Getting Ready for Hard Times
Introduction
Getting Ready for Hard Times by John T Koraska aka SargeK was published as a free E-Book, September 11,2006 http://debtism.com/US-Economy/statistics.htm
Since then, the totals of US government debt and social insurance obligations (Social Security, Medicare & Medicaid) have sky-rocketed. Prospects of fulfilling “The American Dream” have virtually disappeared for millions of hard working Americans. The US economy has continued to weaken and with unsustainable debt overloads throughout society and governments at all levels; and with unemployment in the 9.5% to 10% range, prospects for a healthy economic recovery have become significantly more problematic.
A revision of Gettling Ready for Hard Times, dated August, 11, 2010 is being published on the http://www.uspublicpolicy.com website because I have found that the Network Solution’s web-hosting, internet facility to be easier to navigate and manage.
The revised Getting Ready for Hard Times E-Book is divided into four Chapters:
Chapter I - Legacy of Perpetual Debt
Chapter II - Fixing Social Security - Permanently!
Chapter III – US Econonmy
Chapter IV - Strategy for US Economic Reconstruction
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The legal principle of Equal Justice under Law, engraved over the Supreme Court is a
US Constitutional oxymoron. Violation of this principle has evolved into Injustice under Law.
Freedom without justice is as elusive as justice without truth. John Koraska
Warning of Perpetual Debt
"I place economy among the first and most important virtues and public debt as the greatest dangers to be feared.
To preserve our independence, we must not let our rulers load us with perpetual debt. If we can prevent the government from wasting the labor of the people, under the pretense of caring for them they will be happy." Thomas Jefferson
Chapter I
The Legacy of Perpetual Debt
A Legacy of Perpetual Debt is the American government's bequest to its hard working people. Practices of socialism and debtism have caused the USA to become the world's leading Debtor Nation. This did not happen because the nation is poor or in recession. The path from creditor nation to debtor nation is the direct result of faulty tax and welfare schemes that reward debt, penalizes savings, and erodes the rights of a free people. The Social Security (Chapter III) program provides prima facie evidence of how the U.S. economy is being insidiously transformed from a system of private ownership and free enterprise to socialism and debtism.
As a practical matter, Getting Ready for Hard Times requires changing public and private attitudes toward tax and welfare policies that are driving the country toward an economic and social abyss. This means education of voters and election of new faces with new ideas.
Any fair tax system should treat similar net incomes (regardless of source) with similar rates. All tax laws should consider the impact of inflation on income and should be indexed to an appropriate standard measure before taxes are calculated. This would reduce the incentives for government and citizens to use inflation to pay down debt with cheaper dollars. A return to the Gold Standard or a currency indexed to a basket of commodities would also reduce much of the political mischief and misdeeds that have occurred.
The US economic and social fabric is frayed and the tax, welfare, and monetary systems are broken. No amount of peripheral tinkering with programs now in place can repair the damages, regardless of who is in power. “Getting Ready for Hard Times” provides vital information regarding flawed tax and welfare policies to alert and motivate citizens to develop comprehensive plans to attain financial security, independent of government promises.
The evolving dynamics of government and business activities are driven by diverse public interests that often provide formidable obstacles to the private interests and personal wellbeing of an individual who may have strong desires to control his own financial destiny. The federal government has become the master, not the servant, of the people. Self-serving politicians confiscate income from wage earners that could be saved and invested; believing they can manage household budgets more effectively than the individual. A review of government's and the Federal Reserve Bank's records of fiscal and monetary failures indicates a chimpanzee could probably do a better job and would likely be more entertaining. The errant policies and practices of the federal government, the banking system, and corporate America have promoted debtism, while diminishing personal savings, equity, personal responsibility, and the motivation for self-sufficiency to provide for one's own needs.
Brief Review of Ambiguous FIT & FICA Rules, Laws & Practices
16th Amendment to the US Constitution (1913)
"The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without
apportionment among the several states, and without regard to any census or enumeration."
Social Security Act of 1935
INCOME TAX ON EMPLOYEES
"SECTION 801. (Paraphrasing) “In addition to other taxes, employees shall pay an income tax on 1% of wages up to $3,000 and every employer shall pay an excise tax on individuals in his employ of 1% on wages up to $3,000 on each employee... "
Note: The initial 1% was scheduled to increase in the early years of the program. There appears to be no constitutional authority for the government to transfer funds taken from one citizen and give them to another. Further, there is no constitutional authorization for a single taxing entity to collect two income taxes on the same income.
