Perry's Alternative Maximum Tax

Presidential candidate Rick Perry has finally announced his tax plan. As it turns out, he isn't favoring the Forbes flat tax as initially predicted; rather, his plan is based on Stephen Moore's quasi-flat tax, originally proposed in 1995 as part of Jack Kemp's tax reform initiative.

The plan involves allowing individuals and corporations to select one of two tax plans: to be taxed under the current tax code, or to optionally pay a 20% flat tax, with few deductions (see below), on income exceeding $12,500.

This really isn't a flat tax per se; it's an attempt to replicate Hong Kong's tax code here in the United States. Moore described his plan here in 1998; Alan Reynolds critiqued it in this article in 2005 (both are links from the Cato Institute). Interestingly, Moore makes no comment about his participation in crafting the "optional flat tax" concept in his initial remarks about Perry's plan.

In effect, Moore's plan is a 20% cap on income tax liability, similar to Hong Kong's 16% cap.

At first glance, one might see this as a political expedient- believing a flat tax system won't pass through Congress, but that an optional flat tax system might. I see a potential pitfall with this line of thinking: as in Hong Kong, where only the top 2% of taxpayers pay the 16% flat rate, this proposal would only apply to the top few percent of taxpayers here in the United States. In other words, it would amount to a "tax cut for the rich"- something which makes tremendous sense (especially in the current economic climate) but has always been politically problematic to implement.

Contrast this with the rhetorical core of a flat income tax proposal: Everyone pays the same rate.

The plan does have some positive attributes: An upper limit on income tax liability makes the tax system more predictable for upper-income earners- including owner-operator businesses. It also allows individuals and businesses to choose to simplify tax preparation. Even if this means a slightly higher tax liability for some payers, it may be worth the additional sum to dispense with extensive tax preparation- to pay a bit more for the sake of convenience.

Moore claims an advantage of his proposal which, in my opinion, is specious: He claims that opting into the plan will eventually make the current tax code obsolete, because most taxpayers will eventually decide to pay flat tax. Unfortunately, decades of experience with a dual system in Hong Kong contradicts that claim- as stated above, only 2% of taxpayers opt for the 16% flat tax.

One major fault of the plan is the deductions. As I stated in my Forbes post, the charitable contributions deduction is one of the biggest holes in our tax system. Perry's plan preserves this deduction, as well as the sacred cow mortgage interest deduction and deductions for state and local taxes paid, for persons earning less than $500,000. However, no mention has yet been made of a deduction for business expenses. As stated previously, the business expenses deduction is critical to small businesses and individuals entering self-employment; failure to include it makes the alternative maximum tax a less-attractive option for these taxpayers. Hopefully this deduction will be included as Perry's campaign fleshes out the plan.

All-in-all, Perry's plan is substantially better than 999. It is, essentially, an "opt-out" from the current tax system. With some substantial improvements, it could replicate the effect of Hong Kong's tax system- which is generally accepted to be part of the reason for Hong Kong's economic prosperity, along with greatly less-restrictive business regulations (and cutting business regulations has been a hallmark of Perry's record as Governor of Texas).

I would prefer a flatter tax structure for everyone, for a number of reasons. However, I am cautiously optimistic about this plan.

The Forbes Flat Tax

Current speculation is that Governor Rick Perry will advocate for the flat income tax plan proposed by Steve Forbes. As a flat income tax proponent myself, I am elated by this news. Perry has referred to the plan as "the most exciting tax plan since Reagan's". I couldn't agree more!

The Basics:

Forbes proposes a flat rate of 17% applied to business and personal income in excess of $36,000 per year, with very few deductions or credits. Corporate income tax, which is a double tax, would be eliminated. Capital gains tax would also be eliminated, which is sensible when one considers that capital gains are realized from investments purchased with already-taxed money. Retirement accounts would continue to recieve the same tax treatment as now.

In Forbes' own words:

The flat tax would be simple. You could fill it out on a postcard. It would be honest. It would eliminate the principal source of political corruption in Washington. It would be fair. Millions of people would be off the federal income tax rolls.

