Thursday, October 27, 2011

Herman Cain's 999 Plan, Part 5: "I don't trust those businesses..."

Big businesses are just going to take unfair advantage of the new tax code. How do we know Warren Buffet and Wall Street won't just cheat the new system?
There will always be people who are trying to game the system. But trying to cheat the system right now is like trying to cheat at a game of Monopoly with real $5000 dollar bills: The stakes are high, and the game is complicated enough that a clever player just might get away with it. Switch to the 9-9-9 plan, and you've lowered the stakes, and made the rules as simple as tic-tac-toe. Sure, you just know someone is going to try to cheat, but it's harder to see how they'll get away with it.

You just want to help the rich, and step on the poor.
Cut that out, we're trying to have a reasonable conversation here. Nobody sane wants a tax code that helps the rich at the expense of the poor. But that doesn't mean that the only other choice is a system that punishes success. Let's have a simple tax code with a simple purpose: Collecting only the necessary funds to pay for the expense of government. I do want to help the poor, but there are thousands of tools that are better suited for that task. Use the right tool for the job if you want to get the job done right.

Okay, but how do we really know big companies won't just pocket the money, instead of lowering prices?
That's a fair question. Let's deal with it analytically. Remember the spreadsheet from the last article? By replacing the current 35% corporate tax with a 9% corporate tax, my subtotal before sales taxes goes from $208.55 to $172.43. That's $36.12 in savings before taxes, and $21.67 after all sales taxes are figured in.

To try out the "greedy store" scenario, I've copied all my calculations over to a new tab. I've added a new field to test how much the greedy store owner can add into the price, before corporate tax and sales tax, until I'm back to my original bill. With a little bit of experimentation, I see that the greedy store owner could deprive me of my $21.67 in savings, but he's only going to get $18.42 out of the deal, at most, and that's only if he limits his price rise to items that are taxed at the lowest state/local rate. Every dollar he doesn't let me keep is a dollar for which he has to pay some tax.

But still, what if he does keep the money? That money still isn't going to end up in Scrooge McDuck's money bin. Amazingly successful businesses don't increase their success by hoarding money, but by using it. How might they use it? Let me count the ways.

Maybe the store owner wants to give his overworked and underpaid employees a bonus. With the double shifts his staff has been working since the layoffs in 2007, they probably deserve it. Or maybe the store owner wants to expand the business. That means new hiring, and we all want unemployment to go down, right?

But let's say that we're dealing with a real greedy corporate fat-cat here, someone who's only interested in grabbing all the money he can, and increasing the value of his stock portfolio. As long as he's not breaking the law, I can live with that! I'd like to get the stock market out of the tank, maybe then we could shore up a few firefighter and teacher pensions, and help my own 401k while we're at it. If he is breaking the law, let's deal with that in the criminal justice system, not the tax code.

Image from Wikimedia
Here's the important thing: Prices go up and down all the time. When businesses are feeling the pinch, and the cost of production has gone up, then prices go up. When a company wants to engage in a good old-fashioned price war with its rivals, prices go down as far as the cost of production will allow. By changing the tax code, we've reduced the "pinch", and introduced more leeway for price lowering. When companies can produce more for less, prices can go down and productivity can go up. That's the power of microeconomics for you.

Monday, October 24, 2011

Herman Cain's 999 Plan, Part 4: Turning the math up to "eleven"

Since I wrote my first article, I've had some questions and concerns posed to me about my example. I like questions and concerns! It gives me a reason to do more writing!

My friend John wrote to me:
Another problem lies in the sales tax structures of the various states. An erroneous assumption in your calculations is that Georgia does not charge state sales tax on groceries. Only local sales taxes are charged on groceries and I believe pharmaceuticals.
Florida has no sales tax charged whatsoever on groceries or prescription drugs. Varying state tax structures, to me, infinitely complicate the whole picture of whether 999 is good or bad when integrated into the existing taxes that will not go away.
Here's the good news: Unlike Obamacare, we don't have to pass this bill to know what's in it. We can research, we can calculate, and we can prove whether this undertaking is really complicated beyond measure.

My first task will be to research existing sales tax structures in both Georgia and Florida. I will take a real receipt from my own real grocery shopping, with goods taxed at two rates, and replicate the sales tax calculation in a spreadsheet. Finally, I will use the spreadsheet to show a post-9-9-9 cash register transaction.

My "pass/fail" standard for the test is this: I am assuming that grocery stores can handle the pre-9-9-9 register transaction. The post-9-9-9 register transaction must have a level of complication no worse than the pre-9-9-9 transaction.

