Tag: fiscal policy

Look Before You Leap on Cain’s 9-9-9 Tax Plan

I like the overall approach of Herman Cain’s 9-9-9 tax plan. As I recently wrote, it focuses on lower tax rates, elimination of double taxation, and repeal of corrupt and inefficient loopholes.

But I included a very important caveat. The intermediate stage of his three-step plan would enable politicians to impose both an income tax and a national sales tax. I wrote in my earlier post that I had faith in Herman Cain’s motives, but I was extremely uncomfortable with the idea of letting the crowd in Washington have an extra source of revenue.

After all, Europe’s welfare states began their march to fiscal collapse and economic stagnation after they added a version of a national sales tax on top of their pre-existing income taxes.

But it seems that I was too nice in my analysis of Mr. Cain’s plan. Josh Barro and Bruce Bartlett are both claiming that the business portion of Cain’s 9-9-9 is a value-added tax (VAT) rather than a corporate income tax.

In other words, instead of being a 9 percent flat tax-9 percent sales tax-9 percent corporate tax, Cain’s plan is a 9 percent flat tax-9 percent sales tax-9 percent VAT.

Let’s elaborate. The business portion of Cain’s plan apparently does not allow employers to deduct wages and salaries, which means – for all intents and purposes – that they would levy a 9 percent withholding tax on employee compensation. And that would be in addition to the 9 percent they presumably would withhold for the flat tax portion of Cain’s plan.

Employers use withholding in the current system, of course, but at least taxpayers are given credit for all that withheld tax when filling out their 1040 tax forms. Under Cain’s 9-9-9 plan, however, employees would only get credit for monies withheld for the flat tax.

In other words, there are two income taxes in Cain’s plan – the 9 percent flat tax and the hidden 9 percent income tax that is part of the VAT (this hidden income tax on wages and salaries, by the way, is a defining feature of a VAT).

This doesn’t make Cain’s plan bad from a theoretical perspective. The underlying principles are still sound – low tax rates, no double taxation, and no loopholes.

But if I was uneasy when I thought that the 9-9-9 plan added a sales tax on top of the income tax, then I am super-duper-double-secret-probation uneasy about adding a sales tax and a VAT on top of the income tax.

Here’s my video on the VAT, which will help you realize why this pernicious tax would be a big mistake.

Again, this doesn’t make Cain wrong if we’re grading based on economics or philosophy. My anxiety is a matter of real-world political analysis. I don’t trust politicians with new sources of revenue. Whether we give them big new sources of revenue or small new sources of revenue, they will always figure out ways of pushing up the tax rates so they can waste more money trying to buy votes.

Will Republicans Choose Sequester Savings or a Supercommittee Surrender?

The budget fights this year began with the “shutdown” battle, followed by the Ryan budget and then the debt limit. These fights have mostly led to uninspiring kiss-your-sister outcomes, which is hardly surprising given divided government.

Now the crowd in DC is squabbling over Obama’s latest stimulus/tax-the-rich scheme, though that’s really more of a test run by the White House to determine whether class warfare will be an effective theme for  the 2012 campaign.

The real budget fight, the one we should be closely monitoring, is what will happen with the so-called Supercommittee.

To refresh your memory, this is the 12-member entity created as part of the debt limit legislation. Split evenly between Democrats and Republicans, the Supercommittee is supposed to recommend $1.2 trillion-$1.5 trillion of deficit reduction over the next 10 years. Assuming, of course, that 7 out of the 12 members can agree on anything.

There are two critical things to understand about the Supercommittee.

With these points in mind, it doesn’t take a genius to realize that the Supercommittee is designed – at least from the perspective of the left – to seduce gullible Republicans into going along with a tax hike.

In other words, the likelihood that the Supercommittee will produce a good plan is about the same as seeing me in the outfield during the World Series (the real World Series, not this one).

Fortunately, there is a way to win this fight. All Republicans have to do is…(drum roll, please)…nothing.

To be more specific, if the Supercommittee can’t get a majority for a plan, then automatic budget cuts (a process known as sequestration) will go into effect. But don’t get too excited. We’re mostly talking about the DC version of spending cuts, which simply means that spending won’t rise as fast as previously planned.

But compared to an inside-the-beltway tax-hike deal, a sequester would be a great result.

You’re probably wondering if there’s a catch. After all, if Republicans can win a huge victory for taxpayers by simply rejecting the siren song of higher taxes, then isn’t victory a foregone conclusion?

It should be, but Republicans didn’t get the reputation of being the “Stupid Party” for nothing, and they are perfectly capable of snatching defeat from the jaws of victory.

