Presidential Candidate Herman Cain’s 9,9,9- all the German you need to know

Yes, it is highly regressive, and, worse, the 9% Federal sales tax is a transactions tax that discourages those transactions it taxes.

And, taking him at his word, it balances the budget, which leaves the economy even more short of aggregate demand than the current tax structure, meaning unemployment would be that much higher unless it somehow drives up private sector debt expansion by $trillions per year.

Cain: I’m the Only One Who Wants to Kill Tax Code

By Jeff Cox

October 12 (CNBC) — Now that Herman Cain’s stock has been rising in the Republican presidential scrabble, he’s drawing a clear line between himself and the other candidates when it comes to taxes.

Where his fellow GOP challengers are content to tinker with the current convoluted tax code, Cain says he is the only one who wants to junk the current system altogether and come up with a simpler way that everyone can understand.

It’s all part of his 9-9-9 proposal, which he discussed on CNBC.

“Their plans or ideas all pivot off the existing tax code,” the former CEO of Godfather’s Pizza said in an interview Wednesday. “My plan is the only one that throws out the tax code and is a fresh presentation of how we raise revenue on an expanded base.”

Cain has unexpectedly become one of the Republican leaders in the crowded field. Entering the race as a virtual unknown, Cain shocked the race by winning last month’s Florida straw poll. Recent surveys from Gallup and others have him in a virtual dead-heat with Mitt Romney, the frontrunning former Massachusetts governor.

At its core, the Cain plan slaps a 9 percent flat tax — no loopholes, no exceptions — on businesses, individuals and sales.

While the exact figures have yet to be released, the candidate said he has had his plan scored by an analytical firm and he will show that it generates more revenue while stimulating growth for the ailing U.S. economy.

“No, it is not regressive,” he said. “First of all, by putting it on sales tax — that third ‘9’ — we are going to pick up revenue that we are not getting today. That helps to lower the rate for everybody including the people that are making the least amount of money.”

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188 Responses to Presidential Candidate Herman Cain’s 9,9,9- all the German you need to know

  1. Mario says:

    Warren,

    Can people generate excess savings through horizontal money?

    Or is that impossible to accomplish b/c of the interest charged on all horizontal money whereas all fiscal expenditure has no interest charge attached to it?

    Reply

    WARREN MOSLER Reply:

    impossible because the dollars merely change hands, adding to the receiver’s balance and subtracting from the giver’s balance

    Reply

    JCD Reply:

    @WARREN MOSLER, Actually, I think there’s an interesting dynamic at work here.

    During a boom, credit expands, and both borrower and lender value loans (horizontal money) at nominal value.

    However, when asset prices start to fall, and credit contracts it may be that borrowers realize before lenders that the gig is up. The borrower knows before the lender that the loan may not be repaid — they are after all closer to the situation.

    In this case if it occurs systematically across the economy, horizontal money could in the minds of market participants create net money.

    I think this dynamic is behind ‘extend and pretend’. By leaving the loan on the books, lenders can pretend they have more assets than they really do.

    Reply

    WARREN MOSLER Reply:

    and then there’s the bezzle from Galbraith’s Great Crash:

    “In many ways the effect of the crash on embezzlement was more significant than on suicide. To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in – or more precisely not in – the country’s business and banks. This inventory – it should perhaps be called the bezzle – amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks.”

    JCD Reply:

    @JCD,

    Perfect.

    I always thought of the transition from the top of the business cycle to the bottom, as the tide receding out of a bay. When the tide goes down, all sorts of things below the surface of the water get revealed. Like Enron, or Madoff or Greece …

  2. John O'Connell says:

    Still out of reply buttons:

    So if we raise the deficit enough to fulfill the desire to save, but no more, then what happens to spending, aggregate demand and unemployment?

    WARREN MOSLER Reply:
    October 21st, 2011 at 9:21 pm

    Unemployment goes away

    Output is up due to more people working

    So, raising the deficit raises SPENDING, and aggregate demand, and employment. Just as I thought.

    I don’t understand why you say we need to raise the deficit to increase SAVING (“satisfy unfilled desire to save”) when the effect (the desired effect) of raising the deficit is on SPENDING, not on
    SAVING.

    Step by step, as I was taught in the dark ages of Keynes and Friedman, the increased deficit puts money into someone’s hands, and that someone has a marginal propensity to save and a marginal propensity to consume, expressed as percentages that add up to 100. He spends MPC, and saves MPS. And the next guy gets the MPC fraction of that deficit increase, and he spends some and saves some, and so on until someone saves the remainder.

    Along the way, there has been a whole lot of spending, a “multiplier” (=MPC/MPS) of the deficit increase, and a single unit of saving (= the deficit increase).

    Do you disagree with this traditional way of thinking about it? Or are you just trying to be clever (not to say obtuse and inscrutable) with your words?

    If you disagree, please explain why. If it is explained in 7DIF, I can’t find it there, so please point it out specifically.

    Reply

    WARREN MOSLER Reply:

    we need to raise the deficit to accommodate unmet savings desires.

    the macro problem is people want to work and produce output but don’t want to spend enough to buy all the output.

    so we need to cut taxes and/or increase govt spending to get that output sold that they don’t want to buy because they want to save.

    that is, they get the dollars they want to save by working and producing output.

    makes sense?

    Reply

    John O'Connell Reply:

    @WARREN MOSLER,

    I agree with all that, but I don’t see any unmet desires. Unless, perhaps, it is the desire of the people who need to spend all their income, which has been reduced because of the saving by others?

    (I’m having more flashbacks. The words my coach actually said were “You gotta have dizzARRRR”.)

    By “unmet desire”, then, you mean the difference between the amount of saving that is occurring and the amount that would occur if there were full employment?

    I see the math of that, I think, but not the logic of your wording of it. Even at full employment, there is a non-zero marginal propensity to save, no? How is that not also an “unmet desire”?

    Reply

    WARREN MOSLER Reply:

    and the unemployed aren’t hired when someone would have to reduce his savings to pay them with no hope of getting it back

    John O'Connell Reply:

    @John O’Connell,

    @Warren,

    “and the unemployed aren’t hired when someone would have to reduce his savings to pay them with no hope of getting it back”

    ?HUH? To what is this in response?

    Mario Reply:

    @John O’Connell,

    “and the unemployed aren’t hired when someone would have to reduce his savings to pay them with no hope of getting it back”

    if I’m getting his point, in other words, reducing savings is not going to increase output nor will it reduce unemployment levels. This is b/c more than likely the person will only reduce their savings when they HAVE TO not when they “want to.” That’s what savings are.

    WARREN MOSLER Reply:

    not what I was getting at.

    if you are looking for a job and reasonably qualified and can’t find one because no one is hiring, why aren’t they hiring?

    it’s because no one wants to spend any dollars to pay you (and of course not because there is nothing to do)

    spending dollars reduces someone’s dollar savings and adds to your dollar savings, and so on.

    John O'Connell Reply:

    @John O’Connell,

    I still have the feeling you’re responding to some other question, not mine.

    To respond to yours:

    Why is nobody hiring carpenters now? Because we already have too many homes, there is no need to build more of them (at least at current market prices – I don’t want to start a discussion of homelessness; sure, the Federal government is not constrained, and could buy up all the vacant mansions in Scottsdale to shelter the homeless, if it wanted to.)

    In this case, is there “something” for carpenters to do? Sure, they could build more houses. Is it something worthwhile to do?

    Like carpenters, if a person can’t find a job that he is qualified to do, it is because there is not enough demand for his output, whether it is housing, or computer programming, or steelmaking or whatever. I don’t see that as the desire (and especially not an UNMET desire) of a potential buyer (or the economy) to save, but as the result of the economy already having enough of what the person is selling — enough to meet the current demand for it. In macro terms, there is enough labor already employed to meet the aggregate demand, no more is needed.

    The answer is to raise aggregate demand, by govt spending more or taxing less. Not for the purpose of increasing SAVING (although that is a side effect, and may even be, mathematically, the gauge of when the stimulus is sufficient), but for the purpose of increasing SPENDING.

    WARREN MOSLER Reply:

    sort of.

    and ‘frictions’ are a separate matter.
    today most all jobs are in the service sector.
    lots of people needed to hold hands in nursing homes, for example
    but not to say that under employment isn’t a real cost.

    so, from the ‘beginning’

    non monetary societies don’t have unemployment as we define it- people looking for work that pays in dollars- as there are no dollars.
    they are doing things/given things to do on a non monetary basis. The men hunt and build houses, the women pick berries, grandma takes care of the kids, whatever.

    a currency, like the dollar, in the first instance, is a tool to move real goods and services from private to public domain

    to do this the gov imposes a tax payable in dollars, which creates what we call unemployment- people looking for work that pays in dollars.
    they, at the macro level, need the dollars to pay taxes and net save dollars as desired. that’s why ‘the economy’ works for dollars.

    the govt then buys the goods and services it wants. that is, it hires the unemployed it created.
    if there are unemployed remaining it’s because for the given tax, more unemployed were created than the govt wanted to hire.
    the answer is for the govt to either hire the extra unemployed it created, or reduce the tax to the point where they are no longer unemployed.

    John O'Connell Reply:

    @John O’Connell,

    @Mario,

    Economists use the word “savings” to mean two different things. If you had $100 in the bank, and last year added $10 to it, what was your “savings”, $10 or $110? It could be either one, depending on the context, and the context is not always made as clear as it should be made.

