IRS Refunds $4 Billion Child Tax Credits Per Year to Illegal Immigrants Whose Kids Do Not Live in US (and May Not Exist at All); Earned Income Fraud Another $13 Billion

Here's an interesting video that came my way yesterday from a close friend. The video highlights a news investigation by Channel 13, WTHR in Indianapolis, regarding fraudulent refunds of taxpayer money to illegal immigrants living in the US. The refunds are based on child tax credits, when the kids live in Mexico or elsewhere.



Link if video does not play: Another Massive Tax Loophole!

Typically videos like this are not remotely true, but this one is according to FactCheck.

Q: Does the IRS pay billions in tax refunds to workers who are in the U.S. illegally?

A: Yes. The Treasury Department’s Inspector General determined that $4.2 billion was paid in 2010, up from less than $1 billion in 2005. Leading Democrats are resisting a bill that would stop future payments.

FULL ANSWER

This is a rare case of an Internet rumor with some substance to it. In fact, it’s shaping up as a major dogfight in Congress. At issue here are the federal child tax credits that can be claimed by persons with dependent children under age 17. Some Democrats are already defending these child tax credit payments that have gone to those without a valid Social Security number, accusing Republicans who want to end them of a heartless attack on children.

Several different versions of this viral email all cite a recent investigative story by an Indianapolis television station, but WTHR-TV is far from the first to notice. The Washington Post and others reported on this last year when the Treasury Department’s inspector general for tax administration issued a report on July 7, 2011.

The title of the report summed up the IG’s [Treasury Inspector General] finding: “Individuals Who Are Not Authorized to Work in the United States Were Paid $4.2 Billion in Refundable Credits.”

Problem Still Not Addressed

The WTHR video appears to be from 2012. The treasury inspector general report came out in 2011.

So Congress, the treasury, the IRS, and presumably president Obama have known about this for at least two years.


Fraudulent Bonanza for Illegals

The question I had this morning is a simple one: has anything been done yet?

It does not appear to be the case.

On April 16, 2013, The Washington Times featured an article by Edwin S. Rubenstein Collecting billions in a loophole, subtitled "Fraudulent tax refunds yield a bonanza for illegal immigrants".

As federal services from air-traffic control to White House tours are ratcheted down thanks to the budget sequestration, millions of illegal aliens are now eagerly await billions in illegitimate Treasury payments, courtesy of the Internal Revenue Service (IRS).

Two programs, the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC) provide cash payments to low-income parents who pay no income tax and fail to have a valid Social Security number.

The IRS knowingly allows illegal aliens who claim children to get Earned Income Tax Credit cash payments of up to $5,891 per household. This is one reason why these cash payments are expected to exceed $52 billion in fiscal year 2012 alone. The General Accountability Office (GAO) estimates that roughly a quarter of all Earned Income Tax Credit payments are issued improperly.

Compounding the problem is the Additional Child Tax Credit, which was added to the older Child Tax Credit program that became law in 1997. The Child Tax Credit reduces the tax low-income families pay by $1,000 for each child under 17. If the tax filer claims five children for a credit of $5,000 but owes only $2,000 in taxes, under the Additional Child Tax Credit the IRS sends the filer a check for the difference, or $3,000.

The federal tax agency makes no effort to verify the existence of children or the eligibility of the tax-credit recipients to work in the United States. Indeed, IRS managers reportedly encourage their staff to ignore questionable applications and blatant fraud for the sake of fast-tracking Individual Taxpayer Identification Number approvals.

The scandal prompted at least one congressman to act. Last year, Rep. Sam Johnson, Texas Republican, introduced the ITIN Reform Act. The legislation would require people claiming Additional Child Tax Credit refunds on tax returns filed without a Social Security number to verify their citizenship status in person at an IRS office. Currently, the IRS sends these refunds automatically, with no questions asked.

Total Illegal Immigrant Fraud Over $17 Billion Annually

General Accountability Office (GAO) estimates one-fourth of the annual $52 billion in earned income payments is fraudulent. The math here is pretty simple. One-fourth of $52 billion is $13 billion, so the total cost to taxpayers is $17 billion annually.