DEDUCTIBILITY FROM INCOME TAX
"SEC. 803. For the purposes of the income tax imposed by Title I of the Revenue Act of 1934 or by any Act of Congress in substitution therefore, the tax imposed by section 801 shall not be allowed as a deduction to the taxpayer in computing his net income for the year in which such tax is deducted from his wages.” Note: This provision of the Social Security Act more clearly violates the US Constitution than collecting two income taxes on the same income. It mandates that employees not only pay two taxes, it requires FIT taxes to be paid on FICA taxes. The 16th Amendment only authorized a tax on income. It DID NOT empower the government to collect an income tax on an income tax.
The FICA tax should be a legitimate deduction from individual FIT for no better reason than its prohibition is based on law of questionable constitutional merit. It is absurd that a debtor can deduct interest on a loan made voluntarily, but is prohibited from deducting the FICA income tax confiscated involuntarily from the same income.
The employee FICA tax rate is currently 7.65%. The 6.2% OASDI rate is capped at $94200 (2006) and the 1.45% HI rate has no ceiling. Since "deduction" of the 7.65% FICA tax is disallowed from individual federal tax returns, a taxpayer is required to pay income tax on the FICA tax. A worker in the 20% nominal tax bracket is actually paying 9.18% (7.65% FICA on gross income + 1.53% FIT on FICA income taxes).
EXCISE TAX ON EMPLOYERS
SEC. 804. In addition to other taxes, every employer shall pay an excise tax, with respect to having individuals in his employ, equal to the following percentages of the wages......(The excise tax matched the employee 1%)
Note: The implication “In addition to other taxes,” is two taxes are exacted on employers, (1) on income tax on profits and (2) an excise tax on wages. In practice, that is NOT how it operates.
No (SEC 803) prohibition was made for adjusting employer (corporate) income taxes by the amounts of other taxes. This TAX LOOPHOLE has led to massive government subsidies to corporations by fiat. Corporations not only deduct their own taxes, but ALSO all the individual FIT and FICA taxes confiscated from the paycheck of their employees plus their wages.
A possible remedy to balance employee and employer taxes is to close the Loop Hole that favors the latter. Simply repeal the Sec 803 standard that compels employees to pay two income taxes on the same income and FIT taxes on FICA taxes OR apply the same standard to employers that would eliminate the Business tax deduction of employee FIT & FICA taxes. Closing these Loop Holes would result in Business Employers to pay their fair share of taxes, reduce the tax load on employees, and provide billions in new revenue to the IRS.
Business Expense Deduction of employee FICA and FIT Taxes as Wages IRS Publication 535 (2004), Business Expenses
http://www.irs.gov/publications/p535/ch06.html
IRS QUOTE: 6. Taxes... Employment Taxes:
If you have employees, you must withhold various taxes from your employees' pay. Most employers must withhold their employees' share of social security and Medicare taxes along with state and federal income taxes. You may also need to pay certain employment taxes from your own funds. These include your share of social security and Medicare taxes as an employer, along with unemployment taxes.
You should treat the taxes you withhold from your employees' pay as wages on your tax return. You can deduct the employment taxes you must pay from your own funds as taxes. You pay your employee $18,000 a year. However, after you withhold various taxes, your employee receives $14,500. You also pay an additional $1,500 in employment taxes. You should deduct the full $18,000 as wages. You can deduct the $1,500 you pay from your own funds as taxes. UNQUOTE
How US Treasury Secretary Utilizes "Reverse Accounting" To reconcile the Gross Amounts of FICA taxes reported to the Social Security Administration (SSA) with the Net Amounts of FIT & FICA tax collections the US Treasury Secretary has resorted to “Reverse Accounting”!
This is footnote (5) to Table 1, discovered on page 41 of the Internal Revenue Service (IRS) 2003 Data Book.
Quote: “(5). Collections of individual income tax are not reported separately from Old Age, Survivors, Disability, and Hospital Insurance (OASDHI) taxes on salaries and wages (under the Federal Insurance Contributions Act or FICA, and on self-employment income under the Self-Employment Insurance Contributions Act or SECA). The OASDHI tax collections and refunds shown in Table 1 are based on estimates made by the Secretary of the Treasury pursuant to the provisions of Section 201(a) of the Social Security Act as amended and include all OASDHI taxes. Amounts shown for the two categories of individual income tax were derived by subtracting the OASDHI tax estimates from the combined total collections for the two taxes (refund estimates were not made for these two categories).” Unquote
The IRS 2005 Data Book http://www.irs.gov/pub/irs-soi/05db01co.xls provides the most current annual tax data, (fiscal year, ending September 30, 2005). This is a brief summary of Table 1 that focuses on key elements.