    Instead of adding $10, this year you add only $9, and now have $119 in the bank. Have you reduced your saving, or increased it? Depends on what you mean by “saving”. I think in the context of this discussion, you would have reduced it. That’s what affects this year’s spending and aggregate demand. “Saving” can go down from year to year while total accumulated savings rises. Think of “debt” and “deficit”, which are also frequently misused to refer to each other. If I had $1 for every time someone heard on TV “The deficit is $14 Trillion”, I might be able to pay off the national debt ;-)

    Mario Reply:

    @WARREN MOSLER,

    so we need to cut taxes and/or increase govt spending to get that output sold that they don’t want to buy because they want to save.

    Warren is that to say that you support the government buying up excess goods and services? Isn’t that a rather strange thing for the government to do? It kind of sounds like the Fed targeting NGDP no? You don’t support the Fed doing that do you?

    And what if those excess goods/services reflect a lack of demand for that product rather than a lack of excess savings?

    Reply

    WARREN MOSLER Reply:

    it’s a matter of politics. some would like to see more govt infrastructure, for example. that’s the govt using up the excess output it created when it over taxed for the size govt it had.

    others would rather the govt cut taxes.

  3. Mario says:

    apparently this is the latest and greatest from Ron Paul writing in the WSJ.

    Thoughts?

    http://online.wsj.com/article/SB10001424052970204346104576637290931614006.html

    Reply

    Mario Reply:

    @Mario,

    a central theme to MMT is zirp and the inefficacy of monetary policy. However many, many people feel that zirp creates bubbles. MMT needs to address this concern head-on somehow….and frankly other I myself haven’t heard much about how MMT handles this possible point against zirp either….Warren? Tom? Beo? etc.??

    people of my generation are really into RP and there’s just seemingly no way to talk to them otherwise. They really think they’ve got it “all figured out” with RP and Austrian econ.

    Reply

    Matt Franko Reply:

    @Mario, This is from Warren’s site a while back, tell your freinds that the Fed is giving up on these ideas as we speak… the Fed is catching up to MMT but it sure is taking a long time.

    http://www.federalreserve.gov/pubs/feds/2010/201041/201041pap.pdf

    Reply

    Mario Reply:

    @Matt Franko,

    nice Matt. Thank you!!!

    WARREN MOSLER Reply:

    Japan hasn’t had a bubble with 0 rates for plenty long to have fostered one?

    the latest US bubble came after rates were being hiked, and hard to say low rates caused any prior US bubble?

    Reply

    Mario Reply:

    @WARREN MOSLER,

    great points Warren!!! Thank you! I’m going to use those in the “heat of battle.” ;D

    MamMoTh Reply:

    @WARREN MOSLER,

    But we can argue Japan is still in a balance sheet recession.
    Hence 0% interest rates do not fuel inflation or bubbles.
    The question is what happens when horizontal credit starts expanding?

    WARREN MOSLER Reply:

    and i can argue that unemployment is always a balance sheet issue, and they are all balance sheet recessions.
    and 0 rates never fuel inflation or bubbles.

    and should horizontal credit start expanding we will hopefully see aggregate demand increasing as well, unless it’s from/with a drop in net imports or govt fiscal balance adjustments.

    :)

    Tom Hickey Reply:

    @Mario,

    What’s the specific argument that ZIRP creates bubbles, i.e., what is the causal mechanism they cite? If they don’t offer any causal explanation specifying the transmission mechanism, how is one to address it.

    Reply

    Mario Reply:

    @Tom Hickey,

    I think the argument goes something like this:

    lower rates = cheaper capital = mal-investment = bubble

    Tom Hickey Reply:

    @Mario,

    Right, that is the standard Austrian argument that has yet to be shown correct because it begs the question. The define malinvestment as everything that goes under after a crash. What does that say other assuming that low interest rates lead to crashes. Bubbles are not identifiable before crashes, or at least, no economic criteria for identifying bubbles have been shown so far. Moreover, the causality is complex. Interest rates may or may not be significant, but it is a stretch to claim that interest rates are the sole or primary cause. That has to be shown and I am not aware that anyone has done that convincingly.

    WARREN MOSLER Reply:

    except with floating fx the risk free rate is always 0 without some kind of govt. interference to make it higher,
    such as paying interest on reserves, selling tsy secs, etc.

    WARREN MOSLER Reply:

    they claim it fuels excess borrowing to spend

    Mario Reply:

    @Tom Hickey,

    bubbles can be measured through standard deviations of the mean, wide-spread cultural/social acceptance (expectation/assumption), and a general lack of rational thinking all of a sudden. But the standard deviations are really the kicker.

    Mario Reply:

    @Tom Hickey,

    @Warren

    except with floating fx the risk free rate is always 0 without some kind of govt. interference to make it higher,
    such as paying interest on reserves, selling tsy secs, etc.

    right so what about when banks are earning interest on reserves when rates are at zero and they can also buy treasuries too….doesn’t this create a free-money, no risk scenario for banks into the billions of dollars. Why do this? From this standpoint it is understandable why Austrians hate zero rates I think. If not for the mal-investment but for the banking subsidies. Wouldn’t you agree? I mean how else can it be?

    WARREN MOSLER Reply:

    If the fed pays interest on reserves that becomes the marginal cost of funds floor, not 0

    Where does ‘free money’ come in, whatever it means?

    Mario Reply:

    @Tom Hickey,

    @Warren

    what are banks legally able to do with their reserve holdings? Are they able to invest them in anything they want or is it limited to just treasuries or cash at the Fed? Legally can bank take those reserves and put them into other investment vehicles if they want like stocks, comms, even certain businesses or subsidiaries of theirs? Or do they have to keep that money at the Fed? Since there’s not any fractional reserve lending going on, as long as there are enough reserves for the balance of payments, what happens to the extra cash in reserves? And what can legally happen to that extra cash? Does anyone know?

    WARREN MOSLER Reply:

    Reserve accounts at the fed are like checking accounts in other banks.

    A bank with dollars in it’s fed reserve account can spend them on most anything from pencils to tsy secs

    But that spending then shifts the reserve balances to the bank of whoever sold the pencils

    So total reserves don’t change unless the fed does something to change them

    MamMoTh Reply:

    @Mario,

    My understanding is that reserve balances can only leave the banking system as cash withdrawn from banks by the public or as vertical transactions (tax payments, bond purchases).

    Don’t know if they can be parked abroad as eurodollars or something though.

    Mario Reply:

    @Tom Hickey,

    @Warren

    If the fed pays interest on reserves that becomes the marginal cost of funds floor, not 0

    Where does ‘free money’ come in, whatever it means?

    yes it becomes the floor, but isn’t that interest paid to them on the reserves a subsidy to them? How is it not? We don’t have to pay them on those reserves so why do we? What is the value of having the support rate if the target rate is not the same? The Fed offers funds at 0%-.25% and the big guys probably get it at 0%. They then get interest on that free money based on the support rate. That seems to be an arbitrage opportunity and hence “free money.” No?

    WARREN MOSLER Reply:

    They compete for those client balances so ‘market forces’ drive the rates banks pay for deposits towards the rate banks can earn, and sometimes higher. Check the rates your local banks pay on money market funds and see if it’s lower than fed funds or int on reserves. I guess in general banks pay more than that

    MamMoTh Reply:

    @Mario,

    The Fed’s quantitative easing programs increased the national
    debt by trillions of dollars.

    Now that’s utter nonsense!

    Reply

    beowulf Reply:

    @MamMoTh,

    You’d think a former Chairman of a Federal Reserve Bank would know that.

    Reply

    ESM Reply:

    @beowulf,

    @beowulf,

    I think you’re getting Paul confused with Cain. Or perhaps you’re getting obstetrics/gynecology confused with banking?

    beowulf Reply:

    @beowulf,
    Or perhaps you’re getting obstetrics/gynecology confused with banking?

    Its all plumbing in my book. :o)

    For some reason I thought the topic of this conversation was
    “Presidential Candidate Herman Cain”, so I assumed that’s who MamMoTh was quoting. Sorry for the mixup.

    Mario Reply:

    @MamMoTh,

    no mammoth…that’s UDDER nonsense!!!! Otherwise known as cow-sh_t….

    Reply

    Tom Hickey Reply:

    @Mario,

    Ron Paul from WSJ link cited above: “Money is like any other good in our economy that emerges from the market to satisfy the needs and wants of consumers. Its particular usefulness is that it helps facilitate indirect exchange, making it easier for us to buy and sell goods because there is a common way of measuring their value. Money is not a government phenomenon, and it need not and should not be managed by government. When central banks like the Fed manage money they are engaging in price fixing, which leads not to prosperity but to disaster.”

    Bonkers. “Money is good that emerges from the market to satisfy needs of consumers”? Really? RP is clueless, just like most of that ilk.

    Reply

    WARREN MOSLER Reply:

    in fact, there are pretty serious laws against counterfeiting

    Reply

    Matt Franko Reply:

    @Tom Hickey, What Tom? Here is some ‘emerging’ right here:
    http://tinyurl.com/4xuefxg
    Better late than never I guess! ;)
    More magical thinking from Ron Paul… Resp,

    Reply

  4. John O'Connell says:

    In your suggestions to reread 7DIF, I assume you mean:

    Deadly Innocent Fraud #3:
    Federal Government budget deficits take away savings.
    Fact:
    Federal Government budget deficits ADD to savings.

    The tenor of that one is that the government sets its budget, and the non-government is more or less “stuck” with whatever level of savings it determines. If there is a surplus, then non-gov financial assets go down (dissaving), and if there is a deficit they go up (saving).

    Whatever happens to non-government savings is due to the deficit, not to anyone’s (or everyone’s) collective “desire” to save.

