Tackling Income Inequality

Laura D’Andrea Tyson is a professor at the Haas School of Business at the University of California, Berkeley, and served as chairwoman of the Council of Economic Advisers under President Clinton.

The Occupy Wall Street protesters have focused attention on rising income inequality in the United States, and they are right to do so.

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Income and wealth disparities have reached levels not seen in the United States since the Roaring Twenties. And the concentration of income and wealth contributed to the speculative excesses that brought on the 2008 financial crisis (see Robert Reich’s “Aftershock” and Raghuram Rajan’s “Fault Lines”).

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According to a recent report by the Congressional Budget Office, rising income inequality is a long-term trend that began in the late 1970s and strengthened during the last two decades. The report confirms the protesters’ belief that the rising gap between the income of the top 1 percent and the income of everyone else is a major factor behind escalating inequality.

In the last 20 years, inequality has been largely a story of a small elite – not just the top 1 percent, but the top 0.1 percent – pulling away from everyone else in every source of household income: labor income, capital income and business income.

The top 1 percent’s share of national income has also been rising in most other advanced industrial countries, but it is by far the largest and has grown the most in the United States (see Jacob Hacker and Paul Pierson’s “Winner-Take-All Politics”).

Why have incomes of those in the top 1 percent soared? Their occupations provide some clues. From 1979 to 2005, nonfinancial executives, managers and supervisors accounted for 31 percent of the top 1 percent, medical professionals for 16 percent, financial professionals for 14 percent and lawyers for 8 percent.

Together, executives, managers, supervisors and financial professionals accounted for 60 percent of the increase in the top 1 percent’s income, with a widening compensation differential between those in the financial sector and those in other sectors of the economy after 1990.

Superstar athletes, actors and musicians, often portrayed among the super-rich, accounted for about 3 percent of the top 1 percent from 1979 to 2005, far less than the less glamorous people (mostly men) who lead and advise America’s businesses.

Researchers have identified several reasons for the rapid growth in incomes for the occupations that make up most of the top 1 percent, including “winner take all” technical innovations that have changed the labor market for superstars in all fields; increases in business size and complexity; a growing premium for highly specialized skills; changes in the forms of executive compensation, including the rise of stock options and weaknesses in corporate governance; and the increasing size of the financial sector.

All of these factors have played a role, but there is no definitive evidence on their relative significance.

Growing inequality in labor compensation played a major role in increasing income inequality between the top 1 percent and the rest of the population from 1979 to 2007. Over the period, however, both the growing inequality in business income, including income from small firms, partnerships and S corporations, and in capital income in the form of dividends, interest and capital gains, as well as the rising share of these forms of income in household income, played a more significant role, especially after 2000.

According to the Congressional Budget Office, from 2002 to 2007 more than four-fifths of the increase in income inequality was the result of an increase in the share of household income from capital gains, with the remainder the result of an increase in other forms of capital income.

Capital and business income are much more unevenly distributed than labor income and have become more so over time. Capital gains income is the most unevenly distributed — and volatile — source of household income.

The top 0.1 percent earns about half of all capital gains, and such gains account for about 60 percent of the income of the top 400 taxpayers.

Large cuts in federal tax rates on capital and business income have been very beneficial to the top 1 percent over time. In 1978, a Democratic Congress and a Democratic president reduced the top tax rate on most long-term capital gains to 28 percent from about 35 percent. It was reduced again to 20 percent in 1981 and then raised back to 28 percent in 1987, where it remained for a decade.

While serving as President Clinton’s national economic adviser, I led a study by his economic team of the likely effects of reducing the rate. We concluded that a cut would decrease future tax revenue, would contribute to rising inequality and would not increase saving and investment as its advocates asserted. Despite these warnings, in 1997 the president agreed to cut the rate to 20 percent, as part of a budget compromise with the Republican Congress.

Then, with Democratic support, President Bush reduced the tax rate on capital gains and other forms of capital income to a record low of 15 percent in 2003. Under the “carried interest” provisions of United States tax law, this rate also applied to fees earned by hedge fund and private equity managers, a rapidly rising cohort within the top 1 percent.

As a result of these changes, along with President Bush’s across-the-board cuts in income tax rates, federal taxes as a share of household income fell for the top 1 percent. Over all, the Bush tax cuts were the largest — not only in dollar terms but also as a percentage of income — for high-income households and increased the concentration of after-tax income at the top. Far from curbing escalating inequality, the Bush tax cuts exacerbated the problem.

While the federal tax code is still progressive, its progressivity has eroded, with a significant percentage of the richest now paying a much lower tax rate than the merely rich and the middle class. (Warren E. Buffett pays a lower tax rate than his secretary because most of her income comes in the form of wages that are subject to both federal income tax and the payroll tax while most of his income comes in the form of capital gains and dividends that are taxed at 15 percent and that are not subject to the payroll tax.)

A credible plan to reduce the long-run deficit requires a significant increase in revenue. Polls indicate that the majority of Americans, like the Wall Street protesters, believe that higher taxes on the rich are warranted both to reduce the deficit and to contain mounting inequality. I agree.

Restoring the top income tax rates and capital gains and dividends tax rates to their levels under President Clinton, as President Obama has repeatedly proposed, would be useful first steps. Taxing some carried interest as ordinary income would make the tax system more efficient and curtail outsize compensation in the financial sector. Adding a progressive consumption tax would augment revenue while encouraging saving and discouraging spending on luxury goods, both by the very rich and by those down the income ladder struggling to keep up.

The majority of Americans, like the Wall Street protesters, also believe the corporate tax rate should be raised. I disagree.

For reasons I discussed in an earlier Economix post, I believe that this rate should be reduced – a position advocated by both President Obama and former President Clinton in his new book. Raising tax rates on capital gains and dividends to the levels under President Clinton would curb the growth of income for the top 1 percent and could finance a substantial cut in the corporate tax rate that would bolster wages and job opportunities for American workers.

The Balanced Budget Amendment Delusion

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of the coming book “The Benefit and the Burden.”

This week the House of Representatives will take up a balanced budget amendment to the Constitution. An idea that has been kicking around for ages, it has never overcome the hurdle of needing a two-thirds approval vote in both houses of Congress. (After which it would not require the president’s signature but would need to be ratified by three-quarters of the states to take effect.)

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The concept of balancing the budget annually is a bad idea but not an unreasonable one. However, the idea of mandating a balanced budget through the Constitution is dreadful. And the proposal that Republican leaders plan to bring up is, frankly, nuts.

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The Founding Fathers took the necessity of balancing the federal budget to be self-evident – with no need to mandate it because economic circumstances severely constrained the government’s ability to spend more than taxes covered.

The memory of the hyperinflation of the War of Independence was fresh, and people were rightly concerned that deficits would lead to the printing of money to cover budgetary shortfalls, restarting inflation. Moreover, the domestic capital market was virtually nonexistent during the early years of the republic, and all Americans were wary of borrowing from abroad unless absolutely necessary.