Gross Amount Net Amount
$2,268,895,122 $1,998,850,893 United States Total
307,094,837 272,762,788 Corporate Income Tax
1,107,500,994 879,927,524 Individual Income Tax
786,612,462 766,315,297 Individual Income Tax withheld
759,955,617 754,951,225 Employment Tax OASDI-HI total (5)
716,905,338 n.a. Federal Insurance Contributions Act (FICA)
43,050,279 n.a. Self-Employment Ins. Contributions (SECA)
6,947,510 6,819,217 Unemployment Insurance (FUTA)
4,538,535 4,534,855 Rail Road retirement
Note: In footnote 5, (referenced, above) the IRS has confirmed that the FICA (OASDHI) tax is just another “income tax”, even though the IRS and the SSA continue to label the FICA income tax as a “Contribution”. Even more interesting is the revelation of how the US Treasury reconciles ($100s of billions) of differences between gross FICA taxes reported to the SSA; but not collected by the IRS (due to EMPLOYER Business Expensing of Wages & Employment taxes, withheld from workers paychecks) on government balance sheets. To reconcile the shortage of net IRS FICA collections with the gross contributions reported by the Social Security Administration, the US Treasury simply totals up FIT & FICA collections, subtracts the estimated FICA taxes from the total, and calls the remainder “Individual Income Tax.” This dubious technique of “reverse accounting” provides a convenient, but highly questionable means of complying with the law that states: “Social security (OASDHI) (FICA-contributions) income taxes can only be spent on Social Security and Medicare.
This interpretation (reverse accounting) of IRS Footnote 5 is further supported by the US Treasury “Budget Results for fiscal year 2005”:
“Social insurance and retirement receipts were $795 billion, $2 billion higher than the MSR estimate. This increase was primarily attributable to the reallocation of withheld tax receipts from individual taxes to the Social Security and Medicare Trust Funds. The adjustment offsets the adjustment to individual income taxes described, above; there is no impact on total receipts.”
The arrogance of politicians, corporate and banking functionaries to think they can do a better job of managing money than an individual acting in his own self-interest is ludicrous and dangerous. The economic failures of the USSR provides an illuminating example of how dubious planning and excessive control by a central government erodes individual rights of the masses and diminishes the real value of labor and capital, over time. Vast wealth is concentrated into the hands of a small minority with increasing power over those who choose to surrender their individual freedom to socialist bureaucracies. History is a testament that centralized economic control, in the extreme, has always preceded economic and social chaos, although the process may take decades.
One might ask a Russian pensioner their thoughts on collectivism (central government economic management) and paper money. Specifically, one might ask what happens to political promises when a fiat currency loses its luster, or debt service overwhelms income and creative new schemes to sustain economic bubbly? Then, one might ask, what is the United States doing to AVOID a similar outcome?
The United States of America was formed to free the colonies from oppressive foreign rule and to create a unified defense. The U.S. Constitution was designed to limit the power of centralized government, and to preserve sovereign rights of and for the people. Finding new meanings in the document that do not exist are a hallmark in the political and judicial "Halls of Blame.”
Trends of pyramiding US debt are so ingrained in the economy that any abrupt change in direction will release massive economic forces that will erase decades of prosperity built on the national credit card and unconstitutional practices. The crisis once ignited will rapidly become uncontrollable. When trust is betrayed, it is almost impossible to restore.
The point of no return between implementing rational fiscal and monetary policies and national disaster may have already been breached!
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Chapter II
Fixing Social Security – Permanently
The Day of Reckoning has finally arrived! The inevitable, predictable point whereby no new victims can be added to
the Ponzi schemes is here – NOW! US government retiree compensation and public social insurance obligations have
overwhelmed the tax base and there’s little left to tax to support prior political promises. Social Security is about to
cease playing its decades-old role as a political cash cow and subsidizer of the rest of the Federal Government.
Since raising taxes and/or cutting spending are politically risky and may exacerbate economic recovery; speeding up
the currency printing presses may become the only temporarily acceptable alternative.
The two political parties, will as always, blame each other for (decades old) systemic policy failures which they will
proclaim to be unintended (but predictable) consequences of recession, aging population, etc. They will express
surprise by each succeeding crisis they have brainlessly engineered while prospects for future national prosperity
continues to decline. Concurrently, income and wealth spreads between the Chiefs and the Indians continues to
widen, unabated.
