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Wednesday, October 26, 2011

FLAT TAX FEVER

Republican presidential candidate Herman Cain has generated much attention with his
"9-9-9" plan to reinvigorate the economy, as well as his campaign.  The plan starts with eliminating the current multi-bracket federal individual tax system and replacing it with a single bracket; a "flat tax" of just 9%.  It would also reduce the corporate tax rate to 9%.  The obvious loss of federal tax revenue by such a change would be partially made up by eliminating most tax deductions.  Cain also sought to enhance revenue sufficient to eliminate federal deficits and reduce the federal debt by the imposition of a federal sales tax of 9%.

Cain claimed that his plan is "bold" and indeed it is, and he was rewarded, at least temporarily, by a jump in his poll numbers, actually leading former front runner Mitt Romney by a small percentage, with both around 25%. 

This is not a new idea.  A "flat tax" has been discussed among conservative politicians and economists for years.  In the current campaign, candidate New Gingrich has been one of those and has recently offered a more detailed description of his own.

Now comes Texas Governor Rick Perry who is attempting to recharge his flagging popularity with his "own" flat tax plan.  While Gingrich still has a bigger popularity deficit than Perry to overcome, Perry's sudden enthusiasm for "bold" tax and spending plans is clearly driven by his fall from poll numbers in September of around 30-35% to his current 8-11.5%.  Indeed, all of these plans are primarily intended to generate support among Republican conservatives, Tea Party identifiers and others as well, in the nomination contest.  Because of the realities of the two party legislative process and special interest influence, none would emerge from Congress in the same form as proposed, if at all.

Nonetheless, with three such plans on the electoral table it is worth taking a look at the concept from an economic and political point of view.

Essentially, the plans are very similar in structure with the major differences being the flat tax rate proposed.  Cain’s plan stipulates a 9% individual and corporate rate:  Gingrich’s plan has an individual “flat” rate of 15% “or less” and a corporate rate of 12.5%:  Perry proposes an individual and corporate rate of 20%. The current maximum corporate rate is 35%.

The differences in impact on federal revenues, individual and corporate tax obligations and benefits will require a detailed analysis by a credible financial institution similar to  the Office of Management and Budget (OMB) which doesn’t look at campaign proposals but would analyze any similar legislative proposal.  What is clear however is that Cain’s plan for income taxes taken alone, would benefit individual and corporate tax payers more than Gingrich’s or Perry’s simply based on the lower rate.  All three would eliminate the estate tax, the capital gains tax, and the taxes on dividends.  In political terms, liberals thus claim that flat taxes provide disproportionate benefits to corporations and wealthy individuals, the implication being that this is “unfair” to middle and lower class tax payers.

The important differences in the plans start with Cain’s third “9”.  This is revenue enhancement by imposition of a national sales tax of 9% which, according to Cain allows the otherwise unrealistically low tax rates of 9%.  A second difference is that of allowable deductions.  The tax simplification part of all three plans is based more on the removal of the vast number of so called “tax expenditures”, or allowable deductions which complicate the tax code and are seen by critics to primarily benefit corporations and the “rich” . All three would continue to allow business deductions for capital expenditures, and Gingrich and Perry would allow the standard deduction for individuals of $10-12,000 and $12,500 respectively. Mixed in with these politically inspired tax breaks however are a couple of additional “sacred cows” which the politically sensitive Gingrich and Perry have stepped around.  Both would allow the current mortgage interest deduction on primary residences as well as the deduction for charitable contributions.  Cain’s plan would allow the charitable deductions but is silent on the mortgage interest deduction which in the context of today’s housing crisis has become even more like the free wandering bovines of Calcutta.

Thus the major criticism of the three flat tax plans will be that at the outset they would all create major federal revenue shortfalls and thus continue to increase annual deficits and the cumulative federal debt.  Cain will point to his national sales tax as the remedy for this but a new sales tax on top of the average state sales taxes of 9.6%, (although much lower in many states), will be condemned as “regressive” by liberals and send shudders through the “any new tax” averse conservatives.  In any case, all three rely on hypothetical levels of economic growth generated by the plans to make up federal revenues and provide new jobs.