There would be no tax on Social Security. No tax on pensions. No tax on personal savings. It would zero out capital gains taxes. It would set off a boom by letting people keep more of what they earn and by lowering barriers to risk taking.

Flat income tax would also eliminate most of the estimated $140 billion annual cost of tax preparation, remove many opportunities for tax avoidance, and take most of the bite out of the IRS.

There is already broad support for flat tax principles on both sides of the aisle in Congress. Democrats want to eliminate "tax loopholes", Republicans want to lower rates. Flat income tax does both.

Eliminating deductions and credits:

On the one hand, this means no charitable contributions deduction, mortgage interest, child credits, and so forth. On the other hand, I ask the reader this: Look at your tax return for last year. Did all of the tax incentives you claimed- mortgage interest, child credit, charitable contributions, etc.- add up to $36,000? For virtually all middle-income earners, this would equate to a net reduction in federal taxes paid.

Naturally, the major public objection to this concept is the elimination of the charitable contributions deduction. The public at large believe that this deduction promotes altruistic contributions from "the wealthy" to legitimate charities. In fact, the reality of this deduction is somewhat different: Much of the money claimed in this deduction is donated to non-charitable organizations (political and quasi-political organizations, for example).

Indeed, in the book, "The Flat Tax" (which can be bought in e-book format from that link for $6.72, and I highly recommend it, even if it does contain a few left-leaning sentiments), Robert Hall and Alvin Rabushka point out the following:

There is little merit in public subsidy for organizations whose success in raising funds depends on tax deductibility rather than the intrinsic merits of their activities.

Business expenses:

Among the few deductions Forbes would retain is the deduction for business expenses- a very necessary deduction, since taxing business expenses would create a barrier to entering self-employment, and would disproportionally burden small businesses in comparison to large businesses.

The payroll tax problem:

There is one major problem with any flat tax transition: What to do with payroll taxes? Most countries (Russia, for example) which have converted to flat income tax have never addressed their payroll taxes. If payroll taxes are left unchanged here in the US, a flat tax system would pinch the middle class most:

Income below $36,000 per year would be taxed at 7.65% (payroll);

$36-102,000 (Social Security tax cap) would be taxed at 24.65% (17% + payroll);

Income over $102,000 would be taxed at 18.45% (17% + Medicare tax).

Forbes has yet to address this problem. My suggestion? Remove the income cap for Social Security tax, so that it is applied to all income.

I admit this idea has problems, but it also has one whopping big perk. As I explained in a previous post, one of the core components of wealth redistribution is to force employers to fund entitlement programs- through employer payroll taxes- from which the employer will derive no benefit. It conceals the true cost of these programs. It also creates a barrier to hiring new employees, or retaining current employees. The revenue-neutral alternative is to convert payroll taxes into an 8% flat tax on incomes- with no deductions- removing the cap on Social Security tax and eliminating employer contributions into entitlements.

In other words, it would make the "employer payroll tax holiday" permanent.

If this were instituted, tax rates would look like this (notice the miniscule difference from the figures above):

Income under $36,000 per year would be taxed at 8% (FICA);

Income over $36,000 per year would be taxed at 25% (17% plus FICA).

This idea offers another benefit: It would eliminate the tax penalty for self-employment (payment of both "halves" of payroll taxes). A person's tax rate would be the same, regardless if that person were employed or self-employed. Since it would also apply to income derived from capital gains, it would soften the objection to eliminating capital gains tax while also softening the effect taxation has on said investments.

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In comparison to Cain's "999 Plan", flat income tax is simpler, fairer, more transparent, and decidedly less risky. Flat income tax is also a tried-and-true system, which has been a rousing success in those countries which have instituted it.

In other words, it's exactly what our country needs.

UPDATE (10/25/11): Perry has announced his own tax plan.

9-9-9 Part II: Coming Apart At The Seams

Now that Cain's campaign has put some more of the 999 Plan in print, we can begin discussing the misconceptions and deceptive language found in this proposal.

The reader should notice immediately, when reading the above link, that most of the "proposal" is meaningless soundbites, non sequiturs, and strategic rather than economic justification for the plan. Once we sift through all of that, however, we run into problems.

