The Hermanator Experience

I've been meaning to write about Herman Cain for a while. As a black Republican businessman, he seemed out of place in the Republican Presidential race, but he always spoke with precision and confidence. Even before his Florida straw poll victory, I thought he was making a strong run as a potential Vice Presidential candidate. Needless to say, I learn more about an issue or a person when I write about them and I have to do the research.

So let's start off with a little background; unlike the rest of the candidates, Herman Cain has no experience in political position. He's a career businessman:

Cain, 65, grew up in Georgia and graduated from Morehouse College. He became a turnaround artist, rescuing the Burger King outlets of Philadelphia. From there, he went to Omaha, where in 1986 he took over and stabilized Godfather’s Pizza with clever advertising and aggressive downsizing.

By the early 1990s, Cain had started to transition out of day-to-day management at Godfathers and delve into politics. In 1992, he was appointed to the Federal Reserve Bank of Kansas City. In 1994, he became head of the National Restaurant Association, a post he held for five years.

He's a turnaround specialist, something he's highlighted in all the debates. The US is in need of a turn around, and he feels he's the best man for the job. This isn't the first time he's run for office. He ran for President in 2000 and he ran for Senate in 2004. Despite those failures, he left an impression:

But despite his lack of political success, he managed to attract the notice of a radio executive with his rich, booming voice. His campaign manager became his producer. He trademarked the expression “The Hermanator Experience.”

The two main talking points of his campaign have been the 9-9-9 tax plan he wants to institute and the Chilean social security model he wants to implement.

The 9-9-9 plan will be hard on the lower and middle classes (check out the article in the side bar, worth a full read):

Most economists agree that a national sales tax would raise the relative tax burden on low- and middle-income earning taxpayers. "The main reason is that low- and middle-income households consume more of their income than high-income households do," said William Gale, senior fellow for economic studies at the Brookings Institution. "Another way of saying that is high-income households save more of their income than low-income households do."

Basically, if all people consume the same amount of taxable goods and services, if you have a lower income, whatever is taxed is going to be a higher percentage of income.

His whole system will make the lower classes pay more while the upper classes pay less. Now, I've already said that taxes need to be lower for the US to be competitive, but I don't think it makes sense to increase taxes on people who already are having trouble making ends meet. Yes, you want a society that encourages economic advancement, but you also need a minimum standard of living across the board. This is the United States where we tout our economic opportunity and high standards of living. Instituting a national sales tax is a straightforward attack on the lower classes.

One of the things that I've been interested in is the viability of the Chilean Model:

But while the reform's supporters argue it has been a major success story, officials both inside and outside Chile now increasingly question whether the high costs and modest investment returns have doomed Piñera's original promise: a decent retirement income for workers at a savings for the government.

Social Security has come under fire because of the uncertainty surrounding its future. The government has misappropriated funds, so this would be another way of protecting individuals. The problem is that it doesn't provide enough income for the retired:

A recent report by the Chilean government brought more grim news, forecasting that as many as half of all workers won't be able to save enough to receive the minimum pension when they retire—even after paying into their accounts for 30 years—and will therefore rely on government subsidies. More than 17 percent of Chile's retirees now continue working because they can't afford to live on their pensions, according to that study, and another 7 percent want to work, but can't find jobs.

Despite this, the model has been praised and used as the basis of models in other countries. I think it is important that someone takes a greater look into this and challenges Cain in the next debate. He can't tout a program that doesn't get real results. Praise is one thing, results is the real thing.

There are further mathematical challenges with the program:

Here’s the problem: To finance benefits at promised levels for those 55 or older, we would need to continue to collect payroll taxes from today’s working-age population. However, we would also propose to divert a significant share of those payroll tax into personal accounts. In effect, we would be trying to spend the same dollar twice, and we would do it trillions of times.

This doesn't seem like a worthy endeavor considering our country's tricky financial situation.

One thing is for certain, he is very confident:
And he'll need it because his Florida win has brought him under fire as people begin to think whether he is a viable candidate for Presidency or not. It's uncertain whether his tax plan will work:

"I don't understand how the 9-9-9 plan -- which includes both a national sales tax and an income tax while purporting to repeal the 16th Amendment at some point -- can be taken seriously by anyone who feels we are already overtaxed," said Andrew Nappi, director of the Florida 10th Amendment Center.

And has it been vetted:

Zimmermann, a Romney supporter, said, "I don't know anyone who has vetted the 9-9-9 proposal and confirmed it as a viable plan."