    It’s a simple accounting identity, nothing more. If the government gives money to an individual who wants to spend it, he does so, and the recipient of that spending gets the choice to spend or save, and so on until all of it ends up in the hands of people who don’t care to spend it. I suppose if everyone spent it immediately, then it’s like musical chairs, at the end of the accounting period whoever happened to be holding it is a “saver”, even if it is spent in the first millisecond of the next accounting period.

    So, where do “desires” fit into this? Clearly the non-government sector could not increase their savings by more than the deficit, but how does the existence or non-existence of unemployment tell us anything about their “desires”?

    Or am I looking at the wrong DIF?

    Reply

    WARREN MOSLER Reply:

    Good start but keep reading.
    And start with #1 thanks.

    Reply

    ESM Reply:

    @John O’Connell,

    @John:

    “So, where do “desires” fit into this? Clearly the non-government sector could not increase their savings by more than the deficit, but how does the existence or non-existence of unemployment tell us anything about their “desires”?”

    The “desire” fits in as a plug to explain the relationship between aggregate demand and NFA held by the private sector (including the rest of the world). The larger the “desire” the lower demand is for a given level of NFA.

    In Japan, the debt/GDP ratio is 200%, yet there appears to be insufficient aggregate demand (there hasn’t been inflation for over a decade). That’s because the Japanese are misers.

    Americans are definitely not misers, but a significant portion of “savings desire” in USD comes from the rest of the world. And right now it appears that savings desire is elevated even in the domestic private sector because of the need to delever. The administration’s policies aren’t helping either.

    Reply

    John O'Connell Reply:

    @ESM,

    All desires aside, is not the level of non-government savings set by the size of the deficit, and not the other way around?

    Reply

    ESM Reply:

    @John O’Connell,

    In general, yes. But to the extent that tax and spend policy has automatic stabilizers embedded in it, the causality can run the other way. If people want to save, that slows down economic activity and reduces tax revenues, which then increases the deficit. I think that’s what we’ve been seeing for the last few years.

    WARREN MOSLER Reply:

    Yes

    WARREN MOSLER Reply:

    Depends on the institutional structure, but it is ultimately under govt control

    John O'Connell Reply:

    @John O’Connell,

    I see two conflicting answers here. Warren say “ultimately under govt control”, but also seems to agree with ESM that if people WANT to save, it slows down economic activity, etc etc.

    I would disagree with that wording. Wanting is not the same as doing. I agree that if people DO save, that would slow down economic activity, and the simple math remains that increased saving and increased deficit must coincide.

    But which is cause and which is effect? Is it under govt control, or does the government deficit respond to the economy?

    WARREN MOSLER Reply:

    in the first instance, not spending income means unsold inventory for business, called ‘involuntary savings’

    the second order event is business cuts production and lays people off so business doesn’t have unsold inventory
    and workers/owners don’t have the income to not spend.

    etc.

    Tom Hickey Reply:

    @John O’Connell,

    John, the sectoral balance equation is a national accounting identity. The actual figures at any time are obviously ex post facto, the summation of accounting entries. Thus, this is simply the nominal statement of a state of affairs in the economy with no causal implications.

    However, if one understands how the variables relate to the events that result in the accounting numbers, then it may be possible to discover causality operative. The is one thing that MMT does as a theory. According to MMT, propensity of the domestic private sector and the external sector to save are endogenously determined. The government’s fiscal balance is exogenously determined. Therefore, if (S-I) and (X-M) can be anticipated, then (G-T) can be adjusted so that the identity sums to zero at full employment.

    This theoretical understanding gives government control over the state of the economy wrt changing propensity to save by using appropriate fiscal policy to offset shifting propensity to save. Since it is difficult to anticipate shifts in propensity to save or consume, MMT advises using automatic stabilization in so far as possible for making adjustments rather than ad hoc legislation, which is cumbersome and untimely.

    John O'Connell Reply:

    @John O’Connell,

    @Warren,

    “in the first instance, not spending income means unsold inventory for business, called ‘involuntary savings’

    the second order event is business cuts production and lays people off so business doesn’t have unsold inventory
    and workers/owners don’t have the income to not spend.”

    Yeah, the Austrians and Keynsians know that, too.

    What this says to me is that the deficit must be large enough to offset the saving — what IS occurring, not any unfulfilled desires that are not occurring. Where do the unfulfilled desires come into play?

    WARREN MOSLER Reply:

    yes, the deficit = actual savings of net financial assets.

    unemployment shows there are people looking for paid work who can’t find it.

    that means, for example, if the govt hired them that extra govt spending would go to savings as it would increase the deficit

    and if govt cut taxes enough, they would get hired as well since everyone who wanted to work would be working
    which demonstrates that the deficit is high enough to provide the dollars desired to pay taxes and the net dollar savings desires.

    jim Reply:

    @John O’Connell,

    The desire to save is similar to the desire to balance the federal budget. The actual effort to implement the desire may not produce the intended result. If everybody is trying to save that reduces aggregate income and makes it more difficult for anybody to save (paradox of thrift)212.

    WARREN MOSLER Reply:

    right, actual savings of net financial assets equals the deficit

    if the actual savings falls short of the desired savings, the evidence is unemployment as defined

    John O'Connell Reply:

    @John O’Connell,

    “All desires aside, is not the level of non-government savings set by the size of the deficit, and not the other way around?”

    Hmmm. Wray says differently:

    “In reality, the size of the government’s budget deficit is largely ‘endogenously’ determined by the spending propensities in the non-government sector.”

    http://cas.umkc.edu/econ/economics/faculty/wray/papers/In%20Defense%20of%20Employer%20submittedJEI.doc

    If that is the case, the government cannot be blamed for a too-small deficit, when its deficit is determined by the non-government sector.

    But I don’t buy it. For a given set of laws and appropriations, I think the deficit is set exogenously within a fairly narrow band, and its exact size within the band may be determined endogenously by a multitude of factors, one of the less-important ones being the spending propensities of the non-government sector; and the most important one being the phase of the business cycle, and its relative intensity during the accounting period.

    Anyway, I think I’ve solved the math problem, and made sense of the quite confusing way you have of stating this.

    On to other questions.

    WARREN MOSLER Reply:

    Randy is referring to the results of the current institutional structure which is set up by govt, of course. so it’s still govt the way i see it

    John O'Connell Reply:

    @ESM,

    I should have said “unmet desire”. Agreed, larger savings means less aggregate demand. (And agreed about Japan and delevering.)

    Income is either spent or saved, nothing else can happen to it. How much is saved is determined by the desire to save. If there is any income, and any spending, then the desire to save has been met (spending is what is left over after saving desires have been reduced to a level less than spending desires). Desires are always greater than abilities. Even at full employment, nobody refuses a raise on the grounds that they are already spending and saving all they want to.

    If there is unemployment, and a larger deficit is the fix, then it is meeting unmet SPENDING desires that will fix it.

    Reply

  5. John O'Connell says:

    Warren,

    “Why else would the economy be willing to work for that unit of account other than to pay taxes or to net save them?”

    To spend them. In round numbers, consumption is 70% of the economy (or was, until recently). Taxes 20%, saving 10%.

    If there were no taxes, then yes, the physical currency would have no value other than its BTU content. But people would still work in order to earn credits that they could use to trade with, whether we used computer bits or notches on a stick for keeping score.

    Reply

    WARREN MOSLER Reply:

    think macro.

    why won’t anyone work for confederate dollars, or my business cards (tried but can’t sell them on ebay either)?

    in order to spend, there has to be a seller, so the question is why is all that stuff for sale in exchange for dollars?
    answer- taxes and net savings desires.

    again, the 7dif is on this website

    Reply

    John O'Connell Reply:

    @WARREN MOSLER,

    Yes, the reason they work for dollars and not your business cards is taxes. But they work not just to pay taxes or to save, they work mostly to spend.

    Reply

    WARREN MOSLER Reply:

    You’re still missing the infinite regression in your logic. Keep reading!

  6. John O'Connell says:

    Warren,

    “And your reword says the same thing.”

    I was kind of trying to say the opposite.

    Take today, for instance. If we took your advice and eliminated the FICA tax tomorrow, that would put more money into the economy instantly. If that money went to fulfill unfulfilled desires to save, it would have no good effect on the recession. Unemployment would remain unchanged. The point of doing it is for that money to be spent, not saved. I suggest that people, generally, are saving all they want to, and instead have unfulfilled desires to spend.

    Reply

    WARREN MOSLER Reply:

    right, if the fica tax wasn’t spent, output and employment would remain the same.

    which begs the question of why have a FICA tax in the first place if it wasn’t reducing aggregate demand?
    so in any case, if what you say happens, the FICA tax shouldn’t be there.

    And in that case it means we would still be grossly overtaxed for the size govt we had.

    again, a re read of the 7dif is in order, thanks

    Reply

    John O'Connell Reply:

    @WARREN MOSLER,

    Yeah yeah yeah. We both say

    Tax reduction –> spending increase –> lower unemployment

    And I would go further:

    Big enough tax reduction –> big enough spending increase –> full employment

    But you said

    “With unemployment total savings desires are not filled”

    and you argue for larger deficits to reduce unemployment.

    But

    Tax reduction –> spending increase –> lower unemployment

    says nothing about saving. How does saving enter into it? Explain how

    tax reduction –> fulfill saving desires –> lower unemployment

    Reply

    Mario Reply:

    @John O’Connell,

    it’s b/c if people have savings desires then that by definition will come before consumption activities. And consumption activity is what fuels employment as we clearly see today. So if public deficits aren’t large enough to fulfill private savings desires then consumption, and hence aggregate demand, which then leads to higher UE rates. That decrease in aggregate demand is typically some multiplier of the reduction in public deficits.

