Randy Hunt's Blog

Why 9-9-9 is headed for the deep six

Link: http://randyhuntcpa.blogspot.com/2011/10/why-9-9-9-is-headed-for-deep-six.html

I watched analysts battle over the positives and negatives of Herman Cain's 9-9-9 tax plan this past weekend. After hearing their arguments and using my own CPA noggin, I'm coming down on the side that it's a great slogan but falls down in two key ways.

So we're on the same page, here are the main points from Cain's website. The 9-9-9 plan would eject the current tax code and replace it with a 9% tax on personal income, a 9% tax on corporate income, and a 9% federal sales tax. The only deduction for personal income tax returns would be charitable donations. Deductions from gross income for businesses would be purchases from other U.S. located businesses, capital investments, and net exports. The federal sales tax would be on new goods, but I haven't been able to determine if services would be taxed. In fact, other than the vague bullet points on Cain's election website, I haven't been able to locate the actual 9-9-9 plan. Although a tax code that can be printed on a note card seems appealing, it's doubtful that one that short could actually be implemented.

Here's why 9-9-9 is destined for failure:

1) It scraps the long accepted graduated tax system for one that favors people with discretionary income. A person making $50,000 in wages and who has no charitable deductions would pay $4,500 (9%) in federal income tax. An additional 9% in federal sales tax would be assessed on expenditures. Because there's no actual 9-9-9 plan to read yet, I'm not sure if spending on car and house payments would be taxed or if services would be taxed. Are utilities considered new goods or services? Let's assume that this person spends $25,000 on federally taxable stuff. That would amount to an additional $2,250 for a total of $6,750, or 13.5% of the $50,000 wage.

Now let's consider someone who makes $1,000,000 in salary and spends $250,000 of it to support a nice lifestyle. Assume again that half of the $250,000 is spent on federally taxable items. Federal income tax would be $90,000; sales tax would be $11,250. That totals to $101,250, or 10.125% of the $1 million salary.

How does that compare to the current tax code? A single person earning $50,000 with no itemized deductions pays $6,350. A married couple earning $50,000, again with no itemized deductions, pays $3,061. A single person earning $1 million would certainly be able to itemize deductions, so it's not realistic to assume a standard deduction for such a person, but for laughs, let's do just that. A single person earning $1 million would pay $324,371. A married couple would pay $313,763.

Therein lies the political challenge for 9-9-9. Lower paid folks would pay a higher percentage of their earnings in taxes than people who earn more than they spend. Secondly, compared with the current system, 9-9-9 provides a significant reduction in actual dollars paid in federal income taxes for high earners, while the opposite is true for lower earners. Some people may like this idea, but it won't fly at the ballot box.

2) The introduction of a federal sales tax is just too tempting as a new revenue source for Congress. The Fair Tax Act, as formulated by Neal Boortz and John Linder, calls for a national sales tax but marries the idea with the repeal of the 16th Amendment, which would abolish the federal income tax.

Herman Cain's 9-9-9 plan, according to his campaign website, is step one of a two-step process, with step two being adoption of the Fair Tax Act. The problem I see is that, in the unlikely event that Cain is elected and 9-9-9 becomes law, Congress would start dreaming about how great a 12-12-12 plan would be, or a 20-20-20 plan. Income taxes would remain on the table and the easy way to avoid spending cuts would be to crank up the national sales tax. More tools in the tax hike toolbox is a recipe for disaster.

Tax reform is needed, but I believe we will have to whittle away at the tax code we've got. Eliminating loopholes and tax preferences will result in a fairer tax system without cutting the safety net we have in place for our less fortunate citizens. Anyone who thinks they'll win the presidency on a tax policy that goes after lower wage earners to benefit high wage earners is just not tuning into the national debate.

I got my sense of humor from Mom

My mom will be 85 next month. She suffers with Alzheimer’s and our conversations are too infrequent and, unfortunately, rather shallow nowadays. It’s all part of the inevitable progression of this disease. Maybe someday we’ll find a cure.

I have many fond memories of the crazy things she used to say. I realize now that she is the source of my sense of humor and some of the off-the-wall thoughts that invade my mind during key moments at important business meetings.

Not that my dad didn’t have a sense of humor. He laughed at funny things, particularly at his favorite shows, like Hee Haw. But he didn’t tell many jokes or make many wise cracks.

Mom, on the other hand, would be in the kitchen and say stuff like “Lord have mercy!” I’d look to see what the emergency was and she’d say “This water is never going to boil. The faucet’s colder than a well digger’s butt.”

