Wednesday, November 23, 2011

Newt Gingrich on Amnesty | In his own words

Updated: During the CNN GOP National Security Debate on 11/22/2011, Newt Gingrich recommended a comprehensive approach to address illegal immigration. Just for the record, what Mr. Gingrich really said about Amnesty follows:

Mr. Gingrich said that any such plan must (A) start with securing the border, then (B) establishing a guest worker program, and finally (C) setting up a board to review the status of each person here illegally. Such a board would distinguish between those who recently came here, and those who are more established. He said that those who recently came here, who don't have family ties, or are otherwise not established, should be sent home. While those who are established, who have been here for 25 years or more, who have children and grandchildren in America, who belong to churches, who have obeyed the laws, and who have paid their taxes, should be allowed to stay legally, but not automatically granted citizenship. For the latter, he recommended using something similar to the Red Card Solution, which would be used as a form of identification, to grant legality, but not as a path towards citizenship.

The Krieble Foundation's Red Card Solution is a proposal which would allow companies to recruit workers from Mexico. The Red Card would permit workers to enter America, and would allow employers and immigration authorities to track them. It would aid in enforcement of immigration laws, with less intrusion by the government. According to the Krieble Foundation:

"It’s a simple solution. Private employment agencies would be allowed to open offices in foreign countries, and authorized to issue temporary non-citizen worker permits. The permits would be “smart cards” with a microchip that includes a photograph, fingerprint or other biometric identification data, and information needed so that border agents, police, and employers could swipe the card and know who the holder is, where he works, where he lives, who issued the permit, when it expires, and any other required information. Employment agencies would be licensed by the government and would be required to run criminal background checks before issuing non-citizen worker permits, much like gun shops do today. Employers would simply post jobs with employment agencies like they do today. Best of all, the program would be funded by user fees, not taxpayers."

Gingrich also recommended that H1 Visas be granted with every graduate degree in math, science and engineering, to encourage foreign students to stay in America.

For the most part, I concur.

Sunday, November 20, 2011

National Debt Bomb | 1976 to 2011

The 4th Deadly Sin -

By: Larry Walker, Jr. -

Definition of Lazy – “encouraging inactivity or indolence” -

The Nixon Shock was a series of economic measures taken by U.S. President Richard Nixon in 1972, which included unilaterally cancelling the direct convertibility of the United States dollar to gold and essentially ending the existing Bretton Woods system of international financial exchange. However, it was not until March of 1976 when the world’s major currencies began floating. It is notable that what cost $1.00 in 1976, now costs $3.95, and what costs $1.00 today, cost only $0.25 in 1976, as annual inflation over the period averaged 4.00%.

Meanwhile, since 1976, the U.S. National Debt has grown from $620.4 billion to $15,039.4 billion, in nominal dollars (as of November 17, 2011). So the questions today are as follows: How much of the national debt is attributable to a declining dollar? And, does anyone really care about the looming debt implosion?

Measuring the National Debt in 2011 Dollars

At the close of fiscal year 1976, the U.S. National Debt stood at $620.4 billion. Converting this to 2011 dollars, would have made it equivalent to $2,450.1 billion. So it took the United States 186 fiscal years, from 1791 to 1976, to accumulate today’s equivalent of $2,450.1 billion in debt. This averages out to around $13 billion per year, in today’s dollars, over the entire 186 year period. In contrast, over the last 4 fiscal years, the national debt has grown by a total of $5,006.9 billion, when measured in 2011 dollars. This averages out to borrowing of $1,251.7 billion per year, over the last 4 fiscal years.

Per NationMaster.com, in 1976, the U.S. population stood at 218.0 million. By 2011 the population had increased to 311.7 million, representing an average annual growth rate of 1.2%. At the current rate of growth, the population will reach 1,008 million by the year 2193, 186 years from 2007.

From 1977 through fiscal year 2007, the national debt grew from $2,450 billion to $9,783 billion (in 2011 dollars). That’s an increase of $237 billion per year, or an average annual growth rate of 9.7%. On that trajectory, the debt would reach $185.5 trillion by the year 2193.

From 1977 through fiscal year 2011, the national debt grew from $2,450 billion to $14,790 billion (in 2011 dollars). That’s an increase of $353 billion per year, or an average annual growth rate of 14.4%. On this trajectory, the debt would reach $402.2 trillion by the year 2193.

In fiscal years 2008 through 2011, the national debt grew from $9,783 billion to $14,790 billion (in 2011 dollars). This represents an increase of $1,252 billion per year, or an average annual growth rate of 12.8%. Since the growth rate has been slightly lower over the last four years, as compared to 1977 to 2011, on its current trajectory, the national debt will reach $359.2 trillion by the year 2193.

On a per capita basis, the national debt was $11,237 in 1976 as compared to $47,450 at the end of fiscal year 2011 (in 2011 dollars). Based on its 1977 to 2007 growth rate, the debt would reach $183,997 per capita by the year 2193. At its 1977 to 2011 growth rate, the debt would reach $398,944 per capita by the year 2193. However, at the rate of growth since the end of 2007, the debt will reach $356,327 per capita by the year 2193.