    Personally I’d LOVE to see more statistical data on multiplier effects in the economy from federal deficits…if you know of any feel free to direct me please and thank you.

    Cheers!

    PJ Pierre Reply:

    @John O’Connell,

    It is sometimes hard to see the forest through the trees.

    “spending increase” vs “fulfill saving desires”

    This is a bit of a semantic argument. (Net income)-(net savings)=(net spending). An order for net spending to increase, net income must increase or net savings must decrease or a combination of the two. If I am not mistaking, it is a basic rule of macroeconomics that all income must be spent in order for all output to be sold. So if all else is equal, X amount of savings = X amount of unsold output (unemployment).

    John O'Connell Reply:

    @John O’Connell,

    @Mario,

    So if we raise the deficit enough to fulfill the desire to save, but no more, then what happens to spending, aggregate demand and unemployment?

    WARREN MOSLER Reply:

    Unemployment goes away

    Output is up due to more people working

  7. John O'Connell says:

    Warren,

    “there are always more things to do than people and hours in a day to do them.”

    If they are things that would benefit someone in excess of their cost, then why are they not getting done? Why doesn’t the person who would benefit from having them done hire someone to do it, and pay him out of the profits?

    5 years ago it was impossible to hire someone even for the most profitable projects, because they were all working already. Not now. They are available today, but there is nothing worthwhile for them to do. Not “always”. Sometimes.

    Reply

    WARREN MOSLER Reply:

    again, a re read of the 7 DIF is in order.

    the desire to save/not spend keeps people from spending to hire the unemployed.

    Reply

    John O'Connell Reply:

    @WARREN MOSLER,

    Agreed, but that doesn’t mean there are not enough people or hours to do all the work that we WANT to be done. (I’m assuming you are talking about useful things to do, not wasteful things. There are certainly more wasteful or useless things to do than hours to do them all, but that is not your point, is it?)

    So if there are useful things to do, and people to do them, the reason they are not done is that saving is more profitable than spending to have those things done. They are not economically useful things to do, or somebody would do them and reap the profits, no?

    Reply

    Tom Hickey Reply:

    @John O’Connell,

    “They are not economically useful things to do, or somebody would do them and reap the profits, no?”

    There are a lot of economically and socially useful things that the private sector is either unable or unwilling to undertake, for a variety of reasons. The notion that everything economically useful must be monetized in order for it to be implemented is a norm, and there are alternative norms.

    MMT takes the fundamental economic and social norm wrt macro and economic policy to be full employment with price stability and works from there.

    WARREN MOSLER Reply:

    It’s when they want to net save rather than spend, often due to tax incentives.
    It’s that pesky govt…

    Keep reading!

    John O'Connell Reply:

    @John O’Connell,

    @Tom Hickey,

    What is the alternate norm that results in most beneficial use of scarce resources?

    WARREN MOSLER Reply:

    for example, what if you think the US should save it’s oil for when everyone else ran out?

    how would the market do that?

    Tom Hickey Reply:

    @John O’Connell,

    “What is the alternate norm that results in most beneficial use of scarce resources?”

    Individual choice expressed through a fair and open political process by an informed electorate rather than solely on the basis of markets, especially in a rigged system where the playing field is not level.

    ESM Reply:

    @John O’Connell,

    “Individual choice expressed through a fair and open political process by an informed electorate …”

    Tom, this is patently ridiculous. Voting is a group decision process, where even under the most favorable of circumstances, you are one of thousands of voters (and usually you are one of millions). That is not individual choice, even if the process is fair, transparent, and everybody is Harvard-educated (God forbid).

    Tom Hickey Reply:

    @John O’Connell,

    I happen to trust democracy more than markets. There ain’t no such thing as a “free” market, for instance. IMHO, it’s simpler and more worthwhile to work toward a more effective democracy than try to level the playing field wrt markets.

    John O'Connell Reply:

    @John O’Connell,

    @Tom Hickey:

    So, central planning rather than (admittedly imperfect) free markets and individual decisions? Like a government board that decides how many Volts GM should build (oh, wait, we have that, don’t we?) and how many people should be working in the computer industry and in farming? I think that’s been tried and hasn’t worked out so well.

    @Warren:

    You mean, like if XOM should decide some day to cease production in the US, and save their reserves for a few years, when they predict they can make more profits? Why not? Maybe if they don’t think that will be profitable, someone else will buy those reserves, at a price agreeable to both parties, and let them ripen. That’s hardly an alternative norm. Lots of oil sat untouched in the ground when prices were low, in a very capitalistic industry. Adam-Smith-like strategy.

    WARREN MOSLER Reply:

    i was thinking a govt directive to save it for later

    Tom Hickey Reply:

    @John O’Connell,

    Just where I did say “central planning.” You grant that markets are not perfect. I grant that central planning (command system) is not perfect either. Where’s the middle ground?

    Please don’t be dismissive. It doesn’t advance the argument.

    John O'Connell Reply:

    @John O’Connell,

    @Tom Hickey,

    You didn’t use the words “Central Planning”, but you advocated

    “fair and open political process by an informed electorate rather than solely on the basis of markets”

    and said “I happen to trust democracy more than markets.”

    Maybe I’m misunderstanding, but this seems to say we should vote on economic decisions, or perhaps to elect representatives to make decisions for us, rather than having us make decisions individually, in a marketplace of willing participants, however much differing market power or ethics the individual participants may have.

    Decisions like what Warren says, to have the government determine that oil production in the US should stop for now, waiting until the oil in Saudi Arabia runs out.

    That sort of policy decision seems to me to be the very epitome of a centrally planned, command economy.

    If I’ve misunderstood, please explain more.

    (I’m sorry to have been “dismissive”, but it seems like the entire world has dismissed the idea of a command economy, in favor of more personal freedom. Not only for economic reasons, BTW.)

    Reply

    ESM Reply:

    @John O’Connell,

    “…it seems like the entire world has dismissed the idea of a command economy, in favor of more personal freedom.”

    You must be living on a different planet than I. I think it’s part of human nature to be idealistic, and collectivism is built upon unrealistic ideals. The lessons of the 20th century will have to be relearned over and over again, I’m afraid.

    Reply

    John O'Connell Reply:

    @ESM,

    I have no idea what you mean.

    Let’s start with what “lessons of the 20th century” you refer to?

    ESM Reply:

    @ESM,

    The 20th century was the century where humans experimented with collectivism and command economies on a grand scale. Leaving aside Fascism (which I consider to be closely related to Communism), the Communist takeovers in the Soviet Union and China alone led directly to more than 50MM unnecessary deaths and the suffering of hundreds of millions more.

    The OWS protests are fascinating in that many of the protestors are trying to create tiny collectivist communities, even eschewing the concept of leaders (and soap apparently). But the evolution of these mini-societies is happening on an accelerated timescale in full view of the cameras. The inevitable crackup will not be pretty. Thankfully, there is a real functioning society for these guys to fall back on. So no people will starve, be thrown into a gulag, or be murdered … or at least not very many.

    WARREN MOSLER Reply:

    human nature drives some to collectivism which generally doesn’t work due to other aspects of human nature.

    Gary Reply:

    @ESM,

    “Communist takeovers in the Soviet Union and China alone led directly to more than 50MM unnecessary deaths and the suffering of hundreds of millions more.”

    yes, that was tragic – but most overlook that those revolutions were reactions to something. They were all born out of suffering and desperation (fascism included).
    So what caused the suffering and desperation?

    Another note – many ignore that those 3 examples actually caused very quick material advances in those societies. To he point where the rest of the world had to really mobilize and try to militarily stop them.
    Now, I am not saying these kinds of societies are viable – clearly they are not. But like I said – they were built in reaction to the previous type of society – which was also clearly not working.

    ESM Reply:

    @ESM,

    “…but most overlook that those revolutions were reactions to something.”

    Yes, pace Woody Allen, in Russia’s case it was when the people found out that the Tsar was every bit as ineffectual as the Czar.

    Gary Reply:

    @ESM,

    indeed… the key word is “ineffectual”

    Sergei Reply:

    @ESM,

    ESM: The 20th century was the century where humans experimented with collectivism and command economies on a grand scale.

    We all know about bad sides. What do you know about the good sides?

    ESM Reply:

    @ESM,

    @Sergei:

    “What do you know about the good sides?”

    Well, without communism we wouldn’t have Yakov Smirnoff, so I’m grateful for that.

    “In America, you can always find a party. In Soviet Russia, Party always find you!”

  8. John O'Connell says:

    Warren,

    “With unemployment total savings desires are not filled.”

    I don’t understand why not. If I want to save, I will. Why does a small deficit stop me?

    Reply

    WARREN MOSLER Reply:

    think macro,

    if the govt taxes 100, and ‘the economy’ wants to net save another 100, they can’t unless the govt spends 100 more than it taxes

    you need to read up on it again in ‘the 7 deadly innocent frauds of economic policy’ on this website

    Reply

    John O'Connell Reply:

    @WARREN MOSLER,

    I’m reminded of my high school coach who said “You’ve got to WANT it!”

    What he meant was that we want a whole lot of things, but if you’re not willing to sacrifice one of your wants for another, then you don’t really WANT that other. If you really WANT to make the team, then you’ll spend your time practicing, not chasing girls.

    So, if the economy has an income, and “wants” to save 100, but it doesn’t save that 100, it spends it instead … what did it really WANT?

