Interesting article about the current calculation of the federal deficit and the federal debt.

The popular press has typically picked up the amount of this year’s federal government deficit (revenue minus expenses) as around $1.3 trillion.

The total amount of the debt of the US is around $15 trillion.

The USA Today argued today that the deficit for this year is much larger due to the increase funding required for Social Security and Medicare. 

http://www.usatoday.com/news/washington/story/2012-05-18/federal-deficit-accounting/55179748/1

The addition of just these two liabilities (SS and Medicare) this year, if translated into additional expenses, would push the deficit to $5 trillion (for just this year).

Obviously, this is not a good situation – but unfortunately, there are so many assumptions that go into this model, it could just as easily be close to a zero deficit as $5 trillion. 

Let’s just take one example of how “iffy” those numbers could/can be.  The US currently “owes” $15 trillion.  Well, last year, prices (the CPI index) went up about 3%.  That means the $15 trillion deficit is actually worth less this year – by about $450 billion (or 3% of $15 trillion).  Inflation eroded the value of the bonds and hurt those holding those bonds – so when eventually they get their money back, they will be able to purchase less with the cash proceeds.

Yes, you can argue that those bondholders were compensated by interest payments from the US government.  Very true – and those interest payments are included as government expenses.  But the fact the government now theoretical owes less to each person because of inflation (which is revenue to the government) – is not included as a $450 billion decrease in the government deficit for the year.

And this is just one of many, many assumptions that the US government “accounting” has to make in arriving at a number such as $1.3 trillion or $15 trillion.

Unfortunately, a comment made at the end of the article by Sheila Weinberg of Institute for Truth in Accounting implies that accounting, particularly at this level, can be simple – like “arriving” at a single number or amount.  Not true.  Even in my introductory financial accounting course, I point out all the ways “assumptions” can significantly change the reporting results of companies (like in expensing for depreciation and bad debts).

Dallas CPA Annual CPE Day

Yesterday (Friday, May 4, 2012) I was in attendance at the annual Dallas CPA Society continuing professional education day.  It is a day were around 1500 CPAs from northern Texas meet in one hotel (this year, the Dallas Hilton Anatole) to list to eight hours of updates in various fields of accounting.

The lunch speaker was one of Texas' US senators, John Cornyn, whose talk was entitled "The Prospects of Tax Reform."

And this year (2012), in case you're wondering, it is basically none. Actually, he never got around to saying that - but you could surmise it from all the "Bad Obama" this and "Bad Obama" that the Republican senator managed to utter in a 15 minute speech.

One of the interest tidbits he mentioned, though, was past presidents who had passed capital gains cuts - including Kennedy in the early 1960s, Carter in the later 1970s and Clinton in the 1990s - all Democrats.

The implication being that Democrats could pass capital gains tax cuts - but Obama was too headstrong to realize how good it can be for the economy.

Absent from Cornyn's discussion (and something I would have loved to ask him) was why he didn't mention the ultimate Republican of the 20th century, Ronald Reagan - who actually RAISED capital gains tax rates in 1986.

http://www.americanprogress.org/issues/2012/01/ta_012612.html

Why did Reagan allow this to happen?

Well, first, he brought the capital gains tax rate up to the same tax rate as ordinary income (wages, for example) - and that made the tax code simpler.  No longer did you have to worry about defining what a capital asset was, or its holding period as long or short term, or whether corporations or other taxable entities could be used to take advantage of the difference in rates.

Reagan also believe that not EVERY SINGLE YEAR IN HUMAN HISTORY does a cut in capital gains tax rate spur more investment than the resulting decrease in investments from the government using the cash instead (which many members of the Republican party seems to erroneously believe).  If you cut the capital gains tax rate, you give more money to the people and away from the government.  You better hope the people invested it quickly in projects which will spur jobs, increase standards of living, etc.  Nowadays though, in a risk-adverse US economy, that isn't happening.  Many people are content with sticking their money in a bank paying near zero percent interest rate, and banks aren't interested in lending money to anyone with a risky profile.

Somehow as Cornyn went down the list of democratic presidents who cut the capital gains tax rate, I knew he would never get around to the republican president who raised them... what a surprise... NOT!