Fiscal 2018 Deficit Through April

The graph below illustrates the monthly deficit or surplus for Fiscal 2018. 

The cumulative deficit through the end of April is $382 billion, which is $39 billion more than last fiscal year. The large surplus in April is primarily due to the payment of individual taxes that were due April 15th. Based on current projections, the federal government won't have another surplus month this fiscal year and the deficit will more than double over the next five months.

What are your thoughts about the Fiscal 2018 deficit?

The Cost of Higher Interest Rates

The amount of interest paid by the U.S. government is one of the fastest growing expenditures of the federal government. With a national debt in excess of $21 trillion, small increases in the interest rate results in the government paying billions of dollars in additional interest.

Interest rates have been at historic lows for nearly a decade, but rates are starting to rise. This is good news for investors, but bad news for the federal government. With a $21 trillion debt, a 1% rise in the interest rate will cost the U.S. government $210 billion of additional interest. As illustrated in the chart below, that is more than the federal government spent on eight Departments last year.

This additional interest cost will add to the annual overspending and make it more difficult to balance the budget. It will also exacerbate the budget battles in Congress.

Broken Process = Bad Results

If you’re concerned about the continued rise in the federal debt, you’re probably not very pleased with the spending bill that recently passed Congress. The $1.3 trillion spending plan, only covers about 25% of total federal spending. The U.S. government spends another $3 trillion for what is classified as mandatory spending (e.g. Social Security, Medicare, Medicaid, interest on the debt). 

Although there are a lot of aspects to increased spending, the process is a contributing factor. As one Representative opined, “Nothing good comes from legislation passed at the deadline.” Members of Congress know that last-minute, must-pass legislation is an opportunity for a lot of pork-barrel spending.

Congress has a budget and spending process but hasn’t followed it for years. The process begins with a proposed budget by the President in February. Congress then passes it’s own Budget Resolution by May, followed by 12 different Appropriations (spending) bills, that can be enacted before the beginning of the fiscal year on October 1.

For the current fiscal year, Congress didn’t pass its Budget Resolution until November and just passed the spending bill in March; nearly 6 months after the fiscal started. Instead of passing 12 different spending bills, everything was rolled into one massive 2,200+ page bill, that was passed within 24 hours of being written. 

Following the process doesn’t guarantee a balanced budget or reduced spending. However, Congress’ failure  to follow its budget process is helping to drive increased federal spending.

Do you agree the broken process is leading to bad fiscal results?

Fiscal 2018 Deficit through March

The chart below compares the monthly deficit of Fiscal 2018 with Fiscal 2017. Through the first six months of the fiscal year, the federal government has overspent by $598 billion, which is $73 billion more than the prior year. As a percentage, the deficit is nearly 14% greater than one year ago.

The rate of growth in federal revenues has slowed since the beginning of January. Since most of the tax law changes became effective on January 1, this is not a complete shock, especially since the CBO projected the federal government would collect $1 trillion less over the next decade. Add in the additional spending approved through the Fiscal 2018 Omnibus appropriations bill, and the deficit will continue to increase throughout the rest of the fiscal year.

What do you think of the current increase of the federal deficit?

Fiscal 2018 Deficit Through February

Below is a graph tracking the deficit of the U.S. government by month, in comparison to the prior fiscal year. Through February 28, 2018 (five months into the current fiscal year), the federal government has overspent by $392 billion.

See the big blue line for February? That shows the federal government overspent by approximately $216 billion; just in February. Considering there are only 28 days in February, our government overspent by nearly $8 billion each day.

Any rational person would have to admit this is unsustainable, yet Congress seems to have little time, attention or political willpower to anything about it.

What do you think about the current spending pattern of the U.S. government?

Fiscal 2018 Deficit through January

Below is a graph comparing the monthly federal deficit for Fiscal 2018 in comparison to Fiscal 2017.

The deficit for the first four months of the fiscal year was $174 billion. This is $17 billion higher than the deficit for the first four months of 2017. January's surplus is primarily driven by individuals who pay their last installment of 2017 estimated taxes in early January.