    Are you saying that in order to eliminate unemployment, we must increase the deficit until there is enough money so that the spending WANTs are all satisfied, and then increase it some more so that all the savings “wants” are also satisfied?

    Reply

    WARREN MOSLER Reply:

    Keep reading thanks!

  9. Draco says:

    One interesting feature is that 9-9-9 only taxes new goods, not used goods. It seems to me that this will drive up the value of used goods as compared with new goods. People will tend to get more use out of their used goods, avoid new goods, and buy used goods from each other. What will this do to the retail manufacturing sector? (Think cars.) Should we buy eBay stock if this thing passes?

    Reply

    Coupon Clipper Reply:

    @Draco, That’s the way the sales tax works now AFAIK. I think this is the way it has to be, or else you’d end up with effectively a transaction tax instead of a consumption tax.

    Reply

    John O'Connell Reply:

    @Coupon Clipper,

    I think the state collects sales tax on a used car, too. In my experience, they get it when you register the car, but each state might do it differently. For stuff you buy on Cragslist, maybe not so much.

    Reply

    Tom Hickey Reply:

    @Draco,

    Exactly. Taxing consumption only makes sense in periods of high inflation. Otherwise, it is a recipe to decrease consumption, lower growth and cost jobs.

    The argument that prices will adjust to the new conditions without rising, therefore will not affect sales is bogus. Even if this were true, taxes act as a negative reinforcement of behavior. Adding a federal retail sales tax to state and local sales taxes will be strong negative reinforcement affecting consumption.

    This would also hurt the poor doubly, first with an increase in regressive taxation and also a rise in the cost of used goods. The way they make it now is by purchasing used goods very cheaply in comparison with new. If that avenue narrows for them because they are competing with the middle class, its game over for many of them. They won’t be able to make it without charity. But that is in the Cain plan, too, isn’t it. Cain projects that the rich will voluntarily give more. This gives new meaning to trickle down.

    Reply

  10. Matt says:

    I’m glad the MMT experts are looking at the 999 proposal. My first layman’s impression was that it would probably make the deficit much bigger than it is now so that would be a good thing, but if it actually reduces demand for working people then no thanks.

    Newbie question: My reaction upon learning that the govt as currency issuer doesn’t need taxes to “fund” its programs was “WOW!” and then, “maybe we can get more political support for safety net programs if taxes can be reduced and simplified, so why not a flat tax?” Sounds like a primary objection would be the same as the one to the 999 plan. I’m sure this has been asked and answered before, so my apologies. Also, does anyone have more details/insight about the federal real estate tax Warren mentions above?

    Reply

  11. Tyler says:

    ESM,

    If we were to let people retire at the same age as federal employees, that would be a good thing.

    Reply

    ESM Reply:

    @Tyler,

    I agree there is an inequity there. But I think it is a case of federal employees being pampered because they are paid by people who don’t really have much of a stake in getting the most value for their dollar.

    I was a federal employee for two years (at NIST), and it definitely felt pretty cushy. Not only did you have access to great benefits (the Thrift Savings Program was fantastic), but the work environment was quite pleasant. Also, we spent a lot of time thinking about how to spend our entire research budget by the end of the year so we could ask for even more the next year.

    Reply

    Sergei Reply:

    @ESM,

    “Also, we spent a lot of time thinking about how to spend our entire research budget by the end of the year so we could ask for even more the next year.”

    Wow, great argument. Every year we (in the private sector) spend great amount of effort to make sure we spend our whatever budget because if we do not then it will be gone next year. But we are not stupid for wait for it to happen. And since private sector takes a larger share of economy it is much more harmful to productivity.

    LOL

    Reply

    Tyler Reply:

    I am a federal employee. The Social Security retirement age should always match the retirement age for federal employees. Retiring at 60 is not cushy, especially if you have a backbreaking job like construction.

    Reply

    Djp Reply:

    @Tyler,

    So if life expectancy goes to 100 we should expect people to only work about 40% of their life? (Or if you get an advanced degree, maybe 30-35%?)

  12. Tyler says:

    Introducing a national sales tax is a horrendous idea.

    In my view, we really only need to do two things to get the economy booming again:

    – Lower the full-benefit Social Security retirement age, as well as the Medicare eligibility age, to 60. This will allow millions of people to retire, thus creating millions of job openings for the unemployed.
    – Eliminate the FICA tax.

    Reply

    ESM Reply:

    @Tyler,

    “- Lower the full-benefit Social Security retirement age, as well as the Medicare eligibility age, to 60. This will allow millions of people to retire, thus creating millions of job openings for the unemployed.”

    Oh sure. Let’s encourage currently productive people to become idle. That will be great for prosperity.

    Maybe we should make using machines for construction illegal. That will open up lots of jobs for people that know how to use a shovel.

    Reply

    Tyler Reply:

    Federal employees can retire at 60, yet we force private employees to do stuff like coal mining until they are 67. This makes no sense.

    Reply

    Djp Reply:

    @Tyler,

    You hit the nail on the head, Federal employees should not be retiring at 60. Or at least not with benefits that were put in place when life expectancy was much lower. You should be free to leave the workforce whenever you wish.

    WARREN MOSLER Reply:

    agreed on the FICA tax.

    ok to lower the retirement age,
    but permit working without losing soc sec and medicare benefits.

    it’s not about creating job openings.
    there is inherently a continuous labor shortage

    unemployment comes from the deficit being too small, and not from there not being things to do

    see ‘the 7 deadly innocent frauds’ on this website

    Reply

    Tyler Reply:

    Thanks, I’ve already read it. Excellent book!

    Isn’t creating a job opening equivalent to creating a job?

    Reply

    ESM Reply:

    @Tyler,

    “Isn’t creating a job opening equivalent to creating a job?”

    No, of course not. Do you really need me to explain this? I will if you want.

    WARREN MOSLER Reply:

    thanks!

    when you replace a worker real output doesn’t go up

    JCD Reply:

    @Tyler,

    Isn’t creating a job opening equivalent to creating a job?

    Here’s an interesting way to look at it. In the Soviet Army in World War II, there was a constant need for riflemen. They had the men, but sometimes they lacked the rifles.

    Of course the Germans had an easier time killing men than they did destroying rifles. From the Red Army point of view, when a rifleman was killed, a replacement could step in and pick up the old rifle. No net gain in firepower. However, when a new rifle was produced, that was one more rifle pointing at the Germans.

    Your ‘solution’ to the ‘problem’ would be akin to the Red Army shooting it’s own riflemen, so the replacements would have something to do.

    Keith Newman Reply:

    @WARREN MOSLER,
    Warren, I don’t follow your comment that there is an inherent labour shortage. It seems to me you are arguing there is labour oversupply…

    Reply

    WARREN MOSLER Reply:

    there is always more to do than there are people to do it. who do you know that couldn’t use one or more personal assistants to help get it all done?
    so then who could be the personal assistant?

    John O'Connell Reply:

    @Keith Newman,

    “there is always more to do than there are people to do it. who do you know that couldn’t use one or more personal assistants to help get it all done?
    so then who could be the personal assistant?”

    Please elaborate on who could be the personal assistant? Sounds like a rhetorical question, but I don’t see the obvious answer.

    So if there is such a demand for labor, why is there unemployment? So as not to be rhetorical about it, it is because the cost in time (to the employee, money to the employer) to do the labor is not justified by the benefit of having it done. Otherwise all those involuntarily unemployed people would be employed, doing it. Some, no doubt, is made uneconomical by minimum wage laws, but not a large part of it, I think.

    WARREN MOSLER Reply:

    seems you need to read ‘the 7 deadly innocent frauds’ on this website?

    unemployment is the evidence of govt spending not being sufficient for the economy to pay its taxes and fill its net savings desires

    Matt Franko Reply:

    @John, The way I look at it, the govt sector is not providing enough USD ‘settlement balances’ to both satisfy USD savings desires (both foreign and domestic) and the balances to facilitate desired (but not yet ‘demandable’) transactions between non-govt entities that would like to transact. The fact there is any involuntary unemployment AT ALL, makes this a tautology if you know the reality/truth about how a FFNC state currency system works… Resp,

    ESM Reply:

    @Keith Newman,

    @Warren:

    “unemployment is the evidence of govt spending not being sufficient for the economy to pay its taxes and fill its net savings desires”

    John does allude to a good point, for which I don’t have an answer. What if 10% of the workforce is delusional about how much their labor is worth? Suppose there are plenty of decent jobs which pay $15/hr + benefits, but these delusional people (perhaps all sporting college degrees in Fine Arts or French Literature) won’t work unless they are being paid $30/hr and doing something that is intellectually stimulating?

    In an MMT construct, do they count as unemployed? In the real world, I think they do count as unemployed, but if we increased the deficit to the point that these people actually found the jobs they think they deserve, entry level cashiers at McDonalds would be making $30/hr. You can’t just increase NFA until a delusional college graduate with no skills gets to earn what he thinks he’s worth. That’s a recipe for high inflation because in the real world, he can’t actually produce something that is valued by other people.

    WARREN MOSLER Reply:

    Agreed. If someone won’t work and doesn’t need the income there are a few things that could be applied to not lose the output, such as ‘preferences’ for people with full time jobs, like with regards to making the better seats at the theater for them, designated lanes on the highway, express lines at motor vehicles and govt services, etc. and in general ‘honoring’ those who work for a living. That is, social incentives.

    However, on a practical level, we’ve had unemployment under 4% and far higher labor force participation rates a little over 10 years ago,
    so seems it may not be all that large an issue at the moment

    JCD Reply:

    @Keith Newman,

    @ESM;

    If I have it right, the point of ELR is to peg the dollar to an hour of (unskilled) labor, as opposed to so many drams of gold.