Democrats do not want to do a damn thing about this, nor does the IRS. Please play the video, it's a real eye opener.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Mapping Color Names

Where does "purple" stop and "pink" begin? At what boundary does "green" become "yellow?" Above is a map for an average English speaker.

The blog Empirical Zeal digs into the question of how cultures have arrived at their mental maps of color names.

"The picture that’s emerging is that colors aren’t quite random slices of the visual pie. They’re somewhat basic categories that humans from different cultures gravitate towards, and must have to do with how the biology of how we see the world. In other words, rainbows have seams. We can distill a rainbow into its basic visual ingredients, and a handful of colors come out."

The Crayola-fication of the World.

California, Illinois on Brink of Pension Crisis; New Actuarial Rules Will Force States to Admit Problems

Many states, especially California and Illinois, have had severe pension underfunding problems for many years.

However, new actuarial pension rules will finally force states to admit the problem. Thus, it should not be surprising that talk of "technical bankruptcy" and “service insolvency” is growing.

Here are some pertinent ideas from California on the Brink: Pension Crisis About to Get Worse

• Moody’s new credit standards for public pensions would nearly double the unfunded liabilities for state and local pension plans in California to $328.6 billion from $128.3 billion.
• California has the second lowest credit rating at Standard & Poor’s of all 50 states; Illinois now has the worst. Moody's new standards would drop the funded status of these plans to 64%, versus a previous estimate of 82%, the Center said.
• “By standard accounting methods, some state pension funds will run out of assets within as little as five years”
• New rules will lower expected rates of returns on their pension assets, instead of the often overstated returns they now use to paper over holes in their plans blown out by bad investments.
• Meredith Whitney says California is papering over budget holes with gimmicks, like raising taxes retroactively, pushing state expenses onto local towns and cities that can’t afford them, and underfunding their pension funds. "It’s so much worse than the rosy picture that the headlines suggest,” the CEO of Meredith Whitney Advisory group says.
• The Senate Joint Economic Committee reiterates what Whitney says. “Many states and localities have regularly skipped or underfunded contributions to pension plans,” the report said. “Over the past five years, state and local governments have underpaid actuarially required pension contributions by more than $50 billion. The worst culprit of all, Illinois, has underpaid its pension contributions to the tune of $28 billion over the past 15 years.”
• Illinois’ plan is just 44% funded, or 30% using “conventional accounting standards,” the Senate committee says. Los Angeles’ combined plans would fall from 77% funded to 50% funded.
• San Jose’s combined plans would fall from 75% to 60% funded.
• San Francisco’s combined plans would fall from 88% funded to 69% funded.

Trouble Will Escalate

Many California cities are in serious trouble, and that trouble will grow by leaps and bounds as soon as there is a significant stock market correction.

Pension plans typically assume 7.5% returns. That's  not going to happen on a sustained basis with 10-year treasuries yielding close to 2%. Yet, any significant rise in bond yields will crush existing bondholders as well as wreak havoc in equities.

Moody's wants states to assume 5.5% returns, but even that is far too high. The stock and bond markets are now so bloated thanks to Fed bubble-blowing policies that 0-2% returns for a full decade is a distinct possibility. And not a single pension plan in the US is remotely prepared for such an event.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Fierce Selloff in Emerging Market Currencies; India Intervenes to Stop Plunge in Rupee; Brazil Steps Up Real Intervention; Root Cause of Crisis

It's hard not to laugh at the irony of recent central bank currency actions.

• After complaining for years about the strength of the Real, the Brazilian central bank stepped up intervention actions hoping to stop a plunge in the currency.
• Turkey now attempts to attract capital after taking measures for the past four years to stop the flow of money into the country.
• In India, the central bank seeks to stop a plunge in the Rupee which is at a record low of 58.95 to the dollar.

The Wall Street Journal reports Emerging-Market Currencies See Turnaround After Hefty Losses

The South African rand and other emerging-market currencies reversed course to gain against the dollar Tuesday after suffering heavy losses earlier in the session.

