Sunday, October 16, 2011

Cain Ahead in the Polls but Romney Way Ahead in the Betting, The Meaning of 9-9-9

Who Exactly is the Favorite?
Frequent readers to this space can't exactly be surprised by the Jupiter-gravity speed fall of Texas Governor Rick Perry from frontrunner to near afterthought in the GOP race.  After all, I'd been warning you for weeks: Rick Perry is this year's Fred Thompson, Rick Perry is a great concept for the GOP but a horrible candidate, Rick Perry is not ready for prime time.  Certainly none of this stopped the talking heads from immediately appointing Perry the guy to beat as soon as he led in the polls.  But they stopped talking about him just as fast as his numbers crashed, instead focusing on the new guy at the top in national polling: former Godfather's Pizza CEO Herman Cain.

Cain is ahead in the national polls modestly and leads in several early states.  The primary and caucus calendar is a dynamic thing, thanks to Florida's decision to go early, but ultimately it should settle down to the first 5 races still being Iowa, New Hampshire, Nevada, South Carolina and then Florida.  The "early 4" will do whatever it takes to move their debts to preserve their early status and will all therefore set calendar dates earlier than Florida's accelerated January 31st date.  South Carolina has already moved its date up to January 21st, Nevada to January 14th.  Iowa and New Hampshire have not yet set their dates, but the mostly likely dates are for Iowa to go January 3rd and New Hampshire to go January 7th, although there is some possibility that New Hampshire will attempt to go in December, as they are extremely unhappy with the notion of having only a four-day gap between Iowa and them.

These states all have different dynamics.  Iowa and Nevada are caucuses, which require participants to donate money, invest significant time and openly declare their support for candidates - in other words, these are events that only the most devoted party members participate in.  New Hampshire, South Carolina and Florida are primaries, which, at a minimum, allow open access to any member of the party that wishes to participate and require only the few minutes it takes to go cast a vote.  Add to this the further wrinkle of primary rules - New Hampshire has what is known as a "semi-closed" primary - Republicans and Independents can participate in the GOP primary but Democrats cannot.  South Carolina has an "open" primary, meaning anyone of any party can participate in its GOP primary (they cannot participate in both primaries, but that is largely irrelevant this year as President Obama faces no real opposition for the Democratic nod.)  Florida has a "closed" primary - only registered members of the GOP can participate.

So, with 4 different kinds of elections in the offing in the first 5 contests, polling gets extremely tough.  Caucuses are notoriously hard to poll for and open primaries are generally harder to get a read on than closed primaries.  All of that said, let's assess the latest polling numbers both nationally and in the likely first 5 states:

Latest Average of Averages for National Polls:
Romney - 20.5%, Cain - 19.2%, Perry - 13.7%, Paul - 8.6%, Gingrich - 7.6%, Bachmann - 4.8%, Santorum - 1.9%, Huntsman - 1.6%

While Romney still leads marginally over Cain nationally, all the dynamics would seem to favor Cain.  Perry has been in decline and his support, almost vote-for-vote, has been going to Cain.  Paul has been a relatively constant at that level, with a small, but very loyal demographic backing his libertarian views.  Gingrich has been on the rise, mostly at the expense of the other minor candidates.  The other candidates don't have enough support to be worth taking, but to the extent that they fade, it is likely that Bachmann and Santorum's supporters would go to Cain, while Huntsman's would go to Romney, based on their ideologies.

So, for now, call it basically a wash between Romney and Cain, with Cain gaining and Romney relatively constant (he's been in the low 20s virtually the whole election cycle.)

Averages by State:
Iowa (only 1 recent polls): Romney 26%, Cain 20%, Paul 12%, Perry 11%, Bachmann 11%, Gingrich 5%, Santorum 5%, Huntsman 1%

New Hampshire (3 recent polls): Romney 40%, Cain 15%, Paul 12%, Huntsman 6%, Perry 5%, Gingrich 4%, Bachmann 3%, Santorum 1%

Nevada (no recent polls)

South Carolina (no recent polls)

Florida (no recent polls)

So, as things stand now, Romney would be poised to take the first two contests, which would give him considerable momentum going into the next 3.  Cain is live in Iowa, but Romney appears to be a lock in New Hampshire, which neighbors his home states of Massachusetts. 

You would think Nevada is fairly neutral ground (a moderate state but a caucus structure), South Carolina would heavily favor Cain (or anyone else polling well against Romney, being a conservative electorate) and Florida would be a fairly neutral state (classic large-state swing contest.)

So to have the momentum to mount a serious charge, anybody other than Romney (for now, we'll say Cain) needs to win in Iowa.  Expect the next couple of months leading up to the caucus to be fast and furious in that regard.

