On today’s edition of Coffee and Markets, Brad Jackson and Ben Domenech are joined by Ryan Ellis to discuss Herman Cain’s 9-9-9 Plan and Rick Perry’s Cut, Balance and Grow proposal. We’ll talk about which one of these has a better chance of making it through Congress, the impact they’ll have on your bottom line, and whether they will be able to restart America’s failing economy.

We’re brought to you as always by BigGovernment and Stephen Clouse and Associates. If you’d like to email us, you can do so at coffee[at]newledger.com. We hope you enjoy the show.

Related Links:

9-9-9: A Discussion with Herman Cain
Governor Rick Perry’s Tax Reform Plan
ATR Summary of Perry Tax Plan
Cain’s Responses on 9-9-9 Answered
Herman Cain Was Against a VAT Before He Was For It
Perry tax plan would raise either $4.7 trillion or $1.7 trillion less than CBO baseline through 2020
On second glance, Perry flat tax scores better on revenue and growth
A Slow-Growth America Can’t Lead the World
Herman Cain’s 9-9-9 Plan
Rick Perry’s Cut, Balance and Grow

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The hosts and guests of Coffee and Markets speak only for ourselves, not any clients or employers.

On today’s edition of Coffee and Markets, Brad Jackson and Ben Domenech are joined by Kelly Cobb, Government Affairs Manager for Americans for Tax Reform to discuss the section of the Dodd-Frank bill that institutes price-controls on debit card transactions, how this new law is effecting banks and how the changes mean a worse, not better environment for consumers.

We’re brought to you as always by BigGovernment and Stephen Clouse and Associates. If you’d like to email us, you can do so at coffee[at]newledger.com. We hope you enjoy the show.

Related Links:

Little saved from lower debit fees
Like your free checking account? Prepare to say goodbye
ATR Will Rate a Vote on Tester Interchange Fee Amendment
Kelly Cobb at ATR

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The hosts and guests of Coffee and Markets speak only for ourselves, not any clients or employers.

Job #1 of the Super-Congress is Tax Reform.  This is our best chance to simplify American tax policy so a second grader can explain it.

Grover must pledge: Cutting the Tea Party's taxes matters most!

Crucial point: Grover Norquist is a good guy, but my main concern is not do taxes go up overall?

What I care about is: Do the Tea Party’s taxes go down a lot?

If we see overall tax revenues increase because GE is not getting green dollars, while all the small business owners are paying MUCH MUCH less – we have a winner.   You hear that Pelosi?  I just gave you some solace; render unto the patriots their due, and at least you can show your team some Fortune 1000 scalps.  Of course they won’t donate to your team any longer, but you should only get donations from the lower classes anyway.

Let’s be straight forward about what we want to see in a new tax policy:

1. The bottom half of America must pay at least as much as they pay now.
2. The Wall Street investor class and the Fortune 1000 management can pay more.
3. The owners of small businesses across the US, the savers, the scrimpers, the Tea Party faithful pay MUCH LESS.

Because when we say “broaden the base, end the loopholes, and lower the tax rates” – the above is exactly what we really mean.    And we can’t let Grover Norquist’s Tax Pledge screw us up.

Example: The idea of a special rate for capital gains sounds good, but it is ridiculous.  Ask Grover and he’ll say it is, “double taxation.”

But, a small business owner is actually AN INVESTOR.   He just invests in himself.   And every dollar he makes that he re-invests in his own companies is no different than a Wall Street or Real Estate investor who takes profits and buys more stock or a new building.

You might not know this, but under current tax law (rule 1031) when a Real Estate investor sells a building for a profit, he pays NO taxes if he buys another building in 90 days.

But if a small business owner earns $250K in profit, he pays income tax on that before he can re-invest it in another business idea he has.

Let’s say Tom and his partner Steve have a string of frozen yogurt shops in their local market.  Why should Tom have to treat his profts as income, if he wants to partner up and put money into an Internet startup with his nephew?  Why should the IRS encourage Tom to keep building yogurt shops  just so he doesn’t have to declare those profits as income?   Why isn’t Tom as free to decide what to do with his profits as as any other  investor?

Treating small business owners better than we treat real estate and Wall Street investors is an idea whose time has come. The Super-Congress should concern itself with cutting the Tea Party’s taxes and forget about everybody else.

If the Super Congress doesn’t dump truck loads of money at the feet of small businessmen, the Tea Party should RIOT.  Even if it means just that the automatic cuts go into effect, every GOP congressman should speak on the house floor, not against corporate taxes, but against taxes on small business.

It is time for the GOP to dance with the ones who brung them.  If it means the owners of main street get to pay less, Warren Buffett and the founders of Google should pay more.