To summarize, measuring in 2011 dollars, the national debt grew by an average of $13 billion per year over the 186 year period ending in 1976, and over the last four fiscal years it has increased at an average of $1,252 billion per year. Putting this into historical context, as compared to pre-1977 borrowing, the federal government is presently incurring the equivalent of 96 years of debt in each new fiscal year.

Another way of looking at this is that since the debt grew from $2,450.1 billion in 1976, to $14,790.3 billion in 2011, it has grown by $12,340.2 billion over the last 35 years, or by an average of $352.6 billion per year (in 2011 dollars). So because since 1976 we have borrowed an average of $352.6 billion per year, versus an average of $13 billion pre-1977, it may be stated that, the United States is currently borrowing at an annual rate which is 2,612.3% higher than its pre-1977 average.

And thanks to the Federal Reserve, what cost $0.25 in 1976, now costs $1.00. So since everything costs about 400% more than it did in 1976, in real terms, government borrowing is only off target by 2,212.3% from its pre-1977 level. Therefore, although the declining dollar is partially responsible for the increased borrowing, it only represents about 15.3% of the problem.

Debt to GDP: 1976 vs. 2011

By the end of fiscal year 2011, the national debt had grown to $14,790.3 billion. Meanwhile, according to the Bureau of Economic Analysis, U.S. Gross Domestic Product stood at $15,198.6 billion, as of the end of the 3rd quarter 2011. So at the close of fiscal year 2011, our debt-to-GDP ratio was 97.3% (14,790.3 / 15,198.6). In comparison, the national debt stood at $2,450.1 billion, in 1976, and GDP was $7,205.7 (in 2011 dollars). So at the close of fiscal year 1976, our debt-to-GDP ratio was only 34.0% (2,450.1 / 7,205.7).

  • 1976 Debt-to-GDP Ratio: 34.0%

  • 2011 Debt-to-GDP Ratio: 97.3%

Measuring the National Debt in Constant 1976 Dollars

Since the dollar has lost 300% of its value since 1976, courtesy of the Federal Reserve, what would the national debt look like had our currency remained stable? Well, according to the table below, the national debt would be $3.8 trillion, as of 11/17/2011, in constant 1976 dollars, as opposed to its present value of $15.0 trillion. More interestingly however, there are five years where the national debt actually declined, when valued in constant 1976 dollars – 1979, 1980, 1981, 2000 and 2001.

Best 5 vs. Worst 5

When valuing the national debt in 2011 dollars, the table below shows that the worst 5 years were 2004, 2008, 2011, 2010, and 2009, with annual debt increases of $595.8, $1,017.1, $1,228.7, $1,651.8, and $1,885.1 billion, respectively. But what’s more disturbing is that, based on the first month and a half of fiscal year 2012, borrowing is currently on pace to reach $1,992.1 billion, which would exceed the fiscal year 2009 record of $1,885.1 billion, making this year, potentially, the all-time worst on record.

The table also shows that the best 5-years were 2000, 1980, 2001, 1981, and 1979, with annual borrowing decreases of $-44.1, $-20.7, $-18.8, $-15.1, and $-11.9 billion, when valued in constant 1976 dollars, respectively.

The chart above reflects the annual change in the national debt, in nominal dollars as compared to constant 1976 dollars. But it’s not like anyone really cares. Who’s paying attention anyway? I definitely have better things to do than worry about what’s going on in Washington, DC. As far as I’m concerned, wherever the buck stops is where the blame lies. So what does Obama have to say, after posting 3 of the worst 5 spending records in modern U.S. history? “…Also to put our economy on a stronger and sounder footing for the future, we’ve got to rein in our deficits and get the government to live within its means, while still making the investments that help put people to work right now and make us more competitive in the future.” So in other words, according to Obama, government needs to spend more and lower its annual deficit at the same time.

Obama recently made the admission that, “We’ve been a little bit lazy over the last couple of decades. We’ve kind of taken for granted — ‘Well, people would want to come here’ — and we aren’t out there hungry, selling America and trying to attract new businesses into America.” So pray tell, exactly who has “gotten a little bit lazy” in attracting foreign investment to America? It looks to me like most of that investment is coming in to cover Obama’s own irresponsible spending, and that the only other attraction would be the lure of higher taxes, and tighter governmental regulations. Oh, and by the way, those Obama manufactured Occupy Protests aren't exactly lending America the aura of stability either. If America has gotten "a little lazy over the last couple of decades", she must have committed the 4th Deadly Sin over the last 3 years.

References:

Nixon Shock - http://en.wikipedia.org/wiki/Nixon_Shock

Dollar Times – Inflation Calculator - http://www.dollartimes.com/calculators/inflation.htm

U.S. Treasury – Historical Debt - http://treasurydirect.gov/govt/reports/pd/histdebt/histdebt.htm

Thursday, November 17, 2011

Tax Simplification, Part II

Saving $1,756 Billion, Overnight -

By: Larry Walker, Jr. -

“There is no doubt that many provisions in the Tax Code benefit narrow groups of taxpayers, but the dirty little secret is that the largest special interests are us – the vast majority of U.S. taxpayers. Virtually all of us benefit from certain exclusions from income, deductions from income, or tax credits.” ~National Taxpayer Advocate

According to Article I, Section 7 of the United States Constitution, “All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills.” And, according to the 16th Amendment to the Constitution, “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” Thus Congress has the power to pass spending bills, and a responsibility to collect taxes on incomes; however the pair should be administered by separate agencies. Anyone with a background in accounting or auditing knows that an adequate internal control system should include proper authorization and segregation of duties. By granting the IRS the dual responsibilities of administering social welfare payments and collecting taxes, Congress has left the door wide open for ineffable fraud.

