The Pentagon’s $35 Trillion Accounting Black Hole

The Pentagon’s $35 Trillion Accounting Black Hole

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Plus: Sanders, Biden tax plans come up short, study says
Thursday, January 23, 2020

Biden, Sanders Tax Plans Would Raise Far Less Revenue Than They Project, Study Says

Tax proposals put forth by Democratic presidential candidate Joe Biden and Bernie Sanders won’t generate as much revenue as their campaigns project, and in some cases would fall significantly short of estimates, according to new analyses by the Penn Wharton Budget Model, a non-partisan policy research initiative at the University of Pennsylvania.

The Biden plan: Biden calls for higher taxes on the wealthy and corporations, along with other reforms. His campaign says the proposals would raise $3.2 trillion over 10 years to fund investments in health care, climate, infrastructure and education. The Penn Wharton analysis projects that his plan would raise $600 million to $900 million less that that, or between $2.3 trillion (after economic feedback effects are factored in) and $2.6 trillion (without those macroeconomic effects). Most of the tax increases under the Biden plan would fall on the top 0.1% of income earners, raising their annual taxes by more than $1 million each and lowering their after-tax income by 14%.

Biden’s plan would have little impact on GDP, Penn Wharton finds. “The Biden proposal has two opposing effects on the macroeconomy,” the new study explains. “On one hand, reducing federal deficits increases investment, leading to greater capital accumulation and, therefore, increasing GDP. On the other hand, the increase in marginal tax rates discourage labor and savings. We project that these two effects are largely offsetting over time.”

The Sanders plan: Sanders has proposed a 1% tax on net worth above $32 million for a married couple, with the tax rising until it reaches 8% on wealth over $10 billion. He also calls for higher estate taxes and the introduction of a financial transactions tax. The Sanders campaign estimates that his wealth tax would raise $4.35 trillion over a decade, but Penn Wharton projects it would fall more than $1 trillion short of that mark, raising between $2.8 trillion and $3.3 trillion over 10 years.

Projecting out to 2050, Penn Wharton says the Sanders wealth tax would reduce GDP by 1.1% and average hourly wages would fall by 1% “due to the reduction in private capital formation.”

Penn Wharton also estimates that Sanders’ plan to expand the estate tax, which would raise rates and reduce the federal exemption from its current level of about $11 million ($22 million for married couples) to $3.5 million for singles (and $7 million for couples). Sanders’ staff reportedly estimated that the tax would raise $315 billion over a decade.

Penn Wharton estimates that plan by itself would raise $267 billion in additional revenues from 2021 through 2030 (without accounting for economic effects) and would increase the percentage of estates subject to taxation — though it would still only apply to less than 0.5% of people who died in any given year.

What it all means: The results aren’t necessarily surprising. The Penn Wharton Budget Model’s earlier analysis of Sen. Elizabeth Warren’s wealth tax found that it would raise as much as $2.7 trillion in revenue over 10 years — well shy of the $3.8 trillion Warren’s camp estimated. And as we noted then, critics of the Penn Wharton model question some of its assumptions about how higher taxes affect the economy.

There are other issues with the model, as well: The latest analyses follow the Congressional Budget Office’s standard in applying revenues raised by higher taxes toward deficit reduction — even in cases where a candidate has laid out other uses for the money. Penn Wharton reportedly plans to follow up with additional analysis considering the effects of the tax plans if the revenue raised were used to fund investments that boost productivity.

More questions ahead: Still, Sanders and Elizabeth Warren have faced repeated questions about how they would pay for policy proposals such as Medicare for All and the new analyses may revive those questions, for Sanders in particular.

Biden may face some challenges, too. “Economists, including the ones who would do official analyses of any tax legislation, assume that workers ultimately pay part of the corporate income tax in the form of lower wages,” The Wall Street Journal’s Richard Rubin explains. “That means studies of proposals to raise corporate taxes do show some higher taxes—under $200 for many households in Mr. Biden’s case—for the middle class.”

In addition, the gap between the campaigns’ estimates and Penn Wharton’s nonpartisan analysis demonstrates the challenges candidates face in generating new tax revenue to fund ambitious proposals, writes Bloomberg News reporter Laura Davison:

“Overly rosy figures are fine for the campaign trail, but they wouldn’t pass muster in Congress, where any plan would be subject to an estimate from the non-partisan congressional Joint Committee on Taxation. That tally would determine how much money Democrats have to work with to implement one of their priorities, such as expanding health care coverage or infrastructure investment. … [T]o fill the gaps between their estimates and what congressional scorekeepers project, lawmakers may have to look to other, potentially less popular, sources of revenue.”

Chart of the Day: Behind the Trillion-Dollar Deficits

What’s driving the trillion-dollar annual deficits the U.S. is expected to record for years to come, tax cuts or federal spending? Bloomberg’s Justin Fox crunched the data and came to a simple conclusion: It’s both.

“Real outlays grew 1.7 percentage points a year faster than the historical average since the end of 2017; real receipts grew 1.8 percentage points slower,” Fox says. “Both thus seem about equally to blame for the rise in the deficit.”

Fox also says that it’s not entirely clear that the deficits are cause for concern at the moment. “There has been a big course shift among macroeconomists in recent years over the risks and rewards of fiscal stimulus,” he writes. “The rise in the deficit since 2017 has so far been accompanied by solid if unspectacular economic growth and near-record-low unemployment rates. Maybe this unconventional late-expansion experiment in stimulus will come to be seen as a huge success.”

Still, there are plenty of people who are concerned about the rise in the size of the deficit, though Fox says he’s no longer one of them: “As a onetime deficit worrier who has seen pretty much none of the big concerns of deficit worriers in the 1980s through early 2010s come to fruition, I’m not going to get all apocalyptic about this. But a combination of long-ago policy choices and recent ones have put us on a path where those who continue to worry about deficits are going to have a lot more to worry about.”

Editorial of the Day: Mnuchin's 'Risible Fantasy'

“The claim that tax cuts don’t cost money is a lie that won’t die, because proponents of tax cuts have learned that many voters like to hear it.”

– The New York Times Editorial Board, in a piece examining Treasury Secretary Steven Mnuchin’s renewed claim this week that the Trump tax cuts will pay for themselves, which the editorial calls a “risible fantasy.”

The Pentagon’s $35 Trillion Accounting Black Hole

While it shouldn’t come as a surprise for an organization that has famously failed to ever pass an audit, the Pentagon was nevertheless able to shock some observers this week with a new batch of financial numbers.

According to Bloomberg’s Anthony Carpaccio, the Department of Defense made $35 trillion in “accounting adjustments” in 2019, easily surpassing the $30.7 trillion in such adjustments recorded in 2018.

Carpaccio notes that the number “dwarfs the $738 billion of defense-related funding in the latest U.S. budget, a spending plan that includes the most expensive weapons systems in the world including the F-35 jet as well as new aircraft carriers, destroyers and submarines.” It’s also “larger than the entire U.S. economy and underscores the Defense Department’s continuing difficulty in balancing its books.”

So what are these accounting adjustments? Todd Harrison of the Center for Strategic and International Studies says they represent “a lot of double, triple, and quadruple counting of the same money as it got moved between accounts” within the Pentagon. “A lot” may be an understatement: According to government data, there were 562,568 adjustments made in the Pentagon’s books in 2018.

Why it matters: More broadly, the number highlights the persistent lack of internal financial controls at the Pentagon, which makes it extremely difficult to account properly for defense spending. “Although it gets scant public attention compared with airstrikes, troop deployments, sexual assault statistics or major weapons programs, the reliability of the Pentagon’s financial statement is an indication of how effectively the military manages its resources considering that it receives over half of discretionary domestic spending,” Carpaccio says.

Rep. Jackie Speier (D-CA), who asked the Government Accountability Office to look into the issue, said the “combined errors, shorthand, and sloppy record-keeping by DoD accountants do add up to a number nearly 1.5 times the size of the U.S. economy,” and charged that the Pentagon “employs accounting adjustments like a contractor paints over mold. Their priority is making the situation look manageable, not solving the underlying problem.”

RIP, Jim Lehrer. 

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