Consequently, the budget was usually balanced for the nation’s first 150 years, except during wartime, and strenuous efforts were made to pay down the debt as soon as hostilities ended. This budgetary norm didn’t change until the 1930s, when economic stagnation and widespread deprivation made balancing the budget impossible. Also, the economic theories of John Maynard Keynes became popular and argued that large deficits would be necessary to restore growth.

Conservatives view the adoption of Keynesian economics as original sin, opening the door to a vast expansion of government. Instead of being paid for with politically unpopular tax increases or spending cuts, new spending programs were to a large extent financed with seemingly costless deficits. The economist James Buchanan called this “fiscal illusion.”

He had a point. We would have less spending if its tax cost was fully apparent. If people knew their taxes would go up or they would lose government benefits whenever spending increased, we would have a lot less spending.

Unfortunately, conservatives intentionally destroyed the remnants of the implicit balanced budget constraint in the 1970s so they could cut taxes without having to cut spending at the same time. Finding enough spending cuts to pay for big tax cuts would have doomed their efforts, so they concocted a theory, “starve the beast,” to maintain a fig leaf of fiscal responsibility.

Under this theory, deficits are intentionally created by tax cuts, which puts political pressure on Congress to cut spending. Thus, cutting taxes without cutting spending became the epitome of conservative fiscal policy. Unfortunately, it didn’t work.

We gave starve-the-beast theory a test during the Reagan administration, but as I have shown previously, when push came to shove, Reagan was always willing to raise taxes rather than allow deficits to get out of control.

We gave starve-the-beast theory another test during the George H.W. Bush and Clinton administrations. They both raised taxes and, according to the theory, this should have caused spending to rise, because tax increases feed the beast. But they didn’t. Spending as a share of the gross domestic product fell to 18.2 percent in 2000 from 22.3 percent in 1991, according to the Congressional Budget Office.

We gave starve-the-beast theory another test during the George W. Bush administration. Taxes were slashed, but spending rose – again, the exact opposite of what the theory said should have happened. The economist Bill Niskanen asserted that the result was not surprising because the Republican position on taxes effectively reduced the tax cost of spending.

Nevertheless, conservatives like Grover Norquist insist that starve-the-beast theory works, which is why they relentlessly push for still more tax cuts despite the obvious failure of previous tax cuts either to stimulate economic growth or restrain spending, and oppose even the most trivial tax increases no matter how big the deficit.

Historically, one problem conservatives had with a straightforward balanced budget requirement was a concern that it might lead to tax increases. It would also make further tax cuts more difficult to achieve.

Today, most conservatives support a constitutional requirement that will only restrain spending but make tax increases effectively impossible, while continuing to permit tax cuts regardless of the deficit. This is the essence of the “balanced budget” amendment that Republicans plan to vote on.

The amendment reported by the House Judiciary Committee in June would limit federal spending to 18 percent of “economic output” (whatever that is) without a three-fifths vote in both the House and Senate and would require a two-thirds vote to raise taxes. The latter requirement is even more stringent than it appears because it applies to the full membership of both houses, not just the percentage of those present and voting. Taxes, on the other hand, can be cut with a simple majority vote.

Space prohibits a full discussion of all the technical problems with this poorly drafted amendment. A July 8 report from the Congressional Research Service does a good job of going through some of them.

These include the fact that gross domestic product is nowhere defined in law, nor could it be because it is a continually evolving concept; 18 percent of G.D.P. is a totally arbitrary figure that couldn’t be achieved this year even with the abolition of every federal program other than Social Security, Medicare, national defense and interest on the debt, because the deficit is twice as large as total nondefense discretionary spending.

Outlays would actually have to be well below 18 percent of G.D.P. in practice because future spending is held to 18 percent of the previous fiscal year’s G.D.P., and there is no practical way of enforcing the amendment through the federal courts. For more details, see my July 11 article in Tax Notes magazine.

The truth is that Republicans don’t care one whit about actually balancing the budget. If they did, they would want to return to the policies that gave us balanced budgets in the late 1990s.

The crucial one was higher taxes, which virtually all Republicans opposed in 1990 and 1993, and budget controls that prevented tax cuts unless offset dollar-for-dollar with cuts in entitlement programs, which Republicans abandoned in 2002 so they could cut taxes without constraint.

Of course, no Republican favors such policies today. They prefer to delude voters with pie-in-the-sky promises that amending the Constitution will painlessly solve all our budget problems.

Senators think they have solved the Internet sales tax problem

After years of trying to figure out how to force Internet companies to collect sales taxes on their purchases, Sen. Lamar Alexander (R-Tenn.) thinks he and a bipartisan group of senators finally have hit on the right solution.

Alexander joined Sens. Mike Enzi (R-Wyo.) and Dick Durbin (D-Ill.) on Wednesday to introduce federal legislation that would enable states to more easily collect sales taxes for online purchases made by their residents. They are among a group of 10 senators -- five Republicans and five Democrats -- co-sponsoring the Marketplace Fairness Act.

"If I were president of an online retailer...I would look at this week in Washington, D.C., and I'd make my plans to start collecting sales taxes wherever I sold things in the United States," Alexander said.

He predicted the legislation, which would give states the option of collecting sales taxes from online retailers with annual sales above $500,000, would pass Congress. The bill is similar to legislation already introduced in the House.

"I think we've finally found that sweet spot," Durbin said.

The bill has drawn support from conservatives, including the American Conservative Union, because it leaves it up to each state to decide whether they want to collect the sales tax. And the nearly solid wall of opposition from online retailers has cracked, as Amazon.com Inc., the giant Internet retailer, has backed the proposed legislation.

Enzi said existing law, which requires consumers to voluntarily pay sales taxes for online purchases, costs state and local governments about $23 billion annually.

The legislation come as states have been trying to solve the problem on their own. California has enacted legislation requiring online retailers with subsidiaries in the state to collect sales tax from California customers.

Amazon, which has fought such efforts in other states, had threatened to launch a referendum battle over the California law. But last month, Amazon agreed to begin collecting the taxes starting in September 2012.

Amazon said Wednesday it "strongly supported" the Senate legislation. Alexander, Durbin and Enzi cited Amazon's support as an indication the proposal would not endanger online retailers.

The law would allow states to become part of a group of 24 states that have adopted a streamlined system to reduce the complications for retailers in figuring out a customer's exact sales tax. The law also would allow states to collect taxes on their own if they adopted some simplification requirements.

"It's about closing a tax loophole," Alexander said. "It's about stopping the subsidization of some businesses over others."

But some high-tech groups, along with online auction site eBay, said they oppose the legislation.

“This is another Internet sales tax bill that fails to protect small-business retailers using the Internet and will unbalance the playing field between giant retailers and small-business competitors," said Tod Cohen, eBay's vice president for government relations. "It does not make sense to expand Internet sales tax burdens on small businesses at a time when we want entrepreneurs to create jobs and economic activity.”