The "big secret" about 999? It's really four taxes, not three. It's an income tax, a sales tax, a VAT tax, and a hidden payroll tax, all rolled into one package.

1) It's a payroll tax. Cain has been touting a feature of 999: that it would eliminate payroll taxes. I think it's safe to say that most thinkers agree that eliminating the burden of payroll taxes will help stimulate hiring.

One problem: Cain's plan doesn't do that.

Let me explain: Currently, employers are allowed to deduct payroll as a business expense, so long as payroll taxes are paid on the amount. Under Cain's plan, however, most business expense deductions would be eliminated:

"Gross income less all purchases from other U.S. located businesses, all capital investment, and net exports"

In other words, the 7.65% tax on payroll would be replaced with a 9% tax on payroll and almost every other business expense. This is, of course, in addition to state payroll taxes.

7.65% of payroll is enough of a burden to hiring; 9% of almost everything would be even more so.

Allan Bourdius makes an even graver case: 9-9-9 isn't just a substitute payroll tax, but that it's the mother of all payroll taxes, and would effectively kill service-oriented businesses such as personnel services.

Eliminating the payroll tax paid by the employee, while increasing the payroll tax burden on the employer, is exactly the opposite of needed reform. If government is going to be involved in retirement, low-income health care, unemployment insurance, and the other services funded by payroll taxes, the cost should borne by the employee who might recieve these benefits, not the employer who won't. Burdening job creators with funding social programs is the core of wealth redistribution, and 9-9-9 will only increase that burden.

2) It's a VAT. How do we know? Cain's campaign says it is.

In this PDF from Hermancain.com, the business portion is described as a "subtraction method value added tax". Bizarrely, Cain supporters continue to claim it isn't a VAT.

Most of my readers already know the destructive potential of a VAT; to refresh our memories, here is a classic description of this effect from Murray Rothbard, reproduced by Reason.com.

In fact, it's worse than a VAT. It's a gross receipts tax with VAT-like qualities.

Hank Adler uses Safeway grocery stores as an example of this destructive effect:

One need only look to the annual report of Safeway to understand the impact of 999 on grocery prices. Because the grocery business is incredibly efficient and there is significant competition, there are very, very low margins in the industry. The pretax profit in good years for Safeway is only about 2% of sales and the Federal income taxes therefore are less than 1/2% of sales. After making a reasonable guess based on other information in the Safeway annual report, the total Federal income tax plus Safeway’s portion of their employees’ payroll taxes is less than 2% of sales. Assuming that would all be passed through to the customer in the way of price reductions, the price of food must increase by about 7%.

In addition to this estimated 7% increase in food prices, there's a new sales tax, which brings us to this:

3) It's a national sales tax. And it's not just any sales tax, either. As Adler questions (above), Cain's campaign isn't clear about whether this will be an exclusive sales tax (as state sales taxes in the US currently are), or an inclusive tax. I argue that this ambiguity points toward Cain's intentions: The tax will be inclusive.

We can readily deduce this: Cain is an ardent FairTax advocate. Cain has stated his desire to implement full FairTax. He has described 9-9-9 as an introduction to full FairTax. FairTax is an inclusive tax. Hence, his "introductory" FairTax will also be inclusive. And if the sales tax portion of 9-9-9 were intended to be exclusive, like current state sales taxes, wouldn't Cain would just say so and alleviate any concern?

If the reader is still in doubt about this point, there are two more pieces of evidence:

a) The scoring tables for 9-9-9 (PDF) from Cain's own website include tables for a "poverty grant" to offset the regressiveness of 9-9-9 (see Point 6, below). In other words, it would include a "prebate", just like FairTax. Interestingly, Cain is simultaneously claiming no "poverty grant" would be included, citing the reasons I cited in a previous post about "prebate" becoming yet another welfare entitlement.

b) Cain has renewed his intent to use 9-9-9 as a step toward full FairTax. From the 9-9-9 link at the beginning of this article:

Amidst a backdrop of the economic renewal created by the 9-9-9 Plan, I will begin the process of educating the American people on the benefits of continuing the next step to the Fair Tax.

