The Private Sector is NOT Doing Fine | How’s the Federal Government Doing?

* By: Larry Walker, Jr. *

“The Private Sector is doing fine.” ~ Barack Obama *

A couple days ago, Joe Weisenthal wrote an article, inappropriately entitled, “Here’s What’s Really Happened to the Private Sector Under Obama”, in which he sought to prove why Mr. Obama will be reelected. His premise, like Obama’s, is that the Private Sector is doing fine, but State and Local governments aren’t. There was no mention at all of how the Federal government, the part of the economy Mr. Obama actually influences, is doing (see the chart above). However, what Mr. Weisenthal actually did was highlight the main reasons why Mr. Obama should not be reelected, and should lose by a landslide in November. I hate to burst Mr. Weisenthal’s bubble, but he’s in La-La Land if he thinks his 24 chart presentation will convince even Mr. Obama to defend his own senseless remark.

First of all, Mr. Weisenthal’s article was inappropriately titled because by definition, the “Private Sector” is not “under Obama”, as he so implies. To the contrary, the only part of the economy Mr. Obama presides over is the Federal government, whose $16 trillion debt, $5.3 trillion of which has been added by Obama himself, actually imposes a drag on the private economy. Yet, Mr. Weisenthal supports Mr. Obama’s plea for more Federal borrowing, to be expended at the State and Local level. Secondly, Mr. Weisenthal doesn’t provide any benchmarks. It’s as if he’s comparing the pre-2010 Obama to the post-2009 Obama. That’s all well and good, but if this were baseball, Mr. Obama would be heading back to the Minor Leagues (and so he is).

Here’s a brief summary of Mr. Weisenthal’s main points (in bold type) and my comments. You may view his 24-chart catastrophe here.

  1. ‘Corporate profits after tax are higher than ever.’ – I concur. But this is primarily due to corporate austerity, which has nothing at all to do with Mr. Obama. Although some corporations have been able to increase sales, most all of them have actually improved profitability through reductions in labor and other operating costs. We call this productivity, which is something Mr. Obama could learn from, but not something he practices within his sphere of influence.

  2. Rental Income is higher than ever. – I agree. But, the fact that more than 3.3 million families lost their homes since September of 2008, and are now forced to rent, is hardly anything to boast about. Could there be any other reason for the 125% increase in rental income since the recession began, such as some program implemented by Mr. Obama? The claim that rental income has reached a new record, under the policies of Barack Obama, is more of an admission of failure than anything else.

  3. ‘Gross private domestic investment is coming back nicely.’ – If you consider a rebound to 1999 levels a nice comeback, that’s all fine and well, but I think it’s rather pathetic. By the way, this particular chart has actually moved sideways and to the right since 1999, not upwards. So far in 2012, it looks like most of what should go towards gross private domestic investment is actually being invested into U.S. Treasury’s. After all, someone has to buy all of the newly created Federal debt, and the Federal Reserve appears to be closed for business, at least for the time being.

  4. ‘The private sector has been adding jobs steadily since the end of Obama’s first year, and today there are more private sector jobs than there were before Obama took office.’ – Did he say, ‘since the end of his first year’? Of course no good Democrat should ever discuss Obama’s first year in office. It’s as if he took over the reigns in January of 2010, instead of 2009. In reality, the Private Sector lost a total of 5,051,000 jobs between January of 2009 and February of 2010, before things started to turn around. Even still, the Private Sector has only gained 55,000 jobs over the last three years and four months (not including the 839,000 jobs lost in January of 2009). This represents an annual growth rate of just 0.015%, and a total growth rate of a mere 0.050%.

    Meanwhile, the Working Age Population increased by more than 8.2 million over the same period. So let’s see, that’s 55,000 private sector jobs created since Obama took office, for 12.2 million unemployed workers (4.0 million who had already lost their jobs before Obama took office, and another 8.2 million who reached working age during his term). That’s gotta be a record alright, but it’s not exactly the kind of record either Mr. Weisenthal, or Mr. Obama should be ginning up.

  5. ‘It would be great if the [Private] Sector were stronger, but things are going up and to the right in these charts.’ – Yes, and things are going up and to the right in some other charts as well. For example, Federal budget deficits (shown below) are far outpacing any of the statistics above. The fact that a chart is moving upwards and to the right doesn’t mean anything on its own merits. The following questions come to mind. Is this good or bad? What’s the trend? What’s the growth rate? Is it keeping pace with population growth? How is its performance against other benchmarks? Comparing the last two years and five months of Obama to his first year in office, and then drawing conclusions, is like saying that a baseball player with a batting average of .000 in his first year and who is now batting .00015 has improved. Yeah, he’s improved alright, but he won’t be playing in the Majors next year.

  6. ‘Total government employment is far below where it was when Obama started office.’ – This is true, and it’s actually a good thing. Who can afford to pay for more public sector workers when more than 23 million Americans are either unemployed or underemployed? Mr. Weisenthal and Mr. Obama seem to think that more State and Local government hiring will solve our unemployment problem. What they really mean is that the Federal government should take more money from a shrunken private sector labor force to pay others. What planet have they been living on? Apparently neither one of them received the memo issued in November of 2010.

  7. ‘Why is employment going down? Because state and local government spending growth has hit its lowest level ever.’ – The first part of this statement is false; the second part is true. To say that the decline in State and Local government spending is causing the decline in employment may fire the emotions of a few State and Local government workers, but it’s simply untrue. State governments employed a record 5,198,000 workers in January of 2009, versus 5,073,000 today. Local governments employed a record 14,588,000 in January of 2009, versus 14,077,000 today. So State and Local government employment is only off the mark by 636,000 from an all time high in January of 2009. If all 636,000 workers were rehired tomorrow, how would that solve the problem for the 23 million Americans who are either unemployed or underemployed?

    Although it’s true that State and Local government spending has declined, the reason is that revenues have plummeted. Unlike the Federal government, State and Local governments can’t spend money they don’t have. Nor should they borrow what they can’t repay. The decline in revenues is due to the downturn in real estate values, high unemployment, and the need to cover unfunded pension liabilities. With legal requirements to balance their budgets and an inability to print their own currencies, State and Local governments are prohibited from implementing the disastrous borrow-and-spend policies of Washington, DC.

  8. During the crisis, the state & local pain was mitigated by aid from the Federal Government, but that has since dropped off dramatically. – He’s referring to the part of Obama’s $831 billion Stimulus Program that went to State and Local governments in 2009/2010. Remember that? The problem is that it didn’t work then, and it won’t work now. The reason it didn’t work the first time is because it’s not the Federal government’s job to tell State and Local governments what to do. The Federal government is not in charge of State and Local budgets and thus cannot mandate more hiring.

    State and Local governments legislate according to the desire of their residents; they don’t take orders from Washington. State and Local government officials actually have to live under the policies they implement. They are in-touch with their constituents, while Mr. Obama seems to be completely out-of-touch with most of America. Even if the Federal government handed State and Local governments another $1.0 trillion to hire more workers, how would they pay those same workers in subsequent years? And if they have to pay the money back as well, how will they be able to pay the additional workers while repaying the loans? Ideas that make sense to a desperate reelection campaign are not always practical in the real world, or in the best interests of anyone other than the candidate. Think about it.

Monetizing the Debt

Mr. Obama presides over the Federal government, whose $16 trillion national debt imposes a drag on the Private Sector. For example, in 2011 the Federal Reserve monetized 77% of the Federal deficit (see chart below). By the way, that’s the opposite of what it said it would do. Eventually the Fed will have to reduce its Treasury holdings, and as you can see, the last time it did so the economy went straight into recession. Maybe the Fed can afford to sit on piles and piles of low interest Federal debt forever, but that doesn’t mean everyone else can, or will. The question Mr. Weisenthal ought to be asking himself is where will the Federal government get the money to repurchase this debt? It will ultimately come out of the Private Sector, through higher taxes, fees, and fines. The prospects for additional Federal borrowing are growing slim.

Private Sector Employment Benchmarks

Mr. Weisenthal’s charts don’t provide any benchmarks, so I will. Assuming that Private Sector Employment should grow at the same rate as the working age population, approximately 1.0% annually, the chart below compares actual Private Sector jobs growth to a 1.0% benchmark, beginning with the terms of the last 5 presidents.

  • By the end of Ronald Reagan’s first term, Private Sector Employment beat the benchmark by 2,088,000 jobs. He was reelected based on his pro-business policies.

  • By the end of Reagan’s second term, Private Sector Employment had topped the benchmark by 8,248,000 jobs.

  • By the end of George H.W. Bush’s only term, Private Sector Employment fell behind the benchmark by 2,466,000 jobs.

  • By the end of Bill Clinton’s first term, Private Sector Employment beat the benchmark by 6,901,000 jobs. He was reelected based on small government, pro-business policies.

  • By the end of Clinton’s second term, Private Sector Employment had topped the benchmark by 13,291,000 jobs.

  • By the end of George W. Bush’s first term, Private Sector Employment had fallen behind the benchmark by 5,562,000 jobs. He was reelected based upon his strong defense and anti-terrorism policies, not for his economic record. Were it not for the War on Terror, Mr. Bush would have lost his reelection bid.

  • By the end of W’s second term, Private Sector Employment had fallen behind the benchmark by 9,100,000 jobs.

  • After three years and five month’s of Barack Obama, Private Sector Employment has fallen behind the benchmark by 3,801,000 jobs. Short of finding another reason, such as convincing Americans that the killing of thousands of innocent civilians in drone attacks is important to their security, Obama’s anti-business policies should make this his final term.

Federal Government Employment Benchmarks

Who wants more Federal workers? Instead of telling State and Local governments what to do, Barack Obama should spend some time figuring out how to shed the 29,000 Federal positions added under his administration. Assuming that Federal Government Employment should grow at 0.0% or less, the chart below compares actual Federal government jobs growth to a 0.0% benchmark, beginning with the terms of the last 5 presidents.

  • By the end of Ronald Reagan’s first term, Federal Employment exceeded the benchmark by 3,000 jobs.

  • By the end of Reagan’s second term, Federal Employment exceeded the benchmark by 195,000 jobs.

  • By the end of George H.W. Bush’s only term, Federal Employment dropped below the benchmark by 57,000 jobs.

  • By the end of Bill Clinton’s first term, Federal Employment dropped below the benchmark by 253,000 jobs.

  • By the end of Clinton’s second term, Federal Employment was below the benchmark by 347,000 jobs.