    In this regime, if someone insists on offering their labor above the market clearing rate for their skills they will be unemployed. They will have no income from labor, and will be forced to rely on other sources.

    This is an unpleasant reality, but I think it’s unavoidable result. The alternative policy (increasing deficits until x% of Americans are employed in the private labor market) is open to a simple response by the collectively delusional — go on strike until ELR pays $30/hr. Or maybe $35 or perhaps $60? Note that the smaller x is, the easier it is for a small number of holdouts to raise ELR.

    WARREN MOSLER Reply:

    the point is to use an employed labor buffer stock, rather than today’s unemployed buffer stock.

    so your point would be currently the alternative is to go on strike until unemployment pays $30/hr?

    JCD Reply:

    @Keith Newman,

    Warren,

    My point, is that if the delusional won’t work for $15, well then they don’t work.

    Any policy attempts to coerce them into the labor market are likely to significantly worse than the lost output.

    WARREN MOSLER Reply:

    ok,

    let’s make the fiscal adjustments, provide the transition job, and see what happens?

    it’s not slavery. no one is required to work. work is an avenue to.
    however support for able bodied people of working age not working obviously must be limited.

    JCD Reply:

    @Keith Newman,

    Warren,

    Works for me, but don’t be surprised when that “transition job” lasts longer than it should. Also don’t be surprised when fraud is uncovered in the ELR program.

    I’d still prefer it to the status quo, but it won’t be a panacea.

    WARREN MOSLER Reply:

    At only $8hr and high levels of aggregate demand in general there will be plenty of incentive for anyone capable for moving on.

    but in any case it’s still better than unemployment as we know it today.

    and yes, some supervisor will have his elr underlings doing work on his personal property, etc.
    Humans!!!

    Neil Wilson Reply:

    It’s not a transition job. It’s a job which will last until the private sector comes up with something better.

    It needs to be effective, not necessarily efficient.

    WARREN MOSLER Reply:

    that’s what the FICA suspension and $ to the states does.

    John O'Connell Reply:

    @Keith Newman,

    Warren,

    You need more “reply” links.

    I’ve read it. Maybe we’re confusing micro with macro.

    “unemployment is the evidence of govt spending not being sufficient for the economy to pay its taxes and fill its net savings desires”

    On the face of it, that statement is patently false. Taxes do get paid, and savings desires are fulfilled, and yet we have unemployment. Unless you’re saying that if the deficit were bigger, then savings or taxes (but not consumption) would increase along with it; but that wouldn’t help raise aggregate demand, would it.

    The missing piece is consumption. I would word it differently:

    Unemployment is the result of the government deficit not being sufficient to offset the reduction in aggregate demand (consumption) due to taxes and non-government savings.

    Use of the word “desire” is also confusing. My economics 101 teacher said economics is about the balancing of unlimited wants with limited resources. I may desire to spend $100,000 a year, and save $100,000 a year for my retirement, and play 18 holes every day, but if my full-time job only pays $50,000 then I’m going to have some unfulfilled desires. If the deficit must fulfill desires, then the deficit must be infinite.

    Hiring that “personal assistant” is a CHOICE between spending and saving, isn’t it? A choice we all face with every dollar of our earnings. I can go to a car wash and spend $10 there, or I can get out my bucket and sponge and wash the car myself, and save that $10. Do we not save all that we want to save, given the choices and limited resources that we deal with, without regard to the deficit? Who is it that is watching the monthly numbers and saying “Ah, the deficit is down (up) this month, I think I’ll save a little less (more) than I had previously planned”?

    That’s microeconomics, though, and using the language of microeconomics as you did confuses the issue, when the issue is macroeconomics.

    I get it now about who would be the personal assistant (someone unemployed), but I don’t see why a bigger deficit would make me want to hire one, when I’d rather save the money as I do today.

    It seems to me that the mechanism is that a bigger deficit is more consumption, and the additional demand causes employers to hire, as they run out of inventory and need to produce more. More consumption, not more saving.

    WARREN MOSLER Reply:

    With unemployment total savings desires are not filled.

    And your reword says the same thing.

    Why else would the economy be willing to work for that unit of account other than to pay taxes or to net save them?

    For example, eliminate all taxes permanently and the value of the currency falls to 0, as no one is willing to sell anything in exchange for it, including labor.

    The personal assistant thing was just to illustrate that there is an inherent labor shortage in that there are always more things to do than people and hours in a day to do them.

    Sorry to not respond to all you said. please restate any remaining issues thanks

  13. rodneyrondeau says:

    I didn’t listen too closley to this guy because I didn’t think he had a chance. Eliot spitzer hounded this guy about which regulations and which cuts he would make and he wouldn’t answer. He would only say we needed them and he wouldn’t let him pin him down. His sales tax plan cannot be good for aggregate demand. I would buy less.

    Reply

  14. Daniel says:

    So, tax workers and business but remove all taxes on rent? Nothing new here. Just more and worse of the same.

    Reply

    Tom Hickey Reply:

    @Daniel,

    Basically, it is a tax on gross income and all new consumption, while exempting most economic rents.

    Moreover, it does not collect enough revenue to fund SS and Medicare, and it eliminates federal contributions to the social safety net including Medicaid and the automatic stabilizers.

    The plan states that these matters should be handled by states, local governments, churches, and charities.

    The is not a plan. It is a fruitcake and so is Mr. Cain. It is a recipe for not only depression but also social catastrophe.

    Reply

    Tom Hickey Reply:

    @Tom Hickey,

    Hereis Lawrence O’Donnell’s deconstruction of 9-9-9. O’Donnell was Daniel Moynihan’s chief of staff when Moynihan was chairman of the Senate finance committee. O’Donnell dubs it “Cainsian Economics.”

    MSNBC’s Lawrence O’Donnell explains how Herman Cain’s 999-plan would destroy Social Security and Medicare, and leave us with a 30 percent national sales tax. Bruce Bartlett, a former senior policy analyst in the Reagan White House, joins The Last Word to help us crunch the numbers.

    Reply

    ESM Reply:

    @Tom Hickey,

    First, Lawrence O’Donnell is making the same mistake as Mario above. Workers making below $105K or so in wages really do pay implicitly the employer’s portion of the wage tax.

    Second, O’Donnell is extrapolating some vague words about having the Federal government get out of the charity business into a plan to shutdown Medicare and Social Security. This is dishonest because Cain has already said that he wants to convert Social Security to the Chilean plan, which actually leaves Social Security in place (and is a better model, if you ask me). As Cain has said before, this is personalization, not privatization.

    Third, whatever O’Donnell’s political credentials, he is a total partisan hack, and you know it.

    Fourth, I have never see O’Donnell give any indication that he knows the first thing about economics, although to be fair, he probably doesn’t write his own copy.

    Tom Hickey Reply:

    @Tom Hickey,

    No doubt LD is highly partisan and doesn’t have a clue about MMT. However, he is a trend leader in the meda and politics and is going to provoke some tough questioning of Cain on these points.

    But my concern is that 9-9-9- taxes income and consumption, which reduces demand and sales (fine if there is full employment and a continuously rising price level, otherwise…) and leaves the majority of gains from economic rent untouched (wildly increasing inequality due to the regressive taxation).

    9-9-9 would result in 911, as the production-distribution-consumption cycle either is reduced or skewed toward production of luxury items and rent-seeking and speculation incentivized. The result would be disastrous for the real economy and would create enormous financialization culminating in another bigger financial crisis, especially when coupled with the proposed further deregulation.

    It is completely crazy.

    Tom Hickey Reply:

    @Tom Hickey,

    Concerning Lawrence O’Donnell economic credentials, this brings up an interesting point that is off thread but relevant to MMT. As the chief of staff of the chair of the Senate finance committee, O’Donnell was in a powerful position to influence legislation through his direct influence on Senator Moynihan. This is how congressional staffs operate. Moynihan was a very savvy guy himself, but I know that a lot of congress critters are not, and they basically let their staffs run the office and take their cues from the leadership.

    Virtually no members of the legislature, or political class or media, are competent in economics, and if they are credentialed at all, it is in neoliberalism. Moreover, they take their economic cues from academic and professional economists that are either ideologically biased or “interested men” in Paine’s sense of the term, i.e., not to be trusted.

    This is a really barrier to MMT wrt to its acceptance and use as a policy tool. How could an MMT approach to functional finance work under such constraints?

  15. ” . . . drives up private sector debt expansion by $trillions per year. . . “
    While decreases in federal debt growth lead to recessions, increases in non-federal debt usually lead to recessions. See:http://rodgermmitchell.wordpress.com/2010/06/14/is-federal-money-better-than-other-money/

    Reply

    WARREN MOSLER Reply:

    right, debt to income ratios deteriorate for a sector that is income constrained

    Reply

  16. Paul Palmer says:

    Maybe the sales tax part of it is sub-optimal.

    But it would end a lot of the “waste of human endeavor” frequently mentioned here in MMT writings by simplifying things dramatically.

    Overall the net would be a “win” for the economy, but at the very least it brings up the issue of our disjointed, ineffective, perverse in may ways tax code

    Reply

    Djp Reply:

    @Paul Palmer,

    Agreed.

    You would think that ending the busy work of compliance would be a big draw to those who are looking for an increase in *real* output.

    All other things being equal (meaning, no candidate really seems to suggesting anything other than a balanced budget) I’d favor simplifying the code.

    Reply

    JCD Reply:

    @Djp,

    The one thing we know is the budget won’t be balanced. No matter how hard they try.