Since at least 1975, a growing portion of social welfare spending, now to the tune of $1.7 trillion over a 10 year period, is introduced by congressional tax-writing committees and administered by the Internal Revenue Service. Such manipulation has introduced government spending policy into what otherwise would be an exercise in economic measurement. Tax expenditures, by way of refundable credits, represent a deviation from the “tax base”, introduce complexity into the tax law, and impose a spending function on an agency best suited to revenue collection.

Delivering Social Benefits through the Tax System

In the 2010 Annual Report to Congress, National Taxpayer Advocate Nina E. Olson focused on the need for tax reform as the No. 1 priority in tax administration. In particular, she has focused on the problem of delivering social benefits through the tax system, which complicates the mission of the IRS, resulting in a dual mission of welfare administration as well as revenue collection. Elsewhere in the report, the National Taxpayer Advocate recommends that the IRS adopt a dual mission statement and hire personnel appropriate to the delivery of social benefits that already have been codified.

Okay, so let’s stop playing games. Nobody wants to get rid of deductions for mortgage interest, state income taxes, medical expenses, charitable contributions, employee business expenses, or ordinary and necessary business expenses. And as far as officially expanding the mission of the IRS, to social welfare appropriator, on top of being the tax collection arm of the government, we don’t even need to go there. So let’s just cut to the chase. The main problem with the income tax code, today, can be found among three refundable tax credits, at the individual level.

It is important to note that neither of the following are what their names imply: The Earned Income Credit, Child Tax Credit, and Making Work Pay Credit (now known as the 2% Payroll Tax Cut) are not tax credits at all; they are merely social welfare giveaways, administered by the IRS. For the most part, neither represents a refund of income taxes actually paid, as such refunds, when combined, are well in excess of the total amount of taxes paid, including in many cases Social Security and Medicare withholding. Common sense dictates that one cannot refund something which has never been received.

  1. The Earned Income Credit (EIC) was signed into law by President Gerald Ford in 1975. The function of the EIC was to offset the burden Social Security taxes placed on low-income filers with children, and to motivate them to work. The earned income credit has grown to be one of the principal antipoverty programs in the federal budget. The only problem is that it is not a part of the federal budget. In 1975, 6.2 million families received an average credit of $201. In 2009, 27.3 million families received an average credit of $2,206.

  2. The Child Tax Credit (CTC) was enacted as part of the Taxpayer Relief Act of 1997. Congress established the child tax credit to address concerns that the tax structure did not adequately reflect a family’s reduced ability to pay taxes as family size increased. Initially, for tax year 1998, families with qualifying children were allowed a credit against their federal income tax of $400 for each qualifying child. For tax years after 1998, the credit increased to $500 per qualifying child, and was refundable for families with three or more children. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) increased the credit to $1,000 per child beginning in 2003, and extended refundability to families with fewer than three children. It is one thing to want to help lower the income tax burden of families, but entirely another when the burden is reduced below zero.

  3. The Making Work Pay Credit (MWP) was enacted as part of the economic stimulus act ("American Recovery and Reinvestment Act of 2009," or ARRA). The purpose of the credit is to offset part of the Social Security taxes paid by low- and middle-income workers. MWP provided a refundable tax credit equal to 6.2 percent of earnings (the employee share of the Social Security payroll tax), up to a maximum credit of $400 for individuals ($800 for couples). Couples could claim the full $800 credit, even if only one spouse worked.

Can you say redundant? So let me get this straight – The EIC was implemented to offset the burden Social Security taxes placed on low-income filers with children, and to motivate them to work. The CTC was established to address concerns that the tax structure did not adequately reflect a family’s reduced ability to pay taxes as family size increased. And the MWP was enacted to offset part of the Social Security taxes paid by low- and middle-income workers.

If Social Security and Medicare taxes are collected from all workers, on an equal basis, in order to pay for future benefits, then shouldn’t the act of granting some citizens a premature distribution, of the same, result in a reduction of future benefits? Common sense says it should, but that’s not how this works. Under each of the above tax credits, some citizens are given back all of their Social Security and Medicare payroll contributions, and a portion of their employer’s contributions, and yet they are eligible to reap the full amount of future benefits based on the amount of their rebated contributions. What’s wrong with this picture? Again, common sense would dictate that, if you don’t put anything into the pot, then you don’t get anything out. And if you put something into the pot, then you should have to wait until age 62, 65, or 67 to obtain a benefit, just like everyone else.

