Options for Tax Reform - A Proposal fro the Cato Institute

"Options for Tax Reform" by Chris Edwards, the director of tax policy studies at the Cato Institute, claims:

President Bush has established an advisory panel to study federal tax reform options. The panel is headed by former senators Connie Mack of Florida and John Breaux of Louisiana. Congressional leaders, including House Speaker Dennis Hastert and Majority Leader Tom Delay, have also pledged their support for reform.

Enacting a major tax reform bill will be a challenge, but the president has been remarkably successful with his tax agenda so far. Income tax rates have been reduced, dividend and capital gains taxes have been cut, and the tax rules on retirement savings vehicles have been liberalized.

However, the tax system remains terribly complex and inefficient. The number of pages of federal tax rules has increased 48 percent in the past decade. The complex alternative minimum tax will hit about 35 million households by the end of the decade if not repealed. The high-rate U.S. corporate income tax is under growing pressure as global investment capital has become more mobile.

This study looks at possible changes to address those problems. It identifies three goals for tax reform: simplification, efficiency, and limited government. The latter goal focuses on tax code features such as visibility and equal
treatment that cultivate an understanding of the high cost of government.

This study examines reform options including a flat tax, a national retail sales tax, and a savings-exempt tax in reference to those goals. It also proposes a new option: a “dual-rate income tax.” This revenue-neutral option would convert the individual income tax to a two-rate system that eliminates most deductions and credits and allows nearly all families to pay tax at a low 15 percent rate. A 27 percent rate would kick in for earnings above $90,000 (single) and $180,000 (married).

To promote growth, the maximum individual rate on dividends, interest, and capital gains would be 15 percent. The corporate tax rate would be dropped to 15 percent and interest made non-deductible. These changes would equalize and cut the combined top income and payroll tax rates on wages, dividends, interest, and small business income to just under 30 percent, compared with between 35 and 45 percent under current law.

The dual-rate tax plan would retain the standard deduction, an expanded personal exemption, and the earned income tax credit. The plan would create a simpler and more efficient tax code within the structure of today’s system and may be just the type of tax plan that the president’s advisory panel is looking for. ###

Taxing Sales Under the FairTax: What Rate Works?

In a 2006 paper entitled "Taxing Sales Under the FairTax: What Rate Works?", Paul Bachman, Jonathan Haughton, Laurence J. Kotlikoff, Alfonso Sanchez-Penalver, and David G. Tuerck conclude that based on 2006 levels of government spending (which have subsequently increased) the required national sales tax rate would be 31.27% on a tax-exclusive basis. This tax would be in addition to existing sales taxes that generate revenues for state and local governments.

The Fair Tax - A 2007 Analysis by FactCheck.org

According to a FactCheck.org analysis of the Fair Tax (as proposed by presidential candidate Mike Huckabee in 2007):

We stand behind our earlier analysis of the FairTax. The proposal to which Gov. Huckabee referred is not a 23 percent tax, but rather a 30 percent tax. And it is revenue-neutral only through an accounting trick. It will collect more money from those earning between $15,000 and $200,000 per year and less from those earning more than $200,000 per year. It is possible that the FairTax would make most people better off, but much of that gain would be a direct result of making the tax code less fair.

The Fair Tax - What Advocates Say

According to the FairTax.org website:

The FairTax plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue neutrality, and, through companion legislation, the repeal of the 16th Amendment.

The FairTax Act (HR 25, S 296) is nonpartisan legislation. It abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax administered primarily by existing state sales tax authorities.

The FairTax taxes us only on what we choose to spend on new goods or services, not on what we earn. The FairTax is a fair, efficient, transparent, and intelligent solution to the frustration and inequity of our current tax system.