  • By the end of George W. Bush’s first term, Federal Employment dropped below the benchmark by 25,000 jobs.

  • By the end of W’s second term, Federal Employment exceeded the benchmark by 24,000 jobs.

  • After three years and five month’s of Barack Obama, Federal Employment has exceeded the benchmark by 29,000 jobs.

State Government Employment Benchmarks

Not that the Federal government has any control, but assuming that State Government Employment should grow at the same rate as the working age population, approximately 1.0% annually, the chart below compares actual State government jobs growth to a 1.0% benchmark, beginning with the terms of the last 5 presidents.

  • By the end of Ronald Reagan’s first term, State Government Employment dropped below the benchmark by 5,000 jobs.

  • By the end of Reagan’s second term, State Government Employment exceeded the benchmark by 183,000 jobs.

  • By the end of George H.W. Bush’s only term, State Government Employment exceeded the benchmark by 149,000 jobs.

  • By the end of Bill Clinton’s first term, State Government Employment dropped below the benchmark by 56,000 jobs.

  • By the end of Clinton’s second term, State Government Employment was below the benchmark by 9,000 jobs.

  • By the end of George W. Bush’s first term, State Government Employment dropped below the benchmark by 6,000 jobs.

  • By the end of W’s second term, State Government Employment was below the benchmark by 16,000 jobs.

  • After three years and five month’s of Barack Obama, State Government Employment has fallen behind the benchmark by 306,000 jobs.

Local Government Employment Benchmarks

The Federal government has no jurisdiction over Local governments, but assuming that Local Government Employment should grow at the same rate as the working age population, approximately 1.0% annually, the chart below compares actual Local government jobs growth to a 1.0% benchmark, beginning with the terms of the last 5 presidents.

  • By the end of Ronald Reagan’s first term, Local Government Employment dropped below the benchmark by 622,000 jobs.

  • By the end of Reagan’s second term, Local Government Employment was below the benchmark by 118,000 jobs.

  • By the end of George H.W. Bush’s only term, Local Government Employment exceeded the benchmark by 416,000 jobs.

  • By the end of Bill Clinton’s first term, Local Government Employment exceeded the benchmark by 334,000 jobs

  • By the end of Clinton’s second term, Local Government Employment was above the benchmark by 943,000 jobs.

  • By the end of George W. Bush’s first term, Local Government Employment exceeded the benchmark by 151,000 jobs.

  • By the end of W’s second term, Local Government Employment was above the benchmark by 207,000 jobs.

  • After three years and five month’s of Barack Obama, Local Government Employment has fallen behind the benchmark by 1,018,000 jobs. This is certainly not due to any lack of Federal spending.

The bottom line:

If the creation of 55,000 net Private Sector jobs, over 40 months, for 23 million unemployed or underemployed Americans, is considered “doing fine”, then Mr. Obama’s prospects for a second term, one in which another 8.0 million plus will reach working-age, should be nipped in the bud right now. Mr. Obama had a fair shot and his policies failed. If he is so concerned about State and Local government employment now, then why didn’t he focus his stimulus plan on this sector back in 2009? Instead he placed the emphasis on extending unemployment benefits, which actually exacerbated the problem. And why did he focus so much of his time on passing Obamacare, instead of worrying about how 23 million unemployed and underemployed Americans would be able to afford it? This isn’t Little League. When you’re batting .00015 in the Major’s, the chances of keeping your job are pretty much nonexistent.

If Barack Obama wants to control State and Local government budgets, then perhaps he should be running for Governor, Mayor, State Senator, County Commissioner, or City Councilman. If he wants to take credit for improvements in the Private Sector, then perhaps he should take a shot at running a corporation, in his next career. But if he wanted to continue as President of the United States, he should have paid more attention to the Federal budget while he had the job. There’s an old saying, “If you want a different result, try something different.” So make up your mind today, do you want more insanity, or something different?

References:

Here’s What’s Really Happened To the Private Sector Under Obama

U.S. Government Spending

Data: Spreadsheets

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 one 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:

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

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

Obamas 9-9-9 Tax Cut | For the Blind

***2nd Revision***

Even our brightest may be deceived! ~Anonymous Blogger –

By: Larry Walker, Jr. –

Continued from: 3rd Concern with the 9-9-9 Plan

Mr. Cain’s main argument against the fact that his plan redistributes wealth from the poor to the rich is that, “it does no such thing.” But what does that mean? Simply stating “it does no such thing” doesn’t satisfy the anxiety. The real concern is that since the top 1% of income earners pay 38% of all income taxes, and because the 9-9-9 Plan reduces their tax rate by 74%, while at the same time exempting empowerment zone residents, that either a greater burden of taxes will be borne by the middle class and working poor, or the United States will go down in flames in a matter of weeks instead of years.

According to a study on GOP flat tax proposals conducted by the non-partisan Tax Policy Center, the 9-9-9 Plan would cause ’95 percent of people making $1 million or more to receive tax cuts averaging $487,300′. The dilemma is that since Mr. Cain claims his plan to be revenue neutral, that is to say, the amount of total taxes collected today will be the same under his plan, then where will the money come from to make up the shortfall? You guessed it! From the same study conducted by the Tax Policy Center –

“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.”

So I guess Mr. Cain better hope that the middle class, who are busy working everyday and taxed enough already, aren’t paying too much attention to his claims. But I don’t think that’s the case. Perhaps Mr. Cain needs to go back to the drawing board. So here’s what the Obamas actual 2009 tax return would look like against the 9-9-9 Plan.

When you remove a 15.3% payroll tax, a 35% corporate tax, and a 35% individual tax and replace them with 9-9-9, it doesn’t measure up. In order for the Obamas to make up the shortfall they would have to spend $14,755,022 on items subject to the 9% national sales tax (take the tax cut of $1,327,952 and divide it by 9%). That’s almost 3 times their current gross income. So unless the Obamas run out and buy a new house, or otherwise figure out how to spend 3 times more than they make, on items subject to the sales tax, that revenue will never come back from them. The government will either go broke, or the middle class – 70% of those making $50,000 to $75,000 – will really end up paying $4,326 more in taxes, just like the Tax Policy Center said.

As you know (or maybe not), like many others, not all of the Obamas income is from wages paid by an employer. Actually all $374,460 of his wages were paid by US taxpayers. The other 9% tax on his self-employed business income is already included in the table. Obama’s business didn’t really have any expenses, so no sales tax would be collected there. So did taxing the Obamas self-employed business income the other 9% make up the shortfall? No. So will the 9-9-9 Plan tax the federal government for the other 9% on Obama’s wages in addition? No.

Does the federal, or do state and local governments even pay income taxes? No. So under the 9-9-9 Plan, what tax return will government entities not be allowed to deduct wages from? When it comes to government workers, their employers will not be paying the other 9%, because their employers don’t pay income taxes. You can add other tax exempt organizations to that list as well. And when it comes to the self-employed, and small business owners, some will benefit and some won’t. Those who make more than $330K will clearly benefit more under 9-9-9, while most everyone else will pay higher taxes. That’s why this dog won’t hunt.

By proof, policies have consequences – The 999-Plan will create a host of unintended social problems which naturally occur on the other end of Laffer’s curve. Giving average tax cuts of $487,300 to 95% of people making over $1 million per year, and increasing the tax burden on the working poor and middle-class, solves nothing. Yes I am a conservative, and if you don’t believe it then read the rest of my blog. I’m not too sure how to classify Mr. Cain’s 9-9-9 Plan, but from my point of view, 9-9-9 is not a conservative plan, and not something that conservatives should even be considering. Had Mr. Cain not risked his entire campaign upon this flimsy reed; he might have had my support. But if Herman Cain is somehow able to win the Republican Party nomination, I’ll be casting my vote for the first viable 3rd party candidate.

Source:

http://www.whitehouse.gov/sites/default/files/president-obama-2010-complete-return.pdf

3rd Concern with the 9-9-9 Plan

Conservatives vs. 999ers

By: Larry Walker, Jr. –

Under the 9-9-9 Plan, “95 percent of people making $1 million or more would get a tax cut that averaged $487,300.” ~Tax Policy Center

At a Michigan website entitled, North Star Writers Group, Herman Cain attempted to address some of the criticism to his 9-9-9 Plan. The article, dated October 16, 2011, is entitled, “9 responses to 9 false attacks on the 9-9-9 plan”. But somehow Mr. Cain has confused what is merely constructive criticism with “attacks”. I mean it’s as if when one asks Mr. Cain a valid question these days, he either gets it wrong the first time, or he simply pulls the ‘assault card’. Yet, after I criticized Mr. Cain’s plan (not him personally), when I wrote an article entitled, “Herman Cain’s 9-9-9 Sham”, I was personally labeled as a Marxist, Communist, as naïve, an idiot, and a left-wing shill. And all of that came from fellow, so called, conservatives. So has Mr. Cain’s plan really been “attacked”, or are perhaps the 9 concerns, which he deems to be false attacks, simply valid points?

Personally, I think that when conservatives start calling fellow conservative’s naïve, Communist, Marxist, idiots, and left-wing shills somebody’s got a problem. To contrast, the article I wrote immediately prior to my critique of Mr. Cain’s tax plan was entitled, “Obamacare’s Deadweight Loss”, and with that I was practically branded as a conservative champion, by way of private commentary. But apparently, sometime between October 12th and October 23rd, I either lost my mind, or I unwittingly signed on with the Communist Party USA. I’ll let you decide. Okay, so today I’m not going to list all 9 of the concerns that many have with the 9-9-9 Plan, but just the 3rd, and Mr. Cain’s response.

Claim 3: The plan redistributes wealth from the poor to the rich.

Response: “It does no such thing. It is fair and neutral, taxing everything once and nothing twice. What’s more, we are getting ready to propose empowerment zones for economically struggling areas in which the rates will be even lower. That will allow the poor to benefit even more from the plan than they already would.”

Mr. Cain’s main argument against the fact that his plan redistributes wealth from the poor to the rich is that, “it does no such thing.” But what does that mean? Simply stating “it does no such thing” doesn’t satisfy the anxiety. The real concern is that since the top 1% of income earners pay 38% of all income taxes, and because the 9-9-9 Plan reduces their tax rate by 74%, while at the same time exempting empowerment zone residents, that either a greater burden of taxes will be borne by the middle class and working poor, or the United States will go down in flames in a matter of weeks instead of years.

