Monthly Archives: September 2012

A Tax Proposal

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In 2007, according to Census Bureau data collected from IRS-aggregated Form 1040 filings, we Americans earned $17.8 trillion dollars from all sources: wages and salaries, interest payments, dividends and capital gains, gambling earnings, pass-throughs from their small businesses, and so on.  In 2007, according to Government Accounting Office data, we paid an aggregate of $1.15 trillion dollars in taxes on that income.  That’s an aggregate rate of around 6.5%, with the top 10% of taxpayers paying 70% of that bill (compare that with the roughly 20% paid by Republican Presidential Candidate Mitt Romney over the last 20 years, and the roughly 20% paid by Democratic Presidential Candidate Barack Obama last year).

That’s a ton of money for the government, paid by those who actually pay taxes (50% of Americans pay taxes in the range of 0%-3%).

What would happen, though, to revenues if we moved to a flat tax of 10% with no deductions, credits, or other loopholes, and everybody pays?  One immediate result is that the government would collect $1.78 trillion in income tax revenue—a one-third increase.  Think about what that would mean toward paying down our $16 trillion debt.

Such a static analysis is interesting but unsatisfying since it doesn’t consider the dynamics of an economy.  Let’s look at the impact on a hypothetical family of four, making (to keep the arithmetic sort of simple—we’re dealing with the tax system, after all) $100,000 per year, and taking a currently normal set of deductions: married filing jointly, exemptions for dependents (four, in this case), and they donate $5,000 to charity (this is a bit high for a conservative family, and quite a bit high for a liberal family, but we’re keeping the numbers round).  Let’s also say they own a $200,000 house and they’re four years into a 30 year mortgage at 3.5% (a roughly current market rate in the middle of the range of rates Bankrate.com says can be found for the Dallas area in a quick search last Sunday).  We’ll also say they’re healthy, and their other deductions don’t meet the 7% or 2% thresholds.

Their deducitons, then add up this way.  Their annual mortgage interest deduction is in the neighborhood of $6600 dollars.  Four dependents at $3,700 per gives them a total exemption of $14,800. Add their charity giving, and all of these together reduce the family’s income to a taxable amount of $73,600.  The 2011 IRS tax tables put this family’s tax bite at $10,656.

Now take away all those deductions, and bill the family on the top-line (now bottom line, also) $100k at 10%, and they see a drop in their taxes of $656.  That’s a fair amount of beer and pizza.  Or a mortgage payment.

Some might argue that such a no-frills tax system hurts the poor (now they’re payers of taxes, instead of receivers).  Accordingly, what happens when we allow a single exemption: half the then-year Federal Poverty Guideline.  For our family of four, this would be half of $22,350 for 2011, or $11,175.  Now the 10% tax bite is reduced to $8,882—a reduction relative to our proposed system of $1,118 and of $1,774 relative to the current tax system.  Add pretzels to the beer and pizza.  Or another mortgage payment—every year.  Or car payments—every year.

How does this scale to the national level?  Again, only looking at the back of our envelope, and saying that our 2011 non-retired population consists entirely of families of four, that makes 68,000,000 filings taking that $11,175 exemption: a $760 billion reduction in the government’s tax collection relative to the simple flat tax collection, and a $120 billion reduction compared to last year’s collections and a $544 billion reduction compared to 2007’s actual collections.

Looks like a disaster.  But we’re still in the static analysis stage.  Think about the stimulative effect of those additional $1,774 available for private use, instead of government “investment.”  For those 68,000,000 families of four, that’s those $120 billion left in private hands.

All that money represents additional spending and saving and paying down  personal debt (faster, we already are to a certain degree) represents an active, dynamic economy, with all the revenue that will generate in increasing employment (more folks earning income, and so paying taxes), increasing business activity—which feeds investment and hiring—and so on.

The government likes to say that each $1 in its “investment” returns a $1.5 to the economy as that spent dollar circulates and gets spent again and again, multiple times, before it’s fully absorbed.  That compares with each $1 of spending in the private economy returning $1.7, but let’s use the government’s own figure.  Those $120 billion left in private hands through the lower tax rate will return $180 billion, just in the first year.  And it will grow in subsequent years as economic activity continues to increase from this freeing of us from our present, heavier tax burden.  The revenue “deficit” disappears in very short order.

Nor will I get into the premise that tax reform needs to be revenue neutral at all; nor will I get into the fallacious premise that the government is somehow entitled to our money; nor will I get into the need for government to cut spending—this is a tax reform proposal.

