Saturday, October 29, 2011

A Flat Tax is not Your Friend

Be like Ukraine, Romania and Kyrgyzstan
The flat tax is back!  I'm amazed how many people tell me what a great idea this is.  I can see the charm of it.  After all, our current tax code is unwieldy and few dare calculate their own.  We hear of GE earning a $14 billion dollar profit last year and paying no taxes.  Bank of America avoided all taxes last year also.  Exxon Mobil paid nothing in 2009.  In fact, 2/3 of large American corporations do not pay income taxes.  The top tax rate of 35% should apply to them.  We assume they evaded taxes because of deductions.  That's a small part of the picture for sure.  But the bigger part is their practice of hiding income offshore, in countries such as Panama and Liberia that do not tax it.

Set your flat tax at any rate you please.  It won't fix this problem.

There are two prominent flat tax proposals on the table this election cycle:  Herman Cain's Sim City 9-9-9 plan and Rick Perry's 20% flat tax.  Let's see who the winners and losers might be.

Both would eliminate nearly all deductions.  Both would set a single income tax rate for all earners, rich or poor.  Both have been modified to accommodate the poorest Americans.

I've given considerable explanation and detail below but to spare you reading all of it, here is the summary.

The poorest Americans would see an INCREASE in taxes if a VAT or consumption tax such as Cain's 9-9-9 plan were implemented.

Middle class families would see their taxes REDUCED under both Cain's and Perry's plans.  Perry's $12,500 personal exemption would mean a family of 4 would have to make more than $50,000 to pay any taxes at all.  (On the other hand, singles or couples without children would pay higher taxes)

The top 1% would enjoy substantial SAVINGS from both plans with Cain's the most generous to them.  These savings are not primarily from the cut to the top income tax rate; they are rather from the complete elimination of taxes on capital gains, dividends and inheritance.

Corporations under Cain's plan would lose incentives to create jobs or pay workers fairly as wages could not be deducted from income.  Nevertheless, their (stateside) income would be taxed at a much lower rate:  from 35% today to 9%.  Under Perry's plan, corporations that pay taxes (of any rate) overseas could keep their income tax free in the US.  The 20% tax rate would only apply to those firms who have NOT sheltered income offshore.  Those who have would enjoy a 5% tax rate if they brought it back.  One can imagine all kinds of shenanigans to qualify for the 5% rate.

The most alarming conclusion from both of the Flat Tax proposals though is that nearly everyone (except the poor) would be paying less federal taxes.  Less revenue to the federal government will result in one of two things:  either we allow the deficit to balloon far beyond anything envisioned or projected today or we dismantle the federal government in large measure.  Highways, the military, special education programs, Social Security, Medicare, Medicaid, Homeland Security, the FBI...and so it goes.  And both plans are designed to kill or privatize Social Security.

A flat tax only benefits the wealthiest and large corporations.  Though even they will suffer if our infrastructure crumbles from lack of resources.

What Americans should want is a simplified tax structure that remains progressive (meaning lower rates for the poor; higher for the wealthy).  Eliminate all of the deductions and credits that target just one industry.  Eliminate mortgage interest deductions too and deductions for all but charitable deductions if you prefer.  Tax all of the income American companies make, regardless where they hide it.  Tax capital gains, dividends and inheritance at the same rates as income earned through the sweat of your brow. 

The tax structure today is upside down.  When highly profitable corporations like GE and Exxon Mobil pay nothing and the wealthy who make their money from investments pay less than we shmucks who make ours from going to work, the system is regressive.  Don't buy into any flat tax proposal that doesn't apply to investment income too. 


The Examples

The Poor:  For a family of 4, poverty means earning less than $22,340 per year.