    Of course the harder they try the worse it will be for all of us …

    Reply

    WARREN MOSLER Reply:

    it may be less sub-optimal

    but presumably it balances the budget which would be a lot worse for the macro economy

    Reply

    ESM Reply:

    @WARREN MOSLER,

    From what I’ve read, Cain’s people are trying to tweak the plan so that it is revenue neutral compared to the current tax code. So this MMT-attack that Cain is an idiot because he wants to balance the budget is just a red herring.

    In any case, you could say that about any politician. They all claim to want to balance the budget, but they all know it’s not a realistic goal.

    Reply

    John O'Connell Reply:

    @WARREN MOSLER,

    The budget will not be balanced until there is another growth bubble such as existed in the late 1990’s. Either raising taxes or reducing spending now will send the economy deeper into recession, increasing the deficit, not reducing it (unless it were to be a spending reduction from something like instantly ending all overseas wars).

    Pretending that some candidate would actually put a balanced budget into effect, and criticizing the result is just a straw man.

    Of course, no plan being discussed now will take effect before 2014, so it’s kinda tough to say what the situation will be then, or even what the plan will look like after it gets through the Congress, never mind what the effect of it will be.

    But, we can discuss some questions. What would happen, regardless of the situation at the time, if the corporate income tax were reduced from 35% to 9%? Good or bad for the economy?

    What would happen if FICA were eliminated, regardless of the situation at the time? Good or bad for the economy?

    What would happen if the 10-15-25-28-35 personal income tax were replaced with 9% flat tax? Good or bad for the economy?

    Critics worry that there will be no exemptions and no zero bracket. Not gonna happen.

    Cain bills his third 9 as a “sales” tax, but it is more like a value added tax. Anything purchased from another corporation is exempt, and pretty much every thing comes from another corporation. The main thing taxed by Cain’s VAT is the wage input to a product. I don’t know what that is on average, but it is certainly less than 100%, so the effective tax rate on purchases is going to be less than 9%, maybe more like 4-5%?

    Someone worried about rent being taxed. Not gonna happen.

    Will people who spend 100% of their low incomes pay 9+9=18%, instead of 15.2% now? No way. Straw man.

    And revenue neutral? I can’t see how. Even if it were true that lower income people would pay more than they do today, they don’t have enough money to offset the huge rate reductions for corporations and the upper brackets.

    9-9-9 is a huge rate cut, bigger than Kennedy and bigger than Reagan. If the result on growth is similar, then maybe in a few years revenues will reach 2007 levels. It should be cheered by MMT, not derided.

    Reply

    beowulf Reply:

    @John O’Connell,

    Even if it were true that lower income people would pay more than they do today, they don’t have enough money to offset the huge rate reductions for corporations and the upper brackets.
    And corporations and the upper brackets can’t spend enough offset to the huge AD drop resulting from lower income people, already living hand to mouth, paying more in taxes.

    9-9-9 is a huge rate cut, bigger than Kennedy and bigger than Reagan. If the result on growth is similar, then maybe in a few years revenues will reach 2007 levels. It should be cheered by MMT, not derided.

    The result on growth will be more like Volcker raising interest rates to the moon. Cutting taxes are one thing, but offsetting them by raising taxes on the poor?
    That’s as self-defeating as it is heartless.

    Mario Reply:

    @John O’Connell,

    it’s a regressive tax pure and simple. End of story in my eyes. NEXT!

    But to answer to all of your questions is “it depends.” It depends on which size of corporations get tax reductions to the tune of 75%. That makes a difference to our economy (not our government’s ability to spend). If all of them get the same reduction then it’s decidedly terribly bad news for our economy. Why? In-built competitive advantage for all companies with more money, unearned income, etc. The big guys will be able to grip things that much more strongly. The same thing applies to the individual tax brackets too. Imo one purpose of taxes is to make it tougher on the richest-rich, easier on the poorest-poor, and moderately-minimal (assuming inflation is in check) for everyone else. This 9-9-9 does NOT accomplish that goal.

    FICA to zero would be great for the economy and I totally support that (not that now a large majority of lower-income taxpayers will be paying 1.5% MORE in taxes b/c of the 9-9-9 bullshit)….but a FICA cut is only good so long as they keep up with social security and medicare payments!!! What’s the value of giving back 7.5% to (some) workers but then take away 100% from seniors (and soon to be seniors)!??!!? WTF is that man!?!?!

    One thing we could do is either eliminate AMT altogether or raise the minimum triggers up to at least over 150,000 for singles, 300,000 for MFJ or something like that. Currently it’s around 75,000 and b/c of that waaaay too much of the population falls into that category and they shouldn’t. Plus AMT is annoying to compute too!!! LOL

    And what is the purpose of this dumb-ass VAT tax anyway? What value does it play at all other than this false notion that we need “income” for the government? Why have it at all if there is no need for “income” generation? This 9-9-9 thing is like taking a shotgun to all parts of the economy unnecessarily (except of course capital gains, estate taxes, etc….I mean OF COURSE!!!).

    And how do you KNOW that exemptions and the zero bracket wouldn’t get cut out? How do you know that it’s “not gonna happen”? It sure doesn’t sound like it to me when he says 9-9-9. Are we supposed to support proposals now b/c they are likely to be fully passed through congress? What kind of “thinking” is that exactly? Hedging our bets or something? Sorry if I don’t like a proposal I just don’t like it and I give my reasons. I have to take the man at his word and assume he’s going to get (and go for) what he says he wants to do. To think consider anything less is in my eyes absurd…in fact it could go even worse considering the way things are in DC these days and how “compromise” and “negotiations” work out. ugh

    The only value of taxes as I see it is the two MMT purposes:

    #1. establish a currency of use

    and

    #2. moderate levels of aggregate demand

    I also add in a third value of taxes as well:

    #3. to limit the rentier class and keep them “hungry”

    Those, in my view, should be the purposes of taxation policy. Personally, I’m one of the sick ones and openly admit it….I actually like the tax code for individuals (except AMT). The business tax code is VERY complex and I’m still learning all the ins and outs of it but generally I think some of it could be simplified but overall the structure of income to deductions and credits to liability/refund I think works and is a good approach to taxation.

    I don’t subscribe to this argument about “brain drain” b/c I see it just as a value judgement on what activities are “good” or not. But that’s just me and my two cents on the matter.

    Remember John MMT is not a political party and there are many ways to cut proposals and view them. MMT is party-neutral and “shouldn’t” support anything one way or another. I disagree with Warren on certain proposals from time to time and we are both operating within MMT paradigm. So there’s always going to be different points of view. Personally, I think as Beowulf says, some POV are more “heartless” than others. And these days heartlessness can cost an economy quite alot in collateral damage. OWS is showing that to be quite true.

    WARREN MOSLER Reply:

    agreed a massive tax cut would ‘work’ to support output and employment.
    sorry for taking him at his word that it will balance the budget…

    John O'Connell Reply:

    @John O’Connell,

    @Mario,

    It’s now 9-0-9. That’s what I meant by “not gonna happen”.

    John O'Connell Reply:

    @John O’Connell,

    @Warren:

    “sorry for taking him at his word that it will balance the budget…:

    You should have known better ;-)

  17. MamMoTh says:

    Yes, it is highly regressive, and, worse, the 9% Federal sales tax is a transactions tax that discourages those transactions it taxes.

    Income is mostly generated by transactions, so income taxes discourage transactions all the same.

    I can’t think of a tax that does not discourage transactions in some way.

    Reply

    ESM Reply:

    @MamMoTh,

    A head tax and a wealth tax come to mind. The Florida intangibles tax appears to encourage transactions, although not useful ones.

    Reply

    MamMoTh Reply:

    @ESM,

    Agree with the head tax, which is the most regressive form of taxation.

    Not sure about the wealth tax which I’d say is related to past or future transactions.

    What is the Florida intangibles tax?

    Reply

    beowulf Reply:

    @ESM,

    Well, as James Bowery has suggested, there’s always a net asset tax with rate tied to 3 month T-bills.
    http://majorityrights.com/index.php/weblog/comments/doing_the_basic_math_for_net_asset_tax_as_proposed_by_bowery_in_1992/

    Let’s see, the CBO projects 3 month Treasuries to go up to 5.0% in 2016 and stay there till the end of days. From current 0.02% to 5.0% is quite a shift in tax revenue(going from $10 billion to $2 trillion annually).
    Am I wrong to suppose that long before 2016, the 3 month T-bill auctions would be flooded with 0.00% bids? After all, the natural rate of interest is 0. :o)

    Reply

    WARREN MOSLER Reply:

    which is why I like the Federal real estate/property tax idea as the primary means of reducing aggregate demand to make room for govt spending

    Reply

    MamMoTh Reply:

    @WARREN MOSLER,

    Why would that be better? It amounts to a permanent tax on a previous or a future transaction anyway. And it’s definitely more regressive than an income tax.

    Reply

  18. Dave says:

    I love the title of this post.

    Reply

    rvm Reply:

    :-) !

    Reply

    Hugo Heden Reply:

    @Dave,

    Wir fordern gesamtwirtschaftliche Nachfrage!

    Um, not quite as catchy in german.

    Reply

    WARREN MOSLER Reply:

    i still like nein nein nein

    Reply

  19. ESM says:

    Note that the income tax part of Cain’s proposal is not regressive. He acknowledges that even workers who pay no federal income tax do pay a total wage tax of 15.2%. His plan would reduce that to 9%.

    The sales tax could be made progressive instead of regressive by rebating in advance the tax for the first $25K spent each year.