I remember being a passenger one time when she pulled the car out of the driveway. After adjusting her mirror, she looked past me to the right rear view mirror and said “I can’t see anything out of that mirror. Change it.”

“Which way?” I asked.

“I don’t know,” she said, “I can’t see anything.”

“Can you see the glass of the mirror?”

“Yes.”

“Then what’s reflecting off the glass?” I asked.

“Nothing. I can’t see anything.”

“Well is it gray, like a road? Or blue, like the sky?” I pressed on, being a bit of a jerk, I admit.

“It’s nothing. There’s nothing in the mirror.”

“It can’t be nothing,” I insisted. “Light waves are reflecting off of the surface of the mirror, bouncing into your eyeballs and hitting your optic nerves, so you must be seeing something.”

“Oh, yes,” she said. “Now I see something. I see me putting the car in park, leaning over and wringing your neck.”

“How about now?” I asked after moving the mirror to where I thought it should be.

“Much better.”

I remember a time years earlier when I was in grade school and my friend, Ducky, and I were with my parents driving back from the city dump. It was a hot, summer day and the windows were rolled down. We had our arms out our windows, pretending our hands were airplanes climbing up and swooping down.

We asked if we could play outside when we got home. Mom said, with a completely deadpan expression, “Nope. Too windy.”

She put her arm out the window, catching the 60-mph air and demonstrated to us how windy it was.

“But that’s because we’re driving,” we said, with half a question mark at the end. I mean, was she serious? Even we kids, who only had the benefit of two years of schooling could figure out the it wasn’t the air, but the car that was creating the wind.

“Nope. Too windy.”

Our shoulders dropped and we slumped down, overtaken by our disappointment in her misunderstanding of the physics of air and a car moving through it at 60 mph.

She got me plenty of other times. I grew to anticipate these games and got her back on occasion as well. I miss those exchanges with her, but I’ve got my memories that I guard like heirlooms.

Copyright 2010 Randy Hunt

Health care reform: This Edsel just might fly

In my most recent post, I laid out a 3-step process for ushering in single-payer health care. See it here. Actually, it’s only a 2-step process, the third step being to sit back and watch the new health insurance system crash and burn.

Here’s the summary:

Step One – Pass the law in spite of public opinion and zero bipartisan support: Check.

Step Two – Move the Supreme Court to the left by appointing one more liberal justice: Not so easy.

Step Three – Watch this unsustainable insurance reform spiral out of control—if anyone doubts this will happen, take a closer look at Massachusetts—necessitating another revamp of the system, namely, a government controlled, single-payer system.

What we’ve seen from the right since this law passed centers around two strategies:

1) Repeal the law.

2) Challenge its constitutionality.

Repealing the law seems unrealistic to me. Calls to do this ring more of sour grapes than anything doable. I don’t intend to confiscate anyone’s sour grapes—there are plenty of bunches to go around—but I don’t see a path to repeal, at least by a vote of Congress, without some unlikely, veto-proofing change in the balance of Congress.

Certain aspects of the 2010 Health Care Act, on the other hand, are the object of challenges by a number of states’ attorneys general on the grounds that these requirements are unconstitutional, the primary one being the forced purchase of health insurance policies.

I’m not a lawyer, just a bean counter, but I would guess that if some items in this 2000-plus-page reform law were to be declared unconstitutional, it would not undo the entire bill. Rather, it would just strike those clauses that don’t pass muster.

And that is likely to gum things up.

The argument goes that, if the requirement to purchase health insurance turns out to be unenforceable, a lot of people would wait to sign up for insurance until they get sick, then take advantage of the no-pre-existing-condition rule to purchase insurance just in time for chemotherapy and radiation treatments, dropping the policy immediately thereafter.

Massachusetts has had a no-pre-existing-condition law since the 1990s. Maybe some Bay Staters are pulling this stunt now, but I’m not reading about it in the press. More likely, they are heading to an emergency room and piling up a ton of bills (which the state reimburses a portion of to the hospitals, costing hundreds of millions of taxpayer dollars every year).

So let’s back up for a minute and assume that the health reform act stays intact, surviving all challenges. How do we avoid jumping on the express train to a complete government takeover of our health care delivery system?

Make it work.

Simple.

If my cynical conclusion is true, that this unsustainable 2010 Health Care Act is a backdoor entre to a single-payer system, then the most effective way to battle it is to make it work.

And that can still be done.

It’s time for Republicans and conservative “blue dogs” in Congress to put their money where their tongue depressors are by introducing legislation featuring the cost control measures that have become somewhat of a “usual suspects list:”

Tort reform

Electronic medical records

Interstate competition of health insurance companies

I would add to that list a correction to what I believe is also running up costs: The invisible invoice.