“Don't be misled--you cannot mock the justice of God. You will always harvest what you plant.” ~Galatians 6:7

Today, the United States is reaping exactly what it has sown. We have a $15 trillion national debt, a $1.5 trillion annual budget shortfall, and social entitlement programs on the verge of bankruptcy. But instead of balancing the budget, reducing the debt, and placing money into trust funds to cover future liabilities, we are giving millions of low-income families a double benefit. First, they are given refundable credits, absolving them from any stake in the future of this nation, and then they are promised benefits in the future, benefits which will be paid for entirely at the expense of others.

If the government wants to provide public assistance benefits for low-income filers with children, and motivate them to work, it should accomplish this through one of its other redundant agencies, it doesn’t need to use the tax code. The refundable tax credits, listed above, are precisely the kind of social welfare expenditures that have no place in tax administration. According to the Law of Nature, “You will always harvest what you plant.” But as far as the federal government’s logic goes, justice would seem to dictate that either someone else will harvest what you plant, or you will harvest what someone else plants. It’s not even clear, to most American’s, how much is actually being squandered in this seemingly everlasting war on common sense.

Free Money

According to the Joint Committee on Taxation, in 2010, the IRS gave away $55.1 billion by way of the Child Tax Credit, $56.2 billion via the Earned Income Credit, and $59.7 billion through the Making Work Pay Credit. That’s a total of $170.9 billion in a single year, $103 billion of which was refundable. Over a 10-year period, we’re talking about $1.7 trillion in tax credits, just over $1 trillion of which is refundable.

Note: Although the MWP expired at the end of 2010, it was replaced with the 2% Payroll Tax Cut beginning in 2011, as part of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. The new credit allows for a 2% cut in payroll taxes for employees, which reduces the Social Security Tax from 6.2% to 4.2%, without affecting Social Security benefits. When combined with the EIC and CTC, millions of citizens will receive future benefits without having made adequate contributions. No wonder Social Security is on the verge of bankruptcy.

The federal government has thus, not only come up with a way of returning to millions of Americans the full amount of their social security contributions, but an amount well in excess, since millions of households are eligible to receive all three tax credits. Another major flaw, in all of this activity, is that eligibility for the premature distribution of Social Security benefits doesn’t disqualify or limit any of these tax filers ability to receive other Federal and State social benefits (i.e. Public Housing, Medicaid, Food Stamps, and Temporary Assistance for Needy Families).

If the federal government insists on granting relief to “qualifying” citizens through the tax code, then under no circumstances should such tax credits be refundable. As I stated in Part I, “I think it’s enough to not owe any federal income taxes at all. The concept of transferring one man’s tax payment directly to another taxpayer is most detestable, and unnecessary.” Keep in mind that the refundable tax expenditures above represent amounts over and above the amount of tax initially collected from the affected taxpayers. Thus, these are not income tax refunds at all, they are social welfare payments, confiscated from taxpayers, and handed over to non-taxpayers through the tax code.

Does the act of filing a tax return make a taxpayer?

The reality is that a great number of tax returns are filed simply to receive refundable tax credits. If there were no refundable tax credits, then it is conceivable that several million tax returns would not need to be filed. And if millions of citizens were excluded from filing income tax returns, then that would aid in reducing the size of the IRS, and thus the size of government. Isn’t this what most conservatives want? That brings us to the following questions: How many tax returns are filed each year simply to obtain refunds in excess of taxes actually paid? And, how much money is being squandered in floating social welfare programs through the tax code?

First of all, these days we hear a lot of people whining about the tax code being too complex, so in Part I, we asked the question: How complicated is your tax return? To bring the numbers up to date, we checked the IRS 2009 Data Book (preliminary). We found that for tax year 2009, out of the 140,532,115 individual tax returns filed, only 59.7% filed the more challenging long-form 1040, while 28.4% filed the short-form 1040-A, and 12% filed a simplified form 1040-EZ (see table below). So from this we can see that 40.4% of Americans, who filed 2009 tax returns, filed fairly simple forms.

The data also shows that 65.8% of filers, 92,518,891 out of 140,532,115, utilized the basic standard deduction, while only 32.5%, or 45,640,583, itemized their deductions. It is a fact that only 74.3% of the returns filed contained taxable income, and just 61.3% resulted in an income tax liability. Meanwhile, the majority, 62.6% of filers, claimed tax credits. With 65.8% of taxpayers claiming the standard deduction, 62.6% claiming tax credits and 40.4% filing simple tax forms, there is potential to eliminate the filing requirements for perhaps as many as 56,702,628 households (the lowest common denominator).

The following table was derived from estimates published by the Joint Committee on Taxation (JCT). You will note that the JCT data reflects the total number of returns as 156.8 million, versus the IRS report of 140.5 million. The reason for the difference is that the JCT estimate includes both filing and non-filing tax units. Non-filing tax units include individuals with income that is exempt from Federal income taxation (i.e. transfer payments, interest from tax-exempt bonds, etc...). Note: The JCT data also excludes individuals who are dependents of other taxpayers and those with negative income.

From this, we can conclude that at least 16 million persons, with positive income, are not required to file income tax returns. This is not complicated to follow. Generally speaking, if a taxpayer’s income is less than the applicable standard deduction, and personal and dependency exemptions, then they are generally not required to file a return. The only reason that a return would be filed, when one is not required, would be to obtain a refund of an overpayment of tax withheld, or to receive a refundable tax credit.