There are three reasons why Republicans may fumble away victory, even though they have a first down on the opponent’s one-yard line.

If GOPers sell out for either of the first two reasons, then there’s really no hope. America will become Greece and we may as well stock up on canned goods, bottled water, and ammo.

The defense issue, though, is more challenging. Republicans instinctively want more defense spending, so Democrats are trying to exploit this vulnerability. They are saying – for all intents and purposes – that the defense budget will be cut unless GOPers agree to a tax hike.

Republicans should not give in to this budgetary blackmail.

I could make a conservative case for less defense spending, by arguing that the GOP should take a more skeptical view of nation building (the approach they had in the 1990s) and that they should reconsider the value of spending huge sums of money on an outdated NATO alliance.

But I’m going to make two other points instead, in hopes of demonstrating that a sequester is acceptable from the perspective of those who favor a strong national defense.

  • First, the sequester does not take place until January 2013, so defense hawks will have ample opportunity to undo the defense cuts - either through supplemental spending bills or because the political situation changes after the 2012 elections.
  • Second, the sequester is based on dishonest Washington budget math, so the defense budget would still grow, but not as fast as previously planned.

This chart shows what will happen to the defense budget over the next 10 years, based on Congressional Budget Office data comparing “baseline” outlays to spending under a sequester.

As you can see, even with a sequester, the defense budget climbs over the 10-year period by about $100 billion. And, as noted above, that doesn’t even factor in supplemental spending bills.

In other words, America’s national defense will not be eviscerated if there is a sequester.

Here’s the bottom line. The Supercommittee battle should be a no-brainer for the GOP.

They can capitulate on taxes, causing themselves political damage, undermining the economy, and enabling bigger government.

Or they can stick to their no-tax promise, generating significant budgetary savings with a sequester, and boosting economic performance by restraining the burden of government.

Happy Fiscal New Year (with an Unhappy Obama Hangover)

Today, October 1, is the first day of the 2012 fiscal year.

And if you’re wondering why America’s economy seems to have a hangover (this cartoon is a perfect illustration), it’s because politicians had a huge party with our money in FY2011.

We don’t have final numbers for the fiscal year that just ended, but let’s look at the CBO Monthly Budget Report, the CBO Economic and Budget Update, and the OMB Historical Tables, and see whether there’s anything worth celebrating.

  • The federal government spent about $3.6 trillion in FY2011, more money than any government has ever spent in a 12-month period in the history of the world.
  • The FY2011 budget is nearly double the burden of federal spending just 10 years earlier, when federal outlays consumed “only” $1.86 trillion.
  • The federal budget in FY2011 consumed about 24 percent of national output, up sharply compared to a spending burden in FY2001 of “just” 18.2 percent of GDP.
  • Defense spending is too high, and has increased by about $400 billion since 2001, but the vast majority of the additional spending is for domestic spending programs.
  • Federal tax revenue in FY2011 will be about $2.25 trillion, an increase of 7-8 percent over FY2010 levels.
  • Economic stagnation has affected tax revenues, which are lower than the $2.6 trillion level from FY2007.
  • Federal receipts amount to about 15.3 percent of GDP, below the long-run average of 18 percent of GDP.
  • The Congressional Budget Office does predict that revenues will rise above the 18-percent average - without any tax increases - by the end of the decade.
  • Record levels of government spending, combined with low revenues caused by a weak economy, will result in a $1.3 trillion deficit.
  • This is the third consecutive deficit of more than $1 trillion.
  • The publicly-held national debt (the amount borrowed from the private sector) is now more than $10 trillion.

With budget numbers like these, no wonder America has a fiscal hangover.

And let’s be blunt about assigning blame. Yes, Obama has been a reckless big spender, but he is merely continuing the irresponsible statist policies of his predecessor.

Fortunately, there is a solution. All we need to do is restrain the growth of federal spending, as explained in this video.

But we also know that it is difficult to convince politicians to do what’s right for the nation. And if they don’t change the course of fiscal policy, and we leave the federal government on autopilot, then America is doomed to become another Greece.

The combination of poorly designed entitlement programs (mostly Medicare and Medicaid) and an aging population will lead to America’s fiscal collapse.

Obama’s Economic Policy: From Tragedy to Farce

Herman Cain probably had the best reaction to the President’s speech: “We waited 30 months for this?”

My reaction yesterday was mixed. In some sense, I was almost embarrassed for the President. He demanded a speech to a joint session of Congress and then produced a list of recycled (regurgitated might be a better word) Keynesian gimmicks.

