Monday, October 31, 2011

Rick Perry's "Cut, Balance and Grow Plan" Alternative 20 Percent Flat Tax

Rick Perry's "Cut, Balance and Grow Plan"

Rick Perry proposed an optional 20% flat tax that preserves mortgage interest, charitable and state and local tax exemptions for families earning less than $500,000 annually, and increases the standard deduction to $12,500 for individuals and dependents.


The Economist features a selection of evaluations.

An independent voter may agree with Reihan Salam's characterization in National Review that "Rick Perry’s proposal is not a flat tax. Rather, it is an alternative maximum tax or MAXTAX."

It would likely ease compliance costs for top earners but, as Len Burman writes in Forbes, "Millions of middle-income taxpayers will have to figure their taxes two ways to figure out which plan is better for them."

There are also the usual questions raised about how much revenue would be raised, what the deficit impact would be, and what would be cut in order to balance the budget.

Sunday, October 30, 2011

Rick Perry, Flat Tax, and Inequality

Rick Perry's "Cut, Balance and Grow Plan"

Rick Perry proposed an optional 20% flat tax that preserves mortgage interest, charitable and state and local tax exemptions for families earning less than $500,000 annually, and increases the standard deduction to $12,500 for individuals and dependents.

The Economist features a selection of evaluations.

An independent voter may agree with Reihan Salam's characterization in National Review observation that "Rick Perry’s proposal is not a flat tax. Rather, it is an alternative maximum tax or MAXTAX."

It would likely ease compliance costs for top earners but, as Len Burman writes in Forbes, "Millions of middle-income taxpayers will have to figure their taxes two ways to figure out which plan is better for them."

There are also the usual questions raised about how much revenue would be raised, what the deficit impact would be, and what would be cut in order to balance the budget.

It's coincidental that Rick Perry's plan came out the same week as the Congressional Budget Office report "Trends in the Distribution of Household Income Between 1979 and 2007".

Of the three current top polling candidates, Cain's 9-9-9 plan does the most to accelerate income inequality. Mitt Romney was criticized by Newt Gingrich for capping capital gains tax exemptions.

Inequality Chat

As to the implications of inequality, Paul Solmon followed his PBS NewsHour series with a Twitter chat on 10/28/11, which is re-organized and somewhat translated into English below.

Without getting into arguments about whether or not the United States Government taxes too much or spends too little, this independent voter is primarily interested in two issues. How does income inequality affect the ability of the private sector to function?

Question: Why a series on economy inequality?
Solman: I think it's the most important economic issue of our time, has been for years. Can America Dream, US survive inequality like Gilded Age, '20s?

JRRuss67: What happened in mid-70s to cause the gap to widen so much?
Solman: Lots: Globalization (cheap labor) I. Deregulation. Diminished influence of unions. Big boost came from '80s with "tax reform."

Question: Why feature Libertarian Epstein? Don't they get enough air time?
Solman: Maybe, but not from us. I thought he made his case so blatantly, viewers could evaluate it for themselves. Disagree?

tniblett: How have we convinced ourselves that inequality is good for USA?
Solman: Because it's in the interest of the economy's winners to champion the notion that they deserve what they get?

tniblett: True, but why is it in the interest of economy's losers to believe it?
Solman: A puzzle why economy losers believe it. But polls now suggest we increasingly DON'T believe inequality is good for economy.

Question: Doesn't inequality always contribute to inequality or repression?
Solman: No, inequality doesn't ALWAYS contribute to political instability or repression. But it doesn't seem help either one & if wide enough.

tkmalone: How does concentrated wealth affect consumer spending? More money on fewer individual needs, food, houses, cars, etc.?
Solman: Concentrated wealth hurts consumer spending because wealthy save a higher percentage of their income. Much higher.

Question: Why not "income disparity" instead of "inequality," which implies something wrong, INequitable?
Solman: Because "inequality" is a clear and true description? Would you prefer "income asymmetry"? Folks would feel even better.