Starting January 1, 2018, the U.S. Treasury expects to receive less tax revenue as a result of the tax reform legislation passed in December 2017. To avoid a government shutdown last in early February, Congress also agreed increase defense and discretionary domestic spending. Therefore, you can expect to see a the deficit each month continue to exceed the prior year, for the rest of Fiscal 2018.

Are you concerned with a rising federal deficit?

President Trump's Fiscal 2019 Budget

President Trump released his Fiscal 2019 Budget plan this past week. It's rare for Congress to adopt a President's budget. However, it's the first step in the budgetary process, and it outlines the President's plans and priorities.

Below are some highlights of President Trump's plan.

• Total Fiscal 2019 spending is projected to be $4.4 trillion, with $716 billion allocated for defense and $18 billion to build a wall along the southern border.
• Additional $200 billion of spending for infrastructure, which was part of the President's $1.5 trillion infrastructure plan.
• U.S. Gross Domestic Product (GDP) is projected to grow by 3% annually.
• The Fiscal 2019 and 2020 deficits will be approximately $1 trillion each year before slowly decreasing.
• The plan doesn't project a balanced budget within the next 10 years, and the deficit at the end of the decade is expected to be $450 billion.
• The U.S. will overspend in excess of $7 trillion over the next decade, pushing the national debt to nearly $28 trillion.
• The President wants to reduce domestic spending by more than $3 trillion over the decade, despite the agreement by Congress last week to increase domestic spending by $300 billion.

If you recall, President Trump campaigned on balancing the budget and addressing the $20 trillion national debt. Even though his budget isn't likely to become law, it demonstrates the difficulty our leaders face in trying to reduce federal spending and balance the budget. They may have good intentions, but the harsh realities of the difficult choices required and the potential political backlash make it near impossible to achieve.

This is just the first step in the budgetary process, but if the President, who campaigned on fiscal restraint, doesn't propose a balanced budget, don't expect Congress to pass one on their own.

Fiscal 2018 Deficit through December

Below is a graph comparing the monthly deficit for Fiscal 2018 with Fiscal 2017.

The preliminary December deficit was $26 billion, which is $1 billion less than December 2017. The cumulative deficit for the first three months is $20 billion more than the prior year. Revenues for the first quarter have risen by 4%, but expenditures have risen by 5%. 

Since Congress has yet to finalize the spending for Fiscal 2018. The final appropriations bills could reduce spending and shrink the projected deficit, or they could increase spending and enlarge the deficit.

Do you expect the current year deficit will be larger or smaller than last year?

A New Year - A New Budget

If you're like a lot of people, you create a budget at the beginning of the new year. Budgets are a great way to manage your finances. Putting your income and expenses down on paper can help you better understand how much margin you have in your spending, or if it looks like you're going to come up short. Budgets may not account for every expense or event that may happen, but they are effective financial tools to help you understand your financial obligations, establish priorities and manage your cash flow.

The U.S. government also has an annual budget. However, its fiscal year starts on October 1 rather than January 1. The budget resolution is passed by Congress but doesn't require the signature of the President. The federal budget establishes the guidelines, and the specific spending is determined by separate appropriations bills. 

Although Congress has a budget and spending process, it rarely follows it anymore. Congress didn't pass the Fiscal 2018 budget until November, and none of the appropriations bill have been passed, even though we're more than three months into the current fiscal year. Congress has passed short-term continuing resolutions to keep the U.S. government from shutting down. 

Budgets can be useful financial tools, if used effectively. Individually, budgets should be more than an exercise you conduct at the beginning of the year. You should periodically review and update your budget to check your progress. For the federal government, it should pass a budget and the related appropriations bills before the start of the fiscal year, rather than after several months have passed.

How effective would you rate the federal government's budget process?

U.S. Budget Deficit through November

Below is a graph tracking the monthly federal deficit for Fiscal 2018, which runs from October 2017 through September 2018.