RELATED:

Bipartisan trio of U.S. senators to introduce federal sales tax collection bill

Amazon offers to serve as tax collector -- for a price

California leads the way in putting Amazon in its place

-- Jim Puzzanghera

Photo: Sen. Lamar Alexander (R-Tenn.) predicts legislation, which would give states the option of collecting sales taxes from online retailers with annual sales above $500,000, would pass Congress. Credit: Reuters

 

Bipartisan trio of U.S. senators to introduce federal sales tax collection bill

Congressional efforts to pass a nationwide law enabling all states to collect sales taxes on Internet purchases is gaining momentum.

A bipartisan trio of senators scheduled a Wednesday morning briefing with reporters to unveil legislation dubbed the Marketplace Fairness Bill.

The proposal is backed by Sens. Richard J. Durbin (D-Ill.), Lamar Alexander (R-Tenn.) and Michael B. Enzi (R-Wyo.).

The bill, one of at least three now in Congress, comes as California and other states battle with Internet retail giant Amazon.com over the sales tax. Amazon has agreed to start collecting sales taxes in California beginning in September 2012. The company fought an earlier state law by threatening to wage a referendum campaign to overturn the measure, calling it unconstitutional.

The new federal legislation gives states two ways to collect billions of dollars in unpaid sales taxes when consumers buy products from Internet sellers, such as Amazon, Overstock.com or EBay.com. States that become part of a multi-state legal agreement and bring their sales tax codes into conformity with other states can compel Internet retailers to charge and remit the sales tax.

But other states that don't sign the interstate compact still could collect the taxes if they adopt minimum standards to simplify the levies.

The Durbin-Alexander-Enzi bill would exempt all sellers with annual sales of less than $500,000 from collecting individual state sales taxes.

A fact sheet distributed by their offices stressed that the measure "does not create new taxes or increase existing taxes." 

RELATED:

Amazon offers to serve as tax collector - for a price

Amazon 3Q net income sinks, missing analyst views

California leads the way in putting Amazon in its place

-- Marc Lifsher

Photo: An Amazon distribution center in Goodyear, Ariz. Credit: Ross D. Franklin / Associated Press

Corporate taxes: Many top U.S. firms paid none, report says

Many of the nation's most profitable companies are paying far less than the 35% corporate income tax rate, with dozens paying none at all, according to a new report.

Advocacy and research groups Citizens for Tax Justice and the Institute on Taxation and Economic Policy examined 280 companies and concluded that they paid an average 18.5% rate from 2008 through 2010 -- about half the official rate.

Companies lashed out at the findings.

GE accused the report of being “inaccurate and distorted” and said that it expects to pay a 30% overall tax rate this year. Verizon said the study was “union-orchestrated” as well as being “deceptive and politically motivated,” adding that the company paid out $1.8 billion in taxes over the three-year period.

But according to the study, only a quarter of companies paid close to 35% of their U.S. profits, while another quarter paid less than 10%.

The report also found that 78 paid zero -- or had a negative tax rate -- for at least one year due to nearly $223 billion in tax subsidies, 17% of which went to the financial services industry. Thirty companies went tax free for all three years, researchers found.

Wells Fargo alone took in nearly $18 billion in tax breaks over the last three years, followed by around $14 billion for AT&T and $12 billion for Verizon, researchers found.

Over the period, the tax rate of energy company Pepco Holdings averaged out to negative 57.6%, according to the report. General Electric’s was negative 45.3%.

The study, the 10th since 1984, culled from firms listed among the Fortune 500 who were profitable for each of the last three years.  Amid a backdrop of calls from Republican presidential candidates Herman Cain and Rick Perry to lower the existing corporate tax rate, report authors said their findings were not mean to be “anti-business.”

Corporations are also on the hook for state and local corporate income taxes as well as sales, property and payroll taxes, said Will McBride, an economist with the nonpartisan Tax Foundation research group. From 1994 through 2008, he said, corporations paid out more in taxes than they pulled in through after-tax profits for all but three years.

This week, the congressional Joint Committee on Taxation said that in order for the government to bring in a consistent amount of revenue, the corporate tax rate should drop no lower than 28%.

RELATED:

Gov. Jerry Brown signs Amazon sales tax collection law

Federal government wastes half of every tax dollar: poll

Young people (seem to) support Warren Buffett's tax idea

-- Tiffany Hsu

Photo: Brian van der Brug / Los Angeles Times

Consumer Confidential: Cellphone taxes, 401(k) matches, beer sales

Here's your watching-the-detectives Wednesday roundup of consumer news from around the Web:

--At least your cellphone bill may hold steady. The House has approved a five-year freeze on any new state and local taxes imposed on cellphones and other wireless services, including wireless broadband access. The voice vote reflected a consensus that new taxes on wireless mobile services have far outpaced average sales taxes on other items and have become a deterrent to the spread of wireless broadband technology. Wireless customers reportedly now pay 16.3% in taxes and fees, more than double the average rate of 7.4% on other goods and services. The bill prohibits state and local governments from imposing so-called discriminatory taxes on mobile services, providers or cellphones for five years.

--Some more good news: Most of the companies that either suspended or reduced their 401(k) matches during the economic downturn have reinstated them, according to business consultant Towers Watson. An analysis of 260 mid- to large-sized companies shows that 75% of those that took the step to cut costs have restored their match. Among those, about 74% are continuing the match at the previous level. About 23% brought matches back at a lower rate. Among these companies, the reinstated match was slightly more than half of their original contribution. Just 3% restored matches at a higher rate. I wonder what companies those are.

--But here's a sign that times are still tough: We're not chugging as much brewski. MillerCoors, the country's second-largest brewer, says its third-quarter net income fell 14.1% due to a weak economy, low consumer spending and higher commodity costs. The combined U.S. operations of SABMiller and Molson Coors Brewing, which make Miller and Coors brand beers, said underlying net income in the July-September quarter slipped to $286.9 million, while net sales were down 2.5% at $1.965 billion. The brewer has a U.S. beer market share of nearly 30%, behind Budweiser brewer Anheuser-Busch InBev's share of almost 50%. So do your bit for the economy and hoist a few.

-- David Lazarus

Photo: Lawmakers want to hold cellphone taxes steady for five years. Credit: Jason Alden / Bloomberg

A Close Look at the Perry Tax Plan

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of the coming book “The Benefit and the Burden.”

In an effort to rejuvenate his flagging campaign for the Republican presidential nomination, Gov. Rick Perry of Texas announced his support for a flat-rate income tax in a Wall Street Journal op-ed article on Oct. 25.

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Mr. Perry said he would establish a single rate of 20 percent on corporate and individual incomes, with individuals receiving a personal exemption of $12,500. The estate and gift tax would be abolished, and there would be no taxation of dividends and capital gains. All deductions, credits and exclusions would be eliminated except for mortgage interest, state and local taxes and charitable contributions.

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The flat tax is an idea that has been kicking around Republican circles for 30 years. The publisher Steve Forbes made it the centerpiece of his unsuccessful 1996 and 2000 runs for the G.O.P. nomination. He is now advising Mr. Perry and was glowing in his praise for the governor’s plan. Writing in The New York Post, Mr. Forbes said it would “usher in a great economic boom.”