Also, according to Mr. Cain, “it is fair and neutral, taxing everything once and not twice”. But this is simply not true. As proof, since the 9-9-9 Plan doesn’t allow businesses to deduct wages in determining taxable income, it in effect imposes a 9% tax on wages at the corporate level, and then taxes wages again at the individual level. So how is this not taxing something twice? And further, when the same wages are spent into the economy, they are hit again by a 9% national sales tax. So wages are not only taxed once or twice under Mr. Cain’s plan, but at least three times. Following are two hypothetical examples of what the 9-9-9 Plan will accomplish when it moves from Cain’s chalkboard to the real economy.

Example 1

For example, in the table below, a couple has wages of $1,000,000 and only claims the standard deduction and personal exemption(s). Under the current tax code they would pay federal taxes of $334,043, and only $90,000 under the 9-9-9 Plan. Thus, under Mr. Cain’s plan, this couple would receive a tax cut of $244,035. And in order to make up for the shortfall in revenue, by way of his national sales tax, the couple would need to spend $2,711,500 (244,035 / .09) on items subject to the 9% sales tax, or almost three times the amount of their earned income.

Example 2

Since under the current tax code, the taxpayer’s in the first example are already in a 35% marginal tax bracket, if they earned an additional $1,000,000, they would pay federal taxes of $698,543 under the current tax code, versus $180,000 under the 9-9-9 Plan. So under Mr. Cain’s plan, this couple would receive a tax cut of $518,543 (see table below). And in order to make up for the shortfall in revenue, by way of the national sales tax, the couple would need to spend $5,761,588 (518,543 / .09) on items subject to the 9% sales tax, or almost three times the amount of their earned income.

According to a study on GOP flat tax proposals conducted by the Tax Policy Center, the 9-9-9 Plan would cause ’95 percent of people making $1 million or more to receive tax cuts averaging $487,300′. The dilemma is that since Mr. Cain claims his plan to be revenue neutral, that is to say, the amount of total taxes collected today will be the same under his plan, then where will the money come from to make up the shortfall? You guessed it! From the same study conducted by the Tax Policy Center –

“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.”

So I guess Mr. Cain better hope that the middle class, who are busy working everyday and taxed enough already, aren’t paying too much attention to his claims. But I don’t think that’s the case. Perhaps Mr. Cain needs to go back to the drawing board.

Laffer’s Folly

In a second article written in the same venue entitled, “Arthur Laffer brings reality to 9-9-9 discussion”, Mr. Cain states that, “Contrary to some of what you hear in current conversation, the theory of the Laffer Curve was proven correct when Ronald Reagan cut marginal tax rates across the board in 1981, and federal revenues soared. So did deficits, of course, and that’s the part you usually hear about. But that’s because federal spending soared even more. Excessive spending, not insufficiently high tax rates, was the problem then and it’s still the problem today.”

Notice how Mr. Cain implies that it was “not insufficiently high tax rates” that was the problem back then, or today. That’s a double negative, but doesn’t Mr. Cain’s statement refute his own plan? If tax rates are not the problem today, but rather excessive government spending, then why are we even talking about a 9-9-9 Plan? A few month’s ago, conservatives were in unity behind a platform of not raising the Bush tax rates, and reducing government spending. Yesterday it was, “We don’t have a revenue problem; we have a spending problem.” But now, suddenly, it seems that many conservatives believe that all of our problems can be solved through Mr. Cain’s proposed wealth displacement. So does Mr. Cain’s plan balance the federal budget? Will it fix Social Security and Medicare’s solvency issues? If the answer is no, then what is the point?

Laffer’s curve – In the 1981 Act, Reagan cut the top tax rate from 70% to 50%, and closed many loopholes. He didn’t propose cutting the top rate to 9% and adding a 9% national sales tax. Reagan later raised the bottom rate from 0% to 15%, and cut the top rate down to 28%. But his plan was reasonable, while Cain’s proposition is extreme. On its own merits, the 9-9-9 Plan is extreme enough to fall off the other end of Laffer’s curve. Laffer defined a sweet spot somewhere in the middle – as when tax rates are too high, tax revenues decrease, and when tax rates are too low, tax revenues decrease, but when tax rates are just right, revenues will increase. But I believe that Cain’s plan overshoots the sweet spot by a long shot. In other words, if Reagan Era tax rates were the mark, and I believe that they were, then why not just bring them back?

Policies have consequences – The 999-Plan will create a host of unintended social problems which naturally occur on the other end of Laffer’s curve. Giving average tax cuts of $487,300 to 95% of people making over $1 million per year, and increasing the tax burden on the working poor and middle-class, solves nothing. Yes I am a conservative, and if you don’t believe it then read the rest of my blog. I’m not too sure how to classify Mr. Cain’s 9-9-9 Plan, but from my point of view, 9-9-9 is not a conservative plan, and not something that conservatives should even be considering. Had Mr. Cain not risked his entire campaign upon this flimsy reed; he might have had my support. But even if Herman Cain is somehow able to win the Republican Party nomination, I’ll be casting my vote for the first viable 3rd party candidate.

Related:

Herman Cain’s 9-9-9 Sham

Herman Cain’s 9-9-9 Sham

More Questions than Answers –

By: Larry Walker, Jr. –

Herman Cain argues that the reason we need his 999-Plan is because the tax law is too complicated. But is it really? I’ve worked with the tax law for 30 years, and I don’t think it’s all that complicated. It may have some complex calculations, mainly related to a few special write-offs and credits, but the basic bedrock of the Internal Revenue Code isn’t at all complex. Following Cain’s logic, if the tax law is so complicated that it needs to be “thrown out” and replaced, then isn’t our entire legal system similarly complex? If you answered yes, then why not just throw out the entire United States Code, shut down all courts including the U.S. Supreme Court, and just substitute the 10-Commandments. Would that work for you? If not, then why would you be in favor of Herman’s Cain’s overly simplistic 9-9-9 Tax Gimmick?

Business Taxes

Under present tax law, business expenses that are ordinary and necessary for the production of income are deductible for income tax purposes. The reason such expenses are deductible is because they represent taxable income to the recipient. There’s nothing really complicated about this. Expenses such as wages, advertising, office supplies, vehicle expenses, postage, legal and professional fees, commissions, rental payments, utilities, uniforms, travel, meals and entertainment, telephone usage, insurance, licenses, interest expense, benefits costs, retirement plan contributions and others, which are incurred for the production of income, are deductible for federal tax purposes. Although state and local governments are exempt from federal income tax, a deduction for state and local taxes is also allowed, under the theory that taxpayers should not be taxed at the federal level on taxes paid locally. All such expenses are likewise deductible in determining an entity’s profitability under general accounting principles. Where the law gets complicated, as far as business taxes are concerned, is when it comes to accelerated depreciation and general business credits.

Accelerated Depreciation

The reason fixed assets are depreciable is that each has a limited useful life, so the cost is spread over the life of the asset. For example, a computer has a useful life of 3 years, such that at the end of three years it generally needs to be replaced, so a business is allowed to write-off the cost over a three-year period. However, special gimmicks have been instituted over the years to accelerate the write-off of assets, such as the Section 179 deduction, and 50% or 100% bonus depreciation, whereby at least half or the entire cost may be written off in the year of purchase. If society wants to get rid of the accelerated depreciation loophole, then all that’s required is for the legislature to change the law back to regular straight-line depreciation. It doesn’t take a genius to figure that out, nor does it require throwing out the entire tax code.

General Business Credits

The other place that the law departs from reality is when it comes to tax credits. General business credits are special privileges which allow a company to receive direct tax credits over-and-above the normal deduction. For example, under the new Small Business Health Care Credit, where a business would normally be able to deduct the costs incurred for its portion of employee’s health insurance, a tax credit may now be taken over and above the regular deduction. Where it gets complicated is in determining which businesses qualify for the credit. In order to qualify a business can have no more than 24 full-time equivalent employees, and the average amount of wages paid per employee cannot exceed $49,999 per year. To obtain the maximum credit, a business can have no more than 10 full-time equivalent employees who are paid an average of less than $25,000 per year.

To determine whether one qualifies for the Health Care Credit, a business must be able to calculate the number of full-time equivalent employees and the average amount of wages paid based on complex formulas. Further complicating matters, the business must include and exclude certain types of employees and certain wages. Finally, if the business does qualify, it must subtract the amount of the tax credit from the amount of the normal deduction. For more on this, see Obamacare’s Effect on Small Business. If Americans wish to get rid of the smorgasbord of general business tax credits, it could be accomplished through legislation. It doesn’t take an Occupy Wall Street protest, or a 999-Plan to make this change. All that’s required is leadership.

Getting rid of accelerated depreciation and general business credits would go a long way toward tax simplification. Once accomplished, tax rates may be reduced to more tolerable levels. It doesn’t take a genius or a 999-Plan to accomplish this.

Problems with Cain’s 9% Business Flat Tax

The most egregious problem with Herman Cain’s plan involves wages. Under current tax theory, when a business pays wages, the employee bears the tax responsibility, not the business. But under Cain’s upside-down theory, businesses will not be allowed to deduct wages from gross income, unless they reside in empowerment zones. So in effect businesses will bear a 9% tax burden on the wages and salaries that they pay, and in addition employees will incur a 9% tax on the same. The double taxation of wages in the 999-Plan represents not only a huge departure from basic income tax theory, but from common sense.

Interest expense is currently deductible for income tax purposes as it represents taxable income to the recipient. But under Cain’s theory, interest will no longer be deductible by the borrower, yet it remains taxable to the lender. This is also an extreme departure from common sense. Under Cain’s theory, a corporate officer who loans money to a majority owned company would be taxed on the interest income received, while his company would incur a 9% tax on the same. Who wants to pay a 9% tax on the interest paid to banks and other lenders? It’s not personal, it’s the principle…

Contributions to employee retirement plans are currently deductible for income tax purposes, because they represent future taxable income to the recipient. But under Cain’s plan, company contributions to retirement plans are apparently not deductible for tax purposes. In effect businesses will bear a 9% tax on such contributions and the recipient will bear another 9% tax upon the withdrawal. Again, this form of double taxation represents an extreme departure from basic income tax theory.

Employer paid health insurance premiums are currently deductible for income tax purposes, and not counted as income to employees, although theoretically it should be taxable to employees. But under the Cain plan, employer paid health insurance premiums will apparently not be deductible. In effect, employers will pay a 9% tax on top of the amount paid towards employee’s health insurance benefits. So an employer will be taxed whether or not it provides health benefits. Since there won’t be any incentive for providing health care coverage under the 999-Plan, what will occur? Will companies continue to pay for health benefits plus 9%, or will they just keep the money and pay the 9%? Absent any other requirements, what would you do?