The FairTax:
Enables workers to keep their entire paychecks
Enables retirees to keep their entire pensions
Refunds in advance the tax on purchases of basic necessities
Allows American products to compete fairly
Brings transparency and accountability to tax policy
Ensures Social Security and Medicare funding
Closes all loopholes and brings fairness to taxation
Abolishes the IRS

The fairtax.org website does not explicitly say who will pay more in taxes under the Fair Tax proposal and who will pay less. A 2007 analysis by FactCheck.org provides the answer:

The Fair Tax “will collect more money from those earning between $15,000 and $200,000 per year and less from those earning more than $200,000 per year.”

The U.S. Economy Went Into Recession in December 2007

A December 1, 2008 CNN story reports that the current economic recession officially began in December 2007:

It's official: Recession since Dec. '07

The National Bureau of Economic Research declares what most Americans already knew: the downturn has been going on for some time.

By Chris Isidore, CNNMoney.com senior writer
Last Updated: December 1, 2008: 5:40 PM ET
NEW YORK (CNNMoney.com) -- The National Bureau of Economic Research said Monday that the U.S. has been in a recession since December 2007, making official what most Americans have already believed about the state of the economy .

The NBER is a private group of leading economists charged with dating the start and end of economic downturns. It typically takes a long time after the start of a recession to declare its start because of the need to look at final readings of various economic measures.

The NBER said that the deterioration in the labor market throughout 2008 was one key reason why it decided to state that the recession began last year.

Employers have trimmed payrolls by 1.2 million jobs in the first 10 months of this year. On Friday, economists are predicting the government will report a loss of another 325,000 jobs for November.

The NBER also looks at real personal income, industrial production as well as wholesale and retail sales. All those measures reached a peak between November 2007 and June 2008, the NBER said.

In addition, the NBER also considers the gross domestic product, which is the reading most typically associated with a recession in the general public.

Many people erroneously believe that a recession is defined by two consecutive quarters of economic activity declining. That has yet to take place during this recession.

This downturn longer than most
The NBER did not give any reasons or causes of the recession. But it is widely accepted that the housing downturn, which started in 2006, is a primary cause of the broader economic malaise.

The fall of housing prices from peak levels reached earlier this decade cut deeply into home building and home purchases. This also caused a sharp rise in mortgage foreclosures, which in turn resulted in losses of hundreds of billions of dollars among the nation's leading banks and a tightening of credit.

The current recession is one of the longest downturns since the Great Depression of the 1930's.

The last two recessions (1990-1991 and 2001) lasted eight months each, and only two of the 10 previous post-Depression downturns lasted as long as a full year, according to the NBER.

In a statement, White House Deputy Press Secretary Tony Fratto said that even though the recession is now official, it is more important to focus on the steps being taken to fix the economy.

"The most important things we can do for the economy right now are to return the financial and credit markets to normal, and to continue to make progress in housing, and that's where we'll continue to focus," he said. "Addressing these areas will do the most right now to return the economy to growth and job creation."

President-elect Obama's transition team did not have an immediate comment on the recession announcement. But other top Democrats said this is further proof of the need for another economic stimulus package, which Obama has advocated.

"With rising costs of living, rising unemployment, record foreclosures and depleted savings, we must do more to help families make ends meet," said Senate Majority Leader Harry Reid in a statement. "With the cooperation of our Republican colleagues, we intend to send a plan to the White House as soon as possible following President-elect Obama's inauguration next month."

How long will it go?
Nonetheless, several economists said the real concern is that there is no end in sight for the downturn.

Some suggested that the best case scenario for the economy is that it would reach bottom in the second quarter of 2009. And even if that happens, that would still make this recession the longest since the Great Depression.

Rich Yamarone, director of economic research at Argus Research, said the only good news for the economy is that some of the steps already taken by the government earlier this year could start to spur growth soon. For example, he said interest rate cuts by the Federal Reserve, which started in September 2007, "should be working their magic any day now."

In February, Congress passed a $170 billion tax rebate meant to stimulate the economy. But that only boosted GDP during the second quarter.

The financial market and credit crisis worsened during this summer, prompting Congress, the Treasury Department and the Fed to pump trillions of dollars into the economy through a variety of programs, including a $700 billion bailout of banks and Wall Street firms and hundreds of billions of lending by the Fed to major companies and lenders.