These currencies have plummeted rapidly in June, dragged down by expectations the Federal Reserve will taper its bond-buying program later this year. Ultra-accommodative U.S. monetary policy had helped drive investors to seek higher yields in emerging markets in recent years, analysts say.

India's central bank dove into foreign exchange markets Tuesday to stop the rupee's slide at a record low of INR58.95 to the dollar. Pressured to attract capital to the country, a top Indian economic official promised a new round of measures to allow foreign investment in currently restricted parts of the economy. The rupee pared losses against the dollar but still fell 0.3% on the day to trade at INR58.34 per dollar.

Turkey's central bank on Tuesday announced new measures to attract capital after spending much of the past four years trying to stop too much money from flooding into its economy. That helped to stem the lira's fall to near a multi-year low against the dollar as police moved in on protesters in Istanbul. Turkey's capital measures echoed Brazil's move earlier this month to eliminate a 6% tax on foreigners' bond investments.

Brazil's central bank stepped up intervention in the face of the rapid currency depreciation that began on May 28, with a series of foreign exchange swap auctions, including two on Tuesday.

Emerging Market Assets Suffer in Fierce Sell-Off

The Financial Times reports Emerging market assets suffer in fierce sell-off.

Emerging market currencies, stocks and bonds suffered a fierce sell-off on Tuesday on rising investor concerns over the prospect of the US Federal Reserve reining in its programme of bond-buying to drive down long-term interest rates.

The South African rand and the Brazilian real touched four-year lows against the US dollar on Tuesday, and the Indian rupee fell to a record low. Even relatively robust countries like the Philippines and Mexico – long favourites of investors – have been hit by a spate of selling.

The FTSE Emerging Markets index fell 1.7 per cent on Tuesday, taking its decline since its May peak to more than 10 per cent. Shares in Brazil – one of the four big emerging markets – closed 3 per cent in São Paulo on Tuesday. That pulled Brazilian shares into bear market territory – a drop of more than 20 per cent from a peak this year.

Both international and local currency emerging market bonds have been pummelled, sending borrowing costs higher.

Benoit Anne, a senior strategist at Société Générale, said central bank money had arguably inflated a bubble in emerging markets, which was now unravelling as investors priced in a change in Fed policy. “This will not be a short-lived sell-off,” he predicted.

Emerging market fund managers have also been hit by investor redemptions. Asset managers that focus on international bonds last week suffered the biggest investor withdrawal since mid-2007, according to EPFR. Emerging market equity funds were hit with the biggest redemptions since 2011. 

Cause of the Selloff

Both the Financial Times and the Wall Street Journal pinned the blame on the possibility the Fed would stop its QE programs later this year.

I rather doubt that is the cause, and I also doubt the Fed is going to stop QE any time soon.

Instead, I propose this is what happens when bubbles burst. And a huge part of numerous bubbles was widespread belief the growth in China and India will last forever. Hot money plowed into emerging market countries and also commodity producing countries.

Australia is another casualty of the coming bust of China. For details please see Australian Dollar Plunges as Home Loans Dive; Australia Insolvencies Hit Record; Worst is Yet to Come.

To be sure, insane amounts of liquidity fueled various bubbles in stocks, in bonds, in emerging markets. But with the global economy rapidly slowing, and with much of Europe in an outright economic depression, the Fed is not that likely to curtail QE soon.

If the Fed does slow QE, it will not be because the US economy is strengthening, but rather realization by the Fed (not admitted of course) that various stock and bond market bubbles pose serious economic risks if allowed to grow bigger.

Root Cause of Crisis

By the way, all this extremely volatile currency action, as well as various equity and bond market bubbles, can be pinned entirely on central banks, fractional reserve lending, and lack of a gold standard.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com 

Sketches at IMC

Quick post to let you know that I am at Illustration Master Class in Amherst, Massachusetts, where a group of 95 artists work on a college campus for a week to create a fantasy painting under the guidance of the full-time faculty and guest lecturers. 