9% Business Flat Tax

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

Since Cain doesn’t define the term, “purchases”, what exactly does the above statement mean? Volumes could be written to define this simple statement. For example, does the term “purchases” include services or is it limited to products? If a company buys supplies such as paper and toner, from other U.S. based businesses, are these items deductible, or does deductibility only apply to purchases of goods for resale? If a company employs the services of another business, are such services deductible as purchases? I only ask because if that’s all there is to the proposed tax code, then it’s not clear whether this statement applies to the purchase of services, goods at retail, goods at wholesale or all of the above.

Retail businesses presently buy goods at wholesale, paying no sales tax upon the purchase, but then charge sales tax upon resale. However, service companies buy their supplies at retail; as such products are for internal use and not for resale. Services are not subject to sales tax at the State level, but will they be under the 999-Plan? Will both retailers and service businesses have to pay the 9% national sales tax on U.S. purchases, or are retailers exempt, or are both exempt? If both types of businesses have to pay the national sales tax, then even if such purchases are deductible for income tax purposes, they will have already been subject to a 9% national sales tax upon purchase. The point is that the first half-sentence of Cain’s proposal, by itself, necessitates a myriad of rules, regulations and definitions.

“For if the trumpet gives an uncertain sound, who shall prepare himself for the battle?” ~1 Corinthians 14:8

Next, according to Cain, the amounts spent on capital investments will be deductible under his 999-plan. But Cain doesn’t define what he means by the term, “capital investments”. Although he has publicly referred to this passage as meaning the purchase of equipment, he hasn’t defined any limitations. Does this apply to new or used equipment, or both? Capital assets include all tangible property which cannot easily be converted into cash and which is usually held for a long period, including real estate, equipment, etc. Under current law, buildings and other commercial real estate are generally depreciable over a 39 year lifespan, while land is never depreciable. But since Cain doesn’t go into detail, and because he wants to “throw out” the current tax code, we have to ask, will a business be able to write-off the purchase of real estate including land, in full, in the year of purchase? Are there no limitations? Here are some more questions:

  • If the purchase of capital equipment causes a company to have a net operating loss, can the loss be carried backwards and forward like under current law?

  • Is the purchase of stock in another business considered to be a tax deductible capital investment under the 999-Plan? The purchase of stock would be treated as an asset and not as a deductible expense under current law, but would it be treated simply as a deductible expense under the Cain plan? He doesn’t say.

  • Will there even be such a thing as a balance sheet under the new 999-plan, or will businesses simply need to account for gross income, purchases from U.S. businesses, capital investments, imports and exports?

  • Under the 999-Plan, purchases from non-U.S. located businesses are discouraged. So does the term “purchases” include the purchase of capital equipment? If capital assets are purchased from overseas companies, will they be deductible because they are capital investments, or will they not be deductible due to the “purchases from other U.S. located businesses” clause? Again, it’s not clear.

Net exports are also excluded from the proposed 9% business tax. So it would follow that a U.S. based business, which sells more of its goods overseas than in the U.S., would be exempt from taxes. Thus businesses are encouraged to export their goods and services, which might be beneficial to large manufacturers or retailers, but not to small service based businesses which make up the bulk of the American economy. Does a U.S. company have to be based in the U.S., where it would employ American workers, in order to receive the exemption, or can it open an operation in Mexico, sell its goods there and escape the 9% tax? Cain doesn’t provide any details on the exemption for net exporters either.

“Empowerment Zones will offer deductions for the payroll of those employed in the zone”

Under the 999-Plan, labor intensive companies would not receive a deduction for wages, unless located in empowerment zones. With wages being the bulk of gross income for many service sector businesses, under Cain’s 999-Plan it is possible for a business to have zero or negative income, according to generally accepted accounting principles, and still owe taxes. Also, in spite of the proposed repeal of Social Security, Medicare, and (I guess) Federal Unemployment, since these taxes were previously deductible for income tax purposes, the full effect of their elimination is somewhat mitigated. In other words a business can breakeven, and still wind up having to borrow money at the end of the year in order to pay a tax bill. So will more businesses simply relocate to empowerment zones under Cain’s plan, or will some just get the short end of the stick while others receive a big fat special interest type government subsidy?

“That dog won’t hunt.” ~Herman Cain

Non-Deductible Business Expenses under the 999-Plan

  • Wages paid outside of empowerment zones
  • State and local taxes
  • Federal and State and Local Licenses
  • Purchases from foreign based companies
  • Mortgage Interest Expense?
  • Business Interest Expense?
  • Retirement Plan Contributions?
  • Health Insurance Premiums?

Example 1

The following small business corporation has a single-owner, is labor intensive, and is not located within an empowerment zone. As you can see, in the example below, the company has net income of -0- under current law, and net income of 8,088.50 under the 999-Plan. This is attributable to the elimination of payroll taxes which were also deductible for income tax purposes. The company has taxable income of -0- under current law, but would have taxable income of $128,318 under the 999-Plan. This is attributable to its deductions being limited to capital investments and purchases from other businesses, versus all ordinary and necessary expenses.

Thus, where Federal, State, and National Sales taxes are all -0- under current law, they would be $21,199.08 (11,548.62 + 7,999.08 + 1,951.38) under the 999-Plan. When the total business taxes are subtracted from net income, after-tax income is -0- under current law, but would be negative (-13,110.58) under the 999-Plan. So the owner will either need to borrow money to pay the taxes, or add money from personal accounts to shore up the company. Let’s hope that the 9% Individual Flat Tax leaves the owner with enough to cover the company’s shortfall.

9% Individual Flat Tax

“Gross income less charitable deductions”

Most of us know what the term “gross income” means, but what does it mean under the 999-Plan. If an individual has a sole proprietorship, will they be taxed on gross income and not be allowed to deduct ordinary and necessary business expenses? Will those who own rental properties pay a 9% tax on gross rental income without the benefit of deductions for mortgage interest, real estate taxes, insurance, repairs and depreciation? Will employees who incur substantial unreimbursed employee expenses be denied the benefit of deducting such costs?

  • Since there won’t be a deduction for state and local taxes, including real estate taxes, one will in effect pay a 9% tax on the amount of State taxes paid.

  • Since there will no longer be a deduction for mortgage interest, there won’t be any incentive to payoff an existing mortgage. Homeowners will in effect be paying a 9% tax on the amount of mortgage interest paid. Won’t this cause more families to simply abandon their houses for rentals? Will the plan push us from a private ownership to a public or corporate ownership society?

  • Since there is no deduction for the amount of national sales taxes paid, taxpayers will in effect pay a 9% tax on the 9% national sales tax as well.

  • Since there is no deduction for retirement plan contributions, taxpayers will pay a 9% tax on contributions and another 9% on the same money when the funds are withdrawn. If one currently owns a ROTH retirement plan will they receive an exclusion from the 9% tax when the funds are withdrawn?

  • Will life and disability insurance proceeds, which are currently exempt, be subject to the new tax?

  • Since the 9% Individual Flat Tax doesn’t distinguish between being married, single, widow, widower, or having one child or ten, what will our society look like after this plan is implemented? Will the population decline, as the cost of raising children is penalized? Will there be fewer marriages?

“Empowerment Zones will offer additional deductions for those living and/or working in the zone”

In other words, it’s not a flat tax after all; it’s a flat tax with exceptions for certain special interest groups. If businesses and citizens race to occupy today’s empowerment zones, will they eventually cease to be empowerment zones? And if no one takes the bait, and the masses instead flee from empowerment zones, what then? Will the government start issuing refundable tax credits, like it does today? Will the plan then become known as the +9, -9, +9, +9 Plan? That’s a 9% flat business tax, a 9% refundable tax credit, a 9% flat individual tax, and a 9% national sales tax.

Example 2

In the example below, individual income taxes are calculated on the owner of the small business corporation in Example 1. The owner is married with two dependents and the only income is wages paid by the company. The taxpayer pays mortgage interest, real estate taxes, state income taxes, and makes charitable contributions as shown in the table below. Under current law, taxable income is $59,355 versus $94,500 under the 999-Plan. That’s because the only item deductible for tax purposes under the 999-Plan is charitable contributions. Thus Federal income tax under current law would be $6,053.10 (8,053.10 minus a child tax credit of 2,000), and $8,505 with the 999-Plan. Although the taxpayer saves $8,032.50 under the 999-Plan by not having to pay Social Security and Medicare taxes, State income taxes would be higher, unless all states with an income tax rewrite their revenue codes, simultaneously.

Thus, after-tax income would be $60,446.65 under current law, and $64,270.00 under the 999-Plan, but that’s before paying the 9% national sales tax. If we subtract out 15% of after-tax income as savings and principal repayments on loans, that leaves the taxpayer with disposable income of $51,379.65 under current law, and $54,629.50 under the 999-Plan. Disposable income is the amount that a taxpayer will spend on items subject to the 9% national sales tax. After allowing for the national sales tax of $5,784.30, the taxpayer will wind up paying $1,960.95 more in taxes under the 999-Plan than under current law. So unfortunately, this small business taxpayer will not save enough on personal taxes under the 999-Plan to compensate for the businesses shortfall of $13,110.58. But how many people own small businesses anyway? More than you can imagine. Does it get better for companies with more than one employee? No. It would only get better if the business and its owner relocated to an empowerment zone.

9% National Sales Tax

“Unlike a state sales tax, which is an add-on tax that increases the price of goods and services, this is a replacement tax. It replaces taxes that are already embedded in selling prices. By replacing higher marginal rates in the production process with lower marginal rates, marginal production costs actually decline, which will lead to prices being the same or lower, not higher.”

Once again, volumes could be written to define this overly simplistic statement. Cain has stated publicly that the national sales tax will be levied on the purchase of new houses, cars and other goods, but not on used items. When we were discussing this, someone in my office fired off, “So should I just start buying my clothes from Goodwill?” Why would anyone want to buy a new house if it will cost 9% more? A new $200,000 home would cost $218,000 under Cain’s plan. On face value, that doesn’t mesh with prices “being the same or lower” to me. This means that where a 10% down payment is required, that instead of looking at $20,000, a buyer will now have to come up with $21,800. And since the interest expense will no longer be deductible, what’s the point anyway? One wonders if there will even be any homebuilders left if this plan were to somehow pass.