Question: It seems the corporations have written off consumer demand and are still making profits?
Solman: US corps are selling more and more abroad. That's presumably why the US market has gyrated so because of events in Europe, China.

norrisj: 12th grade economy class here. We are concerned about equal opportunity vs. equal result.
Solman: "Equal opportunity" sounds great. But if only some folks have marketable skills in this economy and others don't, then what? Can those of us with skills that aren't "marketable" opt out of this market in ignorance, deceit and obedience? Aside from unemployment? The grim truth is, choices are to opt out via downshifting (living with folks? At Zucotti Park?) or getting the skills. Opportunity inequality based on marketable ability. Needs to be role for folks with limited ability, be it factory or massage.

policylink: How do the coming racial demographic changes play into this debate? US will be majority people of color by 2042
Solman: I don't know. You'd think poorer minorities would vote for equality policies, wouldn't you?

AFWorkforce: People need choice. Many people feel like they are looking at glass ceiling and shackled to job
Solman: Yes, hard to move if you can't sell your house or are terrified that if you quit your job, you won't find another.

BerylSchewe: How do we widen the chances for equal opportunity without increasing entitlements?
Solman: Why "entitlements"? How about real jobs that need doing, done by sidelined Americans? CCC anyone?

norrisj: What would you propose for equality policy? Income cap? Tax the rich? confiscate?
Solman: Taxing the wealthy seems such an obvious starting point. Top tax rate under Wilson: 77%; FDR: 94%. Today: 35%!

mediacodex From London: Isn't raising opportunities for lower classes more important a focus than on lower inequality?
Solman: Yes, focus on job opportunities for the low downs but can it be done without investing in them? Who will invest but high ups?

bwmcr: How do we begin to showcase that economic policies that increase equality are not socialist, and gaining acceptance.
Solman: FDR was accused of being a socialist and, compared to what had preceded him, perhaps he was.

DgwilsonDave: What about putting fees on fossil fuels and emissions and rebating equally per person?
Solman: Charging the true cost of negative externalities like pollution is basic economics. But wouldn't do much to affect inequality.

bwmcr: How about tax breaks for companies that have more equal pay like Ben and Jerry's? Reward socially-mindedness.
Solman: It would be very difficult to legislate. Got to be easier to tax the wealthy. And if government owns, to pay top dogs less.

tsheely67 Why does such a high percent pay NO federal tax? Wouldn't more stakeholders insist on less waste?
Solman: Interesting point. Flat taxers say simple is better. But you can have simple and progressive both. Check out original tax form.

JohnMesserly: Paul, recall when you did your first story on it?
Solman: For PBS Boston, inequality stories in early '80s. For NewsHour, "Upstairs, Downstairs" in '87. Reported "Hourglass economics" in '89.

Sunday, October 23, 2011

Commander in Chief Reports on Libya and Iraq, Republicans and Two Democrats Vote Against Helping States Keep Teachers


Excerpts from Weekly Address:

This week, I was proud to announce that—as promised—the rest of our troops in Iraq will come home by the end of this year.

In Libya, the death of Moammar Qadhafi showed that our role in protecting the Libyan people, and helping them break free from a tyrant, was the right thing to do.

In Iraq, we’ve succeeded in our strategy to end the war. Last year, I announced the end of our combat mission in Iraq. We’ve already removed more than 100,000 troops, and Iraqi forces have taken full responsibility for the security of their own country. Thanks to the extraordinary sacrifices of our men and women in uniform, the Iraqi people have the chance to forge their own future. And now the rest of our troops will be home for the holidays.

In Libya, our brave pilots and crews helped prevent a massacre, save countless lives, and give the Libyan people the chance to prevail. Without putting a single U.S. service member on the ground, we achieved our objectives. Soon, our NATO mission will come to a successful end even as we continue to support the Libyan people, and people across the Arab world, who seek a democratic future.

These successes are part of a larger story. After a decade of war, we’re turning the page and moving forward, with strength and confidence. The drawdown in Iraq allowed us to refocus on Afghanistan and achieve major victories against al Qaeda and Osama bin Laden. As we remove the last of our troops from Iraq, we’re beginning to bring our troops home from Afghanistan.

To put this in perspective, when I took office, roughly 180,000 troops were deployed in these wars. By the end of this year that number will be cut in half, and an increasing number of our troops will continue to come home.