But Lakshman Achuthan, managing director of Economic Cycle Research Institute, said that at this point, the only solution for the recession is time.

"All the hand waving and real cash that policymakers are throwing at the problem won't change the fact we're stuck in this nasty recession," he said. "The ultimate cure of a recession is letting it run its course."

Achuthan's research firm tracks weekly leading economic indicators that are supposed to signal a change in direction for the economy four or five months ahead of time. Those indicators are continuing to fall at a record pace.

Still, he said he's not worried about the current recession turning into a depression, as many Americans fear.

"Even with indicators in a tailspin, this still is only a very severe recession," he said. "There's lots of gloom, but we don't see doom."

U.S. Poverty Guidelines

THE 2009 HHS POVERTY GUIDELINES

The 2009 Poverty Guidelines for the 48 Contiguous States and the District of Columbia
Persons in family - Poverty guideline
1 $10,830
2 14,570
3 18,310
4 22,050
5 25,790
6 29,530
7 33,270
8 37,010
For families with more than 8 persons, add $3,740 for each additional person.

2009 Poverty Guidelines for Alaska
Persons in family - Poverty guideline
1 $13,530
2 18,210
3 22,890
4 27,570
5 32,250
6 36,930
7 41,610
8 46,290
For families with more than 8 persons, add $4,680 for each additional person.

2009 Poverty Guidelines for Hawaii
Persons in family - Poverty guideline
1 $12,460
2 16,760
3 21,060
4 25,360
5 29,660
6 33,960
7 38,260
8 42,560
For families with more than 8 persons, add $4,300 for each additional person.

SOURCE: Federal Register, Vol. 74, No. 14, January 23, 2009, pp. 4199–4201

The Big Mac index

The Economist magazine publishes the Big Mac index which "seeks to make exchange-rate theory more digestible. It is arguably the world's most accurate financial indicator to be based on a fast-food item."

According to Economist.com:

Burgernomics is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries. Thus in the long run, the exchange rate between two countries should move towards the rate that equalises the prices of an identical basket of goods and services in each country. Our "basket" is a McDonald's Big Mac, which is produced in about 120 countries. The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad. Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued.

According to the magazine's January 22, 2009 print edition:

The dollar’s recent revival has made fewer currencies look dear against the Big Mac index, our lighthearted guide to exchange rates. The index is based on the idea of purchasing-power parity, which says currencies should trade at the rate that makes the price of goods the same in each country. So if the price of a Big Mac translated into dollars is above $3.54, its cost in America, the currency is dear; if it is below that benchmark, it is cheap. There are three noteworthy shifts since the summer. The yen, which had looked very cheap, is now close to fair value. So is the pound, which had looked dear the last time we compared burger prices in July. The euro is still overvalued on the burger gauge, but far less so than last summer.

Which is more effective as a fiscal stimulus: government spending or tax cuts?

"The Economic Impact of the American Recovery and Reinvestment Act" is a January 21, 2009 report by Mark Zandi that analyzes the effect of the federal government program of tax cuts and increased spending designed to stimulate the sluggish U.S. economy. According to the 18-page report:

The fiscal stimulus plan proposed by the House Democrats includes a reasonably designed mix of government spending increases and tax cuts. The spending increases total about $550 billion in 2009-2010, and there are $275 billion in tax cuts. While the timing has yet to be determined, the tax cuts are expected to occur largely this year and much of the spending would begin in 2010.

Increased government spending provides a large economic bang for the buck and thus significantly boosts the economy. The benefits begin as soon as the money is disbursed and are less likely than tax cuts to be diluted by an increase in imports. The most effective proposals included in the House stimulus plan are extending unemployment insurance benefits, expanding the food stamp program, and increasing aid to state and local governments. Increasing infrastructure spending will also greatly boost the economy, particularly as the current downturn is expected to last for an extended period. Most of the infrastructure money will be spent on hiring workers and on materials and equipment produced domestically.