Currently:  A family of 4 at the poverty level would currently pay no income taxes due to the personal exemptions for each household member plus the standard deduction.  They would pay Social Security and Medicare taxes, property taxes and sales taxes.  They might still pay state income taxes.  Final federal tax burden:  0% plus FICA

Cain's Plan:  Under Herman Cain's plan, the poor family would pay 9% or $2090 in individual taxes.  In addition, they would pay a 9% sales tax on all purchases (on top of state sales taxes).  Since the poor spend all of their money in the marketplace, neither investing nor saving, that would add another $2090 for a federal tax burden of 18%.  (Herman Cain's website)  Since Cain proposes eliminating payroll taxes (for Social Security and Medicare), our poor family would no longer pay the 7.65% FICA.  Final federal tax burden:  11.35%.  Of course, the consequence of that is no benefit after retirement.

Perry's Plan:  Rick Perry's proposal would levy a 20% tax on everyone, but with $12,500 personal exemptions, enough to keep our poor family from paying any income taxes.  (Rick Perry's website) Perry would privatize Social Security but there's little detail to allow us to project consequences for families.  Final federal tax burden:  0% plus whatever FICA would be.

Taxes on the poor would go up under Cain's plan and remain the same (zero) under Perry's.

The Middle Class:  A family of 4 earning $63,000 (national average)

Currently:  This middle class family paid federal income taxes of $9600 or 15% after taking typical deductions and exemptions.  As an average family, they paid another $126 in capital gains taxes and $727 in dividend taxes.  Final federal tax burden:  17% plus FICA.

Cain's Plan:  The middle class family can only deduct charitable contributions; the rest is taxed at 9%.  Assuming $1000 for charity, their income tax would be $5580.  Additionally, they would pay the 9% VAT on their purchases, estimated at 40% of income or $2268 per year.  All taxes on capital gains, dividends and inheritance would be eliminated.  Final federal tax burden:  12% (no FICA)

Perry's Plan:  Included in the 20% flat tax are the remaining deductions of home mortgage interest, state and local taxes and charitable contributions.  With $50,000 in individual exemptions ($12,500 x 4), the rest would be swallowed in deductions, leaving the Middle Class family also with little to no federal income taxes.  All taxes on capital gains, dividends and inheritance would be eliminated.  Final federal tax burden:  0-3% plus whatever privatized FICA costs.

Taxes on the middle class would go down under both plans.

The Top 1%:  There are 1.4 million households earning $1.3 trillion dollars.  Average:  $1 million per household.

Currently:  This group all itemize with deductions for this family in the $400,000 range plus $14,600 for individual exemptions for a family of 4.  Federal income taxes on a million dollars in wages would be $178,000.  But this group make most of their money from capital gains, dividends and inheritance.  This family's average capital gains earnings would be $276,000 taxed at 15% ($41,000) and dividend earnings would be $130,000 per year also taxed at 15% (19,000).  Inheritance currently is tax free.  Nice if you get a bunch.  Final federal tax burden:  17% plus FICA. (Notice that in spite of the higher tax bracket on wages, the wealthiest pay about the same rates as the middle class due to very low taxes on capital gains and dividends).

Cain's Plan:  With just a 9% flat tax and only deductions for charitable contributions (estimate of $10,000) and no other deductions, this wealthy family would pay 9% on earned income but would pay no taxes on capital gains, dividends or inheritance.  Total income taxes would be $81,900 on $1.4 million in income (including capital gains and dividends).  Their VAT taxes would be a smaller part of income as well, since $100,000 would be a high estimate of annual purchases for this family.  Final Federal tax burden: 7% plus FICA

Perry's Plan:  Perry's 20% flat tax also does not include any taxes on capital gains or dividends.  Individual exemptions of $12,500 per person exempts $50,000 for this family of four.  Deductions for mortgage interest, charitable deductions and state and local taxes remain, allowing perhaps half of their current itemized deductions or $200,000.  That leaves $750,000 taxable income of the total $1.4 million in actual income with $150,000 to pay.  Final Federal tax burden: 10.5% plus FICA

The Top 1% would pay lower taxes under both Cain's and Perry's tax schemes.

Corporate Taxes

Currently:  Corporations pay income taxes on their net income:  gross income minus expenses such as wages, equipment, cost of goods sold and depreciation.  They only pay on the income claimed in the US.  Income sheltered overseas is free from US taxes. 