A brand new $40,000 vehicle would cost $43,600 under Cain’s law, and that’s not including state and local tax, tag, and title. Most Americans can’t afford the former, so why would the latter be an improvement? So even if underlying prices remain the same under the 999-Plan, prices will, at the minimum, rise by 9%. The 999-Plan would only lead to an increase in used car sales, and a decline in automobile production.

Marginal production costs might decline for businesses that are not labor intensive, make all their purchases from U.S. suppliers, or are located in empowermnet zones; but what about labor intensive businesses, those dependent on foreign suppliers, and those located outside of empowerment zones? Under the 999-Plan, it is possible for a business to have a net loss and still owe taxes. As shown in Example 1, if a business spends 70% of its gross income on wages, and the rest on tax deductible expenses, even though it has no profit, it would still owe a 9% tax on the amount of wages paid. Thus where a business would have owed no taxes under present law, it may owe under the 999-Plan, which will drive up, not lower its production costs.

Eliminates double taxation of dividends –

If I heard Cain correctly, corporations would be able to deduct the amount of dividends paid, before computing taxes, so that dividends are only taxed once at the individual level. That’s a good thing, but if the current tax code is simply “thrown out”, and the IRS is shut down, what’s to prevent corporate officer’s from taking all, or most, of their compensation in the form of dividends instead of wages? Since wages won’t be deductible at the corporate level and dividends will, you can bank on this loophole being blown wide open.

Features zero tax on capital gains and repatriated profits –

No tax on capital gains? That reminds me of that old Better Business Bureau film entitled, “Too good to be true.” Yeah, if it sounds too good to be true, it probably is. Just like with dividends, if there is no longer an IRS, and if the current tax code is “thrown out”, what’s to prevent corporate officers and employees from being paid in stock, rather than wages, and then cashing in on tax-free capital gains later?

Also, since charitable contributions are the only deduction allowed under the 9% Individual Flat Tax, what happens with capital losses? Will capital losses be deductible against ordinary income, only against capital gains, or not deductible at all? He doesn’t say. So when Cain “throws out” the current tax code, and shuts down the IRS, who will write the new code? Will there be some kind of 999 Super Committee, charged with coming up with new tax theories, while barred from referencing the previous code?

Not taxing repatriated profits sounds good, but it also provides an incentive for companies to relocate overseas. So it’s either Mexico, or an empowerment zone, eh? Flip a coin. Although some have advocated for such a measure in lieu of another stimulus, no one was saying that it should be a permanent pillar of U.S. tax policy. Cain has merely picked up on a popular topic and wrapped it into what I would call basically a sham.

“Let’s get real.” ~Herman Cain

Okay, let’s get real. Cain is light on specifics, so one is resigned more to asking questions than analyzing data. It all sounds good on television, but the plan appears to be constructed mainly out of neat little sound bites designed to appeal to weak-kneed conservatives, rather than out of substance. Yes I am an accountant, and I am for simplifying the tax code, but I can’t go along with a plan that lacks common sense. In my opinion, we shouldn’t throw out our current tax code in favor of a poorly constructed plan, instigated by someone who knows nothing about income taxes. Herman Cain may know how to turnaround a pizza parlor, and he was a great local talk show host, but an accountant or economist he’s not.

Anyone serious about simplifying the tax code should be talking about the following:

  1. Eliminating accelerated depreciation
  2. Eliminating general business tax credits
  3. Eliminating personal tax credits
  4. Eliminating the alternative minimum tax
  5. Lowering marginal income tax rates

That would be a good start. If you don’t think that eliminating the above and lowering tax rates would greatly simplify the income tax code, then you don’t know anything about income taxes.

If the 999-Plan were to somehow miraculously survive a left-wing insurrection, how would the 43 States that have an income tax calculate their taxes? Since most of the States begin with federal adjusted gross income and allow federal itemized deductions, and since under the 999-Plan federal adjusted gross income is simply gross income, and itemized deductions are limited to charitable contributions, then won’t all States have to rewrite their tax codes as well? States will have to decide whether they want to allow deductions for mortgage interest, property taxes, and other expenses which are currently deductible, and if they don’t, then the burden of State taxes will rise, further diminishing the effect of the 999-Plan.

Finally, since the 999-Plan interferes with or supplants other federal laws, it will necessitate repeal of the Federal Insurance Contributions Act, and involve drastic changes to how Social Security and Medicare benefits are calculated. Will Social Security benefits be based on gross income, whether earned or unearned? Will future benefits simply come out of the general fund? If so, then will paying social insurance benefits out of the general fund put a strain on the rest of the federal budget, leading to tax hikes in the future? Will the Federal Unemployment Act also be repealed, since it is part of the payroll taxes employers pay?

There’s more to 9-9-9 than 9-9-9. As far as I’m concerned, the 999-Plan is a total sham, and because Herman Cain has staked his entire campaign on it, he’s not fit to be President of the United States. What America lacks is leadership. Offering to lead the nation down an unproven, untested, and unsound path is no different than what we have today. What most of us want to hear from prospective presidential candidates is what will replace Obamacare, which regulations will be repealed, how the size of government will be reduced, and how the federal budget will be balanced. Herman Cain’s 999-Plan is nothing more than a diversion, designed to win a primary and lose an election. If you want four more years of Obama, then vote for Cain.

“WHEN THE FOLLOWERS ARE READY, THE LEADER WILL APPEAR.”

References:

http://www.hermancain.com/docs/999-for-web-10-12.pdf

Obamacare’s Deadweight Loss

Why you should repeal it right away!

By: Larry Walker, Jr.-

“The most important single central fact about a free market is that no exchange takes place unless both parties benefit.” ~Milton Friedman –

Failure to repeal Obamacare by January of 2013 will result in deadweight losses in the American economy. Although static revenue believers contend that the federal government will be able to line its pockets through a new source of revenue, inefficiency will occur in the private sector causing the loss of existing and future jobs, a decline in income tax revenues, less private sector health insurance coverage, and fewer business expansions. In fact, many small businesses will be left with lower revenues, after paying the so called shared responsibility penalty, causing them to either price themselves out of the market, downsize, or shutter, depending on market conditions.

What is Deadweight Loss? – It’s an economic term which represents the costs to society created by market inefficiency. Deadweight loss can be applied to any deficiency caused by an inefficient allocation of resources. Price ceilings (such as price controls and rent controls), price floors (such as minimum wage and living wage laws) and taxation are all said to create deadweight losses. Deadweight loss occurs when supply and demand are not in equilibrium. To see how deadweight loss occurs with Obamacare, let’s use an expanded real world example.

TEA, Inc. is a small Georgia based parts assembly plant with 50 full-time employees, not including its single owner. The company doesn’t provide health insurance for its employees due to a low profit margin, as doing so would impair its ability to continue as a going concern. However, the owner wants to expand in order to increase profits through horizontal integration. The company’s pre-tax net profit is projected to be $150,000 for each plant it operates, and each plant is expected to employ 50 full-time employees. Prior to the passage of Obamacare, TEA Inc.’s owner had planned on opening a second plant in 2012 and a third in 2013 creating an additional 100 jobs, but this misguided legislation has pretty much killed that dream. How’s that?

Well, since TEA, Inc. already has 50 full-time employees, it will be required by Obamacare to either provide and pay for at least half the cost of health insurance for its employees in 2014, or pay a penalty of $2,000 on each (excluding the first 30). In analyzing the financial impact, TEA, Inc. determines that 25 of its employees will require family plans, and 25 will require self-only plans. TEA, Inc. expects the ratio of family versus self-only plans to remain about the same as it expands. In examining the average cost of small group premiums within the Georgia market, it is known that self-only plans cost an average of $4,612, and family plans cost $10,598 (see Obamacare’s Effect on Small Business).

Single Plant Option

Prior to Obamacare, with its one existing plant, TEA, Inc. would have net income of $150,000, would pay federal income taxes of $41,750, and would be left with after-tax income of $108,250 (see table below). Assuming all things are equal, by 2014 when TEA, Inc. is mandated to provide health insurance at its existing plant, its health care expense will be $190,125 leaving it with a $(40,125) net operating loss, and no federal income tax liability. Since this is out of the question TEA, Inc. will be forced to either reduce its number of full-time employees to below 50, or pay a shared responsibility penalty (i.e. Health Care Tax).

Since TEA, Inc. cannot afford to comply with the play portion of the “play or pay rules”, if it does not reduce its workforce before 01/01/2013, then by 2014 it will be forced to pay a shared responsibility penalty of $40,000 ($2,000 per person on 20 of its 50 employees). Since the shared responsibility penalty is not deductible for tax purposes, TEA, Inc. will still have taxable income of $150,000, will pay federal income taxes of $41,750, and will have after-tax income of $108,250. However, after paying the shared responsibility penalty, the company will be left with just $68,250 or $40,000 less than it would have had before Obamacare (see table below). What will TEA, Inc. do? Its owner only has 14 months to decide, because the penalty will apply in 2014 if TEA, Inc. still has 50 or more full-time employees in the year 2013 (see Obamacare’s Effect on Small Business).

Options: If TEA, Inc. reduces its current workforce by one full-time equivalent employee, it can avoid paying the $40,000 penalty in 2014, but it must eliminate that position before the end of 2012, due to the twelve month look-back rule contained in Obamacare’s fine print. By doing so, TEA, Inc. will save the amount of one employee’s wages, less the increase in applicable federal taxes, and will avoid paying the $40,000 shared responsibility penalty, making the company better off. Unfortunately, this might be the best option available under the circumstances. So far, the deadweight loss is one full-time job.

Two Plant Option

If TEA, Inc. opts to push ahead and open the second plant, prior to Obamacare it would have net income of $300,000, would pay federal income taxes of $100,250, and would be left with after-tax income of $199,750. Assuming all things are equal, in 2014 when TEA, Inc. is mandated to provide health insurance at its old and new plant, its health care expense will be $380,250 leaving it with a net operating loss of $(80,250), and no federal income tax liability (see table below). Since this is out of the question TEA, Inc. will be forced to either forgo its expansion plans and not provide the additional 50 jobs, or pay the shared responsibility penalty (i.e. Health Care Tax).