Larry Kudlow of CNBC, who has never seen a Republican tax cut he didn’t like, was so excited by Mr. Perry’s flat tax and Herman Cain’s 9-9-9 plan that he attributed the recent stock market rise to their influence. In a National Review column on Oct. 21, he said the stock market rally was “discounting a new G.O.P. growth plan that will replace the dreary Obama tax-the-rich mantra.”

Although Mr. Perry praised the simplicity of his plan, it would actually complicate the tax computation for many people, because they would have to calculate their taxes two or even three different ways when the alternative minimum tax was also included. That was because Mr. Perry’s flat tax would be an optional tax system; those who wanted to stay in the current system could do so.

This is really just a gimmick to allow Mr. Perry to say with a straight face that everyone would get a tax cut. “Taxes will be cut across all income groups,” he said. His plan allows Mr. Perry to skirt every difficult issue about the impact of tax reform, like the huge increase in taxes that would be paid by the poor because they would lose all refundable tax credits, including the earned income tax credit.

Keep in mind that refundable credits give many people a negative tax rate. That is, they pay no income taxes but still get a Treasury refund. Going from a negative rate to zero would mean a tax increase for such people, as a Tax Foundation analysis illustrates.

To prevent people from gaming the system, Mr. Perry would insist that all those choosing the flat tax would have to stay in that system permanently. It’s not clear if those paying income taxes for the first time would be permitted a choice.

The idea of an alternative flat tax system was originally cooked up by a Wall Street Journal editorial writer, Steve Moore. But at least his idea was that the alternative system would be something like a pure flat tax with no deductions whatsoever. However, Mr. Perry would keep three key deductions in his system, which undermines the whole point of the flat tax, which is to wipe the slate clean. It also makes no sense because those who want to keep the deductions for mortgage interest, charitable contributions and state and local taxes could simply stay in the current system.

One consequence of Mr. Perry’s flat-tax deviationism is that his proposed tax form is lengthened to a full page from the original postcard that Mr. Forbes promised. Because the 1040EZ tax form that most people use is also one page, it’s hard to see those who care about the length of their tax return flocking to the Perry plan.

Of course, if everyone could simply choose to be taxed less or not, it absolutely guaranteed that Mr. Perry’s plan would be a massive revenue loser. In 2007, the Tax Policy Center analyzed a plan similar to Mr. Perry’s that had been proposed by Senator Fred Thompson of Tennessee, who briefly competed for the 2008 Republican nomination. The analysis found that revenues from allowing people to choose would be substantially less than if everyone were forced into the new system.

Giving people a choice also substantially mitigated whatever positive economic effects would be achieved from a flat tax. Its whole point is to change economic behavior by, for example, forcing people to stop investing so much of their savings in owner-occupied housing and investing instead in corporate stock or other forms that will add to the economy’s productive capacity.

Because no one is forced to change their behavior under the Perry plan, there is no reason to think that there will be an increase in economic growth if it is implemented. It would just lose revenue and complicate the tax code. That’s all. Edward Kleinbard, a University of Southern California law professor, calls the Perry plan “a promise to put a unicorn in every pot.”

Mr. Perry has countered with an “analysis” by John Dunham, a former tobacco industry economist, that shows growth will explode under his plan. The analysis states that it was commissioned by the Perry campaign and presumably was not done free. Using “dynamic scoring,” the analysis says gross domestic product will be an astonishing $3.5 trillion larger by the year 2020. Implausibly, it says that federal revenues would be $407 billion higher than under the Congressional Budget Office’s current projections and will rise even as a percentage of G.D.P.

There is no explanation whatsoever for how these estimates were arrived at, and they appear to have come from some sort of black box. When I asked Professor Kleinbard, who was formerly staff director for Congress’s Joint Committee on Taxation, what he thought about this, he corrected me. The estimates came from a “black magic box,” he said.

As Simon Johnson of the Massachusetts Institute of Technology recently explained on this blog, studies show that perhaps a third of a tax rate cut might be recouped through higher growth, and only if spending is cut enough to keep the deficit from rising.

Governor Perry says he will slash spending to 18 percent of G.D.P. from its current level of 23 percent. No explanation was offered of how this would be done or how such a huge spending cut would ever be enacted by Congress. It should be noted that even if every domestic program other than Social Security, Medicare and Medicaid is abolished, that would not be enough for Mr. Perry to reach his goal — all those programs together come to just 4.2 percent of G.D.P.

Thus, Mr. Perry’s plan cannot be taken seriously. I don’t think it’s meant to be, at least by those of us who don’t plan on voting in Republican primaries. It’s just a signaling device, telling the Republican faithful that they can trust Mr. Perry on the tax issue.

Whether the plan makes any sense as a matter of policy is irrelevant to its purpose, which is to win him the Republican nomination. With an Oct. 25 ABC News/Washington Post poll showing the flat tax much more popular among Republicans than Mr. Cain’s 9-9-9 plan, it might just work.

The Republican Idea of Tax Reform

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of the forthcoming book “The Benefit and the Burden.”

Back in 1995, flush from taking control of both the House and Senate for the first time since 1954, Republicans made tax reform one of their first priorities. House Speaker Newt Gingrich and Senate Majority Leader Bob Dole asked Jack Kemp, the former congressman and secretary of housing and urban development, to lead a commission that would report back with recommendations for fundamental tax reform.

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Among the members of the Kemp commission, formally the National Commission on Economic Growth and Tax Reform, was Herman Cain, then the chief executive of Godfather’s Pizza. I assisted the commission in a voluntary capacity, along with a number of other Republican tax policy wonks. I still have a copy of the commission report, issued in January 1996, that Mr. Cain and the other commission members signed.

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I don’t have much recollection of Mr. Cain’s contribution to the commission’s work, but I don’t have much recollection of mine, either. I remember him as being very friendly and easy to work with.

In the end, the Kemp commission didn’t come up with a specific tax reform plan. Its report set forth only a set of general principles that didn’t add much to what everyone already knew about the Republican tax philosophy. It didn’t matter very much; it quickly became clear that Congressional Republicans were losing interest in tax reform, which implies revenue-neutrality, in favor of tax cuts.

Tax cuts had effectively been off the table since 1981, as budget deficits made them politically impossible. Republicans today prefer to forget that Ronald Reagan signed into law 11 major tax increases, including the Tax Equity and Fiscal Responsibility Act of 1982, the largest peacetime tax increase in American history.

Of course, there was still a net tax cut during the Reagan administration. The same source of the table above, the federal budget for fiscal year 1990, shows that revenue was $264.4 billion lower in 1988 than it would have been without the 1981 tax cut. But Reagan effectively took back half of it by his last year in office.

It was their inability to simply cut taxes that really made Republicans interested in tax reform, which had historically been of more interest to Democrats. It was only by pairing tax increases with tax cuts that Republicans could keep alive their goal of reducing statutory tax rates. Their ultimate goal has long been to abolish progressivity by having a single tax rate that applies to everyone.

In the 1980s, Republicans settled for incremental progress toward this goal, which explains their support for the Tax Reform Act of 1986.

