The Econometrix

Let me caveat this by saying that I am fundamentally in favor of a more progressive tax structure.  But this is easy to explain and implement and has at least a nod to progressivity.

Personal Income Tax:

1)      Everyone with a SS# gets a personal exemption tied to the Federal Poverty level for a family of 1.  For 2011, that was $10,890.   There would have to be some fiddling with the personal exemption level, to make a stab at a sustainable deficit level, but I don’t have time to work out the details today.

2)      Above the personal exemption, all income is taxed at 23.8%.  Where does that number come from…well it is federal outlays as a percentage of GDP (for 2010).  Although one might want to build a small amount of flexibility by basing it on estimated expenditures for the following year, or adding a percentage point(s) to make up for the personal deductions.  But tying it to Federal Expenditures neatly ties lawmakers hands.

a.       Also you could suspend the expenditure-and-tax-rate equivalence when Congress declares war, which would give everyone an incentive to do it properly.

3)      It does not matter what you do with that income, give it to charity, pay mortgage interest, pay college tuition, etc.

4)      It does not matter what the source of the income is wages, short vs. long term capital gains, interest, etc.

5)      The marriage tax penalty goes away, because it doesn’t matter whether people are living together in sin or married, they can combine their tax returns, or not, and pay the same tax rate.

Corporate Income Tax:

Corporations are people too…right?

1)      They get taxed at 23.8% of (GAAP) profits. 

2)      Any limited liability corporation pays its own taxes.  S-corp owners would have to decide which was more important to them profits being passed through without taxes or the limited liability protection afforded corporations.  They could however have the S-corp pay them a reasonable salary (or commissions).

Note: If you tax wages the business pays (as Herman Cain’s plan does) that would be double taxing.

TaDa!

1)      Instant Automatic Pay-as-you-go balancing of the budget.

2)      Very simple and easy to understand. 

3)      Lawmakers must take into account the cost to the taxpayers of anything they undertake.

4)      Does away with the whole Alternative Minimum tax, Millionaire/Billionaire tax surcharge, because even Buffet would be paying 23.8%, for him the personal exemption would be a rounding error.

5)      Everybody would literally be paying their “share” of the services that the Government provides.

...in "10 essential fiscal charts" http://www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Reports/Fiscal_Analysis/Essential_Federal_Fiscal_Charts.pdf

Really interesting, if slightly depressing.

  THE GOVERNANCE OF A FRAGILE EUROZONE, by Paul De Grauwe

"When entering a monetary union, member-countries change the nature of their sovereign debt in a fundamental way, i.e. they cease to have control over the currency in which their debt is issued.  As a result, financial markets can force these countries’ sovereigns into default."

http://www.econ.kuleuven.be/ew/academic/intecon/Degrauwe/PDG-papers/Discussion_papers/Governance-fragile-eurozone_s.pdf

Following up: The Debt Ceiling Negotiation and its Consequences - pos.org  (http://pos.org/documents/a_pivot_point_in_american_opinion_the_debt_ceiling_negotiation_and_its_consequences.pdf)

Fact #1: There are losses embedded in the system and someone is going to have to write them down.

Fact #2: The intuitional costs of default or bankruptcy are sufficiently large that no one goes through it for a small write-down.

Fact #3: Sovereign countries whose debts are denominated in nominal terms over which the country has control, have the ability to decrease the real value of the debt without going through default, by either inflation or devaluation (usually both).

There are basically four options in responding to Fact #1: they can be mixed together, but I'm not sure that mixing the choices makes them more palatable. 

A) Germany can take all the losses onto their balance sheet, with or without the common fiscal union, which might protect them from having this happen again.

B ) The private sector can be forced to take the write downs via default.

C) Devaluation/Dissolution: Germany and the ECB can toss Greece out of the club.

D) Devaluation/Inflation: Germany and the ECB can inflate away the debt overhang of the debtor countries in nominal terms.

The European banks like option A, but the Germans have been reluctant to take on all the debt overhang of the debtor countries of the Euro, with good reason.  The amount of debt is enormous, and only the Germans (with help from France and the IMF) would be able to do so. This is the path that Europe has been going down so far, but as some point Germany may well hit its Not-Another-Pfennig limit.

Everybody is afraid of the knock-on effects of option B. What if the Greek default is just the first of a series?  This is what the market has been pricing into bond interest rates.  I am not convinced that this option is made easier or cheaper by waiting to pull the trigger.  The European financial system is very afraid of this one, because while they have been off-loading their debt to the Germans (directly and via the ECB and EFSF) and the IMF, many financial institutions will be technically insolvent. So in this event many billions of dollars would be needed to bail out the European financial system.

Option C would be a complete disaster. There would be bank runs in not only Greece, but also in any country that might eventually be in the same position, causing cascading financial system failures.  This would be Very, Very ugly.  Another ugly possibility would be that Germany leaves the Euro.  It is usually the strongest member that breaks up a currency union.  If they really consider kicking Greece out of the club, they may want to suddenly (without warning) dissolve the whole thing, so there is less time to have Euros slosh into Germany.

Option D is the least painful option.  This option is the reason why sovereign debt denominated in the borrower's currency is generally rated more highly than other sovereign debt.  If you don't face the default threshold problem, you can write it down by small increments of 5% a year instead of 25% all at once. The problem with any default is that once you pay the reputational cost of a default, you might as well really write it down.  Nobody goes through bankruptcy to get a 5% write-down.

The problem with option D is that Germany controls the ECB and they are serious inflation-phobes.  Otherwise, they would have bailed out Greece last year and Helicopter Jean-Claude, would have promptly monetized the bailout....problem solved.  All the other seriously-indebted countries would have benefited by having the real value of their debts decrease and the Euro economy would have benefited from the resulting devaluation.