Here's Mo Willems, children's book writer and illustrator, who gave a talk about his book, which include A Big Guy Took My Ball! .

We were also treated to a talk by New Yorker illustrator and character designer Peter de Sève. He told the story how he got started as an illustrator and found his way to his movie design work.
-----
Previously: Illustration Master Class 2011
Book: A Sketchy Past: The Art of Peter de Seve
Mo Willems A Big Guy Took My Ball!

Illustration Master Class

Mortgage Refis Plunge Following 76 Basis Point Rise in 30-Year Rate; Treasury Yield Reaches 14-Month High; What About Convexity Hedging?

Curve Watchers Anonymous has been watching the rise in interest rates across much of the yield curve.

Yield Curve as of 2013-06-11



click on chart for sharper image

As one should suspect, mortgage rates have been rising in conjunction with the rise in treasury rates. Here is a chart from Steen Jakobsen, Chief economist at Saxo Bank in Denmark.



Note the annotation "30 Yr mortgages rate is up 76 basis points on the year with no growth increase". the phrase "no growth" pertains to lack of growth in the overall US economy.

BankRate notes the following 3-month trends.

30-Year Mortgage Rate



15-Year Mortgage Rate



5/1 ARM Mortgage Rate



As one might suspect this rapid rise in mortgage rates will wreak havoc on mortgage refinancing. And it did. I called a couple of my industry contacts and they state refinancings have plunged by 50% or more.

One contact says there has been spillover into new home applications, another has not seen that "yet".

Word About Convexity

As rates rise, three things happen.

1. Refinancings plunge
2. Losses mount
3. Hedging increases

Bloomberg discusses convexity hedging in its report Treasury Yield Reaches 14-Month High.

Convexity Hedging

“Some people are probably concerned that Treasury yields are approaching a level that would trigger convexity hedging, which will push yields even higher,” said Soeren Moerch, head of fixed-income trading at Danske Bank S/A in Copenhagen. “That adds pressure to the market.”

As rates increase, the potential for refinancing mortgage bonds and loan-servicing drops, extending the average lives of the securities and leaving holders more vulnerable to losses.

Investors then may seek to pare the duration risk or rebalance existing hedges by selling longer-dated Treasuries, mortgage bonds or transacting in interest-rate swaps or options on those contracts, sending yields higher and spreads wider.

Dealers from Deutsche Bank AG to Barclays Plc said the risk of that happening was reduced by the fact the Fed currently has $1.2 trillion of mortgage-backed securities in its stockpile, making it the biggest holder of the securities.
No Repeat

“The actual convexity hedging flows will be less when rates rise this time than it was in the past,” said Dominic Konstam, global head of interest-rates research at Deutsche Bank. The hedging “was massive in 2003, and we won’t see a repeat of that. With the Fed holding so much of the mortgage paper, it really knocks down the amount of mortgage hedging needed when yields rise.”

Convexity hedging "may not" kick in, "as much" but the Fed is buying massive amounts of treasuries,  yet treasury yields soared, with mortgage rates up a very significant 76 basis points in little over a month.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com 

German Constitutional Court to Rule Whether ECB Actions Violate German Law; Irrelevant Arguments and Outright Lies; Dangerous Games

The German Constitutional Court in Karlsruhe, heard arguments on Tuesday on whether ECB measures to contain the eurozone crisis violate German law.

The court does not have the power to block the ECB, but it does have the power to restrict German participation in various funding schemes.

The New York Times dramatically states German Court Debates Fate of Euro.

Karl Albrecht Schachtschneider, a retired law professor and well-known euro opponent, told the court he hoped that “the euro adventure will be brought to an end for the good of Germany and the good of Europe.”

On the opposite side, Wolfgang Schäuble, the German finance minister, warned that the cost to Germany would be incalculable if the country left the currency union. And he pointed out that under the European Central Bank, inflation has been lower than it was with the deutsche mark. “The E.C.B. is acting within its mandate,” he told the court.

Mr. Schäuble said the central bank could be put into an impossible position if it were faced with conflicting rulings by courts in different euro zone countries.