At Home:

On 10/20/2011, the Senate split 50-50 on a vote to debate the portion of Obama's Jobs Act to help the cash-strapped states hire teachers and first responders. The Republicans would have filibustered any vote short of 60 to debate the bill.

All 47 Republicans plus Democratic senators Ben Nelson (Nebraska) Mark Pryor (Arkansas), and Independent Joseph Lieberman (Delaware) decided that an additional 0.5% tax on earned income over $1 million was too great a price for helping the states stabilize their unemployment rates by keeping teachers, firefighters and policemen on the job.

Sunday, October 16, 2011

The Man Behind Cain's 9-9-9 Plan

During the 10/12/11 GOP debate on the economy, when Herman Cain was asked who he turned to for political advice, he replied, "One of my experts that helped me to develop this was a gentleman by the name of Rich Lowrie out of Cleveland, Ohio. He is an economist and he has worked in the business of wealth creation most of his career."

What kind of economist is Rich Lowrie?


According to his Linkedin page he has a BS in Accountancy from Case Western Reserve University.

How did Rich Lowrie create wealth?

He is currently a wealth management adviser at the Pepper Pike, Ohio branch of Wells Fargo.

"We offer comprehensive wealth management solutions for business owners, executives, professionals, families and fiduciaries."

Is a background in economics important?


Here's an exchange from the debate.

JULIANA GOLDMAN (Bloomberg TV): Mr. Cain, you say that your plan is revenue-neutral. And last year, the U.S. collected $2.2 trillion dollars in tax revenue, but Bloomberg Government has run the numbers, and your plan would have raised no more than $2 trillion. And even with that shortfall, you'd still be slapping a 9 percent sales tax on food and medicine.

CAIN: The problem with that analysis is that it is incorrect. The reason it is incorrect is because they start with the assumptions that we don't make. Remember, 9-9-9 plan throws out the current tax code.

Cain uses this statement as a means of getting back to his talking points. I don't believe that Bloomberg Government would "forget" that 9-9-9 throws out the current tax code because analyzing the alternative tax code was the purpose of their calculation.

CAIN: We have had an outside firm, independent firm dynamically score it. And so our numbers will make it revenue neutral.

Now we have a comparison of one named independent firm Bloomberg Government using existing numbers to evaluate Herman Cain's "simple, transparent, efficient, fair, and neutral" plan refuted by an unnamed independent firm's "dynamic scoring." Dynamic scoring is not an accounting principle but an economic one.

GOLDMAN: But then explain why under your plan all Americans should be paying more for milk, for a loaf of bread, and beer?

CAIN: You have to start with the biggest tax cut a lot of Americans pay, which is the payroll tax, 15.3 percent. That goes to 9 percent. That is a 6 percentage point difference. And the prices will not go up. So they have got a 6 percentage point difference to apply to the national sales tax piece of that, and in doing so, they have the flexibility to decide on how much they want to spend it on new goods, how much they want to spend it on used goods. Because there is no tax on used goods.

Here we get a look at Cain's assumptions.

Fact: Americans who pay only a payroll tax will have 6.3 percent more cash in their pocket to pay the new 9 percent sales tax.

Assumption: Prices will never go up.

Assumption: Purchasing used goods will mitigate any net tax increase from the new 9 percent tax.

Here is another fact not questioned during the debate about categories of income exempted from the 9 percent tax.

Fact: Taxes for capital gains and dividends and the estate tax go away completely.

For an independent voter it is often as important to know who advocates a proposal as the nuts and bolts of the proposal itself.

In terms of 9-9-9, how would a wealth management advisor and his clients fare under the new tax code?

Monday, October 10, 2011

Herman Cain's 9-9-9: Shifting the Tax Burden from Producers to Consumers and Suggestions for How the Poor Can Pay the Higher Taxes

Herman Cain's Message

If you visit HermanCain.com, Kent Short, an American butcher, has some glowing words for his candidate of choice. "When they asked him a question, he was just very up front and honest and says, 'I can't give you an answer because I don't know what all the facts are. And that's what we're doin' wrong.' People were giving answers without facts. And as soon as I heard him say that, I said, this is the only guy who's got any sense in the whole thing."

Herman Cain won the Florida Straw Poll with this message.