One of the major appeals of any “flat tax” scheme is that is simplifies the complex tax code which employs a whole industry of tax lawyers and accountants and which all three flat tax candidates claim costs about $435 billion a year in preparation, litigation and enforcement.  But both Gingrich and Perry, hoping to deflect the inevitable criticism from tax code deduction losers and class warriors, have made their flat tax codes “optional”; that is, tax payers, both individual and corporate could choose to compute their taxes based on the new flat tax model or the old, existing model with its progressive rates and deductions.  This is clearly a political dodge and campaign tactic which undermines the “simplification” argument, costs, incentives for economic growth, and any “reform” arguments related to deductions. 

For any of these plans to survive analysis they would have to be combined with major spending cuts.  All three candidates support such cuts in general with talk about balanced budgets, entitlement reform and spending caps and even eliminating whole cabinet departments but cuts in specific programs, which all have organized interests ready to defend them and voters to be angered,  have not been identified. 

All three candidates have claimed that their plans, which include the aforementioned major cuts in federal spending, would eventually balance the budget.  Politically, this has great appeal to the conservative primary electorate and many in the nation-wide independent cohort, but flat tax reform plans themselves are clearly an exercise in primary campaigning.  It's the "I have ideas.  I understand economics.  I'm a leader." strategy.  Politically, such reforms have minimum medium term futures.  Gingrich’s and Perry’s “either or” tax code makes little sense, would be impossible to analyze and project, and Cain’s required flat tax would result in major resistance from the myriad of special interests who benefit from their deductions, as well as consumers who get around to calculating the cost of living with a 9% add on federal sales tax. 

Cain refutes the implications of this by saying that the sales tax is not an “add on” because the “embedded” corporate taxes in the cost of products will be reduced by the lower corporate income tax which implies the base product cost to the consumer will be reduced as well.  That is not likely to happen as the cost of finished products will continue to be primarily based on the cost of raw materials, labor, equipment, transportation, distribution and marketing.  Additionally, the fear of “rate creep” once a national sales tax is established and politicians find a new revenue source, is a concern on both the Left and the Right.

So what will be the impact of these proposed “reforms” on the Republican primary?  All three plans contain elements that make sense, especially when combined with their associated budget balancing and spending cuts, but whether the Republican primary electorate has the patience or interest to understand them and make them priorities in their choice of candidates is not certain.  Nonetheless, the short term, pre-substantive, analysis has already been felt in Herman Cain’s surge.  Governor Perry is clearly attempting to jump start his campaign by gaining back his appeal to conservatives, and like Cain, will probably see some sort of bounce in the polls just from the media attention if nothing else.

 The sustainability of any Perry bounce and Cain’s surge however is in question.  Cain has come under attack for seemingly wandering slightly away from anti-abortion purism and a joke about electrifying the border fence with Mexico.  Recently in Iowa, Perry and Bachmann and Cain were all still focusing on their personal religiosity and opposition to abortion and gay marriage, issues on which the president has little practical influence and ones far a field from flat tax considerations. Perry has been criticized as politically inept and "unpresidential" in the debates which led to his fall from grace, but has apparently sought to get far Right attention by his recent flippant reintroduction of the issue of President Obama’s birth certificate.  The fact that such issues are still crowding the public discourse and the debates, reflect a lack of seriousness on the part of voters and the tendency for policy positions to be secondary in importance to issues of style, personality, ideological conformity and substance.

Meanwhile, while Perry, Gingrich, Paul and Bachmann compete for the evangelical and Tea Party vote in Iowa,  Mitt Romney remains the front runner in New Hampshire by a wide margin.  His strategy so far has been to campaign against Obama and for the votes of the more moderate national electorate and let the more conservative candidates fight against each other and divide that vote.  Romney has introduced his own 59 point economic plan which is focused on national economic growth to produce jobs.  He offers a lower corporate tax rate of 25% and lower individual rates over time.  He also proposes eliminating the capital gains tax, which is an incentive for investment, but unlike the three flat tax candidates he would only exempt investors who earn $200,000 or less per year.  He would also cap federal spending at 20% of GDP from its current 26%.