There are other things threatening his campaign:

Top aides in Iowa and New Hampshire quit earlier this year, saying Cain wasn’t taking the early states seriously. One former staffer recently alleged that staff members tried to cover up the role of a gay campaign adviser. He refuses to name the economic advisers who helped come up with his plan. In May, Cain said he couldn’t talk about foreign policy until elected.

That makes me believe that he hasn't taken himself seriously up to this point. If he really wants to make a run for this, he will aim for the transparency necessary to be a viable candidate. Until then, Herman Cain will be a bump in the road for the front runners. You cannot ignore potential skeletons in your closet and run for president. You will have people make you reveal that information as you rise a legitimate candidate. You should do your best to be prepared.

Now that Cain has one Florida, he best be prepared. He's been shooting for the stars; now the stars will be shooting back.

Tackling Taxes

With the pending debt crisis, the issue of taxes has become a much discussed issue. The biggest backlash in the debate seems to have been spurred by Warren Buffet, who says the ultra-rich should be paying more. A New York Post op-ed says that this is misguided:

Left unsaid is that much of that is taxed at 35 percent (via the corporate income tax) before he even gets his hands on it. So in effect, he’s paying taxes twice (that is, when his companies actually pay, anyway).

Counting both taxes, his effective rate would really be well north of 40 percent for a big chunk of his income.

In addition, Obama has propagated rhetoric against Corporate Jet Owners:
This, according to Republicans, has spurred a class warfare about who pays what taxes. The Daily Show pretty much explains it best:

The Daily Show - World of Class Warfare - The Poor's Free Ride Is Over
Get More: Daily Show Full Episodes,Political Humor & Satire Blog,The Daily Show on Facebook

This dialogue of shifting the burden of taxes from the rich to the poor has been a common thread from the Republican candidates. Fact of the matter is that the people who aren't paying taxes are amongst the poorest in our country. They live from pay check to pay check and can't afford to pay taxes without threatening their already low standard of living. Quite simply, it's a type of tactical rhetoric to enrage the contingency they're appealing to who tend to hate taxes and hate paying them. To these people, everyone should share the burden if there is a burden at all. Here's what Michelle Bachmann had to say:

"Part of the problem is today, only 53 percent pay any federal income tax at all; 47 percent pay nothing," said Bachmann. "We need to broaden the base so that everybody pays something, even if it's a dollar. Everyone should pay something, because we all benefit."

It's not just her saying this. Jon Huntsman is also in the we need more people paying taxes boat (8:11). I agree with Huntsman as saying we need people to have a stake in our spending. If you aren't paying taxes, what do you care how the government is spending those funds?

The problem though is that people are looking at it from a budgetary stand point. Taxing the poor shouldn't be seen as the way to increase tax revenues. It should be used more to make sure people have a shake in the government's spending. It should be to keep the government accountable.

But as I said before, these are the poorest of the poor:

Consider: Of those households that do not owe income taxes, about a third earn $10,000 a year and a slightly smaller share earn between $10,000 and $20,000. More than three-fourths earn $30,000 or less.

In addition, the notion that these households pay no taxes is flat-out wrong. They pay — leaving aside state and local sales, income and property taxes — federal gasoline and other excise taxes and, most significantly, payroll taxes on every dollar they earn. These taxes are regressive. Everyone pays the same share, regardless of income, so they hit the poor hardest, and they counterbalance the progressivity of the income tax code.

Let's not worry about taxes from a who pays stand point then. Let's worry about taxes from the stand point of the budget. Raising tax revenues is necessary in times where the budget is a concern. Deciding the budget isn't as simple as cutting spending and increasing taxes though. It is important to also consider the effect that these changes will have on the economy.

The economy is struggling.

We need policies that encourage economic growth. Let's start with Obama's plan to raise taxes and see if it would positively affect the economy. We'll look at the UK for evidence. The UK raised the top tax bracket to 50% for the wealthiest:

The new rate will affect the 300,000 highest earners in the UK, out of the 29 million people who pay income tax.
It will be levied on taxable incomes greater than £150,000 a year and aims to raise an extra £2.4bn by next year.

This is, in effect, similar to what Obama wants to do in taxing those making $250,000 or more. So did it work?

The most likely explanation is that higher income tax receipts partially represent the new 50p rate kicking in and rasing revenue. How else to explain the figures? Receipts are up way in advance of earnings or employment growth.

So it has worked in raising revenues. The big question then becomes has it helped the economy? It seems not:

"We always said that recovering from the deepest recession that we've had for many decades, with the largest budget deficit that we've seen for a very long time was going to be choppy and I think probably the waters have been choppier than anyone expected. We've seen big headwinds in the global economy, rising oil prices, rising commodity prices. All those things have an impact on the British economy."