The huge cost increases of paying Social Security, Medicare, and Medicaid benefits to an expanding retirement
population poses the greatest economic challenge in US history. Health care cost inflation and automatic cost of
living allowances (COLA) further exacerbate the formidable funding problems. Hopefully President Obama’s
bi-partisan, National Commission on Fiscal Responsibility and Reform will find workable solutions to the impending
fiscal disaster that threatens US prosperity. I hope the commission focuses on defects in US tax and welfare laws
that are a patchwork of so-called “Unintended Consequences”.
Under current law, it is impossible to fix the Social Security Retirement and Disability funding problems.
The “Law” is the problem.
The Social Security Act of 1935, as amended, establishes Old Age, Survivors and Disability Insurance *(OASDI)
Trust Fund accounts. The law dictates that all surplus tax revenues and all earnings shall be invested only in
interest-bearing obligations of the United States or in obligations guaranteed as to both principal and interest
by the United States.
Many Americans believe that the Social Security retirement and disability trust funds contains pots of money that is
sitting somewhere earning interest to pay their benefits when they retire or become disabled. They naively believe
this because decades of widely disseminated misinformation and disinformation by media and political propagandists
have told them so.
As of July 31, 2010 the OASDI combined trust funds held $2.6 trillion 100% invested in special issue, non-marketable
IOU’s from the US Treasury. Correspondingly, the $2.6 trillion is a liability of the US Treasury; therefore, the trust
fund does not have any actual resources with which to pay Social Security benefits. It's like writing an IOU to yourself;
no matter how many or how large the IOUs, it doesn’t change your net worth one cent. Current unfunded liabilities of
the two retirement and disability trust funds currently exceed $5 TRILLION. It is hardly comforting to note that the
increased FICA taxes extracted from Baby Boomer paychecks for the past quarter century to fund their own retirement
(while paying for their parents and grandparents) have been squandered by politicians from both parties who place a
higher priority on incumbency than on the best interest of those they are elected to serve.
Regardless of how politicians, economists and others may describe OASDI trust funds, the bottom line is the law
grants the federal government legal permission to collect dedicated revenues such as the Federal Insurance and
Contributions Act (FICA) income taxes exclusively on wages. The law further authorizes the politicians to spend
cash surpluses for other purposes. The surplus FICA cash is replaced by US Treasury IOUs and put in the Trust Funds.
Interest on the Treasury debt held by the Trust is paid with more IOUs. Like a Ponzi scheme the scam continues until
benefit expenses exceed cash income and the accounts need to redeem the securities to meet beneficiary payroll.
This year, payments to Social Security’s retirement and disability beneficiaries exceed FICA income tax revenues on
wages and the income tax on SS retiree benefits. To pay back the Debt to the Trust Funds, the US Treasury is
financing the cash-flow deficit by increased borrowing from the public. Borrowing from the public will continue unless
or until cash-flows are brought back into balance. According to Congressional Budget Office (CBO) estimates (just a year
or two ago) withdrawals from the trust funds wouldn’t occur until 2016/2017.
See http://uspublicpolicy.com/socialsecuritycrisis.html
The Obama fiscal responsibility commission will undoubtedly propose a mixture of tired proposals to raise FICA tax
rates and eliminate the cap on Social Security (taxable) wage base (currently $106,800), raise the retirement age,
cut benefits and/or tamper with automatic COLAs that protect benefits from inflationary erosion. Except for the
latter, all these remedies were incorporated in previous Social Security reforms and they have produced surpluses
but the politicians SPENT the CASH and put IOUs in the non-marketable IOU debt in phony trust funds that are
disallowed by law to invest in anything but US government debt, which can only be redeemed with real assets such
as cash or marketable assets.
The 1983 Greenspan commission on Social Security reforms resulted in Ronald Reagan raising: FICA OASDI tax rates,
taxable wage base, and retirement age; and, reduced benefits by taxing them for the first time; thus renouncing all
previous political promises not to do so. Not surprisingly the combination of increased FICA income taxes on workers
and the new Income tax on benefits caused reported OASDI Trust Fund tax income to outpace expenses over the past
quarter century. These real surpluses were planned to offset the increased costs of funding “Baby Boomer” retirement.
The only thing wrong with the plan is the surpluses were not invested, they were squandered. So now, the politicians
are back to the drawing board trying to find devious new ways to pass-the-buck while hiding the truth about their fiscal irresponsibility’s and irregularities.
Note: the taxable threshold (Single $25k, Married $34k) on benefits was purposely not indexed to inflation so a
growing population of middle-class beneficiaries would pay income taxes on the benefit, thus reducing its real
value. Prior to 1993, 50% of SS benefits were subject to the Federal Income Tax (FIT). In 1993, new thresholds of
benefit taxation (Single $34k, Married $44k) were introduced to help finance Medicare funding shortages. The
current maximum mount of SS benefits subject to Federal Income tax is 85%.