But in their hearts, Republicans don’t ever want to raise taxes; they only want to cut them. Consequently, tax reform has always taken a back seat to tax cuts whenever political and economic conditions permitted them. Those conditions began to emerge just as the Kemp commission finished its work.

Bill Clinton, in his budget for fiscal year 1997, which was released in early 1996, projected a federal budget surplus by 2001. It turned out that the tax increases initiated by George H.W. Bush in 1990 and by Mr. Clinton in 1993, which were strenuously opposed by virtually all Republicans, did exactly what they were supposed to do and sharply reduced federal budget deficits.

Nevertheless, Republican dogma insists that tax increases just fuel spending and never reduce the deficit. As the Republican tax guru Grover Norquist put it last week, when taxes are on the table there are no spending cuts. “When taxes are off the table, you get spending cuts,” he said.

My friend Grover is factually wrong. Spending as a share of the gross domestic product fell after both the 1990 and 1993 budget deals, in large part because of tough budget controls that Republicans abandoned in 2002 so that they could cut taxes without restraint. And contrary to Mr. Norquist’s theory, the tax cuts of the George W. Bush years did not constrain spending, which rose as a share of the G.D.P. almost every year of his administration (as the raw data confirms).

The point is that once deficits started to disappear, Republicans lost interest in tax reform and turned their attention instead to tax cuts. In 1997, they were successful, joining with Democrats to cut the capital gains rate and create tax credits for children and education, among other things. Of course, in the 2000s, Republicans cut taxes heavily without regard to the budget deficit.

It is only because they have invested so much effort in attacking President Obama for budget deficits that actually arose in large part from Republican policies, like the Medicare Part D program and two unfunded wars, that Republicans are somewhat inhibited from offering more tax cuts today.

This is what has turned their attention back toward tax reform, like Mr. Cain’s 9-9-9 plan, which apparently has evolved into a 9-0-9 plan, and the flat tax, which Gov. Rick Perry of Texas now champions.

While tax reform is a worthy goal — and long overdue — the recent interest by Republicans in the subject should not be taken too seriously. They are only biding their time until political conditions allow them to once again cut taxes.

Michael Hiltzik: The Cain Monstrosity

As long as Americans demonstrate a limitless thirst for tax nostrums, there will be politicians around to slake it. My Wednesday column places Herman Cain's 9-9-9 plan in historical context. The plan, such as it is, can be found here. USC expert Edward Kleinbard's analysis can be downloaded here. Be forewarned: It makes depressing reading.

The column starts below.

Herman Cain’s 9-9-9 plan would probably be seen as just another cockamamie tax scheme were it not for his surprising ascendance to front-runner ranks in the Republican Party primary.

Yet one of the more interesting questions raised by the plan hasn’t gotten much attention: What accounts for the enduring popularity of such tax nostrums, when they never pencil out?

Cain’s proposal, which purportedly would replace today’s federal tax code with a flat 9% personal income tax, a flat 9% corporate tax and a flat 9% national sales tax, has the surface appeal of an advertising slogan. He maintains it would be “fair” and “simple,” get the government “out of our pockets,” allow for the abolition of the IRS and create a huge surge in economic growth.

There’s reason to be skeptical about these claims, because every tax scheme mooted during a political campaign makes the same promises, and none ever seems to be rooted in political or economic realities here on planet Earth. One feature they all share, as it happens, is their murkiness, and 9-9-9 is no exception.

Read the whole column.

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-- Michael Hiltzik

Photo: Republican presidential candidate Herman Cain speaks Monday at the office of Maricopa County Sheriff Joe Arpaio in Phoenix. Credit: Eric Thayer/Reuters

The Tax Reform Act of 1986: Should We Do It Again?

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of the forthcoming book “The Benefit and the Burden.”

This Saturday is the 25th anniversary of the Tax Reform Act of 1986, signed into law by Ronald Reagan on Oct. 22, 1986. He called it a “revolution” and “the most sweeping overhaul of our tax code in our nation’s history.”

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Reagan was especially pleased that “millions of the working poor will be dropped from the tax rolls altogether” and that rich people and big corporations would “pay their fair share.” The law was indeed a major accomplishment, one that Reagan had every right to be proud of.

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But with the passage of time, it appears far less consequential than it did at the time. Although some aspects of the law remain part of our tax system, others were jettisoned with unseemly haste. The experience raises serious questions about the long-term effects of tax reform that those favoring an overhaul today would do well to learn from.

At least on the Republican side of the political spectrum, there is a widespread belief that tax reform is the key to growth. The Republican leadership also contends that the only reform that really matters is cutting the top tax rate for individuals and corporations. It is practically impossible to find a Republican willing to put a specific tax preference — exclusion, deduction, credit or loophole — on the table for elimination.

Of course, many Republicans will proclaim a willingness to wipe the slate clean and abolish all tax preferences. But they always seem to find a couple of exceptions. Herman Cain, for example, whose 9-9-9 plan I discussed last week, would continue to allow a deduction for charitable contributions. In the Cain plan there is no personal exemption, no child credit, no earned income tax credit or any other provision aiding families or the poor — but museums of modern art, Ivy League universities and public television stations would still be able to receive contributions that were tax deductible.

Historically, wipe-the-slate-clean plans have always foundered when squeaky wheels insisted on one little exception. Mortgage interest is a common one. Homeowners are a major Republican constituency, and even if they might be willing to give up the mortgage interest deduction in return for lower rates, few want to see the value of their principal asset fall further in value.

This would almost certainly happen if the mortgage interest deduction were abolished, because its value is capitalized into home prices — people are willing to pay higher prices and can afford larger mortgage payments due to interest deductibility. If the deduction were withdrawn, many homeowners would find renting to be more attractive.

But once one makes an exception for mortgage interest or charitable contributions in a radical tax reform plan, how does a politician say no to those who fear they will lose medical insurance if its tax exclusion is abolished, or those who live in high-tax states like New York where the deduction for state and local taxes is critical?

Once politicians make any exceptions to wiping the slate clean, they are on a slippery slope, because those benefiting from the next most popular deduction will be standing in line demanding an exception, too.

For these reasons, all tax reform plans premised on completely throwing out the tax code and starting from scratch are hopelessly utopian, with not the remotest possibility that any of them will ever be enacted. And support for them is not costless. Because so much political energy is channeled into the Fair Tax, the flat tax, the 9-9-9 plan and other proposals, very little is left over for changes that fall short of tearing the tax code out by its roots but are still needed.

The 1986 law was never about starting from scratch. It was about making progress, improving the tax code and accomplishing something at the end of the day that was worth doing. Yet despite the relative modesty of the goal, it was still extraordinarily difficult to accomplish and could easily have fallen apart on many occasions during the process. It succeeded, in large part, because of factors no longer present in our political system.

First, there was a tradition of tax reform, as was accomplished in the tax reform acts of 1969 and 1976, which concentrated on eliminating tax loopholes that only benefited special interests. This was considered a good idea per se, even if tax rates were not cut in the process. Today, such reforms would be viewed as tax increases and impermissible under the “tax pledge” that Republicans are dogmatically committed to.

