What You Notice By Looking In The Wrong Place: The SAR Limit [Joe Mannix]

With the new (proposed, at the time of writing) $600 electronic transaction reporting threshold the IRS is planning as a part of new legislation, many have brought up the outrageous assumptions and problems with the scheme: the fact that it’s a panopticon, the fact that it represents an egregious violation of privacy, the fact that it will require gigantic expansions in the federal workforce, etc. It has also, as is perfectly reasonable, brought up the “$10,000 IRS reporting limit” as it exists today, and how it is different from what is being proposed.

That $10,000 limit is called the SAR (Suspicious Activity Report) limit. It was enabled by the Bank Secrecy Act (BSA) in 1970. The purpose of the BSA was to prevent money laundering, and included a lot more than the SAR provisions. It is also the source of various “know your customer” laws and requirements for banks. When the BSA was passed, the SAR was set at $10,000 and it is still, fifty years later, the same $10,000. It requires cash transactions above that limit to be reported to the IRS.

When the comparison between the SAR and the new $600 electronic reporting thresholds started, it got me to thinking: how big is the SAR and more importantly, how big was the SAR? To answer that, we can look in a few dimensions. I chose three of those and something interesting surfaced. For what it is worth, both 1970 and 2020 were recession years.

I chose the FDIC limit, median household income and per-capita GDP.
• FDIC Limit (per FDIC)
◦ 1970: $20,000
◦ 2020: $250,000
• Median household income (per Census Bureau; FRED/St. Louis Fed)
◦ 1970: $9,870
◦ 2020: $67,521
• Per-capita GDP (per FRED/St. Louis Fed)
◦ 1970: $5,233
◦ 2020: $63,285

So, how big is the SAR limit then and now? How big should the SAR limit be if it had kept pace? It’s pretty astounding, and it shows some interesting large economic disconnects of which we’re all intuitively aware.
• SAR limit in terms of FDIC Limit
◦ 1970: 50%
◦ 2020: 4%
▪ The SAR limit, if it kept pace with FDIC limits: $125,000
• SAR limit in terms of median household income
◦ 1970: 101.3%
◦ 2020: 14.8%
▪ The SAR limit, if it had kept pace with median income: $68,410
• SAR limit in terms of per-capita GDP
◦ 1970: 191%
◦ 2020: 15.8%
▪ The SAR limit, if it had kept pace with per-capita GDP: $120,934

So what can we learn from this exercise? First, the SAR limit is laughably small already and it really gives some perspective to $600. It should be, depending on which measure you choose, at least 7x bigger than it is and perhaps as much as 13x bigger than it is (assuming, of course, that you think it should exist at all). The specifics may be interesting, but this isn’t very important because everyone knows it is laughably small and thus dishonest.

More interesting in my mind is what it implies about the wider economy, which I wouldn’t have noticed if not for doing this exercise. The FDIC limit, as it turns out, more or less has kept pace with GDP growth. That is somewhat surprising. Household income has not. Inflation, as we have been lamenting off and on for decades is very real indeed, and we can see it bright as day. You used to be able to take out more than the median income before hitting the limit. Now it is a mere 15%. That’s your inflation, and it’s astounding.

But even more astounding is the direct comparison between median household income and per-capita GDP in same-year nominal terms. In 1970, the median household income was 188.6% of per-capita GDP. In 2020, it was just 106.7%. The overall share of GDP represented by median income has collapsed. This, right here, is your middle-class squeeze - the declining relative income of most households even as the economy has soared for half a century. On average each year, incomes fall against the gross size of the economy. Want your middle-class squeeze? Want your income inequality? Here it is, in all it’s staggering glory. Want to know why (other than social considerations) women were able and then more or less compelled to enter the workforce? Here it is: households needed the money.

This also puts some additional perspective on America’s last gasp from 2017-2019. The Trump era, for the first time in decades, saw median household incomes grow against the wider economy. The middle class and especially the working class started doing materially better for the first time in living memory. And now it is over, and we are back to the original status quo. The only difference is that now it is on steroids.

posted by Open Blogger at 03:32 PM

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