Tax cuts generally provide less of an economic boost, particularly if they are temporary; on the other hand they can be implemented quickly. A particular plus for individual tax cuts included in the House stimulus plan such as the payroll tax and earned income tax credits is that they are targeted to benefit lower- and middle-income households that are more likely to spend the extra cash quickly. Investment and job tax benefits for businesses are less economically effective, but are not very costly and more widely distribute the benefits of the stimulus plan.

Income support

The House stimulus plan includes some $100 billion over two years in income support for those households under significant financial pressure. This includes extra benefits for workers who exhaust their regular 26 weeks of unemployment insurance (UI) benefits; expanded food stamp payments; and help meeting COBRA payments for unemployed workers trying to hold onto their health insurance.

Increased income support has been part of the federal response to most recessions, and for good reason: It is the most efficient way to prime the economy's pump. Simulations of the Moody’s Economy.com macroeconomic model show that every dollar spent on UI benefits generates an estimated $1.63 in near-term GDP.x Boosting food stamp payments by $1 increases GDP by $1.73 (see Table 2). People who receive these benefits are hard pressed and will spend any financial aid they receive very quickly.

Table 2: Fiscal Stimulus Bang for the Buck
Source: Moody's Economy.com

Tax Cuts
Non-refundable Lump-Sum Tax Rebate 1.01
Refundable Lump-Sum Tax Rebate 1.22

Temporary Tax Cuts
Payroll Tax Holiday 1.28
Across the Board Tax Cut 1.03
Accelerated Depreciation 0.25

Permanent Tax Cuts
Extend Alternative Minimum Tax Patch 0.49
Make Bush Income Tax Cuts Permanent 0.31
Make Dividend and Capital Gains Tax Cuts Permanent 0.38
Cut in Corporate Tax Rate 0.30

Spending Increases
Extending Unemployment Insurance Benefits 1.63
Temporary Increase in Food Stamps 1.73
General Aid to State Governments 1.38
Increased Infrastructure Spending 1.59

Note: The bang for the buck is estimated by the one year $ change in GDP for a given $ reduction in federal tax revenue or increase in spending

Another advantage is that these programs are already operating and can quickly deliver a benefit increase to recipients. The virtue of extending UI benefits goes beyond simply providing aid for the jobless to more broadly shoring up household confidence. Nothing is more psychologically debilitating, even to those still employed, than watching unemployed friends and relatives lose their sources of support.xi Increasing food stamp benefits has the added virtue of helping people ineligible for UI such as part-time workers.

x
The model is a large-scale econometric model of the U.S. economy. A detailed description of the model is available upon request.
xi
The slump in consumer confidence after the recession in 1990-1991 may have been due in part to the first Bush administration’s initial opposition to extending UI benefits for hundreds of thousands of workers. The administration ultimately acceded and benefits were extended, but only after confidence waned and the fledgling recovery sputtered.

The Economic Impact of the American Recovery and Reinvestment Act

Mark Zandi, the chief economist at Moody's Economy.com, analyzed the effects of the federal government stimulus spending program in the January 21, 2009 article "The Economic Impact of the American Recovery and Reinvestment Act ." Here are the conclusions of his report:

Conclusions

A long history of public policy mistakes has contributed to the financial and economic crisis. Although
there will surely be more missteps, only through further aggressive and consistent government action will
the U.S. avoid the first true depression since the 1930s.

In some respects, this crisis has its genesis in the long-held policy objective of promoting
homeownership. Since the 1930s, federal housing policy has been geared toward increasing
homeownership by heavily subsidizing home purchases. Although homeownership is a worthy goal,
fostering stable and successful communities, it was carried too far, producing a bubble when millions of
people became homeowners who probably should not have. These people are now losing their homes in
foreclosure, undermining the viability of the financial system and precipitating the recession.