Second, Republican tax reformers of the 1980s, such as Representative Jack Kemp of New York and Senator Bob Kasten of Wisconsin, were willing to put specific tax preferences on the table for elimination and take the heat for doing so.

Reagan built on their efforts and put forward a very detailed plan for tax reform in May 1985, based on several years of work by the Treasury Department, that identified a long list of tax provisions needing pruning from the tax code, along with supporting analysis and documentation.

Today, Republicans like Mr. Cain put most of their efforts into devising catchy slogans and almost none into providing details of their tax proposals.

Third, bipartisanship wasn’t a dirty word in the 1980s. The 1986 law would have been impossible if the Republican chairman of the Senate Finance Committee, Bob Packwood of Oregon, and the Democratic chairman of the House Ways and Means Committee, Dan Rostenkowski of Illinois, weren’t committed to the effort and willing to work closely, compromising, making deals and splitting differences in a way that Congressional Republicans and Democrats are incapable of doing today.

In the end, the key compromise that made the 1986 law work was Reagan’s willingness to raise the capital gains tax to 28 percent from 20 percent in return for dropping the top income tax rate to 28 percent from 50 percent.

Today, Republicans like Mr. Cain make abolition of the capital gains tax a key element of their tax reform efforts. It’s hard to imagine that they would ever support a deal like the one Reagan took such pride in.

Even so, critical elements of the 1986 law fell apart almost immediately. The top rate was raised to 31 percent in 1990, while the capital gains rate stayed at 28 percent. Thus both liberals and conservatives lost out, and the dream of treating all income the same and taxing it at a low flat rate went up in smoke. According to the Tax Policy Center, the aggregate size of tax expenditures began rising almost as soon as the ink was dry on the 1986 law.

Nevertheless, the fact that the weeds will grow back is no reason to never prune a garden. One has to take a stab at it once in a while or eventually be surrounded by a jungle of ugly plants. That there is no once-and-for-all solution to it, or to the problems of the tax code, is a poor reason not to at least try to clean up from time to time.

Based on the experience of the 1986 law, the essential prerequisite for doing another tax reform like it is for President Obama to put a detailed plan on the table, as Reagan did, backed by extensive research and analysis from the Treasury Department. Reagan kicked off his effort in the 1984 State of the Union address. Obama’s 2012 address would be an appropriate occasion for him to do the same.

Storming the Capitalist Castle

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst.

Wall Street is not literally a castle, and the small green space of Zuccotti Park claimed by Occupy Wall Street may soon be emptied. But an upstart movement has spray-painted a new slogan onto the ramparts of the economic establishment.

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“We Are the 99 Percent” effectively publicizes a message consistent with research on the distribution of income and wealth: the top 1 percent of households in the United States represents an economic aristocracy.

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Over the last 30 years, it has consolidated and amplified its privileged position, making strategic political investments in policies ranging from financial deregulation to cuts in top marginal tax rates.

It took home 21 percent of the nation’s pretax income in 2008, up from 9 percent in 1976. It controlled 36 percent of the nation’s private wealth in 2009.

Some economists argue that inequality has no downside — a view critically dissected by Timothy Noah in a terrific essay, “The United States of Inequality.”

As a poster I admired at the park last Wednesday succinctly put it: “We want democracy, not plutocracy.”

The protesters don’t necessarily demonize the top 1 percent or suggest that taxing them at a higher rate will balance the budget. What brings them together is the conviction that this group exercises disproportionate control over our economic and political life.

Republicans seem to confirm this view when they assert that higher taxes on millionaires would stunt employment growth – as though a small reduction in disposable income would demoralize otherwise mighty job creators.

The very rich are depicted as champions of the people who would graciously repay further tax cuts with economic growth. Yet Republican tax cuts dug much of the budget hole we live in.

A quarter of the millionaires in the United States pay lower tax rates than some middle-class households, vindicating concerns expressed by Warren E. Buffett, the investor king of Omaha now widely considered a traitor to his class.

The posters I saw didn’t propose class war, but they did express class rage. “I paid for your bailout” said one, “and I want a refund.” “Health care, not wealth care,” said another. Several said simply, “I need a job.”

The protestors I heard didn’t pretend to offer a political program. One held up a sign saying, “We’re Here, We’re Unclear, Get Used to It.” He genially described his participation in a week’s worth of workshops and discussions as a “think tank of democracy.”

Another, more discursive poster described the ideals of the “solidarity economy,” starting with: “I don’t have a boss. I’m a worker-owner in a cooperative business,” and ending with, “I joined a credit union so my money stays in the community.”

What seems to be emerging is what the historian Gar Alperowitz described as a process of “evolutionary reconstruction.” It might start by making capitalism more distinct from feudalism.

This idea came to me while reading about a great new product that just hit the market: a $6,400 toilet with its own remote control for water spray and drying fan. Marie Antoinette would have loved it for Versailles.

Whether the ramparts are breached or not, I predict a long and fascinating siege.

Make-Work and the G.D.P.

Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

Suppose some evening a group of bored and mischievous teenagers slash tires on a number of cars in the parking lot of a shopping center. Distraught car owners call sundry nearby garages to send someone to fix the damage on the spot or tow the cars in for repairs. That work is speedily done, and the cars are ready for use again. The car owners pay the garage owners sizable repair bills.

This fictitious event leads to a number of questions:

1. Did the garages deliver value to the car owners?
2. Was gross domestic product increased or decreased?
3. Were the car owners better off, after paying the repair bill?

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My answer to the first question is yes and to the second yes, as well, unless the garages had to give up other jobs with revenue equal to or greater than what they earn coming to the car owners’ rescue. To the third question, my answer is, it depends.

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If we take as the baseline the position of the car owners after the tires had been slashed, they would be better off, unless for some the repair bill turned out to be so high that, in retrospect, these owners would have preferred to abandon their cars. If we take as the baseline the situation before the tires were slashed, the entire affair left the car owners worse off. It reduced what economists would call social welfare.

Why is this vignette in so serious a blog as Economix? Because it illuminates a phenomenon not always fully appreciated when we talk about value added or G.D.P.

In many instances, Person (or Enterprise) A delivers great value to Person (or Enterprise) B to extract the latter from a situation into which B should not have been put in the first place. We count in G.D.P. the value added by the extrication but do not detract the value destroyed by being driven into a precarious situation.

Quite a few economic transactions included in our G.D.P. parallel this vignette. Think of reconstruction after a natural disaster. We count the money paid for reconstruction in G.D.P. but do not deduct the value destroyed by the disaster.

Suppose a country developed long-range missiles that made our aircraft carriers sitting ducks for attack or developed the ability to paralyze our country with cyberattacks. To extract ourselves from that threat with possibly expensive countermeasures, we would give up enjoyable consumption or investments yielding future enjoyable output in order to increase military spending.

Now think about the almost incomprehensible tax code that Congress has imposed. Think of it as a disaster of human making. To cope with it, individuals and businesses hire legions of lawyers and accountants who have deployed their human capital to understanding this bewildering code. These tax experts work hard and often brilliantly to shield their clients from taxes, usually achieving tax savings that are multiples of what they charge for their services.