He begins with a subtle dig at his fellow candidate speakers by asking, "whose teleprompters are these? I'm not using them." It's true. He has lots of experience as a motivational speaker and radio talk show host.

"It must be borne in mind that the tragedy of life does not lie in not reaching your goals, the tragedy lies in having no goals to reach for. It is not a calamity to die with dreams unfulfilled, but it is a calamity to have no dreams." an unattributed quote from Benjamin E. Mays, who was President of Morehouse College when Cain graduated from there with a B.S. in 1967.

He lists the crises that America faces and offers the good news that we can solve these crises by identifying and hitting the target called "fix it", a reference to his days as a ballistic analyst "working for the Department of the Navy." This is not to be confused with Cain serving in the Navy. He did not.

When he states his bold solution to fix the economy, the audience chants in unison: "9-9-9." But for the independent voter, what exactly is 9-9-9?

Throw out all of the current tax code. Impose a 9 percent business flat tax, a 9 percent personal income tax, and a 9 percent national sales tax. It would be revenue neutral. It replaces all corporate and personal income taxes, capital gains, estate taxes, payroll tax. It provides certainty to the engine of economic growth: the business sector.

Energy: "America is going to dig here, drill here, and explore here first…we have the resources to become energy independent."

Restructuring Social Security: "Seniors don't worry. You won't be affected. Near retirement seniors. You don't have to worry. Because a personal retirement accounts option for younger workers will allow us over time to take care of those where promises were made." Younger workers would have an option to establish their own accounts.

National Security: "Peace through strength and clarity." We would "clearly identify who our friends are, clearly identify who our enemies are, and stop giving money to the enemies." When it comes to defense, he wouldn't look for what to cut but what to enhance. "If we are not in it to win it, we will not be in it."

The Founding Fathers: "'When any form of government becomes destructive of those ideals' (all men are created equal with unalienable rights to life, liberty, and the pursuit of happiness 'it is the right of the people to alter or abolish it.' We've got some altering and abolishing to do." Here he cites not the Constitution, which he would have to swear to protect and defend, but the Declaration of Independence, a document to spell out our grievances against King George III.

He ends with an appeal to "help me to push that shining city on a hill back to the top of the hill. Vote Cain in 2012."

9-9-9 Analysis:

On 09/30/11, the Christian Science Monitor took a look at 9-9-9 in Herman Cain's '999 plan': long overdue tax reform or job killer?" Some highlights:

9 Percent National Sales Tax

Rich Lowrie, Cain’s senior economic advisor claims it would shift the tax burden from production to consumption, allowing exporters to pay less tax on goods they produce and impose a 9% tax on imported goods.

Possible implications of the national sales tax included a negative impact on consumer demand and the possibility of retailers cheating by offering a lower price for wink, wink cash purchases.

9 Percent Corporate Tax

The possible implication of eliminating the business deduction for labor but not investment was favoring heavy industry over the service sector, such as Cain's former business: Godfather's Pizza.

Overall Tax Burden

Using an economic measure called "marginal propensity to consume" (necessary to evaluate the impact of a national sales tax), the article estimated that those who earned:

$20,000 would pay 17 percent vs. the current 12.8 percent.
$55,000 would pay 17.95 percent vs. the current 16.9 percent.
$300,000 would pay 16.3 percent vs. the 27.97 percent.

When asked about this disparity and the regressive nature of sales tax by Chris Wallace on the 10/02/11 Fox News Sunday, Cain responded with a figure for a $50,000 income earner that worked out in his favor according to his plan but without taking into account deductions allowed under the current tax code. Perhaps he should have stuck to "I can't give you an answer because I don't know what all the facts are."

Another concern voiced in the article was the impact shifting to a consumption tax would have on senior citizens who would face the new 9% sales tax on the way to a 30% national sales "fair tax" (a total shift away from income taxation) while the payroll tax supporting Social Security was eliminated.

For criteria on deciding whether independent voters should consider this "fair share" or "class warfare" see Barack Obama's Balanced Approach: Fair Share or Class Warfare?

Impact on Deficit

Chief Economist at Moody's Analytics Mark Zandi opines that the 9-9-9 plan is revenue neutral at the current rate of federal income: 15% of GDP.