The federal government overspent by $198 billion in October and November. This compares to the $181 billion deficit through November 2017. Revenues and expenditures both grew at 6% over last year. Since annual expenditures exceed revenues by $600 billion, the cumulative deficit is greater than last year.

Congress has yet to pass the required appropriations for Fiscal 2018, and current spending is determined by temporary funding measures. The current shot-term Continuing Resolution ends January 19, 2018.

Do you think the spending measures approved by Congress will increase or decrease the budget deficit for this year?

The Deficit for Fiscal 2017

The Congressional Budget Office (CBO) has finished accounting for the country's finances for Fiscal Year 2017, which ended September 30, 2017. The deficit for the year was $666 billion, and the chart below shows the budget surplus or deficit by month. 

The following are a few highlights.
▪️The deficit was $80 billion more than Fiscal 2016.
▪️Since the CBO initially projected the deficit would be less than 2016, the federal government spent over $100 billion more than initially planned.
▪️Revenues were $3.3 trillion: 1% more than Fiscal 2016.
▪️Expenditures were $4.0 trillion: 3% more than Fiscal 2016.

What do you think about the country's financial results for the past year?

The Fiscal 2017 Deficit

The U.S. government's fiscal year ended on September 30, and a new year began on October 1. The Congressional Budget Office (CBO) estimates the Fiscal 2017 deficit was $668 billion, which is $81 billion more than Fiscal 2016. A year ago, the CBO was projecting the Fiscal 2017 deficit would be less than Fiscal 2016, not $81 billion more. The chart below compares the monthly deficit or surplus to the prior year.

Total government revenues increased by 1%, but expenditures increased by nearly 3%. As a percentage of Gross Domestic Product (GDP), the Fiscal 2017 deficit was approximately 3.5% of GDP, up from 3.2% in Fiscal 2016. It's also the second consecutive year the deficit rose as a percentage of GDP, which indicates government spending is growing faster than the U.S. economy.

We're already two weeks into the new fiscal year, and Congress is still a long ways from deciding on government spending for the coming year. To prevent a government shutdown, Congress approved a Continuing Resolution, that effectively continues all Fiscal 2017 spending until mid-December. Since it's unlikely Congress will enact the necessary monetary legislation until close to the deadline, spending for nearly one-fourth of the year will be equal to or greater than last year. Unless Congress enacts spending cuts (which it has been unable to do so far), they have created a situation where the Fiscal 2018 deficit will likely be higher than the most recent $668 billion deficit.

Are you concerned the federal government spent $668 billion more than it received during the last year?

Trump's Tax Plan

President Trump and several prominent members of Congress provided a framework of their tax reform plan earlier this week. The plan is intended to reduce the tax burden for most taxpayers, including individuals and corporations. There are a lot of details to be worked out, but below is a quick summary of their proposals.

• Currently, there are seven different tax brackets, which will be reduced to three: 12%, 25% and 35%.
• The standard deduction will be increased to $12,000 for individuals and $24,000 for married couples filing jointly.
• Most itemized deductions will be eliminated, except for charitable contributions and mortgage interest. The deduction for state income taxes will be eliminated, which could be significant for taxpayers living in states with high income taxes (e.g., California and New York).
• The top corporate rate will be 20%; down from 35%.
• Business income from pass through entities (S Corporations, LLCs and partnerships) will be taxed at a maximum 25% rate.
• The Alternative Minimum Tax (AMT) will be repealed.
• Asset purchases (except for buildings) will be fully expensed in the year of purchase, at least for the next five years.
• All business tax credits, except for the research and low-income tax credits, will be repealed.
• Multinational corporations will be able to repatriate income from their foreign subsidiaries tax-free.
• The estate tax is repealed.

The goal is to reduce the tax burden and simplify compliance. You may read some of the prior articles below on Tax Reform Principles that should be encompassed in a good tax reform plan. Time will tell if this plan will promote economic activity, is fair to all taxpayers and is simple to comply with. As with most tax legislation... the "devil is in the details," and we'll keep you updated as more details become available.

What do you think about this framework? Do you like it or think it's a bad idea?