Perhaps even more important has been the lack of effective regulatory oversight. The deregulation that
began during the Reagan administration fostered financial innovation and increased the flow of credit to
businesses and households. But deregulatory fervor went too far during the housing boom. Mortgage
lenders established corporate structures to avoid oversight, while at the Federal Reserve, the nation's most
important financial regulator, there was a general distrust of regulation.

Despite all this, the panic that has roiled financial markets might have been avoided had policymakers
responded more aggressively to the crisis early. Officials misjudged the severity of the situation and
allowed themselves to be hung up by concerns about moral hazard and fairness. Considering the
widespread loss of wealth, it is now clear they waited much too long to act, and their response to the
financial failures in early September was inconsistent and ad hoc. Nationalizing Fannie Mae and Freddie
Mac but letting Lehman Brothers fail confused and scared global investors. The shocking initial failure of
Congress to pass the TARP legislation caused credit markets to freeze and sent stock and commodity prices
crashing.

Now, a new policy consensus has been forged out of collapse. It is widely held that policymakers must
take aggressive and consistent action to quell the panic and mitigate the economic fallout. An unfettered
Federal Reserve will pump an unprecedented amount of liquidity into the financial system to unlock money
and credit markets. The TARP fund will be deployed more broadly to shore up the still-fragile financial
system, and another much larger and comprehensive foreclosure mitigation program is needed to forestall
some of the millions of mortgage defaults that will occur otherwise. Finally, another very sizable economic
stimulus plan is vitally needed. While there will be much more discussion about the size and mix of
government spending increases and tax cuts to include, the House Democratic plan is a very good starting
point. This is important, for while such debate is necessary it must be resolved quickly. Unless a stimulus
plan is implemented beginning this spring, its effectiveness in lifting the economy will be significantly
muted.

Fiscal stimulus does carry substantial costs. The federal budget deficit, which topped $450 billion in
fiscal year 2008, could reach $2 trillion in fiscal 2009 and remain as high in 2010. Borrowing by the
Treasury will top $2 trillion this year. There will also be substantial long-term costs to extricate the
government from the financial system. Unintended consequences of all the actions taken in such a short
period will be considerable. These are problems for another day, however. The financial system is in
disarray, and the economy's struggles are intensifying. Policymakers are working hard to quell the panic
and shore up the economy; but considering the magnitude of the crisis and the continuing risks,
policymakers must be aggressive. Whether from a natural disaster, a terrorist attack, or a financial calamity,
crises end only with overwhelming government action.

The Economic Origin of Eating Fish on Fridays

Some religious doctrines and practices, such as eating fish on Fridays, have economic origins.

According to a history of the fishing industry:

"Fish consumption during the Middle Ages in Europe was promoted by the Catholic Church which ordered 166 days of fasting a year (including 40 days of strict fasting for Lent) during which fish could be eaten."

Cuyahoga River fire of 1969

The infamous Cuyahoga River fire of 1969 inspired the adoption of significant pollution control laws in the United States, including the Clean Air Act and the Water Quality Improvement Act of 1970. It also inspired a song by Randy Newman:

"Burn On, Big River" (excerpt)
from the Sail Away album by Randy Newman:

...There's an oil barge winding
Down the Cuyahoga River
Rolling into Cleveland to the lake

Cleveland city of light city of magic
Cleveland city of light you're calling me
Cleveland, even now I can remember
'Cause the Cuyahoga River
Goes smokin' through my dreams

Burn on, big river, burn on
Burn on, big river, burn on
Now the Lord can make you tumble
And the Lord can make you turn
And the Lord can make you overflow
But the Lord can't make you burn

Will Obama's Stimulus Package Work?

In the January 9, 2009 TIME magazine article "Will Obama's Stimulus Package Work?," Justin Fox says:

How do you stimulate a stumbling economy? For decades, the consensus among economists was that this was a job best left to the Federal Reserve and to such automatic fiscal stabilizers as unemployment insurance. Passing laws in Congress to cut taxes or boost spending to stave off a downturn was seen as pointless at best. Such help would arrive too late or in the wrong place, the thinking went, or would have no impact at all.