Cain's Plan:  Cain's 9% business tax would tax "Gross income less all purchases from other U.S. located businesses, all capital investment, and net exports."  Wages paid would not be deductible for businesses.  Essentially, economists have dubbed Cain's business tax as another version of a consumption tax, with the tax passed on to consumers.  Creating jobs and paying workers are not considered a value in Cain's plan.  Nothing in Cain's plan corrects the problem of income hidden overseas.  Tax savings for those corporations who do keep their accounts stateside would be substantial but cannot be calculated for a typical business without years of scrutinizing corporate spreadsheets.

Perry's Plan:  Perry would tax net corporate income (undefined) at 20% UNLESS a corporation paid some level of taxes in another country (then it pays nothing) or UNLESS it had previously sheltered income offshore and agreed to bring it back (then it pays just 5%).  The devil would be in the details naturally but one can imagine the acrobatics businesses could do to move money offshore and then back again to qualify for the meager 5% tax rate.  It appears that again capital gains and dividends would be untaxed, a boon particularly for the financial sector.

Friday, October 28, 2011

You Can Take a Pill for That

Quick:  What are the three leading causes of death in the US?

Most people can name the first two but few would identify the third. Heart disease accounts for 25% of all deaths and cancer takes another 23%, together comprising nearly half of all deaths.  (Source) The third cause of death accounts for nearly 10% and few would name it.   That killer -- at 225,000 deaths per year -- is medical error.  (Source)  That includes unnecessary surgeries and infections contracted in hospitals.  But 106,000 of those were from adverse reactions to properly administered prescription drugs.  Another 7,000 are from improperly administered drugs in hospitals.  Add in another 20,000 from "drug poisoning" aka overdoses, predominantly of prescription (not illegal) drugs. (Source

And who is taking all of these prescription drugs?  The chart below from the CDC NHANES study covers ongoing, not episodic, prescription drug use.


Age Group
 Taking 1 or more prescription drug
 Taking 3 or more prescription drugs
 Taking 5 or more prescription drugs
Most commonly used drugs 
(in order)
All Males
43%
18%

statins; pain meds
All Females
53%
23%

anti-depressants; statins; pain meds
Under 12
22%
4%
1%
bronchodilators; antihistamines; penicillins
12-19
30%
6%
1%
stimulants (for ADHD); bronchodilators; antidepressants
20-59
48%
17%
8%
anti-depressants; pain meds; statins
60 and older
88%
64%
37%
statins; beta blockers; diuretics
All Americans
48%
21%
11%
statins; pain meds; anti-depressants
 (Source and Source)
So what?  Other than 100,000 plus of us dying each year from taking the pills our doctors prescribe for us, there are other impacts on our national psyche, perhaps some explanation for the current tone of public discourse?

Psychological side effects of common drugs
Statins:  intelligence loss, memory loss, delirium, depression, irritability, fatigue, violence and suicide (45% of those over age 60 now take statins)
Anti-depressants: sleeplessness, nervousness, tension, fatigue, depression, suicide
Beta Blockers: fatigue, loss of energy, slower brain function, nightmares, dizziness (interestingly, beta blockers also increase triglycerides, increasing prescriptions for statins)
Pain Medications: addiction, drowsiness, dizziness, confusion, anxiety
Stimulants for ADHD: nervousness, sleeplessness
Americans now spend $300 BILLION each year on prescription drugs.  That's $1000 for every child and adult in the nation.  Since the explosion of "direct to consumer" drug advertising, our chemical ingestion has exploded.  And since the 2003 unfunded Medicare drug expansion, 10% of Medicare spending is now for prescription drugs -- with no price controls. 

A recent Medford Mail Tribune article discussed payments directly to doctors from pharmaceutical companies and named the primary abusers locally.  Pfizer alone has given $260 million to doctors nationally since 2009.  In 2008, 74% of all doctor visits nationally resulted in doctors writing prescriptions. We are a chemically induced people.