And if Grover Norquist (and his donors) aren’t on board with “Tea Party first” thinking, then he’s really not for the right kind of Tax Reform.

It is time for Grover to take our pledge.

First, some background. One side of this battle is led by Grover Norquist of Americans for Tax Reform, who is the organizer of the no-tax-increase pledge. Grover argues that America’s fiscal problem is too much spending and that higher taxes are economically and politically foolish.

The other side of the conflict is led by Senator Tom Coburn of Oklahoma, who argues that America’s fiscal problem is too much red ink and that higher taxes are a necessary price to strike a deal with Democrats that supposedly will reduce budget deficits.

The first  skirmish in this fight involved ethanol tax credits. Senator Coburn wanted to get rid of the credit, which everyone agrees is economically destructive and fundamentally corrupt.

But there’s a catch. when you get rid a tax preference, even an odious one, that means the government gets more money. In other words a tax increase. Senator Coburn has no problem with that outcome.

Grover Norquist says that all of the arguments against ethanol are correct, but he says that any proposal to get rid of the credit should be accompanied by a tax cut of equal magnitude.

If the ethanol credit is worth about $6 billion per year, as Senator Coburn’s office states, then find a tax cut of similar size, pair it with the ethanol credit, and kill two birds with one stone. Seems like the best of all possible outcomes, which is why Grover is correct from a policy perspective.

The fight over the ethanol credit may seem like a tempest in a teapot, but it was symbolically important – particularly since it is a precursor for the much bigger fight about whether GOPers should agree to a budget deal with Democrats.

Indeed, this may already be happening as part of the “Gang of Six” negotiations, with Senator Coburn and two other Republican Senators joining three Democrats in putting together some sort of grand compromise (presumably something similar to what was proposed by Obama’s Fiscal Commission).

In this case, the tax increase could be enormous, well over $1 trillion. No wonder this battle is getting heated. Here are some excerpts from a recent story in the Washington Post.

Republicans are feuding over whether to abandon the party’s long-held opposition to higher taxes in pursuit of a deficit-cutting deal with Democrats. …both sides say this cuts to the core of a quandary for the GOP: Will the cause of trimming deficits run aground on the conservative principle that the government must not increase the amount of money it takes in through taxes? …“If we don’t do something, what we’ve done is put the country at risk,” Coburn said in an interview. “I agree we ought to cut spending, but will we ever get the spending cut to the level that we need to without some type of compromise?” Norquist…argues that bipartisan deals struck by Presidents Ronald Reagan in 1982 and George H.W. Bush in 1990, both of which entailed increased taxes, resulted in bigger government rather than spending cuts that both men thought they had secured. “This is a fantasy on the part of the liberal Democrats that the Republicans would be stupid enough to repeat 1990 and throw away a winning hand politically,” Norquist said.

As the excerpt correctly acknowledges, this issue deals with both economics and politics. From an economic perspective, there are all sorts of important issues:

1. What is better for the economy, lower spending or higher taxes?

2. Is it possible to balance the budget without higher taxes?

3. Would tax increases be used for deficit reduction or more spending?

But I covered these issues in my earlier post, so lets’ look at the political implications. Grover asked, in the Washington Post article, “Why would you elect a Republican Senate if they just sat down with Obama and raised everyone’s taxes?” And I was quoted about how abandoning the no-tax-hike position would heavily damage the GOP.

How the debate among Republicans is resolved in the coming weeks will play a large role in determining whether a grand bipartisan bargain on deficit reduction is possible. “There’s a significant split over whether to put taxes on the table,” said Dan Mitchell, an economist at the libertarian Cato Institute and a Norquist ally. Mitchell said the disagreement largely pits House and Senate Republicans against each other and gives Democrats a potential political edge. “Obama has it within his power to drive a big wedge between House and Senate GOP-ers and turn the tax issue from something that works on behalf of Republicans into something that works against them,” he said.

To elaborate on the last point, the no-tax-increase pledge helps the GOP because it sends a signal to all voters that they will not be raped and pillaged (at least in excess of what is happening now).

This puts Democrats in a tough position. They can play the politics of class warfare (as Obama likes to do) and say only the “rich” will pay higher taxes, but voters don’t dislike their upper-income neighbors. Moreover, they probably suspect that Democrats have a very broad definition of what counts as rich, so they instinctively gravitate to the GOP position. After all, the only sure way of avoiding a tax hike on yourself is to oppose tax hikes for everyone.

If Republicans put tax increases on the table, however, the politics get turned upside down. Instead of being united against all tax increases, voters realize somebody is going to get mugged and they have an incentive to make sure they’re not the ones who get victimized.

That’s when soak-the-rich taxes become very appealing. Democrats, for all intents and purposes, can appeal to average voters by targeting the so-called rich. And even though voters will be skeptical about what Democrats really want, they don’t want to be the primary target of the political predators in Washington.

