Friday, November 28, 2008

The Coming Great Depression: Gaming the System

The Elites who own and operate the nation have always gamed the system most effectively. Why else hire an army of 41,000 lobbyists except to get tax breaks designed for a single corporation? (Here's but one of hundreds or perhaps thousands of examples: Gallo winery's "Cranston" and "Dole" tax breaks.)

And speaking of taxes, not only do the top 1% of citizenry who own some 2/3 of the productive wealth of the nation get tender loving legislative help, they also have access to another army of well-paid gamers: tax attorneys and the investment banks who profit from "sheltering" billions in income from the tax bite we mere debt-serfs pay. More Law Firms Touched by Tax-Shelter Investigation.

Untold billions are "sheltered" in offshore Caribbean banks linked to money-center banks in the U.S., and various arcane and not-quite-illegal-but-not-legal-either loopholes are designed with infinite care to help the poor Elites escape actually contributing to the government of the nation they own.

The 9% just below the top 1% of wealth-owners owns most of the rest of the nation's productive assets (i.e. an owner-occupied house is not a productive asset, a dwelling which is rented out for a net profit and which provides a tax shelter is a productive asset). They benefit from legal loopholes which game the system in favor of capital such as estate trusts, etc.

Try sheltering income earned from labor: you can deduct horrendously costly medical care (at least before the expenses drive you into bankruptcy) and the interest you pay on debt-serf assets (the mortgage you "own"), and precious little else.

But if you're sheltering income earned from capital, a cornucopia of options awaits you, starting with corporate tax breaks, "small business" benefits like SEP IRAs, special depreciation rules for oil production partnerships, and on and on and on.

This is why the tax code is tens of thousands of pages long. There are lots of forms of capital to protect and nurture.

Regular folks have also actively gamed the system, too. Public employees have learned how to manipulate overtime: you call in sick so your pal gets huge overtime pay in his/her last year of service, effectively raising his/her pension payments by hundreds of thousands over the lifetime of retirement payments.

This game is now driving municipalities into bankruptcy. The poster child of egregious overtime/retirement gaming is Vallejo, California, where the public unions are fighting the city's bankrupcty in court, claiming that millions of dollars are hidden somewhere and by golly, the firefighters and police officers who gamed OT to boost their pay to $200K each are not going to be bamboozled.
A closer look at Vallejo's woes:

"Vallejo's base pay for firefighters is more than $80,000 a year. Last year, 21 of them topped $200,000 in salary and overtime, according to city payroll records.

City Manager Tanner himself has faced criticism for making a city-best $316,688 salary last year - $71,881 more than San Francisco Mayor Gavin Newsom. "

(Vallejo's population is 117,000, while San Francisco has about 800,000 residents.)

Hardball in Vallejo (Mish). At the bottom of this post you'll find links to the database of vallejo's employees, revealing how many made $299,000, $250,000, and those who reaped a mere $150,000 or so.

Shall we be honest and confess that the public union employees gamed the system in Vallejo to the breaking point?

Next up, Medicare. The opportunities to game Medicare for fun and profit would fill volumes, but let's start with those gamers who have figured out how to draw a $1,500 monthly stipend for caring for their own mothers. Yes, it can be done and is done--if you know how to game the system.

So what happens in a Depression? The stakes for gaming the system get higher, as the deficit-burdened government is finally roused to squeeze off a few of the most egregious (or publicized) games.

The Elites' games require one thing above all else: privacy. Publicity of Elites' shelters works something like sunshine on vampires--yes, the tax breaks get all sparkly and draw undue attention and perhaps a touch of political Kabuki theater to "close the loopholes" temporarily follows.

That is of course no more than a passing annoyance to the Elites. Their armies of lobbyists and tax attorneys are already at work on the next "game": alternative energy credits? We got 'em right here, boss.

But more plebian gamers might find the well has run dry. Public employees will soon be finding the well they've been tapping so effectively leads to bankruptcy court, where they learn the old adage "you can't get blood from a turnip," in this case the turnip being a property tax base in free-fall, a shrinking sales tax base and a small-business tax base which is shrinking so fast government accountants can't subtract millions from estimated tax revenues fast enough.

One way to keep your job is to nail small-time gamers who step over the acceptable lines of the game. Knowledgeable correspondent K.C. recently filed this first-hand report on how Medicaid seems to be tightening up:

"Once again, you are right on with your topic today, the aging babyboomers and evaporating wealth. ( The Baby Boom's Market Order: Sell, Sell, Sell November 20, 2008)

I got to see how this plays out up close and personal not too long ago. My younger brother found himself facing a very displeased judge when he tried to game the system over Medicare/Medicaid for our Mom's nursing home care.

What a lot of folks don't realize is that the government will find you out! The gal who has let her unpaid student loans balloon up from Hyundai-sized to Escalade proportions probably doesn't understand that the government won't waste much time chasing after her now, they will wait and take it out of her social security. Ouch! (Glad I worked my way through college and avoided that trap.)

The point is, the government is relentless. Take the situation of an elderly person who needs nursing home care and applies for Medicaid. She may receive that assistance as the government is not interested in seizing homes from the infirm elderly. The government waits until the person passes away and then collects from the estate. This is what my relative tried to deflect by having our mother declared indigent. (He was chosen by my parents to act as her guardian.)

