Herman Cain's "9-9-9" plan would cut corporate income taxes to 9%, cut personal income taxes to 9%, and create a federal sales tax at a 9% rate. So far, so simple. Winners and losers:
Anyone who pays more than 9% in federal income taxes should be a winner, right? Because of the graduated brackets in federal income taxes, with all the deductions and exemptions, nobody pays the nominal marginal rate for his or her income level.
However, Cain's plan would eliminate all deductions and exemptions, including home mortgage interest, which means that the 9% could apply to a much larger proportion of your actual income. Like all of it!
The sales tax, on top of state and local sales taxes, would be sharply regressive, and could discourage the recovery in retail sales. Moreover, unlike many state sales taxes, Cain's program would not exempt food or medicine from taxation. 9% on everything you buy, across the board. That adds up.
Cain's plan eliminates deductions and exemptions, but it drops income tax on capital gains from speculation in stocks and real estate altogether. That's a big exemption for the finance capitalists and the rentier class. (Those are the people who don't need exemptions.)
Glenn A Knight
In my study
Showing posts with label tax policy. Show all posts
Showing posts with label tax policy. Show all posts
Sunday, October 16, 2011
Sunday, April 25, 2010
You Can't Get from Here to There Via a Tea Party
As I said over on my Facebook profile, I mostly post articles by smart people, that is, by people who agree with me. This column by Douglas Schoen and Pat Caddell is an exception. I think there are a lot of things wrong with Schoen and Caddell's argument, but I'd really like to pick on one paragraph. I think the following indicates both their cynicism and their wrong-headedness.
"[Democrats] must adopt an agenda aimed at reducing the debt, with an emphasis on tax cuts, while implementing carefully crafted initiatives to stimulate and encourage job creation."
In other words, pander to the Tea Partiers by telling them the same lies that the Republicans are trying to sell. Let me repeat this so you'll know it is true:
You cannot reduce the deficit by lowering taxes.
You cannot reduce the deficit by lowering taxes.
You cannot reduce the deficit by lowering taxes.
The mechanics here are pretty clear: The additional economic activity stimulated by a tax cut may generate additonal tax revenue, but it won't generate enough revenue to make up the losses caused by the tax cut itself.
So what about the Laffer Curve? What about supply-side economics? What about the Kennedy tax cuts?
It has become a shibboleth on the right that cutting taxes raises revenue because of the increased economic activity. But this isn't true at all times and in all places. The law of diminishing returns applies to tax cuts, as well as to a lot of other human activities. When the marginal top rate of Federal income tax was 90%, as it was in the Roosevelt and Truman administrations, cutting taxes released a lot of activity and it diminished the amount of tax evasion that had been going on. Cutting taxes from 90% to 71% made it less profitable to hide income, and it provide people with money that they were eager to spend. The postwar boom didn't ride on tax cuts alone, though. During the war demand had been suppressed by forced savings - all those war bond drives with Deanna Durbin and Betty Grable stored up a lot of money, and by rationing. After the war all that stored-up money was turned into cash and used to by newly-available houses, automobiles, and business opportunities.
Similarly, the Kennedy tax cut of 1962, when the top marginal rate dropped from 71% to around 52%, reinforced, but did not cause, a boom that was really led by the German economic miracle, and the recovery of the other countries devastated by World War II. This recovery would eventually turn around and bite the U.S., but in the early 60's we were busy selling stuff to satisfy the recovering demand around the world. And, again, lowering tax rates tends to diminish tax evasion and fraud. Moreover, the Kennedy tax cut was overridden by the stimulus package of the 1960s - Vietnam plus Great Society equaled overheated economy and booming inflation, which made it looks as if tax revenues rose enough to make up for the cuts.
We could go through a lot of economic history, some of it quite contentious. Here's the truth, the whole truth, and nothing but the truth. Taxes are low enough now that we can't hope to release a store of pent-up demand and hidden income by lowering them a little more. Instead of a pile of forced savings on hand, people and companies are serious in debt. The demand isn't there to be released by lower taxes. So cutting taxes will simply reduce government revenue and increase the size of the deficit. Thus endeth the lesson.
(By the way, in the interest of full disclosure, Pat Caddell, who was President Clinton's favorite pollster, was a consultant to the TV show The West Wing. Helen and I watched every episode of The West Wing and loved it. On that basis, I hold a certain affection for Caddell. That doesn't mean I don't think he's serious wrong on the present topic.)
"[Democrats] must adopt an agenda aimed at reducing the debt, with an emphasis on tax cuts, while implementing carefully crafted initiatives to stimulate and encourage job creation."
In other words, pander to the Tea Partiers by telling them the same lies that the Republicans are trying to sell. Let me repeat this so you'll know it is true:
You cannot reduce the deficit by lowering taxes.
You cannot reduce the deficit by lowering taxes.
You cannot reduce the deficit by lowering taxes.
The mechanics here are pretty clear: The additional economic activity stimulated by a tax cut may generate additonal tax revenue, but it won't generate enough revenue to make up the losses caused by the tax cut itself.
So what about the Laffer Curve? What about supply-side economics? What about the Kennedy tax cuts?
It has become a shibboleth on the right that cutting taxes raises revenue because of the increased economic activity. But this isn't true at all times and in all places. The law of diminishing returns applies to tax cuts, as well as to a lot of other human activities. When the marginal top rate of Federal income tax was 90%, as it was in the Roosevelt and Truman administrations, cutting taxes released a lot of activity and it diminished the amount of tax evasion that had been going on. Cutting taxes from 90% to 71% made it less profitable to hide income, and it provide people with money that they were eager to spend. The postwar boom didn't ride on tax cuts alone, though. During the war demand had been suppressed by forced savings - all those war bond drives with Deanna Durbin and Betty Grable stored up a lot of money, and by rationing. After the war all that stored-up money was turned into cash and used to by newly-available houses, automobiles, and business opportunities.
Similarly, the Kennedy tax cut of 1962, when the top marginal rate dropped from 71% to around 52%, reinforced, but did not cause, a boom that was really led by the German economic miracle, and the recovery of the other countries devastated by World War II. This recovery would eventually turn around and bite the U.S., but in the early 60's we were busy selling stuff to satisfy the recovering demand around the world. And, again, lowering tax rates tends to diminish tax evasion and fraud. Moreover, the Kennedy tax cut was overridden by the stimulus package of the 1960s - Vietnam plus Great Society equaled overheated economy and booming inflation, which made it looks as if tax revenues rose enough to make up for the cuts.
We could go through a lot of economic history, some of it quite contentious. Here's the truth, the whole truth, and nothing but the truth. Taxes are low enough now that we can't hope to release a store of pent-up demand and hidden income by lowering them a little more. Instead of a pile of forced savings on hand, people and companies are serious in debt. The demand isn't there to be released by lower taxes. So cutting taxes will simply reduce government revenue and increase the size of the deficit. Thus endeth the lesson.
(By the way, in the interest of full disclosure, Pat Caddell, who was President Clinton's favorite pollster, was a consultant to the TV show The West Wing. Helen and I watched every episode of The West Wing and loved it. On that basis, I hold a certain affection for Caddell. That doesn't mean I don't think he's serious wrong on the present topic.)
Sunday, March 7, 2010
It's Only Make-Believe
There are two popular songs I know of with the word "make-believe" in the title. There's Make Believe from Show Boat ("Can we find peace of mind in pretending?"). And there's an old Conway Twitty hit, It's Only Make-Believe. (That was when Twitty was in his rockabilly phase. I had a copy of the 45. The children are asking, "What's a 45?")
Now we have a column by Robert Samuelson entitled "Both Parties Fall Prey to Make-Believe Politics." At last, some good common sense! The Republicans want tax cuts. In the face of an estimated $12 trillion in deficits in the next ten years, the Republicans want tax cuts! And the Democrats would like to spend more on this and that. In the face of $12 trillion in deficits, the Democrats want to increase spending!
No one wants to cut Social Security, Medicare, Medicaid, farm subsidies, business subsidies, military spending, transportation spending, or any of the other places where the big money gets spent. And no one, not even the Democrats, really wants to raise taxes. Even Mr. Obama wants to retain the Bush tax cuts for people making only $250,000 a year or less.
You know, I think the IRS, OMB, and CBO publish charts on where the money comes from and where it goes. I'm going to find one of those charts and bring it to this blog.
Now we have a column by Robert Samuelson entitled "Both Parties Fall Prey to Make-Believe Politics." At last, some good common sense! The Republicans want tax cuts. In the face of an estimated $12 trillion in deficits in the next ten years, the Republicans want tax cuts! And the Democrats would like to spend more on this and that. In the face of $12 trillion in deficits, the Democrats want to increase spending!
No one wants to cut Social Security, Medicare, Medicaid, farm subsidies, business subsidies, military spending, transportation spending, or any of the other places where the big money gets spent. And no one, not even the Democrats, really wants to raise taxes. Even Mr. Obama wants to retain the Bush tax cuts for people making only $250,000 a year or less.
You know, I think the IRS, OMB, and CBO publish charts on where the money comes from and where it goes. I'm going to find one of those charts and bring it to this blog.
Sunday, February 21, 2010
Death and Taxes
Jackie Calmes has written a nice piece on the deficit situation. She discussed this matter on Washington Week last Friday, and she knows her stuff.
The key here is simple, in general outlines: There is a deficit because the government is spending more money than it is bringing in. This can be resolved by increasing the amount of revenue, by decreasing the amount being spent, or by a combination of the two. Those are the only options. There is no magical "third way."
Republicans refuse to countenance any tax increases. That's fine, under two conditions:
1) The Republicans are prepared to present a program of spending cuts that will bring total expenditures down to current revenues, and,
2) They are able to persuade enough Democrats to support these cuts to provide a majority in both the House and the Senate.
Even if I believed that the Republicans in Congress were finally ready to do away with farm subsidies, business subsidies, energy subsidies, and a big chunk of military spending, I don't see how even the most optimistic Republican could believe that a majority of Congress can possibly support program cuts sufficient to balance the budget. For one thing, I think you could only accomplish that result if you cut Social Security, Medicare and Medicaid benefits, and probably cut benefits for veterans and both military and civilian retirees, as well.
So some taxes, somewhere along the line, will have to be raised. And that means that a lot of Republicans in Congress are going to have to go back to their constituents and tell them the truth. Tough job! It might even be politically fatal.
The key here is simple, in general outlines: There is a deficit because the government is spending more money than it is bringing in. This can be resolved by increasing the amount of revenue, by decreasing the amount being spent, or by a combination of the two. Those are the only options. There is no magical "third way."
Republicans refuse to countenance any tax increases. That's fine, under two conditions:
1) The Republicans are prepared to present a program of spending cuts that will bring total expenditures down to current revenues, and,
2) They are able to persuade enough Democrats to support these cuts to provide a majority in both the House and the Senate.
Even if I believed that the Republicans in Congress were finally ready to do away with farm subsidies, business subsidies, energy subsidies, and a big chunk of military spending, I don't see how even the most optimistic Republican could believe that a majority of Congress can possibly support program cuts sufficient to balance the budget. For one thing, I think you could only accomplish that result if you cut Social Security, Medicare and Medicaid benefits, and probably cut benefits for veterans and both military and civilian retirees, as well.
So some taxes, somewhere along the line, will have to be raised. And that means that a lot of Republicans in Congress are going to have to go back to their constituents and tell them the truth. Tough job! It might even be politically fatal.
Sunday, February 14, 2010
Tea Parties and Flat Taxes
E. J. Dionne spends this column talking about why the Tea Party movement has arisen, why these people insist on seeing the distinctly moderate President Obama as a "socialist," and what is the source of all this rage. I think he quite rightly puts his finger on the anti-government sentiment that goes all the way back to the Anti-Federalists. Some years ago, the Library of America published a two-volume set on The Debate on the Constitution. It can be a real eye-opener in terms of how many people were very suspicious of the power of centralized government.
This leads me to another, related, topic: the flat tax proposals of such conservatives as Steve Forbes. Let's not dismiss these proposals as impractical, fiscally ruinous, or the product of the lust of the rich to keep their ill-gotten gains. The flat tax idea is, at least in part, an aspect of the "starve the beast" concept. Ronald Reagan earned a lot of criticism for his assertions that he could increase defense spending, cut taxes, and reduce the deficit, all at once. Sure enough, that didn't happen, and he had to raise taxes again to keep the deficit under control. But the idea wasn't as ridiculous as it might have sounded, if, that is, you accept a couple of premises.
Premise One is that government spending is essentially non-productive, and that, because of this, it doesn't generate further economic activity. A dollar spent by the government is spent once; a dollar spent by private business is spent many times as it works its way through the economy. This is nonsense, of course. While government spending is, generally, non-productive - from an economic point of view, the military is a complete nullity, it isn't, on that account, tagged with a lower velocity than private spending. A billion dollars spent on a new government building has the same impact on the economy as a billion dollars spent on a new automobile factory.
But this premise leads one to suppose that cutting taxes always allows the money to be spent in some more productive way, thus boosting the economy, and, yes!, raising tax revenues.
Premise Two is that the government will limit its activities according to the amount of money it has, i.e., that there will be no deficit spending. Therefore, tax cuts serve to "starve the beast" by depriving it of its sustenance. This, too, is utter nonsense. Both Republicans and Democrats happily plunge into deficit spending rather than either raise taxes or cut programs that are dear to their constituents' hearts. And every program, no matter how useless, is dear to some constituent's heart.
The flat tax has to bring in less money than a graduated ("progressive") income tax, even if, as Forbes has suggested, we do away with such shibboleths as the home mortgage interest deduction. That's because people making $30,000 per year can only afford so much in taxes. You might get $4,500 (15%) from them, and that would then become the limit for everyone. At a flat 15%, the government would take in a lot less than it does now, and it would have to shrink. QED. Except that it won't shrink; it'll borrow instead.
The only way to shrink the government is to cancel expensive programs. Cancel all farm subsidies. Cancel all business subsidies. Cancel subsidies for energy programs. Cancel subsidies for home heating expenses. Cancel subsidies for small business loans. Cancel subsidies for student loans. Cancel the tax breaks on home mortgage interest, capital gains, and anything else that effectively subsidizes an activity. Cut the military in half and close two-thirds of the military bases in the country. Raise the co-pays on Medicare and Medicaid so that the insurance only covers serious medical conditions and treatments. Give all Federal employees, including the military 20% pay cuts. Give all Federal pensioners, including the military and Social Security recipients 10% pay cuts. Do all that, and you might balance the budget. Watch for that proposal in your local newspaper! Not!
This leads me to another, related, topic: the flat tax proposals of such conservatives as Steve Forbes. Let's not dismiss these proposals as impractical, fiscally ruinous, or the product of the lust of the rich to keep their ill-gotten gains. The flat tax idea is, at least in part, an aspect of the "starve the beast" concept. Ronald Reagan earned a lot of criticism for his assertions that he could increase defense spending, cut taxes, and reduce the deficit, all at once. Sure enough, that didn't happen, and he had to raise taxes again to keep the deficit under control. But the idea wasn't as ridiculous as it might have sounded, if, that is, you accept a couple of premises.
Premise One is that government spending is essentially non-productive, and that, because of this, it doesn't generate further economic activity. A dollar spent by the government is spent once; a dollar spent by private business is spent many times as it works its way through the economy. This is nonsense, of course. While government spending is, generally, non-productive - from an economic point of view, the military is a complete nullity, it isn't, on that account, tagged with a lower velocity than private spending. A billion dollars spent on a new government building has the same impact on the economy as a billion dollars spent on a new automobile factory.
But this premise leads one to suppose that cutting taxes always allows the money to be spent in some more productive way, thus boosting the economy, and, yes!, raising tax revenues.
Premise Two is that the government will limit its activities according to the amount of money it has, i.e., that there will be no deficit spending. Therefore, tax cuts serve to "starve the beast" by depriving it of its sustenance. This, too, is utter nonsense. Both Republicans and Democrats happily plunge into deficit spending rather than either raise taxes or cut programs that are dear to their constituents' hearts. And every program, no matter how useless, is dear to some constituent's heart.
The flat tax has to bring in less money than a graduated ("progressive") income tax, even if, as Forbes has suggested, we do away with such shibboleths as the home mortgage interest deduction. That's because people making $30,000 per year can only afford so much in taxes. You might get $4,500 (15%) from them, and that would then become the limit for everyone. At a flat 15%, the government would take in a lot less than it does now, and it would have to shrink. QED. Except that it won't shrink; it'll borrow instead.
