Topic: Tax and Budget Policy

Savings and the Decline of Small Business Entry

A recent paper from the Brookings Institute raises an important observation that businesses are “becoming older,” that is, the age profile of American business is increasingly dominated by older firms.  One reason is that the entry rate of new businesses has been steadily declining for decades. 

While this decline has been witnessed across firm size, it has been most dramatic among small firms.  One potential contributor to the decline in new small businesses is the long run decline in the personal savings rate.  According to the Census Bureau’s Survey of Business Owners, the number one, by a long shot, source of capital for new businesses is the personal savings of the owner.  For firms with employees, about 72 percent relied upon personal/family savings for start-up capital.  The other dominate sources of capital, credit cards and home equity, were much less frequently used.  Recent legislative changes (2009 Card Act) and a volatile housing market have made those sources less reliable in recent years.

The chart below compares the trend in entry rates for new business establishments with less than five employees with the personal savings rate.  The correlation between the two is 0.62.  While both the decline in business entry and savings are likely driven by common macroeconomic factors, it seems plausible that if households have fewer saving, they are also less likely to be able to start a business.  My preferred response would be to eliminate policies, such as those in the tax code or current monetary policy, which penalize savings.  I suspect others might have different suggestions.

Vehicle Fleet Mess at Homeland Security

Duplication and waste are common themes within the Department of Homeland Security. A recent report from the DHS inspector general (IG) provides another example of wasted tax dollars.

The federal government owned or leased 650,000 motor vehicles in fiscal year 2012. DHS’s fleet was the government’s second largest, consisting of 56,000 vehicles. This armada of cars and trucks cost taxpayers $534 million in 2012. Given the large expense, the IG reviewed a portion of the DHS fleet, 753 vehicles, “to determine whether, for FY2012, the Department met requirements to right size the composition of its motor vehicle fleet, [and] eliminate underused vehicles.”

The IG found that DHS vehicle management is poor. Vehicle identification numbers were not listed correctly for 39 percent of vehicles. Fifty-four percent of acquisition dates did not match other department records. The most damning finding was that 59 percent of vehicles were underused, meaning they were driven less than 12,000 miles, the governmental standard, in one year. Apparently, DHS has far too many cars and trucks, even assuming that the vehicles are used for efficient purposes.

The IG found that DHS does not purge unnecessary vehicles. Eighty-six percent of the underused vehicles were still owned by the department a year later. DHS was unable to provide documentation justifying vehicle retention and the additional expense.

These results led the IG to conclude: “we estimate that operating these underused vehicles cost between $35.3 million and $48.6 million. For these reasons, DHS cannot ensure its vehicle fleet composition is cost efficient, complies with department requirements, and has the correct number of motor vehicles to accomplish this mission.”

This is not the first time DHS has been criticized for its handling of its vehicle fleet. In 2013, the Government Accountability Office criticized DHS for similar problems, including incomplete data and failing to adequately analyze and utilize its vehicles. DHS is also not the only agency with underutilized vehicles, as GAO has been highlighted for years.

The federal government spends $3 billion annually on its vehicle fleet, excluding the United State Postal Service. This should be an area in which bipartisan reforms are possible.

Mandatory Spending Continues to Drive the Budget

This morning, the Congressional Budget Office (CBO) released its updated Budget and Economic Outlook report, known in Washington, D.C. parlance as the “baseline.” This report details CBO’s projections on federal spending and revenue for this year and into the future.

Below are a few key points from the new report.

  • The deficit for 2014, the difference between federal spending and revenue, will be $506 billion, up from the $492 billion forecasted in April. This is driven by lower-than-expected corporate income tax revenue.
  • According to CBO, Medicaid spending jumped 15 percent year-over-year. Adding millions of new individuals under ObamaCare to Medicaid comes at a steep price.  Social Security spending jumped 4.6 percent.
  • The entitlement programs continue to drive spending projections and put enormous weight on the budget. CBO estimates that Social Security, the major health care programs, and interest account for 85 percent of projected spending increases over next ten years.
  • Mandatory spending–which includes the big entitlement programs–will increase 5.5 percent annually over next ten years. ObamaCare leads the way. The newly created subsidies for health insurance will cost taxpayers $1 trillion over ten years, growing from $17 billion in 2014 to $450 billion in 2024.
  • The one bright spot continues to the Budget Control Act of 2011 which is controlling the growth of discretionary spending. Fiscal Year 2015 spending will be $1.016 trillion compared to $1.014 trillion in FY14.

The Future of Dollarization in Ecuador

A new “monetary and finance” law that was approved by Ecuador’s National Assembly in July, is expected to be signed into law any day now. Many suspect that this marks the beginning of the end for dollarization in Ecuador, which began in January of 2000. But the underlying threat to dollarization is the incessant growth of public spending. Losing dollarization would be a sad development, considering it is what has protected Ecuadorians from one of the worst evils of populism: high inflation.

The remarkable contribution dollarization has made to the Ecuadorian economy is worth noting. A 2010 study published by Ecuador’s central bank (BCE) analyzed the first decade of the absence of independent monetary policy and found that average GDP growth increased from -6.3 percent during the 1990s to 4.4 percent during the 2000s; annual inflation decreased from a high of 90 percent in September of 2000 to single digits within a year, and has averaged 3 percent since 2004. Additionally, interest rates went down immediately, thereby reducing the cost of capital. According to the World Bank, the percentage of Ecuadorians living on less than $2 a day (PPP) decreased from 37.7 percent in 2000 to 10.6 percent in 2009.