Perjuring himself on court records was not smart and he found himself facing the court after she passed away and it was time to pay the government piper. I'm oversimplifying a bit but this is the gist of what happened. Her home was sold to pay her bills.

I know of a young friend whose mother had a stroke that put her into a coma, leaving her in need of full-time nursing home care. My friend's Dad was told he had to sign over his house to the nursing home to pay for his wife's care. He is still working but is only allowed to keep a portion of his pay. The rest goes to the nursing home. The family's wealth is gone.

So I'm a little skeptical that average middle-class Baby Boomers are going to be inheriting much. They are in such denial! Most people of our generation have no idea what is in store for them.
My observation is that the middle-class knows very little about wealth preservation, unlike the very rich. Good estate planning can help avoid some tragic consequences, but not all. Life-Changing Events come in too many unexpected variations to prepare for them all. And who is to say the insurance companies will even be around to pay up? Our safety nets are stretched to the breaking point.

When money meets emotions you get turmoil. Both my logic and my intuition tell me we are facing turmoil on a scale we haven't seen here in a long time. This is why I appreciate so much that you discuss these issues in such straightforward style. I do think people are waking up to this new reality, slowly but surely. And every family is different, of course. But the disconnect between how we thought things were going to be and the way they are actually going to be is as big as the Grand Canyon, and this is something we all are experiencing these days.

I think it's great that you write with a calm, level tone, no matter what! It's not just what you say, but how you say it, that makes a difference."

Thank you, K.C. for the report and the kind words. We all know that any rules-based system can be gamed, and any bureaucracy can be corrupted/cheated by those who understand the rules and leverage points.

Nonetheless, for society to maintain a basic level of trust in its institutions, the gaming must be limited via enforcement and punishment to a background level which does not make the honest players just give up in disgust.

I would suggest we are either at that point or well beyond it. Playing the game honestly (i.e. not "gaming the system") earns meager rewards: the honest players receive fewer benefits (if any) and pay the lion's share of the taxes.

One of the most pernicious results of the Republicans' recent reign was the decimation of the government's enforcement efforts, at every level other than the GWOT (global war on terror). The IRS (bad guys when they question you, heroes when they shut down phony for-Elites-only tax shelters that robbed us of billions of dollars) has seen its enforcement division gutted, as have other enforcement agencies.

The result is predictable: gaming the system has increased as the ease of gaming and the rewards of gaming have both risen dramatically. Small-fry gamers justify their lying/cheating/theft via the old "everyone's doing it" line, or "I only steal from the government."
Note to liar/cheat/thief: we are the government. Every dollar you cheat means the rest of us either pony up that dollar or it's borrowed and we have to pay interest on it.

Knowing full well gaming cannot be eradicated but only made more difficult and less rewarding, I would suggest that if President-Elect Obama's team is truly interested in positive change, they should start by boosting enforcement of the various games' rules, and by pursuing tax policies and codes which force the Elites to pay a sum more or less equal to the Social Security (labor) taxes paid for by legitimate players (employers and employees).

That sum is about 35% of all tax revenue--a small enough slice of the wealth the top 1% own and the income from capital they reap.
What are the federal government’s sources of revenue? (Tax Policy Center)

"Individual income taxes and payroll taxes now account for four out of every five federal revenue dollars. Corporate income taxes contribute another 15 percent. Excise taxes, estate and gift taxes, customs duties, and miscellaneous receipts make up the balance.

The composition of tax revenue has changed markedly over the past half century, with payroll taxes contributing an increasing, and corporate income and excise taxes a decreasing share of the total, but the share provided by individual income taxes has remained roughly constant.

In 2007 the federal government collected $2.5 trillion, an amount equal to 18.8 percent of GDP. Federal revenue has ranged from 14.4 to 20.9 percent of GDP over the past five decades, averaging 18.0 percent.

The individual income tax has been the largest single source of federal revenue since 1950, averaging just over 8 percent of GDP. Payroll taxes swelled following the creation of Medicare in 1965. Taxes for Medicare, combined with periodic increases in Social Security taxes, caused payroll tax revenue to grow from 1.6 percent of GDP in 1950 to more than 6 percent since 1990. Payroll taxes also include railroad retirement, unemployment insurance, and federal workers’ pension contributions.

Revenue from the corporate income tax fell from between 5 and 6 percent of GDP in the early 1950s to 2.7 percent of GDP in 2007. "

The coming Depression will increase the pressure on Elites and debt-serfs alike to game the system. If P.E. Obama wants "real change," he should focus on enforcing the rules to protect the honest players and on ending the Elites' tax holiday.

As noted here recently, ideals don't change political power--the existing political/tax structure which favors the Elites (capital) over debt-serfs (labor) can only be replaced by a new power.

The Elites field a private army of several hundred thousand lobbyists, accountants and attorneys to protect their gaming of the system; the only force powerful enough to counter such a vast army of mercenaries is millions of outraged citizens who have decided to focus their outrage on political goals rather than self-destruction/ two-bit gaming on their own.

Thank you, John N. ($90) for your outrageously generous donation to this site. I am greatly honored by your support and readership.

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