For the clients, it is a highly valuable service. Indeed, the more confusing the tax code, the more of these experts we need, the harder they work, the greater the value of their services to their clients and the more income they earn. That income, of course, is part of the G.D.P. But for the most part, their work collectively amounts to one giant zero-sum game, because taxes not paid by one client will have to be paid by other taxpayers now or in the future to bring in the revenue needed to sustain the spending level Congress has set. It does not enhance overall well-being for society as a whole.

We can doubt that these professionals’ work creates a more efficient incidence of taxation, because much of their work is to know and take advantage of complicated and inherently inefficient tax loopholes that Congress should not have established in the first place.

In many ways, our health care system mirrors our tax code — especially in its financing and health insurance facets. These can be made so complex and have been made so complex in the health care system in the United States that many decision makers in health care — patients, physicians, hospitals, employers and so on — need in-house or external consultants to find their way through the maze.

A few months ago, I asked a Canadian hospital executive how many employees he had in his hospital’s compliance department. “Compliance?” he responded. “What do you mean by that?”

Somehow the Canadian provincial government-insurance plans manage to pay Canadian hospitals without requiring them to have the large compliance staff or outside compliance consultants engaged by hospitals in the United States whose task it is to ensure that the hospital does not violate the hugely complex, ever-changing terms of Medicare, Medicaid and other government programs or regulations. An academic health center may have a dozen or two dozen employees devoted to compliance. Such a center may employ several hundred billing clerks to cope with the myriad of private health insurance plans and policies, each with its own coverage, nomenclature and payment rules and requirements for prior authorizations.

Consulting firms help physicians bill private and public insurers or help patients submit claims to insurers after an illness. Legions of insurance brokers help prospective clients through the maze of the nongroup or small-group health insurance market. Large employee-benefit consulting firms, helping large companies, establish what amount, in effect, to analogues of the health-insurance exchanges in the Affordable Care Act, and many more consultants of many stripes are involved.

One does not find legions of expert consultants helping individuals and businesses through the administrative maze of the health care system in, say, Switzerland, Germany or other European countries, or Canada, or Taiwan. It seems to be a uniquely American phenomenon — part of American exceptionalism, I suppose.

All of these consultants perform highly valuable services to their clients, but taken together their work consists for the most part of helping Americans extricate themselves from an administrative nightmare into which they should not have been put in the first place.

At Yale University I had the privilege of sitting in the classroom of the late James Tobin, an early Nobel laureate in economics and one of our profession’s greats. He distinguished between “enjoyable” and “nonenjoyable” G.D.P., with the latter including military spending or other “value added” from coping with either externally inflicted or self-inflicted damage done to our society. I often think of our revered professor when I contemplate the composition of this country’s G.D.P.

Can Tax Cuts Pay for Themselves?

Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

Can tax cuts “pay for themselves,” inducing so much additional economic growth that government revenue actually increases, rather than decreases? The evidence clearly says no.

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Nevertheless, a version of this idea, under the guise of “dynamic scoring,” has apparently surfaced in the supercommittee charged with deficit reduction — the joint Congressional committee with 12 members. Dynamic scoring sounds technical or perhaps even scientific, but here the argument means simply that any pro-growth effect of tax cuts should be stressed when assessing potential policy changes (e.g., reforming the tax code). For anyone seriously concerned with fiscal responsibility, this is a dangerous notion.

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Economists disagree about almost everything, of course, and the effect of tax cuts is no exception. One reasonable way to assess the evidence is to begin with the highest plausible effects, then see what happens if some of the more extreme assumptions are relaxed (this is a nice way of saying that we don’t believe everything the authors are trying to tell us).

I would start with a study by Gregory Mankiw, former chairman of George W. Bush’s Council of Economic Advisers – and therefore presumably on the tax-cutting side of American politics – and Matthew Weinzierl (published in The Journal of Public Economics in 2006 and, unfortunately, available only to subscribers) that shows the economic growth caused by a tax cut can offset, at best, a portion of the revenues lost by that tax cut.

Specifically, Professors. Mankiw and Weinzierl calculated that 32.4 percent of the “static” or direct revenue loss of a capital-gains tax cut and 14.7 percent of the static revenue loss of a labor tax cut could be offset in present-value terms by additional growth, ignoring short-term Keynesian effects (i.e., any immediate stimulus provided to the economy).

Now 32.4 percent is a lot, but it is far less than 100 percent. And a critical assumption for Professors Mankiw and Weinzierl is that government spending falls to keep the budget in balance. In their framework that’s a good thing — as they are effectively assuming away the consequences of any productive effects of government spending (e.g., what if less spending on schools means less education and this hurts “human capital” and therefore productivity down the road?).

Sticking for a moment with just with their view of the world, if instead the tax cuts are financed by additional debt, as was our collective experience during the 2000s, the ultimate effect of those cuts can be to lower economic growth in the long term, depending on whether the larger debt eventually leads to lower government transfers, lower government consumption, higher taxes on capital or higher taxes on labor. (Eric M. Leeper and Shu-Chun Susan Yang discuss this in “Dynamic Scoring: Alternative Financing Schemes,” also in The Journal of Public Economics, in 2008.)

More broadly, in 2005, the Congressional Budget Office, then headed by a Republican appointee, Douglas Holtz-Eakin, estimated that the economic effects of a 10 percent cut in income taxes would offset from 1 to 22 percent of the revenue loss in the first five years; in the following five years, the economic effects might offset up to 32 percent of the revenue loss, but might also add 5 percent to the revenue loss.

This is an entirely reasonable assessment — the budget office exists to provide balanced analysis for the budget process. The bottom line is that betting that tax cuts will pay for themselves is a high-risk strategy and not a good idea at our current levels of government debt relative to gross domestic product. We do not have a large margin for error. (Disclosure: I’m on the Panel of Economic Advisers for the the budget office, but I didn’t have anything to do with that study.)

Of course, economic studies do not necessarily have a direct effect on political discourse. For example, President George W. Bush asserted in 2007, “It is also a fact that our tax cuts have fueled robust economic growth and record revenues.” But this is nothing more than an assertion. Growth during the 2001-7 expansion was only 2.7 percent compared, for example, with 3.7 percent during the 1990s expansion (when tax rates were higher).

And much of the growth during the Bush period turned out to be illusory; it was based on our corporate and national accounting system, which measures profits (an important part of G.D.P.) but not on a risk-adjusted basis. When the risks materialized in the financial crisis of 2008-9, we lost so much output that G.D.P. per capita in real terms today is only at about the level of 2005.

To assess growth properly, you should look “over the cycle,” meaning roughly 10 years for the modern American economy. It is hard to argue that the last decade was any kind of growth success. Of course, other things happened during the 2000s, including further financial sector deregulation not directly related to the tax cuts.

That’s why we have the economic analysis, particularly by the budget office, to disentangle what tax cuts can really do. If the supercommittee buys into dynamic scoring for tax cuts, at best this would be wishful thinking. At worst, it would represent yet another round of fiscal irresponsibility at the top of American politics.