The hearing, in a fenced-off court and police complex in a wooded area outside Karlsruhe, a city in southwest Germany near the border with France, drew an eclectic group of Germans on both the left and right who deride the euro as a travesty and long to bring back the deutsche mark. Outside a security checkpoint, several dozen anti-euro protesters chanted and waved signs. One sign called for Jörg Asmussen, a German arguing on behalf of the E.C.B. in the hearings, to be thrown in jail, an indication of the emotion that some Germans attach to the issue.

Mr. Asmussen, a member of the E.C.B.'s Executive Board, and Jens Weidmann, president of the Bundesbank, were expected to argue opposite sides of the question later in the hearings, which continue through Wednesday.

Mr. Weidmann is expected to repeat his counterposition, often expressed in speeches and interviews, that buying such bonds would violate a prohibition against using the euro zone’s central bank to finance governments.

The objections raised by the opponents of European Central Bank action tended to follow a similar set of themes. The central bank’s policies, they said, will evolve into a means to transfer German wealth to Greece, Italy and other European Union countries against the will of the German people. E.C.B. policies will save banks at the expense of ordinary citizens, complainants argued.

Irrelevant Arguments and Outright Lies

• Schäuble said "the central bank could be put into an impossible position if it were faced with conflicting rulings by courts in different euro zone countries." So what? That is not the problem of the court.
• Schäuble said inflation was lower under ECB mandate. Once again that has nothing to do with the legality of the issues at hand.
• Schäuble warned that the cost to Germany would be incalculable if the country left the currency union. That comment is disingenuous at best. It ignores the huge potential costs to Germany if Germany stays in the eurozone. Regardless, the argument about costs of a breakup are irrelevant.

There is only one issue in this case that is relevant: Do any ECB actions or proposals violate a German constitutional prohibition against using the euro zone’s central bank to finance governments?

I am certain they do. Whether the court pushes the line one more time is the only issue in doubt. I suspect they will, again, with still more wishy-washy language regarding where the line in the sand is.

You can see a strong hint of that possibility as the Times points out "questions [by the judges] suggest the court might rule on narrow grounds, arguing that at least some aspects of the complaints were premature".

Dangerous Game

Spiegel Online Guest Commentary by Peter Bofinger says ECB Case at High Court: The Bundesbank Is Playing a Dangerous Game

With its opposition to the ECB's bond-buying policy, the German central bank is pursuing a risky strategy that may stem in part from a desire to enhance its own power.

The Bundesbank concedes that the purchase of bonds by central banks is a common practice, but notes that in the case of the United States, Japan or the United Kingdom, central banks only buy bonds of high creditworthiness. The ECB, by contrast, plans to buy bonds of "poorly rated member states" in order to reduce their high-risk premiums, writes the Bundesbank.

In doing so, Bundesbank officials are deliberately ignoring the fact that the budget deficits and debt levels of the aforementioned three countries are in some cases considerably higher than in the crisis-hit nations of the euro zone. The "high creditworthiness" doesn't reflect budgetary discipline there. Rather, it stems purely from the fact that the central banks in question opted for large-scale bond buying to give a clear signal to market participants: the US, Japan and the UK will never suffer a liquidity problem in the bond markets.

Mud Slinging

All the euro proponents can do is throw mud and hope some of it sticks. It's quite a stretch of the imagination to propose the Bundesbank purpose is to "enhance its own power".

Regardless, "why" Jens Weidmann, president of the Bundesbank, has pursued this action is of course irrelevant. The only question at hand is whether or not ECB actions violate the German constitution.

Two-Faced Presentation

Finally, I would like to point out the blatant two-faced nature of euro proponent arguments. On one hand they want the court to believe ECB actions will be limited, and on the other hand they want the ECB to do anything and everything (including buying outright junk) in a "whatever it takes" approach, regardless of the risks to German taxpayers, and regardless of constitutional issues.

The end clearly justifies the means for euro proponents.

And here's the irony: The true "dangerous game" comes when populists seek to ignore constitutional issues for the sake of convenience. Nothing good ever comes from such actions.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com