I think it's safe to assume that Cain's "FairTax Lite" will be an inclusive tax- one which is hidden in the shelf price of goods and services.

4) It's a flat income tax. This is terrific- I'm a flat income tax advocate. However, as I have warned before, authorizing the federal government to collect both income and sales taxes simultaneously is dangerous. Does any reasonable person honestly believe that Congress, once authorized to tax both incomes and sales (and clandestinely embed the sales tax in the cost of goods and services), will keep the rate at a mere 9%?

There are two other points which need to be made about 9-9-9:

5) It's unconstitutional. The Constitution does not authorize the collection of a sales tax. Period.

Additionally, part of Cain's plan is the creation of "empowerment zones"- areas of the country where tax rates are lower, or special incentives would be offered. This clearly violates Article I, Section 8 of the Constitution: "...all Duties, Imposts and Excises shall be uniform throughout the United States".

We have enough Constitutional violations embedded in Federal law today, without adding more.

6) It's regressive as hell. While it would cut taxes for the wealthiest taxpayers- which is fantastic, because they pay too much in taxes as it is- it shifts the tax burden toward the poorest. Indeed, an estimated 84% of Americans would experience a tax increase. While it's true that 47% of Americans pay no income taxes (other than payroll tax), what about the other 37%- the middle class who pay income tax now and will pay more under 9-9-9? One goal of tax reform- and of government spending reform- must be to reduce the tax burden on all taxpayers, without incurring more national debt.

So, there you have it. 9-9-9(-9): an unconstitutional, regressive plan which will embed taxes and endanger our economy. It's ill-conceived, unnecessarily convoluted, and potentially dangerous to our economy.

Which is why I'm voting for Rick Perry, who supports a flat tax. (UPDATED 10/25/11)

Romney On Guns: Like Father, Like Son

Mitt Romney says he "supports the Second Amendment". And, based on a casual glance at his record, you could almost believe him. As governor of Massachusetts, he signed some laws to protect hunters and clarified some language in the state's gun laws.

On the other hand, he signed an "assault weapons" ban. As Mitt has said, he was a Republican governor in "a tough state", and he had to make some compromises on these issues.

Naturally, there is some back-and-forth about Romney's gun views- were his actions a "net positive" for gun owners in Massachusetts, as he claims, or were his efforts cleverly-disguised gun grabs?

Let me ask you, the reader, a question: Who was the most influential in forming your political views? I'm willing to bet most of you answered "my parents".

Mitt Romney's father, George, was governor of Michigan from 1963-1969; Mitt has often said that his father was his greatest inspiration. And if we compare the gun laws each Romney passed while governor of their respective states, we find some telling parallels.

Handgun Ownership: In order to understand Mitt Romney's actions here, it is necessary to give a little background information about Massachusetts gun control laws: In 1998, Massachusetts established a list of "safety" criteria for handguns sold in the state. The criteria were designed to disqualify most handguns. The Roster is the list of those few makes and models which have passed the testing requirements.

Mitt Romney created two exemptions: One for handguns already licensed in the state prior to October 21, 1998, and one for "match-grade" pistols (high-dollar handguns purpose-built for shooting competitions).

The 1998 exemption is significant when one understand the "preban effect": Some gun laws are written with an effective date, where firearms sold after the date are subject to the law, while those sold before the date are "grandfathered". Since there is a limited supply of grandfathered items, the sale price of those items skyrockets.

The net effect of Mitt Romney's exemptions was this: In Massachusetts, a person now has three options for legally owning a handgun: 1) an expensive pre-1998 handgun; 2) an expensive "safety-approved" handgun; 3) an expensive match-grade handgun.