The Fiscal 2017 Deficit through August

Below is a graph tracking the monthly deficit or surplus for the U.S. Government. The year-to-date deficit is $621 billion, and the Congressional Budget Office is projecting a $693 billion deficit for Fiscal 2017, which ends on September 30.The Fiscal 2017 deficit is expected to be $100 billion greater than the Fiscal 2016 deficit.

From the graph, there is a clear pattern of overspending by the federal government. So far, there are only two months during the year that recorded a surplus, which easily explains why the federal government will post a deficit of nearly $700 billion this year. Since many corporate and individual income tax payments are due today, it's possible that September will also record a surplus, which would bring the total surplus months to three. However, the occasional surplus isn't sufficient to cover the deficits that occur in most months.

What do you think about the federal government spending more than it receives for nine months of the year?

Tax Reform Principles Part 3: Simplicity and Administration

This is the the third and final article reviewing the general principles to consider when reforming a tax system. The first principle evaluated how the tax system encourages economic growth. The second addressed fairness. This article will review concepts of simplicity and administration.

There are three points to consider in the area of simplicity and administration.

• How costly is it for taxpayers to determine their tax liability and pay their taxes?
• Can the system be easily administered by the government and does it encourage taxpayers to comply with the filing requirements?
• Are some individuals able to avoid their legal liabilities?

Without question, the tax code has become exceptionally complex. As someone who has been a practicing CPA for over 25 years, I can attest to the growing complexity of tax law and difficulty of compliance. The complexity is good business for people who make a living from tax planning and preparation, but there is certainly a cost to taxpayers. Even a person or family of modest means and little financial complexity often finds it challenging to prepare their own taxes. The plethora of possible deductions and credits, that often have very specific qualification, can be challenging to understand and apply. Thankfully there are a number of inexpensive software providers that can help, but if you don't correctly answer the questions or input something incorrectly, you can easily make an error. There have been many bills passed over the past 30+ years that were touted as tax simplification, which resulted in a more complex tax system. Deciding whether the cost of compliance is overly burdensome is a subjective matter, but there definitely is a cost and be wary when Congress promises more simplification.

The U.S. tax system is based upon voluntary compliance. This puts the primary burden upon taxpayers to timely file and properly report their income and corresponding tax liabilities. Timely filing is relatively easy. You simply have to file and pay your taxes by the requisite due date. Properly calculating the tax liability can be more difficult to ascertain. As explained above, the complexity of the tax code makes it extremely challenging to calculate the correct tax. Although few people will avoid filing returns because of the complexity, the burdens of compliance can result in people failing to report certain items because it's unlikely to be discovered by the IRS. With regards to government administration, the number of fraudulent returns that have been filed over the past few years is an indication of the difficulties the IRS has processing and administering tax returns correctly. One recent example highlights their ineffectiveness. A few years ago, several hundred fraudulent tax refunds adding up to several million dollars were mailed to the same overseas address without any questions raised by the IRS until after the checks were cashed. While it's entirely possible a a common mailing address may be used, good internal controls should have identified the number of refunds being mailed to the same address as a potential problem.

On the third point, it's important to remember that tax avoidance is perfectly legal, but tax evasion is not. Avoidance involves structuring your affairs in a manner to minimize your tax liability. Part of tax complexity is a result of years of successful tax planning that Congress and the IRS deemed inappropriate, which resulted in new laws and regulations designed to close the "loopholes". Tax evasion can range from a person who is paid in cash to avoid paying taxes to wealthy individuals who fail to report millions of dollars held in overseas financial institutions. While you may have an opinion on the severity of the crime, a willful failure to report income is illegal whether it's $100 in cash you got paid to work for someone or you have $100 million parked overseas. As technology improves, so has the ability of the IRS to identify potential fraud. The IRS has also dramatically increased certain penalties for failing to comply as an additional incentive to follow the rules. However, the basic premise of voluntary compliance ultimately means some people will be able to successfully avoid paying their taxes.

How would you evaluate the simplicity and administrative effectiveness of the U.S. tax code?