From this data we also learn that 81,458,000 out of the 156,878,000 returns, or 51.9%, were considered to be non-taxable. We can also see that 106,865,000 returns out of the total of 156,878,000, or 68.1%, did not itemize deductions. Thus, from the perspective of the US Congress, there should be room for the elimination of additional pointless compliance. Since 16 million Americans were already eliminated from annual filing rites, what would be wrong with exempting several more million, especially those who take out of the tax system more than they put in?

The next chart (above), also from JCT data, shows the distribution of income tax liability by income class. From this, we can see that most of the returns filed, with less than $30,000 in annual income, had negative tax liabilities. In fact, only 10,071,000 returns out of 70,091,000, or 14.4% of those with income under $30,000, were taxable, while 85.6% were non-taxable. Even more striking is that the returns in this income category had a cumulative negative tax liability of $66.9 billion. We may further infer that almost all of the $71.5 billion in taxes, paid by those who made between $40,000 and $75,000 per year was collected for the sole purpose of being redistributed to those who made less than $30,000.

I submit that the mission of the Internal Revenue Service ought to be to collect what is required to fund the federal government, not to redistribute funds received from some taxpayers directly to others. The fact that federal revenue is being spent before the funds ever hit the US Treasury’s coffers should be alarming. What should be clear is that removing the filing requirement for approximately 60,020,000 (70,091,000 – 10,071,000) taxpayers would result in federal savings of at least $66.9 billion per year ($669 billion over 10 years). Since the tax code already eliminates the filing requirement for 16,000,000 persons, the potential exists to exclude an additional 44,000,000 (60,020,000 – 16,000,000). But that’s not the end of the story.

Exponential Growth of the EIC

The following table, derived from the IRS 2010 Data Book, shows that in the first 18 years after implementation of the Earned Income Credit, from 1975 to 1992, the IRS expended a total of $67.5 billion, $49.4 billion of which was refundable.

The next table, derived from the same data book, shows that in the subsequent 17 years, from 1993 to 2009, the IRS gave away a total of $615 billion through the EIC, $530 billion of which was refundable. So the amount of EIC spending grew nearly 10-fold in the second period.

The Earned Income Credit has thus grown from initially giving 6.2 million families an average tax credit of $201, in 1975, to granting an average credit of $2,206 to some 27.3 million families, in 2009. With the current level of spending in excess of $60 billion per year, the IRS will give away more, on the EIC, in the next 10 years, than was spent in the first 35 years of the program. Will the spending ever end?

Waste, Fraud, and Abuse

Social benefit programs add complexity to the tax code and represent a large part of tax expenditures, or government spending structured through the revenue system. To address the complexity and other implications of tax expenditures, the National Taxpayer Advocate has recommended, “adoption of a process to evaluate whether a tax expenditure presents an administrative challenge, and if so, the extent to which it achieves its intended purpose”. I would contend that the answers to her questions are self-evident, and further evaluation is unnecessary. For had the Earned Income Credit been sufficient, then there would have been no need for the Child Tax Credit, the Making Work Pay Credit, or the 2% Payroll Tax Cut. Thus neither program has been effective. Their only accomplishment, thus far, has been to aid in the accumulation of $15 trillion in government debt, a $1.5 trillion budget deficit, and a downgrade to our national credit rating.

The IRS 2010 Data Book reveals that, in fiscal year 2010, 37% of the 1,581,394 individual returns audited by the IRS, involved the Earned Income Credit (above - click to enlarge). Among these, 556,809 returns had adjusted gross income below $25,000, and 28,393 reported adjusted gross income greater than $25,000. These EIC audits resulted in the recommendation of $2.3 billion in additional taxes. Thus, eliminating the Earned Income Credit will not only save the federal government $60 billion per year (or $600 billion over 10 years) in tax expenditures, but it will eliminate the needless filing and processing of millions of returns, and reduce the number of audits by 37%. That’s significant in and of itself, but when we tack on elimination of the Child Tax Credit and Making Work Pay Credit (2% Payroll Tax Cut), we are talking about total savings of $855 billion over 5 years, or $1,710 billion over 10 years.

In addition, Table 28, of the 2010 Data Book (above - click to enlarge), shows that the IRS expended a total of $12.4 billion in its fiscal year 2010 operations. Thus elimination of the EIC, on its own, would allow the IRS to reduce its size by 37%, saving taxpayers an additional $4.6 billion per year ($46 billion over 10 years). Add that to the savings realized through elimination of the social welfare benefits associated with the EIC, CTC and MWP and this proposal will save the federal government $1,756 billion over the next 10 years. That’s more than three times my original goal. Problem No. 1 solved.

So what’s the bottom line? The administration of social welfare benefits through the tax code should be suspended immediately. By so doing, Congress will eliminate the unnecessary annual filing of more than 40 million tax returns, save the federal government $1,710 billion in tax expenditures, reduce the budget of the IRS by $46 billion, and will accomplish all of this without raising taxes, or eliminating critical spending programs.

