Yale Law School:

Attorney General (and later Supreme Court Justice) Robert Jackson once commented: "If the prosecutor is obliged to choose his cases, it follows he can choose his defendants." The result is "The most dangerous power of the prosecutor: that he will pick people he thinks he should get, rather than pick cases that need to be prosecuted." Prosecutors could easily fall prey to the temptation of "picking the man, and then searching the law books . . . to pin some offense on him." In short, prosecutors’ discretion to charge – or not to charge – individuals with crimes is a tremendous power, amplified by the huge number of laws on the books.

Two recent events have brought more attention to this problem. One involves the decision not to charge NBC anchor David Gregory with weapons--‐ law violations bearing a potential year--‐long sentence for brandishing a 30--‐ round magazine (illegal in D.C.), despite the prosecutor's statement that the on--‐air violation was clear; the other involves prosecutors' rather enthusiastic efforts to prosecute Reddit founder Aaron Swartz for downloading academic journal articles from a closed database, prosecutorial efforts so enthusiastic that Swartz committed suicide in the face of a potential 50--‐year sentence.

Both cases have aroused criticism, and in Swartz's case even legislation designed to ensure that violating websites’ terms cannot be prosecuted as a crime. But the problem is much broader. Given the vast web of legislation and regulation that exists today, virtually any American is at risk of prosecution should a prosecutor decide that they are, in Jackson’s words, a person "he should get."***With so many more federal laws and regulations than were present in Jackson's day, the task for prosecutors of first choosing the man – or woman – and then pinning the crime on him or her has become much easier. This problem has been discussed at length in Gene Healy's Go Directly To Jail: The Criminalization of Almost Everything, and Harvey Silverglate's Three Felonies A Day. The upshot of both is that the proliferation of federal criminal statutes and regulations has reached the point that virtually every citizen, knowingly or not (usually not) is potentially at risk for prosecution. That is undoubtedly true, and the consequences are drastic and troubling. [Emphasis added, Footnotes omitted.]

Risk Based Capital Standards Are "A Well Intended Illusion": Reprint Of My 2013 Blog Post Of A Speech By Then FDIC Vice Chairman Thomas M Hoenig

Reprint of my decade old blog post, FDIC Vice Chairman Calls Basel Risk Based Capital Standards "A Well Intended Illusion" That Creates Undercapitalized Banks: Prefers Simpler Equity To Assets Measure:

 

Tuesday, April 9, 2013

FDIC Vice Chairman Calls Basel Risk Based Capital Standards "A Well Intended Illusion" That Creates Undercapitalized Banks: Prefers Simpler Equity To Assets Measure

Posted By Milton Recht

Posted by Milton Recht:

From "Basel III Capital: A Well-Intended Illusion" by Thomas M. Hoenig, Vice Chairman, Federal Deposit Insurance Corporation, to the International Association of Deposit Insurers 2013 Research Conference, Basel, Switzerland, April 9, 2013:

Aristotle is credited with being the first philosopher to systematically study logical fallacies, which he defined as arguments that appear valid but, in fact, are not. I call them well-intended illusions.

One such illusion of precision is the Basel capital standards in which world supervisory authorities rely principally on a Tier 1 capital ratio to judge the adequacy of bank capital and balance sheet strength.***In contrast, supervisors and financial firms can choose to rely on the tangible leverage ratio to judge the overall adequacy of capital for the enterprise. This ratio compares equity capital to total assets, deducting goodwill, other intangibles, and deferred tax assets from both equity and total assets. In addition to including only loss-absorbing capital, it also makes no attempt to predict or assign relative risk weights among asset classes.***An inherent problem with a risk-weighted capital standard is that the weights reflect past events, are static, and mostly ignore the market's collective daily judgment about the relative risk of assets. It also introduces the element of political and special interests into the process, which affects the assignment of risk weights to the different asset classes. The result is often to artificially favor one group of assets over another, thereby redirecting investments and encouraging over-investment in the favored assets. The effect of this managed process is to increase leverage, raise the overall risk profile of these institutions, and increase the vulnerability of individual companies, the industry, and the economy.

It is no coincidence, for example, that after a Basel standard assigned only a 7 percent risk weight on triple A, collateralized debt obligations and similar low risk weights on assets within a firm's trading book, resources shifted to these activities. Over time, financial groups dramatically leveraged these assets onto their balance sheets even as the risks to that asset class increased exponentially. Similarly, assigning zero weights to sovereign debt encouraged banking firms to invest more heavily in these assets, simultaneously discounting the real risk they presented and playing an important role in increasing it. In placing a lower risk weight on select assets, less capital was allocated to fund them and to absorb unexpected loss for these banks, undermining their solvency.***Despite all of the advancements made over the years in risk measurement and modeling, it is impossible to predict the future or to reliably anticipate how and to what degree risks will change. Capital standards should serve to cushion against the unexpected, not to divine eventualities. All of the Basel capital accords, including the proposed Basel III, look backward and then attempt to assign risk weights into the future. It doesn't work.

In contrast, the tangible leverage ratio provides a simpler, more direct insight into the amount of loss-absorbing capital that is available to a firm. A leverage ratio as I’ve defined it explicitly excludes intangible items that cannot absorb losses in a crisis. Also, using IFRS [International Financial Reporting Standards] accounting rules, off-balance sheet derivatives are brought onto the balance sheet, providing further insight into a firm's leverage. Thus, the tangible leverage ratio is simpler to compute and more easily understood by bank managers, directors, and the public. Importantly also, it is more likely to be consistently enforced by bank supervisors.

The entire speech is available on the FDIC archive collection site.