The Broadest Tax Base Which Can Possibly Be Imagined Implies a Tax Rate of 6.2%

Herman Cain's 999 Plan is focusing attention on the perennially perplexing problem of taxation for the American electorate in 2012. His plan has brought questions about broadening the tax base for tax reform front and center, including: What tax base is large enough to generate adequate federal revenues? and: What rate of taxation is fair?

Herman's big idea is to scrap the entire tax code and start over with three new bases taxed at the same low rate for a temporary period of time, eventually transitioning the country permanently to just one of these bases, taxed at a much higher single rate.

His scheme is quite conventional in that it looks to the existing traditional bases of taxation with which we have been familiar for decades: corporations and individuals.

What is new, however, is the national sales tax, the base for which was fairly sizable in 2008 at $10.1 trillion in personal consumption expenditures [PCE], and running at almost $10.8 trillion annualized through August 2011.

Currently the overwhelming burden of taxation falls on the individual filer whose personal income is taxed in order to provide Social Insurance and Federal revenues, which in 2011 are currently running at an annualized rate of $2.3 trillion, as shown here by the Bureau of Economic Analysis. Corporations, excises and tariffs provide puny sums by comparison: less than $500 billion in 2008.

This means that in 2011, Herman Cain's ultimate idea of taxing consumption to replace current revenues of approximately $3 trillion would imply a national sales tax rate of 28 percent on $10.8 trillion in goods and services expenditures this year. That's a pretty hefty rate by comparison with present conditions.

Currently the personal income base on which we exact that $2.3 trillion in Social Insurance and Federal taxes is just over $13 trillion. This implies an overall tax rate of 18 percent. If personal income in that aggregate amount had to do all the pulling to generate the full $3 trillion in revenues, personal income would have to be taxed at a rate of 23 percent to do the same thing as the consumption tax. Not as high, but still much higher than the 9 percent Herman Cain has called for currently, if only temporarily, in deference to the God of the Bible who asked for just 10 percent from his chosen people.

By way of comparison, if there were some way to easily tax GDP, currently running at $15 trillion, the effective tax rate would have to be 20 percent.

So is there a tax base which is broader still, from which we can derive the necessary sums and get that rate even lower?

Given that people by definition receive income in consequence of the conduct of business of one kind or another (aside from gambling, prostitution and bank robbery), it seems reasonable to look at the size of the various tax bases available strictly from businesses, without whom none of the other tax bases would exist in the first place. If we really mean it when we say we want to tax income only once, we need to go to its source, and for nearly everyone in our society, that source is business.

Corporations in 2008 had total receipts of $28.5 trillion, 2.8 times the size of Herman Cain's PCE tax base. It would have taken a gross receipts tax of merely 10.5 percent on this sum to have generated $3 trillion in tax revenue in tax year 2008, a year when revenues were actually lower at $2.5 trillion. That implies a gross receipts tax of only 8.8 percent on corporations in 2008.

In such a world, there would be no more income taxes on individuals, no Social Security or Medicare taxes either, and no capital gains taxes nor taxes on investment income or savings of any kind, and government would not go wanting. Nor would business be constrained by other taxes and fees imposed on it if we were to throw out the current code and replace it with this simple levy.

But the base could be made broader still in order to lower the effective rate even more.

Add in partnerships, which had $5.9 trillion in total receipts in 2008. And S corporations, which had $6.1 trillion in total receipts in 2008. Both of these added to corporation total receipts yields a gargantuan tax base for 2008 of $40.5 trillion in gross receipts.

All of that could have been taxed at a mere 6.2 percent to meet the federal revenue of $2.5 trillion collected in 2008.

No more talk of a flat income tax, nor of a progressive income tax, nor of a consumption tax. No more compliance costs of $450 billion because of the current code. No more lost time equivalent to 3 million full time jobs.  Just one, low, simple, rate on business. That's it.

In addition to God, John Tamny might go for it, too:

"The answer as always is for the government to simply get out of the way. If it must tax corporations, its taxation should be blind in the way that justice is. A flat gross receipts tax would make all corporations equal before the IRS. That would ensure the most economic allocation of capital on the way to rational, market-driven growth."

Recalculating Herman Cain's 999 Plan For Calendar Year 2008

Herman Cain's 999 Plan continues to get tweaked by none other than Herman Cain himself, in response to criticisms and questions about it in the media in the wake of recent Republican presidential debates.