The higher total tax revenue I mentioned at the outset?  That results from the far broader base of folks who actually pay taxes under this proposal and so who now have positive reason to be active participants in our political process.

I will ask a question, though, since the idea of losing all those deductions and credits will itself be questioned.  What’s the value of those deductions and credits when their sole purpose is to reduce the tax bite from tax rates that are artificially elevated to begin with in order, in part, to recover the “cost” of those deductions?

There’s another aspect to this, also, and that’s the idea of business taxes.  American businesses “pay” taxes, nominally, at a rates as high as 35%, the highest rate in the known world.  Leaving aside examples like GE, which paid no net taxes on revenue of around $148 billion in 2010 (a result of our corporate tax system being as Byzantine as our personal income tax system), our businesses paid in the aggregate some $370 billion in Federal income taxes in 2007 (to keep the year of interest consistent).

I used quotes on “pay” taxes on purpose, though.  Even though the business’ officer signs the tax check, the business isn’t paying a penny of those taxes.  From the business’ perspective, the tax bill is just another cost of doing business, and that cost is passed on to its customers in the form of prices that are elevated to cover that cost, just as the price is set to cover all the other costs that a business encounters.  The customers—you and me at the end of a chain of intermediaries and stores—are the ones who are paying that tax through that elevated price.

My tax reform proposal, then, includes this: eliminate the business income tax altogether.  Reduce our tax bite even further, in the form of reduced prices.

What’s the outcome of this loss of $370 billion in revenue to the government?  First, see the multiplier discussion above.  Then, consider our neighbor to the north; Canada’s example offers an answer.  The chart just below, from the Cato Institute’s “Corporate Tax Competitiveness Rankings for 2012,” shows the effect on the Canadian GDP over the years since 2000 that the Canadians have been drastically reducing their corporate tax burden.

The effect has been nil: corporate revenues as a per cent of GDP have been stable over the entire period of steady reductions.

The chart below shows Canada’s GDP growth in real terms since 1999; I constructed it from these data.

Plainly, drastically reducing (eliminating in my case) the corporate tax bill has no material effect on GDP.  Not only did the rapidly falling tax bite not impact the Canadian government’s corporate tax revenues as a per cent of Canadian GDP, that reduction had no negative effect on the GDP itself.

It’ll be the same in the US, with the single difference that Federal tax revenue as a per cent of US GDP will drop, some, from the elimination of Federal business income taxes.  The per cent of GDP won’t go to zero, though, because I’m only talking about the Federal tax burden; states will remain free to tax—in competition with their fellow states—their domiciled businesses.

First, the Official Denial

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…now comes a partial enumeration of the weasel words and evasion.  I wrote a bit ago about the official denial that the Blind Sheik, he of the first World Trade Center bombing, would be released/transferred to Egypt at Egypt’s behest.

Here’s what former Judge and US Attorney General Michael Mukasey has discovered in the way of that evasion and those weasel words.

Asked before Congress in July whether there is an intention “at any time to release the Blind Sheikh,” Homeland Security Secretary Janet Napolitano responded: “Well, let me just say this.  I know of no such intention.”

And

The State Department’s spokesperson last week, after the ceremonial “let me be clear,” said that there had been no approach on this topic “recently” from any “senior” official of the Egyptian government….

I suppose Egyptian President Mohamed Morsi isn’t senior enough for this spokesperson.

And this:

All of this plays out in the context of an Obama administration that hasn’t hesitated to employ executive orders to get around Congress, led by a president who was caught on a “hot mike” assuring Russia’s leaders that if he wins re-election he will have more “flexibility” to accommodate Russian demands that the US curtail missile defense in Europe.

Since the guy who occasionally sits in our President’s chair refuses to say definitively that the Blind Sheik won’t be released/transferred anytime or under any conditions, all of this sounds pretty definitive to me.

Who Skipped Out?

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On Saturday, during his periodic radio address, Democratic Presidential Candidate bellyached about Congress adjourning before his precious addenda had been carried out.

Last week, without much fanfare, members of the House of Representatives banged a gavel, turned out the lights, and rushed home, declaring their work finished for now.

He added

See, when they skipped town, members of Congress left a whole bunch of proposals sitting on the table—actions that would create jobs, boost our economy, and strengthen middle-class security.

This from the guy who thought it more appropriate to attend his fundraiser and party in Las Vegas than to be in the White House dealing with the attacks, vandalism, and flag desecration at our Cairo embassy and the attacks, destruction, and murders at our Benghazi consulate.