Those same variables would seemingly have the same effect on the US economy. Raising revenues won't be worth it if you have events like this going on:

A solution that also addresses the economy would be the best case scenario. So what other options are there? Michelle Bachmann has proposed that we cut taxes:

Representative Michele Bachmann promised Saturday that as president she would turn things around within one economic quarter, in part by cutting corporate taxes and eliminating capital gains and inheritance taxes. Painting President Obama as doggedly antibusiness, Mrs. Bachmann asked, “Why in the world wouldn’t we do what we know works to create jobs in this country?”

Why would we want to cut taxes when we need to raise revenues? This doesn't seem intuitive does it? Well, a lot of companies have a lot of cash on their balance sheets, but they aren't using it:

Tax policy is driving much of this trend. For multinational corporations, cash earned abroad cannot easily be remitted to the United States. If it is paid back to the United States, it is subject to a dividend tax that can rise to as much as 35 percent. Companies are loath to pay this tax because while they can offset it with taxes paid abroad, the companies still end up paying a relatively high tax rate.

However, lower taxes won't solve the problem completely:

Five companies alone — Pfizer, Merck, Hewlett-Packard, Johnson & Johnson and I.B.M. — repatriated $88 billion, But the repatriation did not result in increased investment. Instead, companies largely repatriated the money and used their current United States holdings to pay out dividends or engage in share repurchases. This was contrary to what Congress had intended.

While the cash was not used for investment, this does not mean it did not have an overall positive effect on the American economy: shareholders went on to spend this cash. The study’s authors acknowledged this, stating that “presumably these shareholders either reinvested these funds or used them for consumption, thereby having indirect effects on firm investment, employment or spending.”

How can this be fixed?

A permanent tax reduction would not only cut taxes but actually raise revenue, allowing for Republicans to vote for it. And it should be a holiday without restrictions — trying to force companies to invest the money rather than pay dividends is a useless exercise that will create only more bureaucracy.

Even if the money were largely spent on buybacks and dividends and a large portion were kept abroad, it would still be reasonable to expect $300 billion to $600 billion to be repatriated. This money would flow into the economy, making the dividend tax cut a stimulus package that Democrats could support.

Lowering taxes isn't the complete solution, but there are ways to combat corporate loopholes and encourage the return of that money into the United States. Tax-friendly areas have been known to do well, as was chronicled in the WSJ documenting the success of the Swiss region Zug:

Developed nations from Japan to America are desperate for growth, but this tiny lake-filled Swiss canton is wrestling with a different problem: too much of it.

Zug's history of rock-bottom tax rates, for individuals and corporations alike, has brought it an A-list of multinational businesses. Luxury shops abound, government coffers are flush, and there are so many jobs that employers sometimes have a hard time finding people to fill them.

Zug provides an example where lower taxes has helped grow the economy and grow tax revenues. This is because as the economy has grown, there's been more wealth to kick back to the government. The government are getting lower percentages of incomes, but those incomes are growing because of the burgeoning economy.

We've actually seen this work in the United States before, when Reagan cut outrageous taxes leftover from the Carter administration. While this didn't rejuvenate the economy immediately, it helped the economy regain momentum through the 1990s, while the Clinton administration operated at a budget surplus.

Government officials need to take a hard look at this. The debt crisis is clearly an important issue. The solution, however, must make long-term sense. To me, this means that the government should encourage economic growth to raise in the future tax revenues. The shortfall from lowering taxes can be done by cutting spending.

The answer to our problems is addition by subtraction. The economy needs a boost. This is the way to do it.

Obama's Bank War Continues

Here are Greg Mankiw's Thoughts:

Will the tax law in fact be so well written? It certainly won't be perfect. But it is possible that it will be better than doing nothing at all, watching the finance industry expand excessively, and waiting for the next financial crisis and taxpayer bailout.

More Taxes

on banks...

President Barack Obama said the levy he wants to impose on as many as 50 large financial firms is aimed at getting back “every single dime” that taxpayers put in to bailing out those companies.

Here's a quote from Obama on the matter:

“My determination to achieve this goal is only heightened when I see reports of massive profits and obscene bonuses at some of the very firms who owe their continued existence to the American people,” Obama said at the White House.

This doesn't sound like a good idea:

“Using tax policy to punish people is a bad idea,” JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon, 53, said after testifying yesterday at a hearing of the Financial Crisis Inquiry Commission in Washington. “All businesses tend to pass their costs on to customers.”

They're trying to promote bank recovery, but now they're trying to recoup tax payer money? It seems like they're trying to kill 2 birds with one stone, but those birds are in opposite directions.