References:

The Joint Committee on Taxation – Congress of the United States

IRS 2010 Data Book

National Taxpayer Advocate - 2010 Annual Report to Congress: Volume 2

Related:

Tax Simplification, Part I

Study: Michigan among states scaling back low-income tax credits

Natural Born Conservative on Taxes

Thursday, November 10, 2011

Tax Simplification, Part I

9-9-9 Plan | Prejudiced and Convoluted?

- By: Larry Walker, Jr. -

"A tax loophole is something that benefits the other guy. If it benefits you, it is tax reform." ~Russell B. Long -

Herman Cain’s 9-9-9 Plan, which involves eliminating the 15.3% payroll tax, of which every dime is presently committed to current Social Security and Medicare payments (and then some), fails to address the main problem with modern day governing – the budget. Since it was just barely 3 months ago when our nation faced its first ever credit downgrade, any tax reform proposal which doesn’t lead to a balanced budget should be pronounced dead on the campaign trail. Replacing a 35% corporate income tax, a 35% personal income tax, and a 15.3% payroll tax, with 9-9-9, not only doesn’t balance the federal budget, but it shifts the burden of federal revenues to those who can least afford it. All that the 9-9-9 Plan really accomplishes is to disproportionately favor the well-off, while punishing the middle class, the working poor, children and the elderly.

I am well aware that some conservatives believe Herman Cain is a gifted mathematical genius, who has it all figured out. And I know that many have bought into his 9-9-9 proposal, without hardly any scrutiny. “Anything is better than what we have now”, some say. Even if it doesn’t make any sense to them, and even though many experts have disputed its claims, an element of conservatives have bought it, lock, stock, and barrel. But I’m not buying it. Herman Cain is human, and no human being is perfect. And to the chagrin of many, there isn’t any such thing as a perfect tax system. For whether a tax is progressive, flat, or regressive, each method involves tradeoffs. There are winners and losers under any policy. And besides, the concept of a flat tax turns out to be nothing more than a myth; there is simply no such thing, as we shall see.

I have never been one to settle for second best. I believe that there is an easier way to achieve the kind of tax simplification that most conservatives really want, a way which is in line with fiscally conservative objectives. And it’s something that could be achieved right now, today. I was never a proponent of taxing those who can’t afford it. The argument that 40% of taxpayers don’t pay any income tax was proffered to counter Barack Obama’s contention that he was going to give 90% of Americans a tax cut. The statistic was used in support of the common sense principle that, you can’t cut income taxes for someone who doesn’t pay income taxes. That was it, and I stand on that to this day. The 40% figure was never intended as a justification for forcing blood from turnips.

But ever since Herman Cain introduced his 9-9-9 Plan, I have heard a few conservatives argue that the poor need to pay their “fair share”. However, my only contention has been that the poor should not be receiving refunds of taxes they never paid. I think it’s enough to not owe any federal income taxes at all. The concept of transferring one man’s tax payment directly to another taxpayer is most detestable, and unnecessary. I have heard a few other conservatives’ state that they don’t care whether or not the federal government can pay its bills. They contend that if the government takes in less money under the 9-9-9 Plan, that Washington DC will be forced to spend less. But that’s not where I stand.

The federal government is already taking in $1.5 trillion less than it spends, so how would Herman Cain’s revenue reduction strategy fix this? It won’t. So the first step (Part I) towards tax simplification is to expose the shortcomings of the 9-9-9 Plan and other flat tax schemes. The second step (Part II) is to outline a plan for tax simplification which will not only eliminate unnecessary compliance, but will in the process, save the federal government $500 billion over 10 years.

Testing Cain’s 9-9-9 Plan

Cain’s main assumption is that the U.S. Tax Code is too complex and should therefore be thrown out and replaced, baby and bathwater. So in other words, he has given up on all other options of reforming the current tax code, and is advocating a radical transformation. I don’t know about you, but I’ve had about enough of fundamental transformations by radicals, on either end of the compass. We all know how Obama’s dream has worked out, but now, instead of simply taking our country back; some conservatives are exhibiting a rather disturbing desire for even more extraneous change.

Whenever a superfluous change is proffered, the first question among conservatives ought to be, “Has it ever been tried before?” And if it has been tried, then this should be followed up with, “How well or how poorly did it work?” But if said change has never been tried, then how would a conservative determine whether or not it would succeed? Well, if a proposed policy has been attempted we just need to analyze the data, and if it has not been tried, then we would simply need to locate and analyze the most similar comparables.

For example, we know that Communism has been tried before, and we know how that worked out. And we know that Universal Health Care plans have been implemented, and we know how they worked out. Real conservatives generally rely on facts and evidence rather than rhetoric. But so far, all we have heard from Herman Cain, and proponents of his 9-9-9 Plan is assertion and rhetoric, rather than analysis and evidence. When challenged, most of them simply resort to name calling and innuendo. But why is no one talking about how combination “flat / consumption tax” plans have fared elsewhere in the world? Well, lucky for us such plans have already been implemented, so there is already evidence available attesting to how well, or in this case, how poorly they have performed.

Flat Tax: Fact or Fallacy?

Most of the EU member states have “progressive” systems under which earners pay higher income tax rates on increasing levels of income. However, seven EU countries – Bulgaria, Czech Republic, Estonia, Latvia, Lithuania, Romania and Slovakia – have had “flat tax” systems in place, some for more than a decade. According to a recent study, ‘Workers’ salaries are taxed at higher rates in “Flat Tax” countries than in “progressive” systems’. This is simply a fact, based on analyzing the evidence, not mere rhetoric.