Since TEA, Inc. cannot afford to comply with the play part of the “play or pay rules”, if it proceeds with the expansion, then by 2014 it will be forced to pay a shared responsibility penalty of $140,000 ($2,000 per person on 70 of its 100 employees). Since the shared responsibility penalty is not deductible for tax purposes, TEA, Inc. will still have taxable income of $300,000, will pay federal income taxes of $100,250, and will have after-tax income of $199,750. However, after paying the penalty, the company will be left with just $59,750 or $140,000 less than it would have had before Obamacare (see table below).

It’s worth noting that even after doubling its profits, TEA, Inc. would be left with less money — $59,750, than it would have had with just the one plant — $68,250. Again, what will TEA, Inc. do? Its owner only has 14 months to decide, because the penalty will apply in 2014 if TEA, Inc. has 50 or more full-time employees in the year 2013 (see Obamacare’s Effect on Small Business). The best option appears to be to not open the second plant, and to reduce the number of full-time employees at the initial plant by one. Thus, the deadweight loss has increased to 51 full-time jobs.

Three Plant Option

If TEA, Inc. decides to trust in “hope and change” and moves ahead with adding yet a third plant, pre-Obamacare it would have net income of $450,000, would pay federal income taxes of $153,000, and would be left with after-tax income of $297,000 (see table below). Assuming all things are equal, in 2014 as TEA, Inc. is mandated to provide health insurance at all three plants, its health care expense will be $570,375 leaving it with a $(120,375) net operating loss, and no federal income tax liability. Since this is impossible, TEA, Inc. will be forced to either forgo its expansion plans and not provide the additional 100 jobs, or pay the shared responsibility penalty (i.e. Health Care Tax).

Since TEA, Inc. cannot afford to comply with the play aspect of the “play or pay rules”, if it proceeds with its expansion plans, then by 2014 it will be forced to pay a shared responsibility penalty of $240,000 ($2,000 per person on 120 of its 150 employees). Since the shared responsibility penalty is not deductible for tax purposes, TEA, Inc. will still have taxable income of $450,000, will pay income taxes of $153,000, and will have after-tax income of $297,000. However, after paying the shared responsibility penalty, the company will be left with just $57,000 (see table below).

It’s notable that even after tripling in size, TEA, Inc. would be left with less money –- $57,000, than it would have had with just two plants –- $59,750, and even less than it would have had with just the one plant –- $68,250. Again, what will TEA, Inc. do? Its owner only has 14 months to decide, because the penalty will apply in 2014 if TEA, Inc. has 50 or more full-time employees in the year 2013 (see Obamacare’s Effect on Small Business).

The best option for TEA, Inc. appears to be to forget about opening a second and third plant, and to reduce the number of employees at its existing plant. By doing so, TEA, Inc. will be able to maintain its present after-tax net income of $108,250, plus the savings achieved by eliminating a job, which yields the optimal result. Thus, in this real-life scenario, the deadweight loss created by Obamacare is 101 full-time jobs. In addition, 49 full-time employees are left without health insurance, and by 2014 will be forced to either pay a tax or secure their own health insurance coverage. Failure to repeal Obamacare means that this entrepreneur’s dreams of expansion will be destroyed, and 101 potential employees will be left on the sidelines. Obamacare will impose unnecessary deadweight losses upon the American economy, which will be multiplied many times over.

Forcing the free-market to accept and live with market inefficiency just doesn’t work out so well in a free market society. Any so called Jobs Bill which doesn’t immediately repeal this irresponsibly enacted, job killing, legislation isn’t a jobs bill at all. In my humble opinion, the Patient Protection and Affordable Care Act (PPACA) should be repealed right away. You should repeal it, right now! Be sure to sign the White House Petition to Repeal Obamacare. You must sign by 10/22/11. “Live free or die.”

Obamacare’s Effect on Small Business

Unaffordable Care Act | Jobless, Unshared, and Irresponsible –

By: Larry Walker, Jr. –

“An unlimited power to tax involves, necessarily, a power to destroy; because there is a limit beyond which no institution and no property can bear taxation.” ~ Daniel Webster in M’CULLOCH v. STATE, 17 U.S. 316 (1819) –

Although Barack Obama boasts of having implemented 17 tax cuts for small business during his one-term proposition, as I pointed out in Why Congress Shouldn’t Just Pass Obama’s Jobs Bill, Again, not one item on the list actually meets the definition of a tax cut. #1 on the list was the Small Employer Health Insurance Tax Credit, which is found in Internal Revenue Code Section 45R. The goals of the Section 45R credit are supposedly as follows: (1) to help offset the cost to small businesses that offer employee health insurance coverage, and (2) to encourage small businesses not providing health insurance to start offering coverage.

But unfortunately, the overall effect of the Patient Protection and Affordable Care Act, will be to encourage large employers, those with 50 or more full-time employees, to drop health insurance coverage, reduce the number of employees, or cut weekly work hours to less than 30 in order to avoid paying the so-called shared responsibility penalty. Neither will the new legislation encourage smaller companies, those with fewer than 50 full-time employees, to offer health insurance, as it merely provides a six-year subsidy for those with fewer than 25 employees, encouraging them to limit their growth to 24 or fewer full-time employees, and it does absolutely nothing for companies with between 25 and 49 full-time equivalent employees.

Code Section 45R – Small Employer Health Insurance Tax Credit

The tax credit is available from 2010 through 2015. For 2010 – 2013 the maximum credit is 35% of qualified premium costs paid by for-profit companies, and 25% for non-profits. The maximum credit is only available to employers with no more than 10 full-time equivalent employees (FTE’s), who are paid average annual wages of $25,000 or less. A reduced credit is available on a phase-out basis for employers with between 10 and 25 FTE’s, who are paid average wages of $25,000 to $50,000. In effect, the credit is reduced by 6.667% for each FTE in excess of 10, and by 4% for each $1,000 in average annual wages paid above $25,000. For example, an employer with 13 full-time equivalent employees who are paid average annual wages of $45,000 will not receive a tax credit. No tax credit is available for employers with 25 or more FTE’s, or who pay average annual wages of $50,000 or more.

From Unaffordable Care Act

In 2014 through 2015, the credit increases to 50% of the amount of qualified premium costs paid by for-profits, and 35% for non-profits, however by then, the employer must participate in a state insurance exchange in order to obtain the credit. [Note: Each state is required to create an insurance exchange by January 1, 2014 which must include an American Health Benefit Exchange, as well as a Small Business Health Options Program (SHOP) Exchange.]

Full-Time Equivalent Employees (FTE’s) – For purposes of the Code Section 45R Credit, the number of FTE’s is determined by dividing the total number of hours worked by each employee (but not more than 2,080 per employee) by 2,080. This is based on a 40 hour work-week for all 52 weeks of a calendar year. The result is rounded down to the nearest whole number. An employer with 25 or more employees may still qualify for the credit if it employs part-time or seasonal workers. Seasonal workers are disregarded in determining the number of FTE’s as long as they work for less than 120 days during the tax year, however the amount of health insurance premiums paid on their behalf is still counted in determining the amount of the Section 45R credit. The number of FTE’s is calculated by totaling all hours worked by each full-time employee, each part-time employee, and each seasonal employee (working more than 120 days) and then dividing the total hours worked by 2,080.

Example: TEA Corporation has 7 employees who worked 2,000 hours each, and 5 who worked 1,500 hours each, during the tax year. The number of FTE’s is calculated by totaling all the hours worked, and dividing the result by 2,080. In this case, TEA Corporation has 10 full-time equivalent employees.

Average Annual Wages – Average annual wages is calculated by dividing the total amount of wages paid for the year by the number of FTE’s. However, certain employees are excluded from both the FTE and average annual wage calculations as follows: sole proprietors, partners in partnerships, greater than 2% owners of S-Corporations, greater than 5% owners of C-Corporations or other entities, and most family members (including children, step-children, siblings, step-siblings, parents, step-parents, nieces or nephews, aunts or uncles, and in-laws).

Example: TEA Corporation paid total annual wages of $250,000, not including the wages paid to its owner. Since TEA Corporation has 10 FTE’s, its average annual wages are $25,000 ($250,000 / 10).

Premiums – Only health insurance premiums paid by the employer under a qualifying arrangement are counted in calculating the Code Section 45R tax credit. For 2010, employers were allowed to count the total amount of premiums paid for the entire year, even though the health reform plan wasn’t passed until March 23, 2010. However, in order to qualify, the employer must pay at least 50% of the total premium costs. Employers are only allowed to count the amount the company pays and not the amounts paid by employees. Health insurance coverage also includes amounts employers pay for dental, vision, long-term care, nursing home care, home health care, community based care or any combination thereof.

The amount of an employer’s premium payments that counts is capped by the amount of average premiums for the small group market in the state (or an area within a state) in which the employer offers coverage. The average premium for the small group market in a state or area is determined by the Department of Health and Human Services (HHS). The IRS released the average premium for the small group market in each state for 2010 in Revenue Rule 2010-13 (table at left-hand). For example, in 2010, the limits in Georgia were $4,612 for self-only coverage, and $10,598 for family coverage.

Carry Back and Carry Forward – The Section 45R credit is not refundable to for-profit companies. Any unused portion may be carried back 1 year and carried forward for 20 years, however a credit earned in 2010 may only be carried forward. Note: Companies with no tax liability will not receive any immediate assistance from the Section 45R credit. So for example, a company taking advantage of the 100% bonus depreciation provision, or other tax benefits, and the Section 45R credit in the same year may not gain any immediate benefit from the health care credit.

Health Insurance Deduction and Tax Credit – Under Internal Revenue Code Section 162, long before health care reform, employers have generally been allowed to deduct the cost of providing health insurance coverage for employees. However, going forward the IRS has interpreted that the amount that may be deducted must now be reduced by the amount of any Code Section 45R credit.

Example: A Georgia Based Small Business

TEA Corporation is a Georgia based company with a single owner and 10 full-time equivalent employees, average annual wages of $25,000 per year, and it provides self-only health insurance coverage. TEA Corporation pays 50% of the total premium for each employee. These figures were chosen specifically; since in order to qualify for the maximum Section 45R credit an employer can have no more than 10 FTE’s, average wages of no more than $25,000, and must pay at least 50% of its employee’s insurance premiums.

Because the total amount of premiums cannot exceed $4,612 for self-only coverage within the State of Georgia, the total amount of premiums paid by TEA Corporation, for purposes of the tax credit, is limited to be $23,060 (2,306 X 10). Assuming the company is in a 34% income tax bracket (i.e. taxable income is between $75,000 and $100,000 per the table below); the Section 162 deduction would normally save the company $7,840 (23,060 X 34%) in taxes.