    Reply

    Tom Hickey Reply:

    @ESM,

    Right, but the premise underlying this approach tax policy is just wrong. First, the policy makers have to understand what the policy is supposed to accomplish. MMT sets that straight, as I think we agree.

    Reply

    chewitup Reply:

    @Tom Hickey,
    I did not see the debate, but I have noticed that his website does not mention anything about balancing the budget. He does mention leaving debt for our children and grandchildren. I would say that his 999 plan is a good start to get the conversation rolling. No FICA, no capital gains, no death tax.

    Reply

    Tom Hickey Reply:

    @chewitup,

    Chewitup, why should there be any taxation at all? Cain simply presumes, I take it, that taxes are necessary to fund government, including the federal government as currency issuer. That position is nonsensical. We need to have the debate on a realistic basis to get anywhere rea.

    Mario Reply:

    @chewitup,

    “No FICA, no capital gains, no death tax.”

    sounds pretty regressive to me…especially when you consider that now the entire lower portion of the economy is now going to be paying at least 1.5% more in taxes on their wages + no more deductions and what not (I’m assuming that he wants to just destroy the entire tax code and all that goes with it…exemptions, deductions, etc.). THAT is totally regressive definition pure and simple end of story.

    Mario Reply:

    @Tom Hickey,

    not to mention….what is going to happen to social security and medicare/medicaid once those FICA payments go away. And UE and SDI too? These guys don’t realize that such “payments” are unnecessary to provide the service…so clearly this is just one more way to “rationalize” the need to stop such services.

    seems pretty obvious to me. thoughts?

    this is another very bold and clear reason why we need to have the REAL AND PROPER tax discussion….ie….what the real value of taxes is and go from there.

    Reply

    Tom Hickey Reply:

    @Mario,

    According to Lawrence O’Donnell on tonight’s show, the Cain plain is a lot more than a tax plan. It is a plan to abolish SS and Medicare.

    Mario Reply:

    @ESM,

    no worker pays a 15.2% wage tax. If they are on a W-2 then it’s half of that for the worker. And if they are self-employed half of it is deductible against your AGI and the other half can be deducted if you itemize.

    9% wage tax is an increase on such people of about 1.5%.

    All of this discussion about individual tax rates is wrong to start unless it’s just to cut FICA….easiest way to do it folks. They are all operating under a false premise of “raising money” for the USA….we’ve gotta save those interest rates!!!! They’re all a bunch of fools.

    Reply

    ESM Reply:

    @Mario,

    “no worker pays a 15.2% wage tax.”

    Well, with the deduction for employers it’s more complicated obviously, but most economists (both on the right and the left) would say that the portion of FICA paid by employers is implicitly paid by employees in reduced compensation.

    Reply

    Mario Reply:

    @ESM,

    We both know that employers won’t raise wages b/c they get a break.

    They got a FICA break already….any wages go up b/c of it? I don’t think so.

    Doesn’t hold up man in the real world. Both right and left also say our government needs those tax dollars too…so what’s your point? I don’t see one.

    Mario Reply:

    @ESM,

    and even if they did (which they won’t unless they are required to)….they wouldn’t raise them 7.5%!! They’d be fools to do that!!! Come on ESM you’re a smart guy…seriously man!!!

    ESM Reply:

    @ESM,

    @Mario:

    “We both know that employers won’t raise wages b/c they get a break.”

    No, I don’t know that. I think the employees would recoup the employer’s portion of the wage tax within a very short time. Just as the rising cost of health care benefits have depressed wages, a reduction in the cost of employing somebody will increase wages. It might phase in over a year or two, but I have no doubt that it will happen for workers earning well above the minimum wage, as there is a competitive labor market there.

    For workers near the minimum wage, it might not happen since it is possible many minimum wage workers are already over-compensated (obviously, it is not a free market when a wage that would clear the labor market for a particular type of job is made illegal). However, you will probably still more minimum wage jobs created as workers at that margin are now cheaper to employ.

    WARREN MOSLER Reply:

    and/or implicitly paid by consumers in higher prices

    Mario Reply:

    @ESM,

    “Just as the rising cost of health care benefits have depressed wages, a reduction in the cost of employing somebody will increase wages.”

    not comparable ESM. Health care costs haven’t effected wages…they’ve effected benefits on top of wages and that makes sense since costs went up benefits went down. But their is not such a direct and comparable relationship between wage levels and business profits. Wage levels are directly effected by supply/demand issues not by the profitability of employers. If that were the case then wages would be rising today as corporations see profits continue to accumulate. But that’s not happening AT ALL, b/c that relationship doesn’t exist. Wage levels rise and fall due to supply/demand of worker and there’s a supply of employees right now. Health care costs are a whole different beast and not comparable in this case.

    I can agree though with lower prices at stores, b/c cost input levels are lower now with no fica. So that is true and an obvious direct relationship…but I am already for a zero FICA rate so that’s not new to me. What we’re talking about here is the issue of Cain’s 9% tax issue and ESM’s inaccurate and misleading statement that employees are somehow getting a 6.5% reduction (15.5 – 9) in federal taxes. That’s just not true and dead wrong.

    ESM Reply:

    @ESM,

    @Mario:

    “Wage levels are directly effected by supply/demand issues not by the profitability of employers.”

    I agree with this generally, but it is not on point. It is the all-in cost of employing that person which has changed. If the labor market was clearing for that type of job at an all-in cost (gross of wages, benefits, taxes, and overhead) of $75K, it will move to that level again as employers bid/compete for additional employees at or below that level of all-in cost.

    There is going to be some stickiness, but it will be captured by the employees within a typical job cycle.

    And by the way, of course health care costs have affected wages. The rise in the value of health care benefits is the single most important reason why inflation-adjusted nominal wages have stagnated. The effect is enhanced by selection bias, where you have workers who expect high health care costs competing for jobs with lower wages but better health benefits.

    beowulf Reply:

    @ESM,
    Its a 9% wage tax (capital income is excluded) with, curiously enough, both a 9% sales tax and a 9% Value Added Tax. That sounds little redundant, the only explanation for splitting consumption taxes in half is a “the 9-18″ plan doesn’t sound as catchy. Needless to say, the income distribution on this is horrible. Taxing food and untaxing capital gains, really?

    The tax would apply to gross sales less dividends paid and all purchases from other companies, including investment goods. Thus, there would be no deduction for wages.
    http://economix.blogs.nytimes.com/2011/10/11/inside-the-cain-tax-plan/

    Reply

    Mario Reply:

    @beowulf,

    “Needless to say, the income distribution on this is horrible. Taxing food and untaxing capital gains, really?”

    exactly B.

    it’s amazing how people don’t see this stuff when it’s staring right at them.

    Truly it’s an ink-blot world.

    Reply

    ESM Reply:

    @beowulf,

    Although it is not currently part of his plan, the regressive nature of 9-9-9 can be fixed by rebating the 9% sales tax and 9% VAT on the first $25K of spending per year.

    This is a feature of the Fair Tax, which Herman Cain has supported in the past (and which I think is his ultimate goal).

    Of course, neither 9-9-9 or Fair Tax has even a snowball’s chance in Hades of passing, but if either one did, the economy would be off to the races.

    Reply

    beowulf Reply:

    @ESM,
    In 2005, the Bush tax reform panel (google the term to see summaries of its two suggested reform plans) took a look at the Fair tax and pretty much destroyed the idea of a national retail sales tax (p.207). I’m surprised the Fair Tax fans are still out there.
    http://tinyurl.com/453ydo5

    The panel had several major objections, but to your point about a rebate… They found that to keep from increasing tax burden on low income families would require paying a rebate so large would instantly become the largest expenditure on the federal budget, an additional 6% of GDP ($900B in 2011), larger than either Social Security or the defense budget and would require increasing tax rates by nearly a third (12-12-12).

    What’s more, as the Bush panel noted, if you’re throwing that much money around, the anti-fraud measures necessary would require annual returns and an enforcement bureaucracy that’d pretty much be the same as the current system.

    ESM Reply:

    @ESM,

    @Beowulf:

    “took a look at the Fair tax and pretty much destroyed the idea of a national retail sales tax (p.207).”

    Well, I read what you linked to and I completely disagree with your characterization. The report raises some general concerns and touches on them rather lightly.

    “They found that to keep from increasing tax burden on low income families would require paying a rebate so large would instantly become the largest expenditure on the federal budget…”

    So what? It’s not a real expenditure where the government is likely to waste real resources; it is a transfer payment. Furthermore, I think the transfer payment should be made to every person with a social security number, regardless of wealth, but perhaps depending upon a person’s age. Not much administrative overhead there (in fact, the infrastructure already exists).

    And I don’t think it’s credible to claim that a sales tax is anywhere near as hard to administer and enforce than an income tax. Plus, as we know, the whole purpose of a tax is to dampen aggregate demand and thereby control inflation. A sales tax has a direct impact on demand, unlike an income tax which directly discourages work, and only indirectly discourages consumption.

    beowulf Reply:

    @ESM,
    Yes, destroyed. The panel was not a fan of the Fair Tax. They made it plain that the VAT is a much better approach to establish a consumption tax than a retail sales tax (that’s the most irritating part about the 9-9-9 plan, its redundant to add two new consumption taxes at the same time). I do take your point that taxing consumption is a more effective tool to dampen AD than taxing income.
    With a demogrant rebate in place, I’d replace the current tax system with a VAT (floating rate inversely to unemployment rate) and a net asset tax. As I suggest downthread, by setting net asset tax rate at 3 mo T-bill yield, every T-bill auction becomes an opportunity for wealthy taxpayers to buy down their tax rate to zero.

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