Think of it this way. You’re a wildebeest running away from a pack of hyenas, but you know one member of your herd will get caught and killed. You despise hyenas, but at that critical moment, you’re main goal is wanting another member of the herd to bite the dust.

This is why surrendering to tax increases put Republicans in a no-win situation. They oppose class-warfare taxes because they understand the disproportionately damaging impact of higher top income tax rates and increased double taxation of dividends and capital gains. So when GOPers get bullied into agreeing to raise taxes, they want to target less destructive sources of revenue. But that usually means that taxes that are more likely to hit the middle class.

Needless to say, Democrats almost always win if there is a fight on whether to tax the middle class or to tax the rich.

Senator Coburn’s heart is in the right place, but he is creating a win-win situation for Democrats. By putting taxes on the table, he is giving Democrats a policy victory and a political victory.

I’m a huge fan of Senator Coburn, who was in favor of cutting wasteful spending before it became fashionable. His office, for instance, releases a “Pork Report” every couple of days. But you shouldn’t read it if you have high blood pressure, because it will confirm (and reconfirm, and reconfirm, ad nauseum) your worst fears about tax dollars getting wasted.

Nonetheless, I’m on Grover’s side on this tax debate for two reasons.

First, we have a spending problem, not a revenue problem or a deficit/debt problem. Red ink is undesirable, to be sure, but it is a symptom of the underlying problem of a government that is too big and spending too much.

But don’t believe me. Here is a chart from the House Budget Committee showing long-run projections for spending and revenues over the next 70 years. As you can see, the long-run fiscal shortfall is completely caused by higher spending. In other words, 100 percent of red ink is due to government spending. So why put taxes on the table?

But this chart actually understates the case against tax increases. It uses revenue numbers from the Congressional Budget Office’s “alternative” forecast, which shows taxes steady at 19.3 percent of GDP. That’s more than the historical average of about 18 percent of GDP, which surely indicates that revenues are not the problem.

However, that 19.3 percent estimate is completely artificial. As CBO states in its long-run forecast, “the alternative fiscal scenario also incorporates unspecified changes in tax law that would keep revenues constant as a share of GDP after 2020.”

I’ll actually be delighted if we can permanently keep federal revenues below 20 percent of GDP, but I’m not overly optimistic because the tax burden is projected to automatically increase over time. And I’m not talking about the expiration of the Bush tax cuts or the alternative minimum tax. Yes, those factors would push up tax revenues (at least based on static revenue estimates), but the tax burden also is expected to climb because even modest economic growth slowly but surely pushes more and more people into higher tax brackets.

This second chart shows CBO’s estimate of personal income tax revenue based on current policy (as opposed to estimates based on current law, which includes already legislated tax hikes). To be more specific, it shows how much revenue the government will collect from the individual income tax even if the 2001 and 2003 tax cuts are made permanent and the AMT is indexed.

As you can see, the aggregate individual income tax burden will increase by roughly 5 percentage points of GDP when compared to the long-run average of about 8 percent of GDP (the CBO estimate only goes to 2035, so I extrapolated to show the same time period as the first chart). And remember, this is the forecast of what will happen to income tax revenues even if politicians don’t impose any new laws to coercively extract more revenue.

This might not be too bad if other taxes were falling, but that’s not what CBO is projecting. As such, this big increase in revenue from the individual income tax means that the overall tax burden will climb by approximately the same amount.

In other words, revenue likely will rise close to 25 percent of GDP as we approach the next century. So if we use this more realistic baseline, we can say that more than 100 percent of the long-run deficit problem is because spending is out of control.

The second reason for a firm no-tax increase position is that higher taxes are a very ineffective way of reducing budget deficits. Indeed, tax increases generally backfire and lead to more red ink. To understand why, it’s important to put away the calculator and instead consider the real world of politics and public policy. For instance:

o  Tax increases rarely raise as much revenue as predicted by government forecasters. This is because of “Laffer Curve” effects, as taxpayers change their behavior to earn less income and/or report less income. Simply stated, people respond to incentives, and this means taxable income falls as tax rates increase.

o  Tax increases erode pressure to control spending. Why would politicians want to make tough decisions and upset special interest groups, after all, when there is going to be more revenue (or at least the expectation of more revenue)? Using more colloquial language, trying to control spending with higher taxes is like trying to cure alcoholics by giving them keys to a liquor store.

o  Milton Friedman was right when he said that, “In the long run government will spend whatever the tax system will raise, plus as much more as it can get away with.” In other words, if politicians think they can get away with deficits averaging, say, 5 percent of GDP in the long run, then the the only impact of higher taxes is an equal amount of additional spending – while still retaining deficits of 5 percent of GDP.