That consensus has unraveled in the face of the current recession, which appears likely to be the worst in the U.S. in three-quarters of a century. When President-elect Barack Obama arrived in Washington at the beginning of the week and began lobbying for $775 billion in stimulus spending over the next two years, the nation's economists — at least the ones who are listened to in Washington — expressed near unanimous support. This support showed no signs of wavering when the Congressional Budget Office projected Wednesday that even before any new spending, the federal deficit will top $1.2 trillion this year. As Obama summed it up in a speech at George Mason University on Thursday, "There is no doubt that the cost of this plan will be considerable. It will certainly add to the budget deficit in the short term. But equally certain are the consequences of doing too little or nothing at all."

Yet this pro-stimulus consensus — "élite groupthink," as libertarian econo-blogger Arnold Kling, one of the dissenting minority, puts it — has its limits. Economists have neglected the subject for so long that their theories of how stimulus works are shockingly underdeveloped. Many of the arguments they make for one proposal or another are the product not so much of economics as of common sense, guesswork and ideology. The motley mix of tax cuts for families and business, aid to states, infrastructure spending, health-care spending and alternative-energy investment that constitutes Obama's stimulus plan is partly the product of campaign promises and political compromises. But it's also a good reflection of the current muddled state of economic thinking on stimulus.

The biggest split is over whether stimulus should take the form of tax cuts or government spending. The main argument for spending over taxes is that at a time when American consumers have turned suddenly frugal, they're more likely to save any extra cash they get than spend it. This may be the right thing for most people to do, but it won't stimulate the economy. Meanwhile, if consumers do spend the money on TVs and cars and such, much of the impact will leak out overseas to pay for imports.

Tax cuts have the advantage, though, that they can be put in place quickly. There's also the more ideological, if still possibly valid, argument that they don't encourage the growth of bureaucracy. And recent empirical research — some of it by Christina Romer, the University of California, Berkeley, economist who will be chairwoman of Obama's Council of Economic Advisers — indicates that tax cuts have been quite effective as stimulus in the past. All of which helps explain why 40% of the Obama stimulus consists of tax reductions.

Then there's government spending. One argument is that if you're going to stick future generations with added debt, you might as well put the money into something that will leave them better off — infrastructure, alternative energy, etc. But these projects take time to get up and running. If they're rushed, they're likely to be botched. That's where the case comes in for simply backstopping existing state- and local-government spending that would otherwise have to be cut back sharply. The Obama plan includes elements of both.

Is it the right mix? Who knows? But if it's any solace, the intellectual godfather of all economic-stimulus plans, economist John Maynard Keynes, didn't think the specific content mattered all that much. It would be better to do something "sensible" with the money, he wrote in the 1930s. But the economy would still be helped if government simply chose to "fill old bottles with banknotes, bury them at suitable depths in disused coal mines, which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again." So far, bottle-burying isn't an element of the Obama stimulus plan. But just wait till next week.

Corporate Control of the News

Corporate control of the news.

http://www.youtube.com/watch?v=jODaS3cts3Q

http://www.truthout.org/article/dan-rather-slams-corporate-news-conference

http://digg.com/television/Dan_Rather_The_News_Stops_With_Making_Bucks

http://www.cyberpunkreview.com/news-as-cyberpunk/dan-rather-corporations-government-runs-newsrooms/

Alternative international media website outside corporate control.(Globalvision News Network)(www.mediachannel.org)

http://www.whoownsthenews.com/

The Community Reinvestment Act (CRA) Deterred Irresponsible Lending

http://www.traigerlaw.com/publications/traiger_hinckley_llp_cra_foreclosure_study_1-7-08.pdf


The Community Reinvestment Act: A Welcome Anomaly in the Foreclosure Crisis

Indications that the CRA Deterred Irresponsible Lending in the 15 Most Populous U.S. Metropolitan Areas

January 7, 2008

Community Reinvestment Act had nothing to do with subprime crisis

http://www.businessweek.com/investing/insights/blog/archives/2008/09/community_reinv.html