Skip to comments.Tax Simplification, Part I
Posted on 11/12/2011 1:31:53 PM PST by NaturalBornConservative
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 Cains 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 doesnt 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 doesnt 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 doesnt 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 Im not buying it. Herman Cain is human, and no human being is perfect. And to the chagrin of many, there isnt 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 its something that could be achieved right now, today. I was never a proponent of taxing those who cant afford it. The argument that 40% of taxpayers dont pay any income tax was proffered to counter Barack Obamas 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 cant cut income taxes for someone who doesnt 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 its enough to not owe any federal income taxes at all. The concept of transferring one mans tax payment directly to another taxpayer is most detestable, and unnecessary. I have heard a few other conservatives state that they dont 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 thats not where I stand.
The federal government is already taking in $1.5 trillion less than it spends, so how would Herman Cains revenue reduction strategy fix this? It wont. 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 Cains 9-9-9 Plan
Cains 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 dont know about you, but Ive had about enough of fundamental transformations by radicals, on either end of the compass. We all know how Obamas 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 Cains 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:
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 Slovakias 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 worlds 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:
So the dynamic implications associated with Cains 9-9-9 Plan probably wont materialize, based on available evidence. And todays proponents of the flat tax have conveniently chosen to ignore the experiences of other countries. If countries who adopted flat tax policies in the 1990s are on the verge of returning to progressive systems, then isnt it entirely possible that our current tax framework is already the best in the world? And why wouldnt it be? Are we not, after all, exceptional?
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 Cains 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 1990s 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 dont 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 Cains plan unknowingly subsidize such entities? In this matter, Cains 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 Cains 9% business flat tax. Since tax exempt entities dont 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 lets 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 doesnt 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 Perrys 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 Cains 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
Herman Cains 9-9-9 Sham
3rd Concern with the 9-9-9 Plan
Obamas 9-9-9 Tax Cut | For the Blind
As much as I like Herman Cain; this is a sham. It is not fair to a lot of tax payers.
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