Raising CAIN? A Critical Look At Policy

The Market Ticker

Well look at the dichotomy we have here.... both from Bloomberg this morning.

First, on tax policy:

Republican presidential candidate Herman Cain’s plan to create a national sales tax would hurt retailers, threaten economic growth and shift the tax burden onto the middle class and poor, tax experts and business groups said.

Would it? I'm not sold. All that matters to the average person is purchasing power.

That is, the number of dollars you have is not particularly material. What they will buy is what's important. And here's the rub: You pay 15% of your income right now - everyone does that has "wage" income, whether self-employed or working for someone else.

Yes, half of that is "hidden" from you in the form of the payroll tax, but make no mistake, it's your money being taken. Your employer calculates the cost of that tax into your hiring decision, just as he does with all the other levies he pays, such as unemployment tax (FUTA and SUTA) and similar. He may be prohibited by law from itemizing this on your pay stub (he is - I attempted to do it and was told by our accountants that I'd get a date with Bubba for doing so) but that doesn't mean you don't pay - you do, and it's hidden through accounting fictions enforced at federal gunpoint.

So let's presume you pay the "9 + 9" - 9% of your gross income (no deductions) and 9% sales tax on what you choose to buy.

If you spend everything you make, what's your effective federal tax?

That's easy to calculate. You start with $100.

You pay 9% in federal income tax, withheld at the point of payment. You now have $91.

You go to the store. You spend the entire $91. How much goods do you buy?

$83.48 worth ($83.48 * 1.09 = $90.99 on the register tape.)

So your actual effective tax rate is approximately 16.5%, or 1.5% more than you pay right now in FICA and Medicare alone!

This assumes you spend every penny you make.

But let's assume you save 10% of your gross. That is, instead of spending $83.48 you spend $73.48. Now the total bill at the register is $80.09, representing $6.61 in tax added to the $9 you have withheld. Your effective tax rate is now 15.6%, or a full percentage point lower.

If you manage to save 15% of your gross you pay almost exactly the same tax rate you pay now for Medicare and Social Security alone! In other words if you spend every nickel you pay an effective income tax rate of 1.5% and if you save 15% of your pre-tax income your effective income tax rate is zero.

So who gets "screwed" with this plan? Well, nobody. It forces everyone to have "skin in the game." Refundable tax credits disappear which means that everyone pays social insurance taxes. This is how it should be!

What Cain is missing (and perhaps intentionally; if so he's a jackass, not a savior) is that saving 15% of your income is more than sufficient, along with a modest help from Social Security and Medicare, to self-fund your entire retirement from savings alone. That is, it requires no risk-taking in the "capital markets." There's only one condition on this: The Federal Government and The Fed must be forced to stop debasing the currency -- that is, they must run a zero inflation policy under penalty of imprisonment (or worse.) If Cain supports this, then he's a reformer. If he does not, he's simply playing politics and intends to screw you blind via hidden taxation.

There are others who bleat about the impact on financial services. If I'm understanding Cain's proposal correctly, they're wrong: You would pay sales tax on the service of brokering a trade. If you pay $8 a trade at a brokerage the tax would be 9% on the $8, not on the value of the securities.

The 9% income tax on corporations would redress the double-taxation of dividends, again, if I'm understanding the proposal correctly. This would go a long way toward fixing the abortion that is found in the current tax code that provides incentives for corporate borrowing and makes the payment of income to shareholders prohibitively expensive through double-taxation of capital return. That, more than anything else in the corporate tax code, is responsible for the abuse of leverage in business. Cain has this part of the plan exactly right.

I also want to look at another part of his pronouncements:

Herman Cain’s self-described “bold” 9-9-9 tax proposal has received most of the attention in his campaign for the Republican presidential nomination. His plans for the federal budget are more radical.

Cain this week pledged at a debate to balance the government’s books in a single year if elected. This would require the elimination of what the Congressional Budget Office projects may be a more than $800 billion deficit in 2013.

Erasing the deficit that quickly would mean a more than 20 percent cut in spending, which could force reductions in politically sensitive programs such as Social Security, Medicare or defense, since they make up more than half the budget.

Actually, it's more than that. $800 billion is a fanciful number; we ran $1.7 trillion in deficits in calendar 2010, and are going to be well over $1 trillion in 2011. To believe we will get under that number by 2013 presumes forward economic conditions that are, on balance, pure fantasies.

The complaint that this would require "massive" budget cuts is in fact accurate. The bad news is that due to the nature of compound growth in any economic system the longer we wait the worse the problem gets and the more pain we must endure to correct it.

In other words while Cain's proposal is "radical" it is only as radical as it is because we intentionally ignored this idiocy for 30 years, and in the last three years we went from a ~20% cut in federal spending that was required (from nearly zero a decade before!) to a 43% one. Before another decade passes we will reach the point that achieving balance will require a default, not a cut in government programs. At that point we are literally Greece.

Republicans in Congress have had to settle for promising to put the government “on the path” toward balance and calling for a constitutional amendment that would require the government to balance its books. While the amendment has little chance of being approved, it does allow lawmakers to underscore their desire to cut spending.

No they don't. And it doesn't matter whether the people are "ready" to hear this or not.

Mathematics does not care if you're politically correct or "politically willing" to hear what it proscribes. It just is.

Cain's plans are not "radical", they're mathematically sound. I understand the screaming that is coming from the left and right on the issue, but the fact that politicians are trying to find yet another Unicorn that craps out pretty colored candies will not make it so. These same politicians produced this:

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