The country currently spends 24% of GDP. The last time the budget was balanced was at 19.5% of GDP with $496 billion more in revenue than it collects today.



For more independent voter's perspective on the path to a balanced budget, see Balanced Budget Amendment

Poor People

On the 10/09/11 edition of Face the Nation, Bob Schieffer asked Cain about the provision that exempted used goods from the 9 percent national sales tax (I couldn't find this on hermaincain.com).

Schieffer: "Aren't poor people also going to get to pay a tax on food and a tax on medicine?"

Cain: "You give poor people more opportunity to stretch their dollar and leverage their income based upon their decision whether to buy new or used goods."

I can't help it but the option of poor people buying used food brought to mind a variation on a famous quote by Marie-Thérèse, the wife of Louis XIV, often falsely attributed to Marie Antoinette.

"Let them eat _ _ _ _. "

Sunday, October 2, 2011

Barack Obama's Balanced Approach: Fair Share or Class Warfare?

On 09/19/2011, Barack Obama made some remarks on how the select committee should approach deficit reduction.

"If we’re going to make spending cuts -- many of which we wouldn’t make if we weren’t facing such large budget deficits -- then it's only right that we ask everyone to pay their fair share."

Obama's definition of fairness: "Middle-class families shouldn’t pay higher taxes than millionaires and billionaires."

Newt Gingrich was the only GOP presidential candidate to refer to Obama's "class warfare" during the 09/22/2011 debate but Paul Ryan, John Boehner, and Lindsey Graham were all characterizing Obama's "fair share" as "class warfare" by then.

In an 08/15/2011 New York Times op-ed piece by the Chairman and CEO of Berkshire Hathaway, "Stop Coddling the Super Rich," Warren Buffett argued that because he received much of his compensation as "carried interest," taxed at 15 percent, his overall tax rate of 17.4 percent was significantly lower than that of his employees, who averaged 36 percent.

An independent voter who isn't issued Republican or Democratic talking points for characterizing Obama's view as "class warfare" or "fair share" has to evaluate some facts, so here goes.

Chris Wallace interviewed White House Senior Adviser David Plouffe on Fox News Sunday 09/25/11.


Wallace used the following figures to question whether top earners were paying their fair share.


Fair Share?
Top 1% = 38% of Federal Income Taxes
Top 10% = 70% of Federal Income Taxes
The Tax Foundation Oct. 2010

Non-Payers
46% = No Federal Income Taxes
The Tax Policy Center July 2011

Looking at these numbers, it seems that the wealthy may be paying a higher percentage of their income to the federal government. Note that the first set of numbers, stating what the wealthiest pay, and the second set, what 46% of households don't pay, come from two different organizations. The second study would appear to be excluding FICA taxes, which Buffett argues disproportionately hit those who derive all their income from salary. Are those numbers also excluded from the first study?

Is seeking to adjust the tax code for high earners class warfare?

On the 08/16/2011 PBS Newshour story Land of the Free, Home of the Poor Paul Solmon reports some different numbers.


Distribution of Financial and Housing Wealth in the United States
Top 20%: 84%
2nd 20%: 11%
3rd 20%: 4%
4th 20%: 0.2%
Lowest 20%: 0.1%
Study by Dan Ariely of Duke University and Michael I. Norton of Harvard

Here we get a story that deals more with "class" and class mobility. Because it deals with quintiles instead of deciles, the numbers don't directly stack up but the underlying numbers don't appear to be necessarily inconsistent.

When it comes to the fair share or class warfare of the Buffett rule, Jon Huntsman advocates cutting the 15% taxation on capital gains and dividends to zero. Mitt Romney supports cutting tax on capital gains, dividends, and interest to zero for those who earn less than $200,000. That makes him more of a "class warrior."

Rick Santorum would cut corporate taxes for manufacturers to zero. Massachusetts Democratic senatorial candidate Elizabeth Warren would beg to differ with that approach.



"There is nobody in this country who got rich on his own. Nobody. You built a factory out there - good for you. But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn't have to worry that marauding bands would come and seize everything at your factory and hire someone to protect against this because of the work the rest of us did. Now look. You built a factory and it turned into something terrific or a great idea - God Bless! Keep a Big Hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along."