The U.S. Deficit for Fiscal 2017 Through July

The graph below tracks the deficit of the U.S. government for this fiscal year, which ends September 30, in comparison to the monthly deficit for Fiscal 2016. For the first 10 months of the year, the cumulative deficit is $568 billion; $54 billion more than last fiscal year. 

Since July 1, 2017 fell on a Saturday, the federal government made a number of payments in June, that would traditionally be recorded in July. As a result of this timing difference, the June 2017 deficit was much larger, and the July 2017 deficit was less. When combined, the June and July 2017 monthly deficits are $30 billion more than the same two months of 2016.

The deficit for all of Fiscal 2016 was $587 billion. Since the federal government has already overspent by $568 billion for the first 10 months of this fiscal year, it's all but certain the Fiscal 2017 deficit will be higher than Fiscal 2016. This is significant because the deficit was initially projected to decline in Fiscal 2017 and Fiscal 2018, before starting a rapid increase in Fiscal 2019. Since the current year deficit will be higher than last year, the cycle of ever increasing deficits may have already started and will continue indefinitely unless Congress does something to move towards a balanced budget.

What's your reaction to the latest budget deficit numbers?

Tax Reform Principles Part 2: A Fair System

This is the second installment in a three-part series discussing the principles to consider for tax reform. In the first part, we reviewed how the tax system is able to modify behavior with the intent of increasing economic activity, and more specifically, how the tax code helps grow the U.S. economy.

The second principle for tax reform is having a fair tax system. Two criteria are typically used to assess fairness.

• Does the tax system treat similarly situated taxpayers the same?
• Does the system account for the different capacities to bear the burden of taxation?

Tax law is supposed to be administered equally, fairly and objectively. Individual persons or companies should not receive different treatment when applying the same law. Even though fairness is a general foundation of U.S. tax laws, there are two areas of concern. The first is the special tax benefits (often referred to as loopholes) for a certain class or type of taxpayer. Most of these loopholes are the result of special interest lobbying and the power of individual members of Congress to write tax law that is beneficial to their constituents. These special provisions may affect a relatively small group of taxpayers (e.g. advantageous depreciation for motor sports track owners), but they rarely apply to a single taxpayer. Thus, all taxpayers meeting the criteria are to be treated equally (i.e. all racetrack owners). The second involves the ability to hire experts to maneuver an increasingly complex tax code. Large corporations and wealthy individuals are often better positioned to hire a team of experts who scour the tax code seeking the most advantageous benefits. These experts may allow them to structure their affairs to achieve tax benefits unknown to the average taxpayer. Again, these benefits are available to everyone, but you need the ability to hire the experts to know how to utilize them.

The issue of capacity to bear the burden of taxation is a subjective assessment of fairness and is open to a wide range of opinions. Fairness in taxation is very much like beauty; it's in the eye of the beholder. For some people, fairness is a very progressive tax structure whereby the more you pay a higher rate of tax when you make more money. The rate could be as high as 70-90%, which could be considered as confiscatory. A progressive tax system is designed to restrict income inequality and wealth accumulation. There is still a lot of subjectivity in a progressive system to determine how much is too much, and who gets to decide the limits. On the other end of the spectrum are those who believe in a flat tax, where everyone pays the same rate of tax, no matter how much you make. For them, the same rate of tax treats everyone fairly and equally. Our current system is a mixture of both a progressive and flat tax structure. 

Considering these two factors, do you think the U.S. tax system is fair? 

Tax Reform Principles Part 1: Promoting Economic Activity

The Joint Committee on Taxation (JCT) recently published a report providing an overview of the U.S. federal tax system and certain policies to consider for tax reform. If you're interested, you can read the entire report here. https://www.jct.gov/publications.html?func=startdown&id=5015

The report identified three questions to ask when evaluating a governmental tax system.

1. Does the tax system promote or hinder economic efficiency?
2. Is the tax system fair?
3. Is the tax system simple and easily administered?