 Cain still lacks a credible campaign organization.  Perry still must climb out of near single digit approval where he is joined by Gingrich.  Flat tax fever may help but fevers subside and 80 percent of likely Republican voters say it’s too early to make up their minds.





Sunday, October 16, 2011

RAISING CAIN

Once again there is a new "front runner", sort of, in some polls,  for the Republican presidential nomination.  In the last couple of months the fortunes of the Republican candidates and potential candidates have mimicked the stock market’s boom and bust cycles.  In a contest with too many candidates, the "leaders" usually have had approval ratings in the high twenties so it is difficult to assess what one's genuine support will be as the fringe candidates drop out.  The "maybe I'll run", non-candidate Donald Trump had 28% support in April but just 8% in May.  Then there was the Bachmann boomlet in early August when she won the Iowa Straw Poll and seemed destined to win the first in the nation and over important Iowa Caucuses in January.  But later on in that same month Texas Governor and new conservative hope Rick Perry entered the race and immediately jumped to 27% approval, stealing most of his support from Bachmann, now at 5%, and edging out front runner Mitt Romney in one poll  (Rasmussen) by 12 points.  But in the televised debates Perry has appeared clueless and unprepared and has gotten himself in trouble with conservative purists over illegal immigration and his failed attempt to require pre-teen school girls to be inoculated against a sexually transmitted disease.  So the conservative leadership banner has been handed off to Herman Cain who now leads Romney 27% to 23% in one poll (NBC/WSJ) and ties him at 29% in another (Rasmussen).  Almost all of Cain's new support comes at the expense of Perry who has dropped into the 9-14% range. 

This poses significant questions as the far right runs out of credible candidates (Gingrich, Paul and Santorum all remain in single digits).   Is this just the latest in an "anybody but Romney" dynamic in a more conservative than usual Republican electorate?  If not, then the presumption will be that Cain and/or his "9-9-9" economic program have genuine appeal. 

Certainly Herman Cain has significant personal appeal.  His background as a successful business executive and President of the St. Louis Federal Reserve Bank is impressive but in a electoral world dominated by interviews and debates his straight talk and confident style probably represent his major appeal. Now however, as happened to the other "frontrunners", much attention will be paid to "what" he is saying as well as  how he is saying it.

What Herman Cain is saying, over and over, is that he has a "bold plan" to restart the economy and cut unemployment.  Unlike the rest of the field who talk in general terms about cutting taxes and spending, Cain's plan not only has a name, "9-9-9" but contains specific details.  The basics include tossing out the existing federal tax code and  establishing a single bracket of 9% on personal income and business income.  This would represent a dramatic reduction across the board from the current brackets which start at 10% and climb through six brackets to 35% .  Capital gains taxes, inheritance taxes and taxes on dividends would also be eliminated. Cain would make up some of the loss in federal revenue by eliminating all tax deductions. He would make up the rest by establishing a national sales tax, also at 9%.  Payroll taxes which fund Social Security and Medicare currently at 15% would also be reduced to 9%.

Political candidates tend to shy away from specifics because they invite criticism from competing political candidates and groups most directly affected, and this proposal will be no different. Removing such things as the mortgage interest deduction, the oil depletion allowance (depreciation for oil wells) and deductions for charitable giving will generate much opposition. Ideologically based criticism is also certain and indeed has already started since Cain has surged in the polls.

Naturally, the first question about 9-9-9 is "Is it a good idea?"  The first and second "9s" are a flat tax with no deductions for individuals and businesses.  This is not a new idea but has definite appeal. It would simplify the ridiculously complex tax code and ensure that most of the 47-49% of tax filers who currently pay no federal income tax pay at least something  As a significant  cut for those who do pay taxes and businesses, it would put large sums of money into the economy instead of the government and thus stimulate economic growth and job creation.