Even if you receive a billing through your insurance company that itemizes the cost of your latest doctor visit, the fact that your responsibility ends with the $10 or $15 co-payment makes it unnecessary to flip through that bill to see what’s in it.

In the old days, we had to pay the doctor, then fill out insurance forms to request a reimbursement. I didn’t particularly enjoy this exercise, but I did know exactly what we were spending on doctor visits. In fact, that 20% co-payment (after we paid the $1,000 family deductible) was enough to keep us from sitting in the waiting room every other day.

The low, fixed price of an office visit encourages the overuse of primary physicians’ services which exacerbates the cost of defensive medicine, that is, doctors being forced to order unnecessary diagnostic tests and prescribing expensive medicines and therapies in an effort to avoid costly litigation.

In an interesting chain of events, the invisible invoice pushes up the cost of health care which, in turn, pushes up premium prices, which results in an even higher utilization of health insurance. It goes like this: “If I have to pay $1,000 a month for health insurance, I’m going to damn well use it.”

And the spiral continues…

So this is our challenge: Coming up with ways to make this health care reform work in order to avoid moving to a system where everything is “free,” because we all know (or should know) that “there ain’t no such thing as a free lunch.”

3-step process to single-payer health care

Last year, I argued that the health care reform bill being peddled by the U.S. House of Representatives, which incorporated a “public option,” was the first step to implementing a single-payer health care system. I wasn’t alone. Here’s Barney Frank saying just that:



When the public option disappeared from the proposed bills, President Obama declared it a nonissue. A nonissue, I thought? How could that be?

I had reasoned that a public option, subsidized by the U.S. Treasury, could offer health insurance at below market rates with no need to produce a profit and no danger of going under. That would eventually result in the demise of health insurance companies and thereby convert the nation to a de facto single-payer health care system.

I now see where I went wrong. There’s no need for a public option to transition to government-managed health care. All we need to do is to subject the nation to the failing Massachusetts experiment.

What started out to be a workable solution to Beacon Hill’s desire for universal health insurance got passed in 2006 sans cost containment measures and plan choices. That guaranteed budget busting premiums for individuals and employers and out-of-control costs for the commonwealth.

For the facts and figures regarding the Health Connector’s budget woes, see America's Consolidation of Healthcare by Outlawing Options (ACHOO).

Step 1 – Pass a national version of Massachusetts’ health insurance mandate; just make sure that it, like our law, includes no cost control measures. Spiraling upward costs are a key component on the path to a single-payer system.

The next problem is to clear the way for this bill—passed by the House on Sunday—to become law and withstand the certain challenges to its constitutionality by several states’ attorneys general and other Constitution-loving organizations.

I’m starting to believe that the delayed timing of implementing this bill is less tied to building the necessary bureaucratic infrastructure than it is to allowing adequate time for Obama to appoint a Supreme Court justice or two.

I know this is a bit of a stretch, given that three of the four liberal judges are all up there in years—Stevens will be 90 next month—but Scalia and Kennedy are both in their mid-70s. However, to seal the deal on “Change You Can Believe In” (I’ve always enjoyed the bad grammar of this slogan), you need to move the High Court to a majority of justices willing to interpret the Constitution to suit the White House’s wishes.

Step 2 – Shift the right leaning Supreme Court to a left leaning body by adding one more liberal justice.

With the first two steps accomplished, the rest is easy.

Step 3 – Watch this grand experiment blow a hole right through everyone’s wallet and bring hundreds of companies and scores of states to the brink of bankruptcy.

The only option that will then be available would be to go to a single-payer system. After all, who in their right mind would want to go back to the evil free market system after this colossal failure showed that the “new and improved” system didn’t work either?

If we don’t put the brakes on this 1-2-3 process, we’ll suffer with this unworkable bill for about a half dozen years, starting in 2014, and be crying “uncle.” By then, all of this will be 2020’s hindsight.

U.S. Census 2010: Counting on 300+ million psychics

Got my 2010 census yesterday.

Let me ask you something: How many people came to your party two weeks from now?

Confused?

So was I.

Here’s the message from the U.S. Census Bureau Director:

Note that it says, in bold type: Please complete and mail back the enclosed census form today. (I’d argue about the need for the word “back” in this request, but I digress.)

Now look at Question 1:

In case you can’t see it, it reads: How many people were living or staying in this house, apartment, or mobile home on April 1, 2010?

If I complete and mail this form today, as requested, just how am I going to answer Question 1 without the benefit of clairvoyance?