In the evaluation of economic efficiency, one criteria considered is how the tax system changes, or potentially distorts, taxpayer behavior. You have probably heard people say that they don't want to work overtime or make more money because they lose too much in taxes. Given the current maximum federal tax rates of approximately 45%, this doesn't make economic sense. Even if you have to give up 45%, you still get to keep 55%. For example, if you earned an extra $1,000,000 and had to pay $450,000 in taxes you would still have $550,000 after taxes. Would be be better off making the extra $1,000,000 or not? However, the truth is the tax code does alter behavior, some good, and some not so positive. 

Another aspect is the extent to which the tax code promotes economic growth. This factor includes effective and marginal tax rates, but it also includes the vast number of incentives contained within the code. Advantageous depreciation provisions and solar energy credits are two examples. Certain depreciation rules allow taxpayers to deduct all, or a significant portion, of the cost of new equipment in the year of acquisition rather than recouping the cost over several years. Solar energy credits reduce the after-tax cost of the equipment and make the overall cost of solar energy more competitive to cheaper fossil fuels. Not only are these incentives designed to benefit the purchaser, but they are also intended to spur economic growth and manufacturing activity by helping to create demand for products. Tax rules also help achieve certain public policy goals, such as creating more green energy.

The final measure is the encouragement to produce domestic goods and services. As many barriers to global business enterprises have been removed in the past 50 years, there has been a lot more focus on how the U.S. is competing with foreign businesses. This was a major issue during the 2016 election cycle and was probably the key to President Trump's victory. Many people have felt the negative impacts of a global economy, especially in the manufacturing sector and are looking for Washington to encourage domestic manufacturing and production. There is a general consensus within Washington that U.S. tax policy is making it more difficult for manufacturers to complete with foreign companies. Since politicians across the political spectrum favor some type of corporate tax reform, it's reasonably likely corporate tax changes will be enacted in the near future.

The next articles will focus on fairness and tax administration.

Given these three criteria, do you think the U.S. tax system promotes or hinders economic activity?

The Fiscal 2017 Deficit Through June

The chart below tracks the monthly surplus or deficit recorded by the U.S. government for Fiscal 2017, which ends on September 30, 2017.

The deficit for June 2017 was $93 billion higher than June 2016. Since July 1st fell on Saturday, certain payments that would typically have occurred in July were paid in June. This accounted for $44 billion of additional June spending. Excluding the timing difference, the June deficit was $49 billion more than June 2017.

Overall, revenues for the first nine months of Fiscal 2017 were 2% more than Fiscal 2016, but total spending increased by 6%. This mismatch of spending growth in excess of revenue growth is fueling a larger deficit. Although the Congressional Budget Office (CBO) initially projected the Fiscal 2017 deficit would be less than Fiscal 2016, the CBO now expects the current deficit will be $109 billion more than last year.

Are you concerned that spending is increasing by 6% while revenues are increasing by 2%?

Freedom and Independence

Yesterday America celebrated freedom and independence. Although our nation is not perfect and we face many challenges, we have freedoms, independence and a standard of living few people of the world enjoy.

In reflection of this day, I see a correlation between freedom and independence. The more independent you are, the more freedom you can enjoy. Conversely, the more dependent you are upon a person, group or institution, the less freedom you have.

Many self-employed persons and entrepreneurs cite freedom and flexibility as one of their great benefits. These people still have to sell products and take care of their customers if they want to be successful, but they typically have more freedom than most employees, who are told when to work and when they can take time off. Frequently, the more dependent a person becomes on their job, the more freedom they are willing to give up.

The same concept applies to our relationship with government. The more dependent we become on the government to provide for our needs, the less freedoms we will enjoy. I recall images in the late 1970's and early 1980's of people in former communist countries of Eastern European lining up every day for their ration of food. They had little freedom and were heavily dependent upon their government for their survival. It may not have been by choice, but their dependence came with a lack of freedom.

This is not a sweeping statement that all government is bad. It's just an observation that the more dependent we become on the government, the less freedom we will eventually enjoy.

What do you think about the relationship between freedom and independence?