Now, since the company qualifies for the maximum Section 45R credit of 35%, it will receive a tax credit of $8,071 (23,060 X 35%), however it will only be allowed to deduct health insurance expenses under Section 162 of $14,989 (23,060 – 8,071). So the Section 162 deduction of $14,989 saves the company $5,096 (14,989 X 34%), in addition to the Section 45R credit of $8,071, for total tax savings of $13,167 (5,096 + 8,071). So in effect, the new tax credit benefits the company by an additional $5,327 (13,167 – 7,840), or by $532 per employee, because the company would have already saved $7,840 (23,060 X 34%) prior to Obamacare.

From Unaffordable Care Act

If in the example above, TEA Corporation was not able to afford health insurance prior to Obamacare, then how does the Section 45R credit change things? Won’t the company still have to shell out an additional $23,060 to cover the employer’s share of health insurance costs? Yes. And although it will be eligible for the Section 45R credit, it won’t realize the $13,167 in tax savings until its tax return is filed in the subsequent year. So in effect, the company’s cost per employee will have risen by $2,306. Adding to the dilemma is the fact that the amount each employee must contribute also increases by $2,306. So both the company and its employees will be poorer at the end of the year, although the employer may have a chance to recoup about 57% (13,167 / 23,060) of its costs through subsequent year tax savings, and its employees will receive health insurance.

Problems: (1) In tax years 2010 through 2013, the federal government is going to somehow magically come up with $13,167 to cover 57% of TEA Corporation’s health insurance premiums, and do the same for potentially thousands of other similar small businesses, but who’s going to pay for this? Won’t the tab simply be added to the seemingly unlimited national debt balance? (2) And since employees will have to pay for potentially half of their own health insurance costs, each one who wasn’t previously covered by health insurance, and more specifically those making less than $25,000 per year, will have to figure out how to live off of approximately $2,306 less in disposable income. Does this sound like a good deal for those making under $25,000 per year, or even $50,000?

More Problems: (1) Of course, if any of the 10 employees in this example require family coverage, the costs for both the employer and employee will go up dramatically, as will the government’s cost of the subsidized tax credit. In the example above, the employer and employee obligation rises from $2,306 to $5,299 per year, or half of the average premium for small group family plans of $10,598. (2) Then in 2014 and 2015, as the Section 45R Credit increases to a maximum of 50%, the federal government’s (i.e. taxpayers) share increases by even more. This additional federal spending, though tax expenditures, will only add to the federal government’s current national debt balance of $14.7 trillion and ticking, until the tax credit well runs dry in 2016. (3) If small companies can’t afford it now, how will those who employ fewer than 25 workers be able to afford health insurance after 2015?

Exempt Organizations – Meanwhile, tax-exempt organizations will receive a “refundable tax credit” of up to 25% of the amount of health insurance premiums paid between 2010 and 2013, and 35% in 2014 and 2015. This refundable tax credit is limited to the amount of federal tax withheld from employees’ paychecks, the amount of Medicare tax withheld from employees, and the amount of Medicare tax matched by the employer.

Problem: Since exempt organizations don’t pay income taxes, the cost of the refundable Section 45R tax credit will never be recovered. In effect, individual and for-profit business taxpayers are subsidizing the tax credits granted to small non-profit organizations. Non-profit organizations, which are not even subject to the income tax, are being allowed to receive refundable income tax credits based on the amount of payroll taxes paid essentially by their employees. So in this respect, all Obamacare does is to giveaway more tax expenditures to folks who don’t pay any federal income tax. Wasn’t this already a major problem prior to Obamacare?

Large Employers – “Play or Pay”

Although Obamacare doesn’t mandate small employers to offer health insurance coverage to their employees, it does include play or pay rules which apply after 2013. The provision is intended to encourage employers to offer coverage or to pay a shared responsibility penalty. The play or pay rules only apply to large employers, those with 50 or more full-time employees. [Note: Employers who offer free choice vouchers to qualified employees were supposed to have been exempt from the penalty, but this provision was repealed in 2011.]

Problem: Employers who employ 25 or fewer employees are given an incentive to begin or to continue health insurance coverage, but are not required to provide it; while those with 25 to 49 employees are given no incentive, and are not required to provide insurance; and those with 50 or more employees are given no incentive, but face penalties for not offering adequate and affordable coverage by 2014.

Shared Responsibility Penalty The shared responsibility penalty will apply to two groups of employers after 2013: (1) Large employers that do not offer health insurance coverage. (2) Large employers that offer coverage but have one or more employees receiving premium assistance tax credits or cost-sharing because the coverage is deemed unaffordable. If even one employee receives premium assistance tax credits through a state insurance exchange, then the penalty will be $2,000 per full-time employee (not including the first 30 workers). And if the employer offers what is deemed to be unaffordable coverage, then the penalty will be $3,000 for any employee who receives premium assistance tax credits through a state insurance exchange up to a cap of $2,000 for every full-time employee.

[Note: Unaffordable coverage is defined as when the premium required to be paid by the employee is more than 9.5% of the employees’ household income. In such cases the employee is eligible for a premium assistance tax credit and cost-sharing reductions, but only if the employee declines to enroll in the employer’s coverage and purchases coverage through a state insurance exchange.]

Large Employer Problems:

(1) Large employers need to know how much household income each employee has including all working adults within their households.

(2) For purposes of the shared responsibility penalty, a Large Employer is an employer which employed an average of at least 50 full-time employees during the preceding calendar year. In other words, those with an average of 50 or more full-time equivalent employees in 2013 will be subject to the penalty in 2014, even if they have reduced the number of employees by that time.

(3) Full-Time Equivalent Employees for Large Employers – Unlike the definition of full-time equivalent employee for small employers, for purposes of the shared responsibility penalty, a full-time employee is defined as one who works an average of 30 hours per week. Employers who think they won’t be affected by the penalty or the employer mandate need to read the fine print.

Conclusions

  1. By offering incentives to micro-sized businesses, those with 25 or fewer full-time employees with average wages of less than $50,000, and no incentives to larger companies, Obamacare discriminates against job creators.

  2. Since employers with fewer than 25 employees are not required to provide health insurance coverage, and are not penalized for not providing coverage, most employers who qualify for the tax credit are not taking the bait. Let’s face it, health insurance plans drive up business costs even with a generous tax credit. And since the tax credit expires at the end of 2015, what is the catalyst which will make health insurance more affordable in the future? Will businesses and their customers have more money in their pockets as a result of Obamacare?

  3. Employers with more than 25 full-time employees and fewer than 50 fall between the cracks. For them, there is no incentive to provide health insurance coverage and no penalty for failing to provide it. It’s as if they don’t exist, which clearly displays the discriminatory aspect which Obamacare casts upon job creators.

  4. Meanwhile, large employers, those with 50 or more employees working at least 30 hours per week, receive no incentive to provide coverage, yet will be punished for not providing it. In the end, some large employers are encouraged to reduce the number of full-time equivalent employees to below 50 before 2013, to reduce the number of hours worked for some employees to below 30 per week, or to simply pay the shared responsibility penalty of $2,000 on each employee (excluding the first 30), rather than commit to even more costly health insurance contracts.

If TEA Corporation, in the example above, had 100 employees requiring self-only coverage, and paid 50% of the premiums, then its health insurance expense would be roughly $230,600. However, if TEA Corporation simply opted to pay the shared responsibility penalty of $2,000, on the 70 applicable employees, it would have to pay the IRS a penalty of just $140,000, in lieu of the $230,600 cost of insurance. But, if TEA Corporation is not able to afford $230,600, to pay for health insurance on its employees, it is compelled by the rule of law to hand over $140,000, money that it may or may not have, to the federal government under the play or pay rules. Is this fair?

The way things stand today, if by the year 2014 a large employer can’t afford health insurance, in spite of Obamacare – which does nothing to make it more affordable, or if providing health insurance would jeopardize its ability to continue as a going concern – in the Obama economy, then it still must pay the shared responsibility penalty, even if it means laying off workers, shuttering operations, or filing for bankruptcy. In other words, America’s job creators will either play, pay or be destroyed. If this job killing law is not repealed by 12/31/2012, the unemployment rate will continue to soar, because the companies which will be most affected are compelled to take action before then. In fact, in order to ensure that they are not blindsided by the one year look-back rule which begins on 01/01/2013, many companies are already taking action.

In my humble opinion, the Patient Protection and Affordable Care Act cannot be repealed fast enough. Be sure to sign the White House Petition to Repeal Obamacare. You must cast your Vote by 10/22/11.

Guess You Can’t | Super Committee 2.0

~ Too Big, Messy, Tough and Democratic for Obama

– Larry Walker, Jr. –

When that year was over, they came to him the following year and said, “We cannot hide from our lord the fact that since our money is gone and our livestock belongs to you, there is nothing left for our lord except our bodies and our land. Buy us and our land in exchange for food, and we with our land will be in bondage…” ~Genesis 47:18-19

At a fundraiser in Chicago on August 3, 2010, Barack Obama said, “It’s been a long, tough journey. But we have made some incredible strides together. Yes, we have. But the thing that we all ought to remember is that as much as good as we have done, precisely because the challenges were so daunting, precisely because we were inheriting so many challenges, that we’re not even halfway there yet. When I said ‘change we can believe in’ I didn‘t say ’change we can believe in tomorrow.’ Not change we can believe in next week. We knew this was going to take time because we’ve got this big, messy, tough democracy.”

We have a big, messy, tough democracy? So is Obama advocating an alternative form of government? Would change come quicker if we had a dictatorship, or a super-committee? If I understand Obama correctly, what he is saying is that, “a government by the people; a form of government in which the supreme power is vested in the people and exercised directly by them or by their elected agents under a free electoral system”, is too big, too messy, and too tough for him. Well, I have one suggestion for you: ‘Quit’! Go back home, and use your community organizing (a.k.a. destabilizing) tools to try to fix what you got wrong in Chicago. This will relieve you of a couple of hundred thousand dollars per year that you didn’t need anyway, while giving us a chance to clean up the damage you have done to our nation in such a short time span.

A democracy can also be described as a state of society characterized by formal equality of rights and privileges. The way it’s supposed to work is that whether majority or minority ideas are put on the table, they are given equal respect. One side calling the ideas of the other evil, terroristic, or selfish does not a democracy make, especially when such ideas may be more plausible than its own. Is killing the leader of Libya and his supporters democratic? Does the execution of one political party leader promote equality of rights and privileges for all?