My grocery store receipt
Where do I start? With Georgia and Florida sales taxes. From the web, from a round of shopping, and from talking with my uncle in Florida, I have learned:

  • Georgia has a 4% state sales tax which applies to all non-grocery, non-pharmaceutic items. Individual  jurisdictions may add sales taxes which apply to everything, including food and medicine. In my area, I've got a 2% "everything" sales tax, which results in a 6% "regular" tax rate and a 2% "food and medicines" tax rate. This is not considering any taxes on alcohol, tobacco, or other "specialty" goods, but expanding from 2 tax rates to 3 or more should be a trivial task, mathematically.
  • Grocery stores are generally the only places which will have to deal with different multiple sales tax rates today. Grocery store registers are tied to databases which provide information on each bar code scanned, including price, item name, and tax category. The tax category is visible on the receipt, in the far-right column: Each item has a category of "B", meaning the 2% tax rate should be applied, or "T", meaning the full 6% tax rate.
  • Florida has more tax categories, but the math is the same. The method of calculating tax does not change. Only the percentages are different.
The math test I performed can be viewed in this Google Docs spreadsheet. If you follow the link and check it out, here's what you'll see:
  1. In columns A and B, I've listed all of the items on my receipt, with the receipt's tax category. "B" indicates a grocery item, "T" indicates a non-grocery item.
  2. The "embedded" tax on items (which comes from the amount that companies have to charge in order to pay their federal taxes) will drop, regardless of the sales tax rate of each item.
  3. After the 9-9-9 tax is implemented, the variables have changed (new subtotal, new point-of-sale tax rate), but the formulas are the same.
If you're still a skeptic, I'd encourage you to copy the spreadsheet and play with the numbers yourself. Adding and changing tax rates is as easy as copy-and-paste.

Are state sales taxes a mess? They can be, depending on your state, county, and city. Does 9-9-9 fix that? No, you'll need to take that up with your own state legislatures. The only thing I can demonstrate here is that 9-9-9 doesn't make the sales tax problem for any state or local jurisdiction more complicated than it is already. If a grocery store or other retailer can handle the existing tax laws, this is a change for no worse, and quite possibly for the better.

Continued in Part 5...

Friday, October 21, 2011

Herman Cain's 999 Plan, Part 3: Aren't sales taxes regressive?

But aren't all sales taxes regressive? 

 Funny, I never hear anyone bring this one up when the state or local governments are trying to get us to approve the SPLOST, or penny sales taxes, or any of those other "temporary but somehow never dying" sales taxes to pay for all of those local projects they love. When politicians want to put a new sales tax on us, the word "regressive" is never heard. It's only when someone proposes getting rid of a complicated income tax system that no one likes anyway that this word even comes up.

Anyway, I want to be careful with this topic. "Regressive" is a politically-charged word. Let's make sure we establish what it means, first. According to Investopedia, a regressive tax is "a tax that takes a larger percentage from low-income people than high-income people". It may be just me, but that doesn't sound like a very precise definition. A larger percentage of what?

Does this mean that, in a regressive tax, a poor person pays more than a rich person for the same stuff? That would definitely be bad. But then, the page goes on to say this:
A regressive tax is generally a tax that is applied uniformly. This means that it hits lower-income individuals harder....
Some examples include gas tax and cigarette tax. For example, if a person has $10 of income and must pay $1 of tax on a package of cigarettes, this represents 10% of the person's income. However, if the person has $20 of income, this $1 tax only represents 5% of that person's income. 
Sales taxes that apply to essentials are generally considered to be regressive as well because expenses for food, clothing and shelter tend to make up a higher percentage of a lower income consumer's overall budget. In this case, even though the tax may be uniform (such as 7% sales tax), lower income consumers are more affected by it because they are less able to afford it.
So,  following this logic, regressive means... everyone gets equal treatment. It's unfair, because it treats everyone the same. If that's what "regressive" means, I don't think I particularly care whether a tax is "regressive". I would rather have fair and equal.

Diving a bit deeper into that analysis, there are a number of assumptions. ""Expenses for food, clothing, and shelter tend to make up a higher percentage of a lower income consumer's overall budget." Well, that's basically a true statement. But usually sales taxes don't apply only to essential expenses. It will apply to all new goods, essential or otherwise. As people get richer, they do tend to spend more money on all those nice little non-essential goods. Also, as my wealth increases, my spending on essential goods may very well increase, as I decide that I can afford nicer food, maybe a restaurant every now and again, better clothes, and maybe even a cleaning service to keep my shelter nice. (I'd love to be able to upgrade my shelter, but we're in a housing slump, and I can't sell the one I've got.) This means that as I have more money, and my spending goes up... drum-roll please... I pay more taxes.

Also, to some degree, the 9-9-9 tax gives everyone some control over how much they pay in taxes. Sure, you can't choose not to buy food, clothing, and shelter... but you can choose to get your clothing and shelter used instead of new, which means tax-free. Families at the poverty line are much more likely to shop consignment than families with private jets. Here's what I'm saying: You can't control your income. You can control your expenses, to a degree. This means that at all levels of income, you have more power over how much you pay under a consumption tax, than under an income tax. Is that "regressive"?