I come from a long line of pharmacists on both sides of my family.  The problem is not pharmacists or doctors.  It's bigger than that.  We as patients are responsible too.   I'm not a fan of dietary supplements or much that falls under the category of alternative medicine.  But I do believe that a good deal more caution in introducing chemicals into our bodies is in order. 

I can't claim to be a medical doctor or a chemist.  But as a social scientist, somehow the side effects listed above help me to understand how our electorate behaves.  If you subtract out children, roughly 2/3 of voters are continuously medicated.  They're irritable, slower on the uptake, exhausted, anxious and confused.  I give you the 112th Congress and the current slate of presidential candidates.

Monday, October 17, 2011

The Truth about Jobs

In 2008 when the recession began, my high school employed 30 teachers for 635 students.  This school year there are 18 teachers for about 600 students.  That's a 40% reduction in the teaching staff.  When we look at the current jobs situation, we hear two predominant prescriptions:

Choice One:  More infrastructure development and more investment in local and state governments (especially education).

Choice Two:  Cut government spending, reduce regulations on business, keep corporate taxes at their historic low.

Choice One makes sense if construction jobs and government jobs are central problems.  Choice Two makes sense if a lack of private investment is the primary problem.  Wouldn't it be reasonable to actually examine what our current employment situation looks like?

Here is a table of job gains and losses by month for 2011 (from the Bureau of Labor Statistics)



2011
Private Sector Jobs
gained or lost
Public Sector Jobs
  gained or lost
Monthly Job Creation Totals
January
94,000
<26,000>
68,000
February
261,000
<26,000>
235,000
March
231,000
<25,000>
194,000
April
268,000
<24,000>
217,000
May
99,000
<46,000>
53,000
June
75,000
<55,000>
20,000
July
173,000
<46,000>
127,000
August
42,000
15,000
57,000
September
137,000
<34,000>
103,000
Total 2011
1,380,000
<267,000>
1,113,000

While adding a million jobs so far this year is not nearly enough to pull us out of the recession, it's interesting to see where jobs are being added and lost.  The private sector is slowly bringing workers back to work.  The public sector continues to bleed jobs.  Since police officers, teachers, firefighters, public health workers, tax collectors and all the other public sector workers are also needed to buy products, pay their mortgages and contribute to the overall economy, the U.S. will not pull out of this recession until everyone is back to work.  That includes teachers and all the other state and local government workers whose job losses are currently pulling the country back towards recession.

What about construction jobs, the other concern of the infrastructure folks (not to mention strengthening the infrastructure itself, a value that reaches beyond job creation)?  The U.S. has lost a total of 5 million jobs since 2008.  Of those 1.5 million were in the construction industry.  That's a 25% rate of job losses for an industry employing 6 million people.

What about the alternate proposal?  Reduce regulations to free businesses to grow and reduce their taxation burden.  Let's look at the tax history there as well. 



Year
(highest in red; lowest in green)
 (rounded to whole numbers)
 (rounded to whole numbers)


1940
30%
81%
14.6%
1950
25%
91%
5.3%
1960
25%
91%
5.5%
1970
32%
72%
4.9%
1980
28%
70%
7.1%
1990
33%
31%
5.6%
2000
21%
40%
4%
2010
15%
35%
9.6%


See any correlations between lower corporate taxes and jobs?  If you do, you're a better statistician than I.  Unfortunately, it's harder to quantify regulation and deregulation history but an approximate gauge would be that regulation grew until Reagan in 1981, then deregulation accelerated.  The above chart doesn't justify deregulation any more than lower corporate taxes.

We need a targeted jobs bill, one that focuses on the areas of heaviest bleeding.  Investing in infrastructure and public services sounds about right to me.  Low taxes may be argued by some but there's zero evidence that more jobs would result.  And we're out of time for dilly-dallying on this issue.  Put teachers, construction workers and others wanting to work back to work.

Note to my Congressman:  You have a job.  We're paying you.  Get to work so others can too.