Compare this to George Romney's "safety" law- Public Acts 215 and 216 of 1964- which required all handguns to be submitted, within ten days of purchase, for inspection by a law enforcement officer in order to obtain a "safety certificate". "Safety", however, was undefined, and determining that a handgun was "safe" was left entirely to the discretion of the officer conducting the inspection. In effect, law enforcement could determine any handgun to be "unsafe", and confiscate the handgun on the spot, without compensating the buyer for his loss. This provided a disincentive for unpopular persons and minorities to attempt to lawfully buy handguns, knowing their handguns would be confiscated. Likewise, a lower-income person would not want to take the risk of saving money to buy a handgun, only to have their investment confiscated in this manner.

Like father, like son: Both Romneys used the guise of "safety" to deny the right to own a handgun to lower-income persons and "undesireables".

Carrying Handguns: Before George Romney became governor, Michigan had created a very restrictive licensing law for carrying a concealed handgun: License applicants had to prove an immediate physical risk to a county license board consisting of representatives of the county prosecuting attorney, county sheriff, and the commissioner of state police. Needless to say, many applications for a carry license were rejected (and this state of affairs led to concealed carry reforms decades later). A concealed carry license was also required if a person wanted to transport a loaded handgun in an automobile, whether or not the handgun was concealed. Open (visible) carry of a handgun was technically legal (outside of an automobile), but in practice, doing it would usually lead to arrest for a "disturbing the peace" type of charge.

So, what was one to do if they wanted to carry a handgun, but weren't politically connected enough to get a concealed carry license? Answer: Get a private security guard license. Said license authorized a person to carry a handgun openly without fear of arrest, carry a loaded handgun in an automobile, and was issued to virtually anyone who applied.

George Romney, however, made that practice illegal. Public Act 100 of 1966 made it a misdemeanor for a licensed security guard to carry a handgun except during work; Public Act 49 of 1967 made it a felony.

Romney did, however, extend concealed carry privileges in Michigan to licensees from other states- understanding that, in the 1960s, almost all states had similarly-restrictive processes for issuing a license to carry concealed. Romney did little more than extend a privilege given to an "elite few" in his state, to the similar "elite few" of other states.

By comparison, Mitt Romney had little work to do in this regard: By the time he took office, Massachusetts already had a two-tiered carry law: Persons with a "Class B" license could "carry" (transport in a box) an unloaded firearm to and from hunting areas and target ranges; the "elite few" granted a "Class A" license (issued to those who could prove a "need" to local law enforcement, as in Michigan in the 1960s) were entitled to carry a concealed handgun for self-defense.

While running for Governor in 2002, Mitt Romney infamously said: “I won’t chip away at them; I believe they protect us and provide for our safety.” And he didn't.

Like father, like son: Both Romneys supported restricting the carrying of handguns for self-defense to an "elite few" of police and politically-connected businessmen.

Assault Weapons: The firearms we nowadays call "assault weapons"- certain types of semi-automatic rifles which cosmetically resemble military rifles- were extremely uncommon in the early 1960s (indeed, most modern "assault rifles" had not yet been invented). On this point we can't compare the record of the two Romneys, as this is a modern gun rights issue. Mitt Romney signed Massachusetts' assault weapons ban- and has frequently cited that he did so because such weapons as "especially lethal" and "not sporting" (see below). As I have stated before, this type of weapon is uniquely suited to the growing problem of home-invasion crimes; denying them to the public places a limit on the practical application of an individual's right of self-defense.

Sporting Purposes: George Romney signed only one hunting regulation as governor- Public Act 159 of 1967, which created a regulatory board for hunting and mandated certain hunting safety practices. Mitt Romney, as governor, signed laws to protect shooting clubs, institute youth hunter safety courses, and restored funding to the Massachusetts Inland Fish and Game Fund. Both Romneys used their "pro-sporting" message as part of their election campaigns.

Like father, like son: Both Romneys used "sporting" rhetoric to conceal their gun control agendas.

In sum, it's not fair to say Mitt Romney is "anti-gun". Likewise, it's not reasonable to believe Mitt was merely bending to the political will of the people of Massachusetts (I doubt the will of the people was to rehash 40-year-old gun control ideas from another state). As proved here, the more natural conclusion is that Mitt was emulating his father's beliefs and ideals.