When it comes to Herman Cain’s Plan, as we have repeated three times previously, according to a study on the 9-9-9 Plan conducted by the non-partisan Tax Policy Center:

  1. “The 9-9-9 Plan would cause 95 percent of people making $1 million or more to receive tax cuts averaging $487,300,” and
  2. “Only 16 percent of people making between $50,000 and $75,000 a year would get a tax cut, averaging $1,959, and at least 70 percent of people in this middle-income category would see their average federal taxes rise by $4,326.”

Conservatives who dispute this claim have, thus far, failed to provide any evidence to the contrary.

It should be noted that flat taxes in the seven EU countries generally apply only to the income tax, as none of the seven have eliminated social security taxes. For example, Slovakia has an individual and corporate “flat tax” rate of 19%, but its employers pay a 35.2% contribution to social security, and in addition to the flat income tax its employees have 13.4% of their pay deducted for social security. Add to that Slovakia’s 19% Value Added Tax (VAT) and you have the full package. When you total it all up, the average worker in Slovakia pays total taxes, as a percentage of real gross income, of around 45.5%. So if tax rates are so high in Slovakia that its plan equates to a 19-35.2-19-13.4-19 Plan, then what makes proponents of the 9-9-9 Plan think that it can cover all of the obligations of the United States with such dramatically lower rates? Do they have any evidence, or just words?

In 2006, the International Monetary Fund (IMF) published a working paper by Michael Keen, Yitae Kim, and Ricardo Varsano entitled, The “Flat Tax(es)”: Principles and Evidence. The study describes the world’s most recent flat tax adoptions as, “quite radical reforms, marked more by assertion and rhetoric than by analysis and evidence.” In other words, public opinion has been swayed, more by confabulation than by a careful assessment of facts. Two of the conclusions of the study were as follows:

  1. “In no case does there appear to have been a Laffer effect: these reforms have not set off effects strong enough for them to pay for themselves.”
  2. And, “looking forward, the question is not so much whether more countries will adopt a flat tax, as whether those that have will move away from it.”

So the dynamic implications associated with Cain’s 9-9-9 Plan probably won’t materialize, based on available evidence. And today’s proponents of the flat tax have conveniently chosen to ignore the experiences of other countries. If countries who adopted flat tax policies in the 1990’s are on the verge of returning to “progressive” systems, then isn’t it entirely possible that our current tax framework is already the best in the world? And why wouldn’t it be? Are we not, after all, exceptional?

Tax Simplification

In terms of tax simplification, the authors of the IMF working paper concluded that, “the rate structure itself is commonly not the primary source of complexity in taxation. This comes more from exemptions and special treatment of various kinds. For example, the (limited) survey evidence for Russia does not suggest that the system was widely seen as significantly less complex after adoption of the flat tax.” Herman Cain has already modified his plan to provide exemptions for individuals and businesses associated with “empowerment zones”. He has also included a deduction of dividends for businesses, an exception for capital gains, an exclusion of charitable contributions for individuals, and others, but these are most likely just the tip of the iceberg.

How will the government determine which areas qualify as empowerment zones? Will there eventually be a push for additional exemptions for poor people who reside outside of empowerment zones? What about allowing a deduction for charitable contributions at the corporate level? Then there will likely be an outcry for exemptions for college students, widows, widowers, the elderly, active military, and on and on. Overtime, the overly simplistic 9-9-9 Plan may become more complicated than our present system. One need only examine the Russian experiment to see how convoluted a “simple” flat / consumption tax system may become. What other exemptions will be granted, and how will those be calculated?

As pointed out in the IMF working paper, the presence of a tax-free threshold means that there are really two marginal tax rates (one of them being zero), so that problems of tax arbitrage, withholding and averaging do not disappear under flat tax regimes. There will still be complications, such as in arranging proper withholding from those with multiple jobs (to ensure that they receive the tax-free amount only once). In Cain’s 9-9-9 outline, he states that there will be exemptions for people who either live within, or work within empowerment zones. So where an individual lives outside of an empowerment zone, but works at one job within a zone, and a second job outside of the zone; or where a business owner lives outside of an empowerment zone, but owns multiple businesses located within and outside of such zones, it is possible that the 9-9-9 Plan will create more complexities, not fewer.

Public Servants and Ministers: 0-18-9

Back in the 1990’s when the United States Congress last considered the flat tax, a paper was written entitled, Flat Tax: An Overview of the Hall-Rabushka Proposal. It was written by Mr. James M. Bickley, for Members and Committees of Congress. In the paper, Mr. Bickley affirmed that, “in some instances, a flat tax can be more complicated (rather than simpler) than the tax it replaces”. For example, he points out, that employees of federal, state and local governments, and non-profits would have to add to their wage base the imputed value of their fringe benefits. “Hence, a separate individual wage tax form would be necessary for these employees.” He adds that, “The actual calculation of the imputed value of fringe benefits would be complicated.”