The OASDI Trust Funds would be in excellent condition today if the surpluses had been placed in real Trusts and
invested by fiduciary Trustees in various asset alternatives instead of exclusively buying special US Treasury debt.
Instead, Congress and the Executive branch spent the surplus cash on other budget priorities and placed IOUs in the
Trust Funds. Now that cash flow between tax revenues and OASDI expenses has turned negative, Treasury must now
sell notes and bonds to the public and pay real interest on the public debt to redeem special issue (internal
government) debt or PRINT cash so all beneficiaries can be paid.
By setting up real Trust Funds with legally enforceable fiduciary responsibilities, government politicians can be held
to the same accounting standards imposed on the public. During the transition from Ponzi to responsible government
and to avoid falling into a national economic abyss; I propose the following:
1. Under the auspices of independent fiduciary Trustees gradually replace the special issue US government Notes
and Bonds with marketable issues and other high grade investment alternatives.
2. Print cash instead of IOU’s to temporarily fill the cash flow gap. This will spur the economy with little prospects
for inflation.
3. Pay interest (currently over $110 billion, annually) to the new Trust Funds in cash and/or marketable securities
so real assets can grow and gradually replace the special issue debt.
4. Consider providing governors of the 50 States with authority to both establish and oversee the new federal
government Trust Funds. Past Presidents and Congresses have already demonstrated they cannot be trusted to
police themselves.
5. Transition into a discontinuation of business wage expense deductions of individual income taxes and FICA taxes.
This will increase US government revenues by $100s of billions and perhaps muffle the noise that US corporations are
over taxed. The 35% Us corporate tax rate doesn’t mean squat when the taxable amount is reduced by massive
deductions, credits, etc. Note: More than ONE THIRD of the individual FICA and FIT taxes removed from
paychecks stays in the pockets of employers.
* Government trust funds bear no meaningful comparison to those in the private sector. Whereas the beneficiary of a
private trust fund legally owns the income from it, the same is not true of a government trust fund, which is really
nothing but an accounting device. Federal trust funds represent one accounting mechanism used to link earmarked
receipts with the expenditures of those receipts. The Office of Management and Budget (OMB) and the Department
of the Treasury determine budgetary designation as a trust fund when a law both earmarks receipts to a program and
identifies the account as a “trust fund” account.
There is no valid, rational reason that the Social Security retirement program cannot be converted to an
equity-based entitlement program whereby participants are insured to get a safe return on their investment,
an asset that may be passed on to heirs. To do that, the phony Old Age & Survivors Insurance (OASI) Trust Fund,
loaded with non-marketable, special IOU’s would need to be replaced with a real Trust Fund, with real assets one
that comprises sound economic principles of compounding asset value instead of compounding government debt.
Social Security participants need legally binding contracts to enforce their rights. To rely on political promises to
finance retirement is naiveté’ to the nth degree. Tell your Congressmen and Senators to change the law and
DO IT NOW! Or, start looking for a real job!
Personal Note: I can still recall when the politicians placed a FICA tax on military pay back in 1957. At the time,
the tax was modest and was concealed within a long overdue military pay raise. The new tax revenue from the
military was needed to help solve an immediate Social Security cash flow problem. Even then, politicians would not
acknowledge or could not grasp the notion that at some point in the distant future, the government would have to
pay benefits to the increased retirement population and to satisfy future liabilities, Trust Funds would require real
investments in marketable assets that could grow to meet predictable demands. Failure, one half century ago, to
change laws with regard to government administered trust funds has led to the massive debt and unfunded social
insurance obligations that exist today.
Since the US government is broke, it is my two sons who are being over taxed to pay for my retirement. Aware that
Social Security as currently constructed is unsustainable; they are trying to plan for their own retirement, but
uncertainties hinder savings and investment. By conserving some of the funds Uncle Sam is extracting from their
pockets and transferring to mine hopefully a just balance (within the family) can be eventually achieved.
John T Koraska, MSgt, USAF, Retired, father, husband, patriot
Note: Again! What makes anyone believe that any new reforms to cut benefits or raise taxes will make Social
Security sustainable and reliable, indefinitely? Without establishing legal restraints on politicians to squander
new revenues instead of making sound diversified investments in legally binding fiduciary TRUSTS it will be
business as usual.
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Revisions of Getting Ready for Hard Times is a work in progress. Hopefully, the remaining two chapters may be
completed before the election. Check back. Thank you.
John Koraska
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