Of course, there are many problems dollarization cannot solve and the positive outcomes above are not solely due to it. But it probably has been one of the main factors contributing to Ecuadorian growth prior to and during our current “revolutionary” government. In fact, Ecuador owes its superior economic performance today–compared the two most prominent populist nations in the region, Argentina and Venezuela–mostly to dollarization.

When a Hamburger Becomes a Doughnut and Other Lessons About Tax Inversions and Globalization

So Burger King plans to purchase Canadian doughnut icon Tim Hortons and move company headquarters north of the border, where corporate tax rates are as much as 15 percentage points lower than in the United States.  Expect politicians at both ends of Pennsylvania Avenue to accuse Burger King of treachery, while spewing campaign-season pledges to penalize these greedy, “Benedict Arnold” companies.
 
If the acquisition comes to fruition and ultimately involves a corporate “inversion,” consider it not a problem, but a symptom of a problem. The real problem is that U.S. policymakers inadequately grasp that we live in a globalized economy, where capital is mobile and products and services can be produced and delivered almost anywhere in the world, and where value is created by efficiently combining inputs and processes from multiple countries.  Globalization means that public policies are on trial and that policymakers have to get off their duffs and compete with most every other country in the world to attract investment, which flows to the jurisdictions where it is most productive and, crucially, most welcome to be put to productive use.
 
Too many policymakers still believe that since the United States is the world’s largest market, U.S.-headquartered companies are tethered to the U.S. economy and committed to investing, hiring, and producing in the United States, regardless of the quality of the business and policy environments. They fail to appreciate how quickly the demographics are changing or that a growing number of currently U.S.-based companies do not share their view. Perhaps too many are unaware of how the United States continues to slide in the various global rankings of attributes that attract business and investment. The leverage politicians have over America’s corporate wealth creators has diminished.

The Size and Scope of Fraud in Medicare

Medicare spends more than $600 billion annually, but not all of that money is spent wisely. Yesterday, I wrote about the Washington Post’s expose on motorized wheelchair fraud. Records suggest that 80 percent of motorized wheelchair claims are “improper,” amounting to billions in waste. Unfortunately for taxpayers, this is just the tip of the iceberg on Medicare fraud.

The Government Accountability Office estimated that Medicare’s “improper payments” amounted to $44 billion, or 8 percent of total expenditures, in 2012. GAO considers Medicare a “high risk” program for its “vulnerabilities to fraud, waste, abuse, and mismanagement.” GAO criticized Medicare for its inability to control the problem saying that Medicare “has yet to demonstrate sustained progress in lowering the rates [of improper payments].”

Other experts believe that GAO undercounts examples of fraud in Medicare. Malcolm Sparrow of Harvard University estimates that closer to 20 percent of claims–or $120 billion annually are improper.

Medicare’s lax oversight of its payment system perpetuates the issue. Millions of claims come in daily and are paid without review or analysis. Scammers know that Medicare payments will not be scrutinized; the chance of getting caught is quite low. Scammers simply adapt and continue finding ways to game the system.

Medicare’s Scooter Scam

Yesterday’s Washington Post has an in depth—and very depressing—piece about Medicare fraud. The piece focuses on scammers taking advantage of Medicare’s payment systems to buy unnecessary motorized wheelchairs and scooters for Medicare enrollees and stick American taxpayers with the bill.

Medicare’s payment system is designed to pay bills within 30 days of receipt; the system receives 5 million claims daily. Due to the huge volume of payments, Medicare only reviews a very small percentage, 3 percent, before the payment is made. Instead, payments are reviewed after they are processed, but even then not all are subject to oversight and review.

That system design invites fraud and scammers are able to take advantage. The Washington Post describes it as an “honor system.” The lack of upfront investigations costs taxpayers billions annually in fraud and wasteful payments.

But even worse than Medicare’s lax oversight is that officials knew about the fraud regarding wheelchairs and still didn’t act. According to the Washington Post,

Now, the golden age of the wheelchair scam is probably over.

But, while it lasted, the scam illuminated a critical failure point in the federal bureaucracy: Medicare’s weak defenses against fraud. The government knew how the wheelchair scheme worked in 1998. But it wasn’t until 15 years later that officials finally did enough to significantly curb the practice.

This problem was widespread. Medicare has spent $8.2 billion on power wheelchairs since 1999 for an ever-increasing proportion of enrollees. Records suggest “that at least 80 percent of claims were ‘improper.’”

Before the fraud had taken off, the chairs were rare:  One study estimated that in 1994, only 1 in 9,000 beneficiaries got a new wheelchair.

By 2000, it was 1 in 479.

By 2001, it was 1 in 362.

By 2002, it was 1 in 242.

In 2012 up to 219,000 Medicare recipients received motorized wheelchairs, 1 in 235 patients, worse than in 2002. In 2013 only 124,000 individuals, 1 in 400 patients, received power wheelchairs from Medicare.

Medicare is slowly getting the issue under control; it is just 15 years too late.