This from the guy who has time to sit face to face with the Ladies of the View but who has no time to meet with world leaders—even those who explicitly ask for such a meeting.  “Give me a call on the telephone,” he says through his press rep, Jay Carney, and his campaign advisor, Robert Gibbs.

This from the guy who, for three years, has declined to present a serious budget proposal to Congress, instead proposing exploding spending, increasing deficits, and deepening debt—disingenuous proposals the last two of which couldn’t even get a single Democrat’s vote.

This from the guy whose Democrat-controlled Senate is sitting on 38 House-passed jobs-related bills without even permitting their discussion, much less an actual vote.

Who is it, really, who’s skipped town?  And been out of town all these years?

This is Stupid

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Spiegel Online International is describing another European hare-brained scheme in the mill for “bailing out” Greece.

Greece’s lenders are reportedly considering further relief in the form of a partial debt haircut for the crisis-wracked country, the Financial Times Deutschland reported on Friday.

…

Martin Blessing, chairman of Germany’s second-largest bank, Commerzbank, has also said a second debt haircut is likely.  “In the end we will see another debt haircut for Greece, in which all creditors will take part,” he said on Thursday in Frankfurt.

And

And though a second debt haircut would be tantamount to bankruptcy for Greece, it would also enable Athens to tackle the extreme debt that has so far hindered economic recovery.

And in a blatant case of demanding this be done with OPM (at least from the IMF’s perspective; the IMF wholeheartedly approves this second bailout),

[T]he IMF is pushing for debt restructuring from public lenders, who currently hold over two-thirds of the country’s total debt of some €330 billion [$426 billion], according to the newspaper.  However, neither the IMF nor the ECB would take part in such a debt haircut, placing the burden on the euro-zone members, the paper added.

I have a couple of questions.  Wasn’t the first haircut, functionally, a Greek bankruptcy?

Second, if you’re not going to hold the Greeks accountable and responsible for their obligations and commitments, why bother at all?  Why not just forgive the entire debt, and let them resume their profligate ways?  You’ll only bail them outprop them up again, next time, anyway.

In the end, here’s the IMF (and ECB, but at least this organization has honorably committed its own creditors’ money) saying, “Debt.  Very dangerous.  You go first.”  Still, the burden, as the IMF and ECB suggest, should be wholly within the euro zone, or rather (say I) more particularly, it should rest entirely with the private investors who loaned their money to Greece—the private holders of Greek sovereign debt.  Europe’s taxpayers should not be—should not have been—put on the hook any further than they already were from the moment it became known that the Greek government was unable to repay its debt.  Indeed, those taxpayers should not have been put further onto the hook from the moment it became known that the Greek government had lied about its financials in order to gain admittance to the euro zone.

Here’s an alternative thought—work with me on this; it’s an idea of responsibility—how about not bailing them out, again?  Instead, let them go bankrupt, and thereby free them to start over.

Welfare, Work, and the Stimulus

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It turns out Obama’s HHS waiver of the work requirement for welfare (in the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, signed into law by President Bill Clinton) wasn’t the first Obama waiver of the work requirement.  No, it’s just one more instance of the wealth redistribution in which Democratic Presidential Candidate Barack Obama believes so much.

The Congressional Research Service has a new report out, albeit one done at the behest of an Evil Republican, House Majority Leader Eric Cantor (the report can be found here or here).  This report demonstrates that the Obama Stimulus Package, drafted up shortly after his inauguration in 2009 and passed just after that also waived the requirement for work in order to get welfare.

Typically the food stamp program requires that group [“able-bodied adults” between 18 and 49 years old who have no dependents] to work or participate in a training program at least 20 hours a week to continue receiving benefits after three months. The stimulus law, though, allowed states to suspend the rule from April 2009 to October 2010—and most states did.

The CRS study showed that in fiscal 2010, the last year for which data was available, the number of food-stamp recipients in that group was at nearly 3.9 million. That’s up from 1.9 million in 2008.

Though food-stamp enrollment was already rising at the time in part due to the recession, the study noted the number in this group “increased more rapidly than the overall caseload.”

Their percentage of that caseload grew from 6.9 percent in 2008 to 9.7 percent in 2010.

This was no effort to accommodate spiking unemployment, though.  Indeed, it never was intended to—unemployment would never rise above 8% and would fall back to 5.5% by the end of 2009 with the stimulus, Obama promised us.  The waiver was, nevertheless, extended beyond 2010.

The latest CRS report noted that while the stimulus law lifted the food stamp work requirement until late 2010, the law allowing extended unemployment benefits likewise allowed most states to waive those work requirements in 2011 and 2012.

Bread and circuses.