The real-world evidence certainly points in this direction. We’ve seen “bipartisan budget summits” several times in Washington, and the result is more spending rather than lower deficits. Americans for Tax Reform has a good analysis of what happened after the two big budget summits in 1982 and 1990, but I think the problem is best captured by my adaptation of a famous Peanuts cartoon strip.

Every year, if my aging memory is correct, Lucy would ask Charlie Brown if he wanted to kick the football. At first, Charlie was skeptical. But Lucy always managed to trick him into giving it a try. And the inevitable result was Charlie Brown lying on his back wondering why he had been so foolish.

In the Washington version of this cartoon, Democrats hypnotize gullible Republicans with ostensibly sincere promises of future spending restraint. Republicans eventually acquiesce, naively assuming that Democrats will be their new best-friends-forever in the fight against big government.

Needless to say, that’s not the way the story ends.

Ronald Reagan is reported to have said that the 1982 tax increase was the “biggest mistake” of his presidency. And since Congress never followed through on commitments to reduce spending by $3 for every $1 of higher taxes, he wryly remarked that, “I’m still waiting on those three dollars of spending cuts I was promised from Congress.”

Like Ronald Reagan, Tom Coburn wants to do the right thing. But good intentions are not the same as good policy. America’s fiscal challenge is too much spending. Government is too big and it is wasting too much money. Taking more money from the American people is not the way to solve that problem.

That being said, Kevin Williamson makes a good point when he says that some supply-siders have neglected the spending side of the fiscal ledger. And it certainly is true that Republicans don’t seem very interested in curtailing the growth of government. But does this mean, as Williamson argues, but that our choices are limited to 1) a 36 percent spending cut, 2) catastrophic deficits and debt, or 3) a European-style value-added tax.

I actually think it would be a great idea to reduce the budget by 36 percent. That would bring the burden of federal spending back down to where it was in 2003. Notwithstanding the screams from various interest groups that this would generate, nobody was starving in the streets when the budget was $2.3 trillion rather than today’s $3.5 trillion. But Kevin is unfortunately correct in noting that this type of fiscal reform won’t happen.

Kevin is wrong, however, in saying that we therefore have to choose between either Greek-style deficits or a VAT.

According to the Congressional Budget Office, tax revenues over the next 10 years will increase by an average of about 7.3 percent each year – and that’s assuming the tax cuts are made permanent and the AMT is adjusted for inflation. Reducing red ink simply requires that politicians exercise a tiny bit of restraint so that spending grows by a lesser amount. This video walks through the numbers and shows how quickly the budget could be balanced with varying levels of spending discipline.

By the way, it’s worth pointing out that the VAT has not prevented gigantic deficits in nations such as Greece, Japan, Ireland, Spain, England, etc, etc. Politicians in those nations implemented VATs, usually with promises that the money would be used to reduce other taxes and/or lower red ink, but all that happened was more spending and bigger government (this cartoon makes the point in a rather amusing fashion). In other words, Milton Friedman was right when he wrote that, ”In the long run government will spend whatever the tax system will raise, plus as much more as it can get away with.”

“There is no evidence of a market failure to justify the burdensome government regulations some are proposing,” the letter read. “Unfortunately, it appears that a few FCC commissioners lack an understanding of how regulations affect investment.”

Proponents of the FCC’s proposed broadband rules note that the issue of Net Neutrality is one in which conservatives are purportedly split. The Christian Coalition of America, a social conservative advocacy group, endorsed the Left’s overtures at re-regulating the Internet.  Likewise, Gun Owners of America have also voiced support for the controversial policy.

But last week’s letter–whose signatories include the likes of American Family Association President Tim Wildmon, Tom McClusky of the Family Research Council, prominent Catholic Deal Hudson and Mrs. Schlafly–suggest the Right, as a virtually unified whole, has turned a page in the debate over a dynamic Internet, and now is staunchly and almost uniformly opposed to what some critics call “a government takeover of the Internet.”

Among their principal stated grievances was the much-debated purported result of net neutrality: All content would be equal, and therefore ISPs would be forced to treat pornography the same as family-friendly content.

“Net Neutrality regulations also call into question how obscenity and other objectionable content on the Internet is treated,” warned the letter. “Let’s be clear, all content is not equal and does not deserve equal treatment, but net neutrality prohibits broadband service providers from prioritizing content consumers want and preventing peddlers of child pornography from having unblocked access to every home Internet connection.”

While the group’s letter was delivered only to Members of Congress, and not filed with the FCC, they hope it will spur public interest in the issue. The Commission announced in early April it had extended the deadline for public comment on the new regulations. Those interested in commenting may do so here (proceeding 09-191) this week.