“For in the same way you judge others, you will be judged, and with the measure you use, it will be measured to you.” ~Matthew 7:2

In the United States, one side believes that raising taxes on those who are more prosperous will solve all of society’s problems. They call this, shared sacrifice. But when others point out that the process will only raise $70 billion per year against a budget deficit of $1.2 trillion, thus leaving a $1.13 trillion per year gap, they are called “terrorists”, and blamed when the nation’s credit rating is slashed. So what about the other $1.13 trillion per year? The compromise: ‘We will form a new democracy, comprised of 12 politicians, six from each major political party, and let them decide’. Is this how democracy works? What happened to the fundamental right of ‘no taxation without representation’?

One side believes that if more tax revenues are needed, then taxes ought to be raised on the 5% who already carry water for the other 95%. But another school of thought believes that if more taxes are needed, society should encourage the creation of more taxpayers. When one side points out that 51% of the labor force pays FICA taxes, but doesn’t pay any income taxes, while the other 49% pay both, they are called evildoers, haters of the poor, and accused of being against the concept of “shared sacrifice”. What gives?

“A man planted a vineyard. He put a wall around it, dug a pit for the winepress and built a watchtower. Then he rented the vineyard to some farmers and went away on a journey. At harvest time he sent a servant to the tenants to collect from them some of the fruit of the vineyard. But they seized him, beat him and sent him away empty-handed. Then he sent another servant to them; they struck this man on the head and treated him shamefully. He sent still another, and that one they killed. He sent many others; some of them they beat, others they killed. He had one left to send, a son, whom he loved. He sent him last of all, saying, ‘They will respect my son.’ But the tenants said to one another, ‘This is the heir. Come, let’s kill him, and the inheritance will be ours.’ So they took him and killed him, and threw him out of the vineyard. What then will the owner of the vineyard do?” ~Mark 12:1-9

While one side devises to kill capitalists, who are also citizens, and distribute their property to the masses, the other simply asks, “Do the 51% who don’t pay personal income taxes benefit from a national defense? Do they drive on federally funded roads and bridges? Have they not benefited from public education, and other federal programs?” We have a government that dishes out up to $8,000 per year in income tax refunds to families who pay no personal income taxes, taking it from those who do, and when the families who pay question the logic, they are called selfish. But is it selfish to ask why the one who has sacrificed time and effort to plant, build, and employ others must be brought down, while those who have not are lifted up? Shall the life’s work of the few be stolen and distributed to the masses in the name of good? What will the owner of the vineyard do?

“For if the willingness is there, the gift is acceptable according to what one has, not according to what he does not have.” ~2 Corinthians 8:12

Everyone who owns real property in my community pays real estate taxes, a form of shared sacrifice, to help fund our common welfare. The tax is based on the value of each property. Even senior citizens, widows, veterans, and those with disabilities pay, although at lower rates. Homesteaders receive a discount, while landlords pay the most, but no one is exempt. Even renters pay real estate tax, which is embedded in the rent. But when it comes to federal income taxes, 51% are given a pass, while a minority is robbed. One side believes that “shared sacrifice” means, “Everyone should pay something”; while the other believes that, “the most fortunate should pay it all”. So who’s right? If all who own or use real property must pay real estate taxes, shouldn’t all American citizens and residents who have income pay some measure of the income tax?

There is one change you can believe in, and it will be here in November of 2012. You can believe that the haters of democracy, those who continually bash the most noble ideals which made this nation great, who instigate racial, class, and party division, who seek to buy their jobs through political favors, who call their neighbors terrorists, and selfish evildoers, who destabilize other nations, killing women and children in the process; it is they and their leader in the White House who will be sent packing. That’s how democracy works, that’s what’s coming, and you can bank on it.

Joseph said to the people, “Now that I have bought you and your land today for Pharaoh, here is seed for you so you can plant the ground. But when the crop comes in, give a fifth of it to Pharaoh. The other four-fifths you may keep as seed for the fields and as food for yourselves and your households and your children.” ~Genesis 47:23-24

Obamarail | The Bullet Train to Bankruptcy

Train Wreck at Eschede

Or death, whichever comes first

– By: Larry Walker, Jr. –

From January through November of 2010, the Federal Railroad Administration received some 8,050 reports of injuries and deaths among railroad workers, rail passengers and people crossing tracks in vehicles or on foot. Yet, while several Republican governors (namely Scott Walker of Wisconsin and John Kasich of Ohio) have turned their backs on Obama’s irrationally exuberant spending binge, including his envisioned high-speed rail system, Transportation Secretary Ray LaHood said the administration would press forward in a “patchwork fashion” if necessary. In other words – Safety, Supply and Demand, and Cost-Benefit be damned. Who cares what the citizens or governors want; LaHood, Biden and Obama know what’s best for all of us, right? I know, I know, “we can’t afford not to spend money that we don’t have.” Yeah, whatever!

Rail Safety?

As stated above, during the first eleven months of 2010 there were 8,050 reports of injuries and deaths among railroad workers, rail passengers and people crossing tracks in vehicles or on foot. So in an effort to improve safety, the federal government is proposing to increase rail speeds from 60 to 80 miles per hour, to speeds of more than 200 mph. If it takes a 100 car freight train travelling 55 miles per hour over 1 mile to stop, one can only imagine how long it takes a passenger train travelling over 200 mph.

In the famous Eschede rail disaster (pictured above), the train was only travelling at 125 mph, yet by the time a passenger was able to report that a wheel had fallen off, within seconds the train derailed leaving 101 persons dead and 88 injured. You may find a detailed listing of pre-1950 through January-2011 railroad accidents here. It appears that instead of addressing the current dilemma, the administration has once again taken the high road to solving imagined 23rd Century problems.

Modal Ratio - click to enlarge

Demand / Benefit

Rail usage statistics reflect not only the “popularity” of rail travel (for example, in Japan) but also the geography of the country. “For instance, the United Kingdom is a relatively small, densely populated country where many more short journeys are made compared to a larger, much less densely populated country such as the United States. To gauge the true importance of rail travel, the number of journeys (however short or long) needs to be calculated.

By this method one finds that the number of intercity rail journeys per year in the United States per inhabitant is so small as to be almost immeasurable. The U.S. figure is approximately 0.08 journeys per inhabitant per year, compared with the United Kingdom’s figure of 17.54 journeys per person. These statistics imply that Britons use the train 219 times more than Americans.

So while perhaps high-speed rail would be important in counties like China, Japan, and the United Kingdom it will have very little impact in the United States. In other words, there is very little demand for intercity rail transportation in the U.S., in spite of the administration’s delusional scheme. Where I come from, that’s not exactly a smart strategy.

Investing any money in any venture which lacks enough demand to recover said investment, along with a reasonable profit, is just plain foolish. While the U.S. has a population of roughly 305,000,000, the National Association of Railroad Passengers (NARP), a Washington, DC based lobbyist, can only boast in membership of approximately 23,500, representing a whopping 0.0077% of Americans.

—————–

Supply / Cost

According to a May 2009 report in the Business Insider, a true national high-speed rail network would cost more than $500 billion. California is attempting to build a true high-speed rail line between San Francisco and Los Angeles capable of top speeds of 220 miles per hour and average speeds of 140 miles per hour. The environmental analysis report for the California high-speed rail had projected costs of $33 billion for just 400 miles. Meanwhile, the Midwest Rail Initiative had projected costs of $7.7 billion for 3,150 miles of moderate-speed rail. That’s $82 million per mile for true high-speed rail (partly because the California project goes through some mountains) and only $2.4 million for moderate-speed rail.

All things being equal, high-speed rail will cost 10 to 12 times more than moderate-speed rail. Knowing this, the administration’s idea is to press forward in a “patchwork fashion” (i.e. Spend $53 billion here and there to get it started, and then beg for more cash every year). I guess it would be nice if we had an extra $500 billion to burn, and even nicer if there was any real demand to support the plot. But, maybe there’s a way to make this all work out after all.

Mandatory Ridership

Perhaps like Obamacare, Obamarail could be funded by requiring every citizen to purchase a ‘mandatory’ seasonal rail pass. The government could even implement another “cash for clunkers” program, but this time when you bring in the old gas-guzzler for crushing, you get a discount on season rail passes. And if you are uncooperative, refusing to participate in the government’s mandatory rail program, you would pay a tax (but they would just call it a penalty). The government could even make the case that mandatory rail travel is covered under the Commerce Clause, because unless everyone buys a ticket, travel by high-speed rail would be cost prohibitive for the 0.0077% who really need to ride.

The IRS could then be called upon to implement the enforcement portion by requiring that a unique national rail ticket number be entered on everyone’s income tax return. And to put the icing on the cake, the CBO could make wildly unsubstantiated claims about how Obamarail will save the nation trillions of dollars over the next century, or some nonsense. Yeah, well, I have an idea about how to save trillions of dollars in the future too. My idea involves not squandering the next $53 billion in present value dollars – today, but as stated above, “who cares what the citizens want”.

The Bullet Train to Nowhere

When this despotic patchwork is complete, only then will we know whether it worked, but first, we have to squander $500 billion on Obamarail in order to find out. Imagine a nation where workers are able to take ‘shovel ready jobs’ hundreds of miles from home, to return once or twice per year via high-cost, oops, I mean high-speed rail, and you have China. The contention is that $53 billion is such a small price to pay for another patchwork adventure in government-side economics. In government-side economics, if the square peg doesn’t fit, then you hit it with a hammer, right? And if it still doesn’t work, then you simply go out on the campaign trail and convince everyone that it did.

In spite of having over-spent by more than $3 trillion during the past two years, they surmise that their only failure was not having spent enough. Do you suppose that if the federal government borrowed and spent another $3 trillion it would do the trick? ‘Maybe next time it will be different! I mean, it’s not like the nation has a fiscal problem or anything.’ Face it, this isn’t supply-side economics, and it’s definitely not demand-side, so that leaves only one possibility; it’s a government-run bullet train to nowhere.

This doesn’t sound like ‘winning the future’ to me. It sounds more like a bullet train to bankruptcy, or better yet, like ‘losing your future’. I mean the one in the near-term, in November of 2012. Are you ready for another shellacking?

Other References:

http://safetydata.fra.dot.gov/OfficeofSafety/publicsite/on_the_fly_download.aspx

http://articles.baltimoresun.com/2011-02-09/features/bs-md-lahood-transportation-20110209_1_high-speed-rail-high-speed-train-plan-east-west-light-rail