And if people are seriously considering altering the rules under which the the budget office operates, they should stop and think again. Changing the score-keeping guidelines at this stage would amount to undermining the credibility of the office, one of the few remaining impartial and well-informed observers of the nation’s economy.

Perhaps this strategy might yield some short-term political gains, but the damage to our creditworthiness would be immense, and the consequences would be felt sooner rather than later.

The nightmare downward spiral and fiscal implosion in the euro zone began with a few countries cheating on their numbers — first to get into the currency union and then to avoid various forms of official criticism. We do not want to start down the same path.

Inside the Cain Tax Plan

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul.

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With recent polls showing increased support for Herman Cain as the G.O.P. presidential nominee, attention is being drawn to his platform, especially what he calls the 9-9-9 tax plan. News reports describe it as a 9 percent tax rate on business and personal income, combined with a 9 percent national sales tax.

Little detail has been released by the Cain campaign, so it’s impossible to do a thorough analysis. But using what is available on Mr. Cain’s Web site, I’m taking a stab at estimating its effects.

First, the 9-9-9 plan is actually an intermediate step in Mr. Cain’s plan to overhaul the tax system and jump-start growth. Phase 1 would reduce individual and business taxes to a maximum of 25 percent, which I assume means reducing the top statutory tax rate to 25 percent from 35 percent.

No mention is made on the site of a tax cut for those now in the 10 percent, 15 percent or 25 percent brackets. This means that the only people who would get a tax rate cut are those now in the 28 percent, 33 percent or 35 percent brackets. According to the Joint Committee on Taxation, only 4 percent of taxpayers pay any taxes at those rates.

As for corporations, Mr. Cain’s proposal is primarily going to benefit those with revenues of more than $1 million a year, because they account for 98.7 percent of all receipts by C corporations. (A C corporation is a legal entity separate and distinct from its owners that is taxed as a corporation; its shareholders pay taxes individually on their gains.) Those companies with receipts over $50 million account for 88.8 percent of total receipts.

Other business entities — sole proprietorships, S corporations (which have between 1 and 100 shareholders and pass through net income or losses to shareholders) and partnerships — would not benefit because they are not taxed on the corporate schedule. But they represent 92 percent of all businesses.

Second, Mr. Cain would eliminate all taxes on profits earned by multinational corporations outside the United States. It’s hard to know the impact of this provision, but according to Martin Sullivan, an economist with Tax Analysts, the 50 largest corporations in the United States generated half of their profits in other countries.

The actual benefit of Mr. Cain’s proposal would be much greater to many of them, because, according to Mr. Sullivan, while some of these 50 companies have no foreign operations, others derive 100 percent of their gross profits in foreign countries. In 2010 these included Philip Morris, Pfizer and Abbott Laboratories.

Third, Mr. Cain would abolish all taxes on capital gains. Such taxes typically generate more than $100 billion in federal revenue annually, according to the Tax Policy Center. According to the Joint Committee on Taxation, two-thirds of all capital gains are reported by those with incomes over $1 million.

Mr. Cain says these three proposals, which he would put into effect immediately without offsetting the lost revenue, will jump-start economic growth. He offers no evidence for this assertion; it is simply put forward as self-evident. But the experience of the George W. Bush administration was that cuts in tax rates on the wealthy and on capital gains had no effect whatsoever on growth, according to the Congressional Research Service.

And this is only Phase 1 of the Cain plan. In Phase 2, the payroll tax would be eliminated, causing more than $800 billion in revenue to evaporate. The estate and gift tax would be abolished, further reducing taxes on the wealthy. And the 9-9-9 plan would be implemented.

It’s important to understand that the 9 percent rates on personal and business income would apply to very different tax bases than now exist. For individuals, the tax would apply to gross income less only the deduction for charitable contributions. No mention is made of a personal exemption.

This means that the 47 percent of tax filers who now pay no federal income taxes will pay 9 percent on their total income. And elimination of the payroll tax won’t even help half of them because the earned income tax credit, which Mr. Cain would abolish, offsets both their income tax liability and their payroll tax payment as well.

Additionally, everyone would now pay a 9 percent sales tax on all purchases. No mention is made of any exemptions from this tax, so we may assume that it will apply to food, medical care, rent, home and auto purchases and a wide variety of other expenditures now exempt from state sales taxes. This would increase their cost of living by 9 percent while, at the same time, the poor would pay income taxes.

The business tax in the Cain plan bears no resemblance to the present corporate income tax. 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.

How benefits would be treated is unclear, because purchases of things like health insurance might constitute a purchase from another company and remain deductible. If so, what is to stop a company from paying its employees by leasing their cars and homes for them and even buying their food and clothing? That would reduce their taxable revenue.

The abolition of any deduction for wages is likely to raise the cost of employing workers, even with abolition of the employers’ share of the payroll tax. And since the dividend deduction doesn’t appear to be related to profitability, companies could borrow to pay dividends and still get the deduction. Even a novice tax lawyer could easily make a tax shelter out of that.

And here’s the kicker in the Cain plan. Phase 2 is merely a transition to yet another fundamental tax reform. In Phase 3, the United States would adopt the so-called Fair Tax, which would replace all federal taxes with a 30 percent sales tax on all goods and services. In a previous post, I explained why the Fair Tax is a bad idea. I went into more detail in testimony before the House Ways and Means Committee on July 26.

Whatever one thinks of the Fair Tax, it makes not the slightest bit of sense to have a plan that requires fundamental changes to the federal tax system twice to achieve its objective.

Veterans of tax reform attempts in the United States know reform is very difficult and time-consuming even once. If the Fair Tax is a good idea, Mr. Cain ought to just do it, without confusing the issue with his unnecessary and highly complicated 9-9-9 plan. After all, one of the prime selling points of the Fair Tax is its simplicity, and the 9-9-9 plan is far from that.

Because so little detail exists, it’s hard to do either a proper revenue estimate or distributional analysis of the Cain plan. It’s obvious, however, that Phase 1 would represent a huge tax cut for the wealthy at a time when federal revenues are at a historical low as a share of the gross domestic product and the economy’s fundamental problem is a lack of aggregate demand.

Thus the Cain plan would increase the budget deficit without doing anything to stimulate demand, because rich people can already spend as much as they want and are unlikely to spend more even if their taxes are abolished.

The poor and the middle class might increase their spending if they could keep more of their earnings, but they will unquestionably pay more under Phase 2 of the Cain plan. With no tax on capital gains, the rich would pay almost nothing, while elimination of all deductions and credits, as well as imposition of a national sales tax, must necessarily raise taxes on everyone else, especially those not now paying income taxes.

At a minimum, the Cain plan is a distributional monstrosity. The poor would pay more while the rich would have their taxes cut, with no guarantee that economic growth will increase and good reason to believe that the budget deficit will increase.

Even allowing for the poorly thought through promises routinely made on the campaign trail, Mr. Cain’s tax plan stands out as exceptionally ill conceived.