While on face, Romney is the favorite, the betting odds might surprise some.  Here are the latest odds from our friends at Intrade:
Romney to win nomination: 68.5%
Perry to win nomination: 12.4%
Cain to win nomination: 8.9%
Someone else to win:10.2%

How can Mitt Romney be such an overwhelming betting favorite when he is only a marginal leader in the polls?  And how can Perry be ahead of Cain when all the numbers look like he's sunk?

The answer is pretty simple.  One is that nobody buys the Cain phenomenon yet as a lasting trend.  Donald Trump led the GOP field in the polls at one time.  Then it was Michelle Bachmann.  Then Rick Perry.  Now Herman Cain is on the verge of it.  Through it all, Mitt Romney has plodded along with his 20-25% support.  It's starting to look like the GOP is going to date a lot of super models but marry the girl next door (note: this analogy has nothing to do with the good looks of the candidates for those who may not be able to connect the dots.)

I've been predicting Romney to get the nod from the get go.  Seems like the smart money is coming around to that.

Since Cain is, at least for the moment, polling strongly in the GOP race, it is worth spending a little bit of time discussing his cornerstone proposal, a fundamental change in the tax code that he has been touting as his "9-9-9 plan". 

Before I dissect the plan, let me give Cain credit.  I'm not a fan of the 9-9-9 plan in a lot of ways.  But at least Cain has proposed something meaningful.  Can you tell me the tax plan of Mitt Romney or Rick Perry?  That's because they don't have one.  So, while I don't agree, I appreciate that Cain is actually contributing to the dialogue rather than just spouting platitudes about not raising taxes.

9-9-9, at its essence, is a replacement of most of our existing taxes: corporate, individual income and payroll with a 9% tax on corporate profits, a 9% tax on individual incomes and a 9% sales tax.

Let me start by providing context to the discussion.  There are two important decisions to be made relative to taxation.  The first is HOW MUCH the government should collect in taxes.  This should (but often isn't) be related to how much you want the government to spend.  In other words, how many bills do I need to pay and therefore what do I need to collect in taxes?  The second decision in a tax code is WHO should pay the taxes and in what proportion.

Cain has stated that his plan was designed to be initially neutral to what the current tax code collects.  I am unable to independently verify that claim, but not able to disprove it either.  You see, it's such a fundamental change in the method of collection (the addition of a national sales tax, a major change in the corporate tax structure) that I simply lack adequate data and study at this point to verify whether it is revenue neutral or not.  So, for purposes of this debate, let's assume that it is, or, if it isn't that Cain would adjust it to be a 10-10-10 plan or an 8-8-8 plan to compensate.

On the issue of who pays, there is some good but a lot of bad.

In our current tax code, the people that pay are the upper-middle class.  The most heavily taxed money is income that is between $85K and $106K.  This income is subject to a federal rate of 28% plus an effective payroll tax of about 15% (considering both the employer and employee share, which you have to, since they both, in essence, come out of the employee's pocket), for a combined rate of about 43%.  This is higher than the 39.6% effective rate paid on very high incomes (over $383K). 

Also paying are US-centered businesses that are in non-capital intensive industries - think software companies and small retailers.  They pay an effective rate of 35%.

The people who don't pay much are:
The working and lower middle classes with children - 47% of the population is able to avoid all income tax through exemptions and deductions and therefore pay only an effective payroll tax of around 15%.

Investors and the non-working rich - capital gains and dividend income is taxed at only 15%.

Businesses that have foreign operations, qualify for energy-efficient tax credits or have heavy capital needs that they can leverage accelerated depreciation - GE famously paid no federal taxes last year and they are not alone.  By shoveling profits to foreign affiliates, taking advantage of accelerated depreciation laws and getting givebacks from the government for investing in green energy, many companies can reduce their effective tax burden to close to zero.

This doesn't seem like a great system in total.  Under Cain's system, the people who would pay most heavily would be:
The working class and the lower-middle class - those who effectively live "paycheck to paycheck" and spend all of their income would be hit fully with both the income and the sales tax and pay an effective rate of 18%. 

Who would be hit the least?  The investing class and corporations, who would pay a mere 9%.

It doesn't seem like a good system to me.  And it isn't because I'm opposed to a less nuanced tax structure.

I'd propose instead, that a better system would be to ditch the sales tax (which is regressive in that it hits the poor a lot harder) and exempt the first $30K per year in individual income from taxation (you shouldn't be taxing people into poverty.)  Beyond that, I'd be fine with a flat tax rate with no deductions (no home mortgage deduction, no charitable contribution deduction, etc.)  I'd treat all investment income (capital gains, dividends, etc.) the same as any other income and nix the corporate tax.  This way, you'd eliminate all the balance sheet and income statement gain playing and tax the money at receipt.  In reality, the rates would likely have to be a lot higher than Cain's 9%, under a system such as mine, the likely rate would need to be 20% or so, but that would beat the heck out of having some pay 43% and some pay nothing.

Tax reform is a debate we have been putting off way too long.  I thank Herman Cain for getting us started even if I don't like his plan.

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