The third "9" will continue to generate the most opposition.  Cain realizes that the federal debt and deficit numbers are so huge that stimulating expansion and spending cuts alone, can never achieve meaningful reductions. Thus he has proposed a broad based national sales tax.  Other conservatives believe all taxes represent a transfer of wealth to the government and depress economic growth.  They also fear that future Congresses seeking ever more revenue would raise the sales tax rate as has been done in the European Union.

Liberals who generally like high taxes prefer both a progressive personal income tax with the "wealthy" paying a higher percentage of their income and a high corporate tax.  They view sales taxes as "regressive" because when applied to basic needs like food, medicine, rent and transportation, the tax takes a larger share of total income from low income families.

So overall, is it a good plan?  Cain's economic adviser claims that the plan would:  1.  add two trillion to the Gross Domestic Product  2. create 6 million jobs  3. increase business investment by 33%  4. raise wages by 10%  5.  raise  federal revenues by 10%.  These are lofty claims and it is fair to assume that they are overly optimistic.  Still, the plan has some support among conservative leaning economists like Art Laffer of "supply side" economics fame, and Republican Congressman Paul Ryan.  A true analysis will require more time and probably more details but the political debate won't wait.

There is also another political consideration.  The plan could only be approved by a Republican majority in the House and a filibuster proof 60 vote Republican majority in the Senate which is highly unlikely in 2012.  That being the case what does it say about Cain's candidacy.  If his economic plan can't be passed, what other appeal does he have?  He is undeniably very intelligent but he has no experience in elected office and has no background in social or foreign policy.  Future debates on these subjects could broaden his appeal or see him join the crowd of "also rans" who experienced short periods of enthusiasm before falling into the single digit approval wasteland.

Thursday, October 6, 2011

FUN IN THE PARK: ZOMBIES AGAINST GREED

The political environment in the country is pretty crazy as doubts about the economy escalate, the related financial crisis in Europe adds to the gloom  and the stock market seems to be riding Superman's trampoline.  In the campaign arena, the Liberal establishment is frantically trying to destroy the presidential prospects of Rick Perry with irrelevant charges about capital punishment in Texas and now a rock with a racially provocative word (long since painted out) that was found at a hunting camp Perry had used.   All this, even while Perry's own missteps are dragging him down in the polls, a circumstance which primarily benefits the more moderate Mitt Romney who Democrats fear more than Perry.

But the Left seems to be going from "dumb to dumber".  A Twitter and FaceBook  inspired protest movement which calls itself "Occupy Wall Street" has appeared in New York City and is currently camped out in Manhattan's Zuccotti Park.  It remains unclear exactly what the movement's goals are and even the self appointed organizers and participants don't seem to know. The New York Times quoted a "pep talk" given to a new protestor; "It doesn't matter what you're protesting; just protest." 

What it is so far is a mostly 20-something sit-in, sleep in, march and holler, carnival complete with balloons, costumes, music and the favored simple minded slogans covering the usual wide spectrum of Left wing causes and complaints.  The Washington Post reports "women in brightly colored wigs playing with hula hoops". Others were encouraged to paint their faces white to portray "corporate zombies and eat Monopoly money.  But mixing songs and silly behavior with self-important outrage can be fun, certainly more fun than educating oneself on the issues and voting. Wiljago Cook (yes, that's her name) quit her job in Oakland, California to come to New York and block other people from getting to their jobs on Wall Street . . . to protest unemployment.  This convoluted thinking seems to support protest organizer David Graeber's acknowledgement that outside opinion sees the protest as ". . . a bunch of kids who don't know economics and only know what they're against.  But Wiljago's logic challenged reasoning, the hula hoopers and those folks seeking their "inner zombie" makes even Graeber's broader strategy seem disconnected from reality:  "So we're trying to reform things away from the rhetoric of demands to a question of visions and solutions."

One "vision" on the protest web site says the goal is to "attract twenty thousand supporters to set up beds, kitchens and 'peaceful barricades' in order to 'occupy Wall Street' for a few months in an effort to end corporate greed."  How keeping thousands of traders, secretaries and janitors from going to work  would end "corporate greed" i.e. profits, they haven't said and certainly don't know.