It is fair to say that Mitt is an elitist on the subject of firearms. His record demonstrates a WASP-y, 1950's view of gun ownership: "Decent" people own guns for hunting and sporting, and protecting their homes. "Decent" people don't "need" to carry guns for self-defense. Preventing people who aren't "decent" from owning guns is a good idea.

His dad felt the same way.

Herman Cain: Six Of One, Half-Dozen Of The Other

Herman Cain's presidential campaign has gained considerable momentum since his recent straw poll victory in Florida. This comes as a shock to me, since I have scratched my head to find a reason why Cain generates so much support amongst "conservatives", since his stances on any meaningful issues are anything but "conservative".

To finally put to bed the notion that Cain is a "good conservative", here are his positions on meaningful issues:

Economic Foresight: In 2005, Cain argued our economy was booming. He didn't percieve any signs of looming economic problems (such as a housing bubble). In 2008, Cain again argued that our economy was booming. He didn't percieve any signs of the housing bubble. In his opinion, warnings about impending economic problems were "Democratic deception" (naturally, Republicans and independents warning of the same were "drinking the Kool-Aid"). Cain's main selling point is his business acumen- and this opinion severely undercuts any confidence in that.

Tom Woods has compiled an excellent case of his own against Cain, focusing on his economic positions, some of which I have borrowed here.

Taxes: Herman Cain is an ardent FairTax supporter. Recently, he has introduced his "999 Plan"- which holds the Laffer curve as a "deus ex machina" to solve our economic problems, rather than a realistic rule-of-thumb, and (if passed) would establish a dangerous precedent for the federal government: the authority to tax both income and sales.

Gun Control: Herman Cain's stated stance on gun control is bizarre- he seems to believe the federal government has only limited authority to regulate firearms, while the states may do so without restriction. Prior to Cain, I had only heard this position espoused by anti-gun judges (like Sonia Sotomayor)- people who favor very strict gun control but must appear to respect the Constitution. If we assume for a moment that this wasn't a "gotcha" question posed by Wolf Blitzer, and that this accurately reflects Cain's Second Amendment stance, then this is a problem.

This position also ignores an historical fact, cited by Justice Clarence Thomas in the US Supreme Court's McDonald decision (incorprating the Second Amendment on the states): The basic reasoning behind the Fourteenth Amendment was to incorporate the Second on the states. At the time of its passage, southern states were passing gun control laws intended to disarm newly-freed blacks. The fact that Cain- a southern black man who lived through segregation- misses this point, is deeply troubling to me.

Romney: Cain supported Mitt Romney in 2008. Romney, like Cain, has a record of poor economic foresight and bad tax policies, and Romney passed numerous gun control laws in Massachusetts while calling himself "pro-Second Amendment".

Monetary Policy: Cain is a former Chairman and member of the Board of Directors of the Kansas City Federal Reserve Bank. It should be no surprise, then, that he opposes auditing the Fed (or at least, wants to convince the public that an audit would be pointless). Whether you are an "End The Fed!" libertarian, or a money-wise conservative, it should be obvious that a Federal Reserve audit is long overdue.

Foreign Policy: Cain is totally clueless on foreign policy. I need say very little that wasn't already said by Bill O'Reilly in this video (thanks to Mediaite). I will also add this video of the infamous "Right of Return" flub.

Race Baiting: Cain has participated in a vicious, and totally meritless, smear against Rick Perry, described in great detail here (thanks to RedState). This is nothing less than a despicable attempt to play the "race card" to gain an advantage.

To summarize: Herman Cain's gun control stance mirrors the most anti-gun leftist judges; his tax stance is deceptive, and would lead to Americans paying more of their income to the federal government; he supported a candidate in the last election with similarly left-leaning positions (and who is now running from those positions); he has a history of bad judgement on our economy; he believes the Federal Reserve should continue to be unaccountable to Congress; he is clueless on foreign policy; and he plays the race card to attack his white counterparts.

Cain is a social-issues populist. The support he currently garners is based on one quality: He makes some people "feel good" about their convictions. He inspires "hope" in people, and his supporters believe he will bring "necessary change".

In other words, he's the Republican party's version of Barack Obama.