This "regressive" and "progressive" categorization of taxes seems to me to be straight from Marx and other various class warfare ideologies, and it's very disappointing to me that so many of the Republican candidates for President would hang their hats on it.

Continued in Part 4....

Thursday, October 20, 2011

Herman Cain's 999: Testing the Math, part 2

Test 2: But what about that 9% income tax? Won't that hurt poor people who aren't paying income tax now?

One concern raised is that the flat 9% income tax will hurt people who aren't taxed right now. Let's try those numbers out, again keeping the assumptions of the tax calculator intact.

Let's take a household of 4 (same as mine), earning and spending at the poverty level. That is, every dollar they earn in a year, they have to spend. Just to make it worst-case-scenario, let's say that everything they buy is new, so everything they buy is taxed. Most sensible families at the real poverty level are buying used wherever they can, which means the tax doesn't touch everything they buy, but let's take this worst case just for the sake of argument. The latest data I have says that in 2005, this family would have earned (and spent) $25,660. Let's say that this family lives in a state with 0% sales tax, just to keep that part of the math simple. Finally, let's assume that their combined federal and state income tax bill is $0 per year. (With both me employed and my wife hit with the self-employment tax, that's what seems to happen for us often, more or less.)

Using the same ratios and methods as before, with $25,660 in annual spending under our existing tax code, our family will only have to spend $23,125.10 in goods plus sales taxes in a year. Ah, but now the income tax! With 9% of $25,660 we get  $2,309.40 in income taxes. That means only $25,435.50 of their original $25,660 is still coming out of pocket. That's a $224.50 not spent over a year. That's within 0.875% of our original "break-even" point, and erring on the side of savings.

Plus, we're again assuming that this family is spending every dime they have on new goods. Every dollar they spend on used items is not going to get hit with the sales tax. So, let's say that $5,000 of their $23,125.10 in spending is for a used car. That's $450 in sales taxes that they won't have to pay. Looks better and better.

In other words, under the old tax code, if I want to reduce my tax hit, I need to hire a tax accountant, spend money on tax software, and/or spend days and days working through paperwork. With the 999 Plan, if I want to reduce my tax hit, all I have to do is learn how to spend carefully and wisely, the way my parents and grandparents did. That doesn't sound so bad, does it?

Update: The news gets better and better. In this model, we're dealing with a family exactly at the poverty level. From an article I have just read, any family earning below the poverty level will be exempt from the income tax. I like it!

Continued in Part 3....

Herman Cain's 999: Testing the math myself, Part 1

By now, most everyone's heard about Herman Cain's 999 Tax Plan. Some love it, some love to bash it. But who can you trust? It seems everyone's got something to gain. A lot of the negative statements about it have come from other candidates who see it as a great target, or from tax lobbying institutes who depend on the complication of the existing system to justify their existence. But then, even though I like Cain, I don't want to risk trusting his math blindly, without checking it out myself. I mean, sure, he's got a degree in math, another in computer science, and he used to calculate rocket trajectories for the Navy, but he could be wrong this time, right?

So, here's a little experiment. I ran across a 999 Tax Calculator web site, not affiliated with or funded by the Cain Campaign, which lets you plug in numbers and see the effect of the new tax plan on prices. The best part is, you can see the calculations and check them for yourself. Will the poor pay more? Is it regressive? Let's see.

Test 1: Will prices go up, with both state and federal sales taxes?

The Test Calculator has two inputs: Your state sales tax rate, and the price of whatever it is you want to hypothetically buy. For starters, I put in my state sales tax rate of 5%, and a price of $200, which is roughly my family's weekly grocery bill when Granny is staying with us. Three adults and a baby, for reference.

First, the calculator tells me that with $200 of groceries, I'm paying about $10 in state sales tax, so my real bill right now is $210. Good starting point so far.

Now, statistically speaking, 22% of my $200 grocery cost (that is, $44) goes to pay the taxes for all the companies that put those groceries into my hands, from the farmer to the store. That's under a 35% corporate tax rate. The Calculator assumes that those ratios will stay consistent, so with a 9% corporate tax rate, the corporate tax will make up a 6% portion of my bill. (We can test with other assumptions later.)

So, what does that mean in actual dollars? My $200 grocery bill (minus state tax) is really buying me $156 of groceries, when I take out the existing federal corporate tax. The new federal corporate tax will be $9.36. So, the new price is $156+$9.36=$165.36. The 9% Federal sales tax on that will be $14.88, and my state sales tax is $8.27.

Final bill: $188.51, including state and federal sales tax, for groceries that cost me $210 today. A savings of $21.49.

Hey, I wouldn't mind keeping an extra $21.49 in my pocket every week, just from groceries. So far it's looking good. But we've got more questions, more test, and more math to go.