As I mentioned previously, since businesses are not allowed to deduct wages for tax purposes under the 9-9-9 Plan, and since government entities, and non-profits don’t pay income taxes, the simple rule of not allowing a deduction for wages would have no effect upon them. However, under our present tax system, because employers pay a matching portion of Social Security and Medicare payroll taxes, all employers are on equal ground, where they would not be under the 9-9-9 Plan. So how will this be resolved? Will government employees, ministers, and other non-profit employees be taxed at higher rates in order to make up the shortfall? Or will those who actually pay taxes under Cain’s plan unknowingly subsidize such entities? In this matter, Cain’s proposal becomes more complicated, not simpler.

To give us a better idea of the complexity surrounding non-taxable entities, as of the 3rd quarter of 2011, per Table 2.2B - Wage and Salary Disbursements by Industry, the U.S. Bureau of Economic Analysis estimated that the annualized amount of wages and salaries paid in the U.S. was $6.7 trillion. However, out of this amount, $1.2 trillion (or 18 percent) was paid by federal, state and local governments. And according to the National Center for Charitable Statistics, employees of nonprofit organizations would account for 9 percent, or roughly $670 billion of the wages paid in the U.S (2009 data). So overall, without additional rules and regulations, roughly $1.8 trillion of wages paid by governments and non-profits would escape Cain’s 9% business flat tax. Since tax exempt entities don’t pay income taxes, government workers may have to pay additional taxes on their benefits in order to be on a level playing field with private sector employees. Thus, describing the 9-9-9 Plan as “simple and fair” may be a gross overstatement.

How complicated is your tax return?

In his flat tax analysis prepared for Members and Committees of Congress, Mr. Bickley admits that the current income tax system is complex. He is sympathetic to the fact that the federal tax code and regulations are lengthy and continue to expand. He agrees that many taxpayers spend much time, money, and effort complying with the current income tax system. And that the complexity of the tax code and the fear of the Internal Revenue Service (IRS) have caused many taxpayers to pay for professional assistance. I generally concur, but let’s review the facts.

For tax year 2000, a micro-simulation model developed jointly by IBM and the IRS estimated the amount of time and money that individuals spend on federal tax compliance. The authors found that “in tax year 2000, 125.9 million individual taxpayers experienced a total compliance burden of 3.21 billion hours and $18.8 billion.” This translates into an average burden of 25.5 hours and $149 per taxpayer. These are just averages, but it doesn’t sound like that much when broken down to the individual level. For example, when compared to the 9-9-9 Plan, which would raise taxes by an average $4,326 on 70% of people making between $50,000 and $75,000, I would hardly call spending 25.5 hours or paying $149 for assistance a huge burden. The big question is - How many Americans would rather pay $4,326 more in taxes, than spend a couple of weekends preparing their own tax return, or pay less than 4% of that amount for assistance?

Furthermore, I agree with Mr. Bickley that, "the complexity of the income tax should not be overstated." For example, in tax year 2003, only 59.4% of taxpayers (78.75 million out of 132.38) paid for the preparation of their returns. Yet for tax year 2004, the Internal Revenue Service reported that only 34.8% of tax returns (46.19 million out of 132.38 million) were filed by individuals who itemized their deductions. That means roughly 32 million, or 24% of taxpayers paid for tax preparation when they could have simply filed their own 1040-EZ, or short-form 1040-A, which are far from complex.

Are IRS Forms 1040-EZ and 1040-A so complex that 32 million Americans have to pay to have them prepared? I think not. These are after all akin to yesterdays versions of Rick Perry’s postcard sized tax return. You know as well as I do that the reason at least 24% of taxpayers pay to have their tax returns filed is not due to complexity, but rather because they want to receive a refund as quickly as possible, and with the least possible effort. In other words, for at least 24%, paying for tax assistance is a matter of convenience, not a burden. I must admit that cleaning my home and mowing my yard are not that burdensome, and I am pretty adept at either, nevertheless, I choose to pay a housekeeper and gardener. There are things I could do for myself that I would rather not. We shall revisit the 24%, and deal with the remaining 76% in Part II.

In conclusion, no matter how simple Herman Cain’s 9% business flat tax, 9% individual flat tax, and 9% national sales tax sounds, under his proposal some citizens would be covered by a pure 9-9-9 tax; while empowerment zone residents, workers, and businesses would be subject to either 9-0-9, 0-9-9, or 0-0-9 plans; and employees of governments and non-profits may be subordinated to something resembling a 0-18-9 plan. The point is that, what portends to be “fair and simple” may turn out to be “prejudiced and convoluted”, or in other words worse than our present system.

To be continued in - Tax Simplification, Part II

References:

http://www.taxpolicycenter.org/taxtopics/upload/412426-Cain-9-9-9.pdf

http://www.langlophone.com/20100526_edition/20100526_EU27_data_table_flipped.pdf

http://congressionalresearch.com/98-529/document.php?study=Flat+Tax+An+Overview+of+the+Hall-Rabushka+Proposal

http://www.imf.org/external/pubs/ft/wp/2006/wp06218.pdf

Related:

Herman Cain’s 9-9-9 Sham

3rd Concern with the 9-9-9 Plan

Obamas 9-9-9 Tax Cut | For the Blind