The only way to shrink the government is to cancel expensive programs. Cancel all farm subsidies. Cancel all business subsidies. Cancel subsidies for energy programs. Cancel subsidies for home heating expenses. Cancel subsidies for small business loans. Cancel subsidies for student loans. Cancel the tax breaks on home mortgage interest, capital gains, and anything else that effectively subsidizes an activity. Cut the military in half and close two-thirds of the military bases in the country. Raise the co-pays on Medicare and Medicaid so that the insurance only covers serious medical conditions and treatments. Give all Federal employees, including the military 20% pay cuts. Give all Federal pensioners, including the military and Social Security recipients 10% pay cuts. Do all that, and you might balance the budget. Watch for that proposal in your local newspaper! Not!
Saturday, February 6, 2010
Are You Rich?
Are you rich? Am I rich?
One of the features of President Obama's fiscal policy has been that he would not impose new taxes on middle-class Americans. Of course, in America, we're all middle-class, so there has to be a cut-off point for such a determination. President Obama has set that point at $250,000 per year of income. A lot of people who make that much (or even more) contend that they aren't rich: They, too, are middle-class.
Daniel Gross provides a nice analysis here, showing that people making $250,000 annually are indeed rich. It's a nicely written piece, and Gross doesn't bother us with statistical analysis, but he does point out that $250,000 is about five times the national median income.
I, for one, think it would be good to allow the Bush tax cuts to expire in their entirety, and for the estate tax to come back in full force, but I'll settle for having those cuts taken away from the rich.
One of the features of President Obama's fiscal policy has been that he would not impose new taxes on middle-class Americans. Of course, in America, we're all middle-class, so there has to be a cut-off point for such a determination. President Obama has set that point at $250,000 per year of income. A lot of people who make that much (or even more) contend that they aren't rich: They, too, are middle-class.
Daniel Gross provides a nice analysis here, showing that people making $250,000 annually are indeed rich. It's a nicely written piece, and Gross doesn't bother us with statistical analysis, but he does point out that $250,000 is about five times the national median income.
I, for one, think it would be good to allow the Bush tax cuts to expire in their entirety, and for the estate tax to come back in full force, but I'll settle for having those cuts taken away from the rich.
Saturday, January 16, 2010
A House Is Not a Home
Daniel Gross entitles this article "Homeless." Actually, it's not about homelessness, or even the effects of the housing market crash on homelessness; it's about the economy recovering without the housing market making a big comeback. On the one hand, Gross cites figures to indicate that more houses were sold in November 2009 than in November 2008, so that's a good sign for the market. On the other hand, prices are still dropping, which is good for buyers but not so good for sellers or would-be sellers. From a couple of sources, Gross finds that prices of existing houses were down a little over 7 per cent in October 2009, compared to October 2008.
Key quote: "Mortgage rates are likely to head higher as the Federal Reserve seeks to pull some of its support from the economy. So those hoping that soaring Toll Bros. stock will replenish their 401(k)s are going to be waiting a long time. ... The thing that gets you into a bubble never gets you out."
For many years, we've been putting too much of our investment capital into building houses and apartment buildings. This is, to put it bluntly, as unproductive as military spending. While factories can be used to make furniture, cars, textiles, and so on, and power plants make electricity, houses don't make anything. They just sit there tying up capital and depreciating.
Now that the crash has helped cut the overspending on housing, maybe the government should make a move to encourage that trend. Abolishing the housing interest deduction would be a good start, and restoring the capital gains tax for personal dwellings would also be a big help. Why should we be subsidizing people for putting their money into nonproductive uses?
Key quote: "Mortgage rates are likely to head higher as the Federal Reserve seeks to pull some of its support from the economy. So those hoping that soaring Toll Bros. stock will replenish their 401(k)s are going to be waiting a long time. ... The thing that gets you into a bubble never gets you out."
For many years, we've been putting too much of our investment capital into building houses and apartment buildings. This is, to put it bluntly, as unproductive as military spending. While factories can be used to make furniture, cars, textiles, and so on, and power plants make electricity, houses don't make anything. They just sit there tying up capital and depreciating.
Now that the crash has helped cut the overspending on housing, maybe the government should make a move to encourage that trend. Abolishing the housing interest deduction would be a good start, and restoring the capital gains tax for personal dwellings would also be a big help. Why should we be subsidizing people for putting their money into nonproductive uses?
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