But I was also angry. Tens of millions of Americans are suffering, but Obama is unwilling to admit big government isn’t working. I don’t know whether it’s because of ideological blindness or short-term politics, but it’s a tragedy that ordinary people are hurting because of his mistakes.

The Wall Street Journal this morning offered a similar response, but said it in a nicer way.

This is not to say that Mr. Obama hasn’t made any intellectual progress across his 32 months in office. He now admits the damage that overregulation can do, though he can’t do much to stop it without repealing his own legislative achievements. He now acts as if he believes that taxes matter to investment and hiring, at least for the next year. And he now sees the wisdom of fiscal discipline, albeit starting only in 2013. Yet the underlying theory and practice of the familiar ideas that the President proposed last night are those of the government conjurer. More targeted, temporary tax cuts; more spending now with promises of restraint later; the fifth (or is it sixth?) plan to reduce housing foreclosures; and more public works spending, though this time we’re told the projects really will be shovel-ready.

And let’s also note that Obama had the gall to demand that Congress immediately enact his plan - even though he hasn’t actually produced anything on paper!

And then, for the cherry on the ice cream sundae, he says he wants the so-called supercommittee to impose a bunch of class-warfare taxes to finance his latest scheme.

What began as tragedy has now become farce.

If you didn’t see it when I posted it a month or so ago, here’s the video I did last year when Obama was proposing a second faux stimulus. Now that he’s on his fourth of fifth jobs-bill/stimulus/growth-package/whatever, it’s worth another look.

Though I must confess that I made a mistake when I put together this video. I mistakenly assumed the economy would have at least managed to get back to a semi-decent level of growth. More confirmation that economists are lousy forecasters.

New CBO Numbers Confirm - Once Again - that Modest Spending Restraint Can Balance the Budget

The Congressional Budget Office has just released the update to its Economic and Budget Outlook.

There are several things from this new report that probably deserve commentary, including a new estimate that unemployment will “remain above 8 percent until 2014.”

This certainly doesn’t reflect well on the Obama White House, which claimed that flushing $800 billion down the Washington rathole would prevent the joblessness rate from ever climbing above 8 percent.

Not that I have any faith in CBO estimates. After all, those bureaucrats still embrace Keynesian economics.

But this post is not about the backwards economics at CBO. Instead, I want to look at the new budget forecast and see what degree of fiscal discipline is necessary to get rid of red ink.

The first thing I did was to look at CBO’s revenue forecast, which can be found in table 1-2. But CBO assumes the 2001 and 2003 tax cuts will expire at the end of 2012, as well as other automatic tax hikes for 2013. So I went to table 1-8 and got the projections for those tax provisions and backed them out of the baseline forecast.

That gave me a no-tax-hike forecast for the next 10 years, which shows that revenues will grow, on average, slightly faster than 6.6 percent annually. Or, for those who like actual numbers, revenues will climb from a bit over $2.3 trillion this year to almost $4.4 trillion in 2021.

Something else we know from CBO’s budget forecast is that spending this year (fiscal year 2011) is projected to be a bit below $3.6 trillion.

So if we know that tax revenues will be $4.4 trillion in 2021 (and that’s without any tax hike), and we know that spending is about $3.6 trillion today, then even those of us who hate math can probably figure out that we can balance the budget by 2021 so long as government spending does not increase by more than $800 billion during the next 10 years.

Yes, you read that correctly. We can increase spending and still balance the budget. This chart shows how quickly the budget can be balanced with varying degrees of fiscal discipline.

The numbers show that a spending freeze balances the budget by 2017. Red ink disappears by 2019 if spending is allowed to grow 1 percent each year. And the deficit disappears by 2021 if spending is limited to 2 percent annual growth.

Not that these numbers are a surprise. I got similar results after last year’s update, and also earlier this year when the Economic and Budget Outlook was published.

Some of you may be thinking this can’t possibly be right. After all, you hear politicians constantly assert that we need tax hikes because that’s the only way to balance the budget without “draconian” and “savage” budget cuts.

But as I’ve explained before, this demagoguery is based on the dishonest Washington practice of assuming that spending should increase every year, and then claiming that a budget cut takes place anytime spending does not rise as fast as previously planned.

In reality, balancing the budget is very simple. Modest spending restraint is all that’s needed. That doesn’t mean it’s easy, particularly in a corrupt town dominated by interest groups, lobbyists, bureaucrats, and politicians.

But if we takes tax hikes off the table and somehow cap the growth of spending, it can be done. This video explains.

And we know other countries have succeeded with fiscal restraint. As is explained in this video.

Or we can acquiesce to the Washington establishment and raise taxes and impose fake spending cuts. But that hasn’t worked so well for Greece and other European welfare states, so I wouldn’t suggest that approach.

Warren Buffett’s Fiscal Innumeracy

Warren Buffett’s at it again. He has a column in the New York Times complaining that he has been coddled by the tax code and that “rich” people should pay higher taxes.

My first instinct is to send Buffett the website where people can voluntarily pay extra money to the federal government. I’ve made this suggestion to guilt-ridden rich people in the past.

But I no longer give that advice. I’m worried he might actually do it. And even though Buffett is wildly misguided about fiscal policy, I know he will invest his money much more wisely than Barack Obama will spend it.

But Buffett goes beyond guilt-ridden rants in favor of higher taxes. He makes specific assertions that are inaccurate.

Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

His numbers are flawed in two important ways.

  1. When Buffett receives dividends and capital gains, it is true that he pays “only” 15 percent of that money on his tax return. But dividends and capital gains are both forms of double taxation. So if he wants honest effective tax rate numbers, he needs to show the 35 percent corporate tax rate.

    Moreover, as I noted in a previous post, Buffett completely ignores the impact of the death tax, which will result in the federal government seizing 45 percent of his assets. To be sure, Buffett may be engaging in clever tax planning, so it is hard to know the impact on his effective tax rate, but it will be significant.

  2. Buffett also mischaracterizes the impact of the Social Security payroll tax, which is dedicated for a specific purpose. The law only imposes that tax on income up to about $107,000 per year because the tax is designed so that people “earn” a corresponding  retirement benefit (which actually is tilted in favor of low-income workers).

    Imposing the tax on multi-millionaire income, however, would mean sending rich people giant checks from Social Security when they retire. But nobody thinks that’s a good idea. Or you could apply the payroll tax to all income and not pay any additional benefits. But this would turn Social Security from an “earned benefit” to a redistribution program, which also is widely rejected (though the left has been warming to the idea in recent years because their hunger for more tax revenue is greater than their support for Social Security).

If we consider these two factors, Buffett’s effective tax rate almost surely is much higher than the burden on any of the people who work for him.

But this entire discussion is a good example of why we should junk the corrupt, punitive, and unfair tax code and replace it with a simple flat tax. With no double taxation and a single, low tax rate, we would know that rich people were paying the right amount, neither too much based on class-warfare tax rates nor too little based on loopholes, deduction, preferences, exemptions, shelters, and credits.

So why doesn’t Buffett endorse this approach? Tim Carney offers a very plausible answer.

For more information about why class-warfare taxes are misguided, this video may be helpful.

Deconstructing the Revenue Side of the Debt-Ceiling Deal: Yes, There’s a Real Threat of Higher Taxes

Politicians last night announced the framework of a deal to increase the debt limit. In addition to authorizing about $900 billion more red ink right away, it would require immediate budget cuts of more than $900 billion, though “immediate” means over 10 years and “budget cuts” means spending still goes up (but not as fast as previously planned).

But that’s the relatively uncontroversial part. The fighting we’re seeing today revolves around a “super-committee” that’s been created to find $1.5 trillion of additional “deficit reduction” over the next 10 years (based on Washington math, of course).

And much of the squabbling deals with whether the super-committee is a vehicle for higher taxes. As with all kiss-your-sister budget deals, both sides can point to something they like.

Here’s what Republicans like:

The super-committee must use the “current law” baseline, which assumes that the 2001 and 2003 tax cuts expire at the end of 2012. But why are GOPers happy about this, considering they want those tax cuts extended? For the simple reason that Democrats on the super-committee therefore can’t use repeal of the “Bush tax cuts for the rich” as a revenue raiser.

Here’s what Democrats like:

There appears to be nothing in the agreement to preclude the super-committee from meeting its $1.5 trillion target with tax revenue. The 2001 and 2003 tax legislation is not an option, but everything else is on the table (notwithstanding GOP claims that it is “impossible for Joint Committee to increase taxes”).

In other words, there is a risk of tax hikes, just as I warned last week. Indeed, the five-step scenario I outlined last week needs to be modified because now a tax-hike deal would be “vital” to not only “protect” the nation from alleged default, but also to forestall the “brutal” sequester that might take place in the absence of an agreement.

But you don’t have to believe me. Just read the fact sheet distributed by the White House, which is filled with class warfare rhetoric about “shared sacrifice.”

This doesn’t mean there will be tax increases, of course, and this doesn’t mean Boehner and McConnell gave up more than Obama, Reid and Pelosi.

But as someone who assumes politicians will do the wrong thing whenever possible, it’s always good to identify the worst-case scenario and then prepare to explain why it’s not a good idea.