But it's the nature of Left wing, post-adolescent protestors to think "big", as the presence of the young self styled Marxists and anarchists, and the "Abolish Capitalism" signs attest.  So far, however, the "movement" is a few thousand people short of the twenty thousand people goal with a "few hundred core supporters" camped out in the park and an estimated 2000 locals joining in the fun when the "movement" starts to "move", as in march.  Following the usual evolution of public mob protests, the dominant issue has now become the charge of "police brutality", as "New York's Finest" struggle to keep the public thoroughfares open and the protestors go happily into "victim" mode. But the prospect of twenty thousand people sleeping in a park without food, water or sanitary facilities “for a few months” is absurd on its face.  Setting up "peaceful barricades", an oxymoron, to shut down the most important street in the world and deny thousands of people access to their jobs is a simple minded invitation for the "mother of all" police confrontations.  But of course, they do it in Greece, so. . .?

The protest's lack of focus, and thus seriousness, has been criticized even from some on the Left and is apparent in the signs complaining about everything from "global warming" to capital punishment, as do the "demands" listed on the web site.   The demands are nothing more than a list of complaints against "them"/"they", the sinister, faceless, Wall Street millionaires who are allegedly and single handedly responsible for all the nation's woes.  Most of these indictments are without merit and without benefit of specific or thoughtful policy proposals.  "Foreclosures"; "gender, race and "gender identity" discrimination"; "poisoned food supply"(?) and "undermined farming"(?);  "They", "used the military and police to prevent freedom of the press"; "accepted contracts to murder prisoners"; and "create weapons of mass destruction".  No social ill, alleged victimization, or cliche'd Left wing charge is left out.

The “movement” can be further characterized by its supporters and cheerleaders.  The usual group of Left wing celebrities have appeared to urge them on.  Susan Sarandon, who always seems to be around these things; black radical Princeton professor Cornell West and actor Alex Baldwin have chimed in, and of course those anti-capitalist, capitalists, Michael Moore and George Soros have offered their “support”. Van Jones, the defrocked former Obama "green jobs czar" who "resigned" after his association with a Marxist group in San Francisco became known, is starting a sister protest group.

What does all this mean?  It’s largely in the eye of the Left wing beholder.  “Solidarity” protests have sprung up in a few other large cities and some liberal commentators have tried to make the case that Occupy Wall Street is the beginning of a significant “revolutionary” movement  that will be the Left’s answer to the Tea Party movement on the Right.  The problem with such forecasts is that the Tea Party has a focused and specific, actionable agenda:  lower taxes, cut spending to reduce the deficit and federal debt and reduce the size and scope of government, and it appeals to a broad range of Americans.  It's strategy does not include "peaceful barriers" and instead focuses on elections.

The complaints and implied solutions to the issues raised by the far Left are higher taxes; “income redistribution”; more government spending, bigger more intrusive government i.e. an enhanced regulatory state, and more social engineering.  In short, it is close to an advocacy of socialism which is specifically evident on the signs carried by some of the protestors.  As such it will at best generate a lot of noise, confrontation, and over analysis by the media but in relative terms, little support from middle class Americans who can't take "a few months" off to live in a park and disrupt traffic.  

All the political “signs”, from chicken entrails, Tarot cards, astrological movements to political polls and punditry, indicate a continuation of the 2010 conservative electoral surge in the 2012 elections.  The Left are beside themselves, frantically striking out at conservatives, fighting among themselves and busily looking for some tactic or strategy to save Obama and themselves.  This opens the door to fringe dwellers and extremists.  Occupy Wall Street is just the latest manifestation of this tendency.  What is likely to happen in the short term is that the more organized, more self serving, issue specific groups on the Left that are now joining or supporting the disorganized Occupy Wall Street protest, will in effect take over the movement and the headlines.  Labor unions and advocacy groups like MoveOn.org will "move in" and as the energy and "fun" of the youthful protest becomes less a part of the movement the political confrontation between conservatives and liberals will return to the usual playing fields of blogs, media and electoral politics.  Occupy Wall Street should disappear soon after the first snow falls on Ziccotti Park.