Some of the additional information he is supplying looks to have been latent and just previously unexplained, while other information has the feel of modification. In any event, the unsettling thing about this is that the 999 Plan appears to be something of a work in progress, not a finished, fully vetted proposal, which makes it less sellable politically.

One question which seems so important to the left, for obvious reasons, has been the plan's ability to fund the Leviathan State's appetite.

Previously it seemed to me that the plan was woefully inadequate to the task. But some of the additional information that has come out makes me more sanguine, if that's the right word as the taxpayer stares into the maw of the bloodthirsty Beast.

For example, with respect to the 9 percent corporate tax, it turns out that, for reasons which I still do not understand, business' cost of labor is no longer deductible for tax purposes under the plan. So for 2008 when corporate profits posted as $1.25 trillion, you theoretically must add back in net compensation of nearly $6.2 trillion. I think. A 9 percent tax on $7.45 trillion now yields a much higher corporate contribution to federal revenue for 2008 of $671 billion.

Combine that with a 9 percent tax on adjusted gross income of $8.5 trillion equaling $765 billion and with a 9 percent tax on personal consumption expenditures of approximately $10.5 trillion equaling $945 billion, the resulting sum is $2.38 trillion, just shy of the actual collected in 2008 under the current system, which was $2.5 trillion.

And if I read the language of the 999 Plan correctly, there will also be substantial tariff revenue from imports designed to level the playing field between them and our own exports. Imports in 2008 of $2.5 trillion taxed at 9 percent would yield an additional $225 billion in revenue, more than enough to cover the $120 billion shortfall. Presumably some imports would not be so taxed due to pre-existing trade agreements, but the potential is obviously there for far more revenue from tariffs than America presently collects.

Mr. Cain is also now stating that his plan is undecided about how to remove the regressivity of the sales tax on the poorest Americans, but that it will. This will, of course, reduce the revenue described above, as will the income tax deduction for charitable contributions.

Ben Bernanke: Clueless on the Consumer Because His Housing Data Are Not Current

From his speech today to the Economic Club of Minnesota:

One striking aspect of the recovery is the unusual weakness in household spending. After contracting very sharply during the recession, consumer spending expanded moderately through 2010, only to decelerate in the first half of 2011. The temporary factors I mentioned earlier--the rise in commodity prices, which has hurt households' purchasing power, and the disruption in manufacturing following the Japanese disaster, which reduced auto availability and hence sales--are partial explanations for this deceleration. But households are struggling with other important headwinds as well, including the persistently high level of unemployment, slow gains in wages for those who remain employed, falling house prices, and debt burdens that remain high for many, notwithstanding that households, in the aggregate, have been saving more and borrowing less. Even taking into account the many financial pressures they face, households seem exceptionally cautious. Indeed, readings on consumer confidence have fallen substantially in recent months as people have become more pessimistic about both economic conditions and their own financial prospects.

Here's the Fed's House Price Index on 8/24/11, which shows prices at late 2004 levels:

The fact is, prices have fallen to 1999 levels and may continue to fall to 1997 levels and perhaps lower than that:

Bernanke doesn't understand the severity of the home equity massacre which the consumer has sustained since 2006. That was the primary source of wealth for the vast majority of Americans, and Bernanke doesn't get that a whole decade of gains has been wiped out. His own data are off by five years.

Everyone hangs on every word of the Fed. "Don't fight the Fed" they say. Too bad the Fed doesn't know what it's talking about.

The Dollar, Then and Now

In 1913, when the Federal Reserve came into being, the 1790 Dollar had lost little value over the preceding 123 years. You needed just $1.08 to buy what a 1790 Dollar could buy.

58 years on from 1913, however, when the Dollar and Gold were finally and completely de-linked from one another in 1971, that 1913 Dollar worth $1.08 had lost over 300 percent of its value. You needed $4.56 in 1971 to buy what $1.08 could buy in 1913. Much of the devaluation of the Dollar occurred in 1933 when FDR confiscated Gold and then reset the price per ounce at $35.00 from $20.67, a 70 percent devaluation almost overnight.

By 2010, just 39 years on from 1971, that $4.56 really went south. Completely unhinged from Gold, you now needed $24.50 in 2010 to buy what $4.56 could buy in 1971. That 1971 Dollar worth $4.56 had lost over another 400 percent of its value.

Carthago delenda est? Try: Down with the Fed!

Forget Ritholtz, Here's The Real Dollar Collapse

Ritholtz' so-called big picture since 2001:

Since 1913, the real big picture: