Perry's complicated simple flat tax

Making his flat tax optional solved one problem - its regressive nature. Howard Gleckman is a resident fellow at the Urban Institute and editor of TaxVox, the blog of the nonpartisan research organization Tax Policy Center. The opinions expressed in this commentary are solely those of the writer. One of the biggest problems with Texas Gov. Rick Perry's optional flat tax may be the choice it gives taxpayers.

Print Comment Perry says you can either pay his new tax or pay under today's system, whichever results in a lower bill. That sounds great, but it is a policy disaster. This is the tax code we're talking about, not some TV game show. Perry says he wants a system that is simple. But his option could well make tax filing far more complicated, especially for middle-income households. He says he wants certainty. But the optional tax will create more confusion. He says he wants people to be able to file on a postcard. But his option may require taxpayers to prepare their returns three times. The option does solve one problem -- the regressive nature of any consumption tax. Herman Cain has learned this the hard way as he's struggled with his 9-9-9 tax. Perry's semi-consumption tax has a similar problem. What's a flat tax? And Perry has chosen to cure the regressivity problem by telling lower income people that if his plan doesn't work for them -- which it won't -- they can continue to pay under the current system. This will help blow an even bigger hole in the budget. For Perry, a small government guy, that may be a good thing since it would drive even deeper spending cuts. And, if he can avoid describing what cuts he'd make, it might even be good politics -- at least through the primaries. The trouble is that Perry's choice creates a tax compliance mess. How much of one depends on a detail he has yet to share: How often will we get to choose which tax to pay? If we can pick each April, filing will be an even bigger headache for most Americans than it is today, although the ability to switch yearly would also make it possible for people to maximize their tax savings. On the other hand, Perry could require you to make the choice only once in your life. That would make filing relatively simple. There's just one minor downside: The wrong choice could cost you hundreds of thousands of dollars over your lifetime. A third option could allow you to switch every, say, 10 years, or if you have an important lifecycle event. Time for Congress to do right on the debt The choice between the current tax system and the Perry plan will be a no-brainer for the very rich, who would do much better under his system. And it will be easy for most low-income working-class families, especially if they have kids. They'd be far happier under a system that preserves refundable credits such as the earned income and child credits than under Perry's plan. But for everyone else, picking between the two tax laws will a huge pain in the butt. The only way to get the right answer will be to do your taxes twice. And if you happen to be among the millions at risk for paying the dreaded Alternative Minimum Tax, you'll have the pleasure of doing your returns three times each year. As my former Tax Policy Center colleague Len Burman says, the Perry choice is something like an Alternative Maximum Tax. At least with Perry's AMT, you get to pay the lowest possible tax instead of the highest. 0:00 / 03:20 Would Cain's 9-9-9 hurt the poor? Making a one-time election would avoid this annual headache, of course. But what a choice. When you first start paying taxes on your own, you'd have to anticipate how many kids you're going to have, how much money you're going to make, and whether you're going to itemize decades in the future (and unless Perry exempts dependent filers from the election, some 3-year-olds would be forced to choose). Guess right, and you can maximize your lifetime tax savings. Guess wrong, and you'll be an unhappy camper for a lot of years. Oh, and there is one other question: Which current system do you get to choose from? Does Perry assume the Bush tax cuts are extended indefinitely or do they expire? If the former, the pre-Perry tax code would itself be quite generous. So far, he has not said. Whatever you think of the rest of Perry's plan, giving taxpayers a choice about how much tax to pay is just plain dumb. If Perry really wants to make his tax plan progressive, there are far better ways to do it. 

Savings rate falls, lowest since 2007

NEW YORK (CNNMoney) -- The good news is, a recent pick-up in consumer spending is fending off fears of another U.S. recession. The bad news is, it's coming at the expense of Americans' savings. Print Comment On average, consumers put 3.6% of their hard-earned dough into savings in September, the government reported Friday. It marks the lowest level of saving since December 2007, when consumers stashed away only 2.6% of their income.

But deciphering the meaning of the savings rate is a tricky business. On one hand, many economists had hoped the Great Recession would spark a newfound period of thrift and frugality, lessening consumers' vulnerability to financial shocks in the future. (The recession did have this effect for a while, sending the savings rate as high as 7.1% in mid 2009.) On the other hand, American businesses have argued that without an increase in demand for their products, there's no incentive for them to create more jobs. If consumers continue to save rather than spend their money, why should the restaurant down the street, the local big-box retailer or even large American manufacturers ramp up their hiring? On Thursday, the government's latest report on U.S. economic growth showed that since July, consumers have started to slow down the amount they add to their savings, to ramp up their spending more instead. Adjusted for inflation, consumer spending rose 2.4% in the third quarter. That was not only strong enough to boost overall economic growth in the recent quarter, it also led some economists to boost their forecasts for fourth quarter growth. But at the same time, others are reluctant to carry their optimism into their 2012 forecasts. Mark Vitner, a senior economist at Wells Fargo, points out that the increase in spending has come even as consumers saw their disposable income fall 1.7% in the third quarter (adjusted for inflation and taxes). "The sluggish income growth cast doubts on how sustainable the pickup in economic growth is," he said. "Without an increase in income, consumers can't afford to keep increasing their spending at the the pace that they have." 

'Dear Jamie Dimon': O.W.S. writes to bankers

Members of the Occupy Wall Street movement delivered letters on Friday at the Manhattan headquarters of some of Wall Street's biggest banks. NEW YORK (CNNMoney) -- Occupy Wall Street is getting personal. After railing against Wall Street greed for weeks from their encampment at Zuccotti Park in New York, a group went on the move Friday, dropping off thousands of letters addressed to Wall Street executives. Print Comment Although the protestors have based themselves at the park in Lower Manhattan, a number of the biggest "Wall Street" banks actually have their corporate headquarters in Midtown, a few miles to the north. While bank executives did not emerge from their offices to accept the letters, group members outside the bank buildings used their "people's mic" system to ensure that their sentiments were heard loud and clear.

"Every day, the 99% are fighting to survive, and it's the hardest work you can imagine," said Maria Maisonet of Brooklyn, reading out a letter addressed to JPMorgan Chase CEO Jamie Dimon, Bank of America's Brian Moynihan, Citigroup's Vikram Pandit and Wells Fargo's John Stumpf. "My nephews and my son tell me they feel like bums because, even though they're trying and trying, they can't get a job. You are the problem, not us." Who are the 1%? After gathering around 300 people in Bryant Park, organizers broke the marchers into two groups. One traveled to the headquarters of Bank of America ( BAC , Fortune 500) and Morgan Stanley, while the other went to Citigroup and Wells Fargo, before they converged at the imposing JPMorgan Chase building. Police formed a cordon around the group and provided security outside the bank buildings, but the march was a peaceful affair, with a singing protest outside Wells Fargo and a number of marchers in costume ahead of the Halloween weekend. Elsewhere around the country this week, however, similar "Occupy" protests have been faced with disorder. Three protestors in Tampa were arrested Friday after members of the group allegedly shoved a police officer, while 51 people were arrested early that morning in San Diego for violating a park curfew and assembling unlawfully. On Thursday, Oakland mayor Jean Quan apologized after police cracked down earlier this week on a protest in the city in a violent episode that left an Iraq war veteran hospitalized with a fractured skull. 0:00 / 1:54 Occupy Wall Street goes global Prior to the gathering in New York, organizers printed off copies of more then 6,000 letters submitted to the website OccupyTheBoardroom.com over the past few weeks and directed to Wall Street leaders. Upon arriving at Bank of America headquarters, protestors folded copies of the letters into paper airplanes and launched them toward the entrance of the building, where they landed among the police and security guards massed outside. At Morgan Stanley, march organizer Austin Guest left his phone number with security outside. Guest asked that it be given to CEO James Gorman, inviting him to have lunch with some of the demonstrators. "We'll pick up the tab," Guest joked. "We've been doing it for the last few years." The march concluded at JPMorgan Chase ( JPM , Fortune 500) headquarters, where several marchers shared their stories before lining up to deliver their letters as bank staffers looked on from inside the building. Mimi Pierre Johnson, from Elmont, New York, told the crowd that she had been struggling to make her mortgage payments since losing her job four years ago. In a letter directed to CEO Jamie Dimon, Johnson said that despite more than a dozen applications, Chase still has not granted her a mortgage modification. "I am sure that if you came to Southeast Queens and saw the devastation, the vacant houses with their littered lawns and boarded-up windows, you would sing a different tune when it came to mortgage modifications," Johnson said. "Name the time and date, Mr. Dimon, and I will personally escort you through the community." 

Dear China, buy our debt! XOXO, Europe

French president Nicolas Sarkozy and Chinese president Hu Jintao may have to do more than shake hands. Europe wants (and needs) China to invest in the EFSF bailout fund. NEW YORK (CNNMoney) -- New dad Nicolas Sarkozy is apparently hoping for a great baby gift from China president Hu Jintao. A couple of hundred billion euro or so should do. With Sarkozy and other European leaders finally reaching a deal to cut Greece's debt load, bolster the broader EU bailout fund and recapitalize the continent's banks, attention now turns to just who will pay for much of the plan.

Print Comment Once again, the world is hoping China will come to the rescue. One of the most tantalizing parts of Europe's latest proposal is the creation of a special investment vehicle that would allow sovereign wealth funds to invest in the European Financial Stability Facility (EFSF) bailout fund. Sarkozy had a phone conversation with Hu after the debt deal was reached in Brussels early Thursday morning. I'm guessing they weren't sharing war stories about late night changes of poopie diapers. According to a report from Chinese news agency Xinhua , the two leaders spoke about more ways to work together to promote global growth. But there was no mention of China being asked to buy EFSF debt. Still, it looks like Sarkozy won't be the only European official making a pitch to China for much-needed funding. Klaus Regling, the CEO of the EFSF, is said to be planning a trip to China (and possibly Japan as well) in the next few days to meet with potential investors. Why you should be worried about Europe The push to get Asian central banks to invest more in Europe makes perfect sense. For one, the EU is a key export market for both China and Japan. It is not in the best interests of either nation to let Europe sink even deeper into an economic morass. Japan, and to a lesser extent China, have also already invested in the EFSF. According to figures from the EFSF, Japan owns about 20% of the bonds issued by the EFSF so far. There are no specific figures for China but "Asia-ex Japan" nations are listed as sizeable investors in various EFSF issues as well. So making further investments may be merely a case of being in for a penny and in for a pound. Or euro if you will. The EFSF may also be a compelling alternative to U.S. Treasuries. China and Japan are the two largest foreign holders of Uncle Sam's debt, owning $1.14 trillion and $937 billion in Treasury bonds respectively. China has made no secret of its irritation with the U.S. regarding the debt ceiling drama in Congress this summer and how that has impacted China's investments. China also can't be thrilled that the Fed's two rounds of quantitative easing and Operation Twist have left interest rates near historic lows. 0:00 / 1:54 Cork popped on EU deal... hangover later And the EFSF bonds have the Triple A stamp of approval from all the major credit rating agencies -- unlike the U.S. Still, experts said it's not a given that China (or other sovereign wealth funds) will make a big bet on the EFSF. "This is a big question mark going forward. It's probably likely that China and others will participate, but it's not definite. There is some skepticism," said Anthony Valeri, fixed income investment strategist with LPL Financial in San Diego. Valeri said that while China does complain about the many fiscal challenges facing the U.S., China realizes that no matter what Standard & Poor's might say, Treasuries are still a better horse to bet on than European bonds. "China will need a lot of convincing that EFSF bonds are an attractive option for them. At the end of the day, Treasuries may still suit their needs as a safe haven investment," he said. Brazil cuts rates. Is China next? And China and other sovereign wealth funds have complicated objectives, added Bhaskar Chakravorti, senior associate dean of International Business and Finance at The Fletcher School at Tufts University. They have political interests as well as financial motives. That could make negotiations difficult. "The road to a beautiful end game in Europe is paved with potholes. The Chinese will still probably be quite cautious and demand a lot both economically and politically," said Chakravorti. "I'm sure that Germany will not be thrilled about that." But Lionel Mellul, co-partner with Momentum Trading Partners, an independent broker-dealer in New York, thinks China eventually will make an investment. Still, he doesn't think that this is necessarily great news. Mellul argues that it's a sign of how desperate Europe is and how nervous leaders are about the possibility that Italy and Spain may also need bailouts like Greece, Portugal and Ireland did. "It just goes to show how bad the situation is in Europe that they are forced to try and strike a deal with China. Europe needs Asian participation for this to work," he said. And that means that China and other potential investors have the bargaining leverage. Mellul said China could make any EFSF purchases contingent on more favorable trade deals, for example. "China will probably participate, but the question is at what cost?" he said. CNN's Jaime FlorCruz in Beijing contributed to this story. The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.  

For most seniors, a small Medicare rate hike

WASHINGTON (CNNMoney) -- Some 35 million Medicare recipients will have to dig a little deeper into their pockets when they go to the doctor next year. Premiums for office visits and outpatient hospital services will go up by $3.50 a month, the Obama administration announced Thursday. Print Comment At the same time, 12 million recipients who had been paying higher premiums because they are recent enrollees or have higher incomes will see their monthly payments decrease by an average of $15.50 a month. Officials with the Department of Health and Human Services were quick to note that the $3.50 increase for most seniors -- to $99.90 a month -- was "far less" than the $10 hike originally forecast for those who get the so-called Medicare Part B, which also covers home health services. "In 2012, people will find more meaningful choices and overall lower cost," said Donald Berwick, administrator for the Centers for Medicare and Medicaid Services.

However, Medicare beneficiaries could be out a bit more if they end up in a hospital or nursing home next year. Medicare Part A -- which nearly all Medicare beneficiaries buy -- is getting a $24 annual hike in the deductible to $1,156. 0:00 / 2:52 Medicare's toll on America's budget The changes announced Thursday will have the biggest impact on Medicare Part B enrollees with higher incomes or who turned 65 in 2008 or later. They've been paying an average of $115.40 a month but will now pay $99.90 a month. In addition, all Medicare Part B enrollees will see their annual deductibles fall by $22 to $140. The reason for the divergence in premiums has to do with the Social Security cost-of-living allowance increase announced earlier this month. Over the past few years, there has been no COLA boost, and Medicare premiums in those years have been capped at $96.40 for most seniors. The $3.50-a-month increase for earlier enrollees helps bring down the rates for those who enrolled more recently. AARP, the lobbying group for seniors, applauded the changes. "Millions of America's seniors are struggling with higher expenses -- particularly higher health care costs, lower incomes, depleted savings and reduced home equity or homes lost to foreclosure, and this small increase is welcome news," said AARP Legislative Policy Director David Certner in a statement.  

Top 1% are getting even richer

Household income for top 1% more than triples, while middle-class incomes grow by less than 40%. NEW YORK (CNNMoney) -- From 1979 to 2007, average household income for the nation's top 1% more than tripled, while middle-class incomes grew by less than 40%, according to a new report from a research arm of Congress. While those at the top have seen their incomes soar over the past three decades, middle-class and lower incomes have stagnated, the report by the Congressional Budget Office found. Print Comment "Over the past three decades, the distribution of income in the United States has become increasingly dispersed -- in particular, the share of income accruing to high-income households has increased, whereas the share accruing to other households has declined," the CBO said. For the top 1% of the population, average inflation-adjusted household income grew by 275%.

The rest of wealthiest fifth of the population, not including the top 1%, saw household income grow by 65% during that time, faster than the rest of the population, but "not nearly as fast as for the top 1%." For middle-class earners, it was a different story. The growing wealth gap Household income grew by just under 40% and the poorest fifth of the population saw their incomes rise by just 18% in a little less than 30 years, according to the study, which was based on IRS and Census data. During that time, income ballooned at the top of the spectrum and government policy did less to redistribute wealth, the CBO found. "The rapid growth in average real household income for the 1% of the population with the highest income was a major factor contributing to the growing inequality in the distribution of household income between 1979 and 2007," the report said. "Shifts in government transfers and federal taxes also contributed to that increase in inequality." 0:00 / 1:54 Occupy Wall Street goes global That's also, in part, what has spurred the recent Occupy Wall Street movement. Protesters refer to themselves as "the other 99%," which suggests that they represent a broad segment of the U.S. demographic, excluding the wealthiest 1% of Americans. Their aim, they say, has been to bring attention to the country's growing economic gap. Occupy Wall Street began on Sept. 17 in Manhattan's Financial District and has since grown into a global movement. 

Troubled homeowners get a lifeline

NEW YORK (CNNMoney) -- In the latest attempt to address the ailing housing market, the government on Monday announced changes to a federal program that will make it easier for struggling homeowners to refinance to today's near-record low rates. Under the new program, homeowners who owe more on their homes than they are worth will be able to refinance no matter how much they are underwater, as long as they are current on their payments. Print Comment More than 1 million homeowners could get cheaper mortgages as a result, officials estimated. The revamped Home Affordable Refinance Program (HARP) will also streamline the refinancing process, doing away with certain types of appraisals and underwriting requirements, and reducing or eliminating fees that prevented homeowners from refinancing in the past. More than 890,000 homeowners have already refinanced under HARP, which is available to borrowers with loans backed by Fannie Mae and Freddie Mac originated before May 31, 2009.

But hundreds of thousands more could not qualify -- mainly because of the previous 125% loan-to-value limit on the program or because banks would not take on the risk. The 4% mortgage -- good luck getting one "We know there are many homeowners who are eligible to refinance under HARP and those are the borrowers we want to reach," said Edward DeMarco, acting director for the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac. Currently, about 11 million borrowers are underwater on their mortgages, with about 4.7 million of those loans meeting or exceeding the 125% loan-to-value limit, according to CoreLogic, a financial analytics company. By the time HARP expires in 2013, the federal housing agency estimates, up to 1 million more borrowers may benefit from the new regulations. Many of those borrowers will be from states like Florida, California, Nevada and Arizona where home values have been hit the hardest. In metro areas like Las Vegas, for example, prices have plunged nearly 60% from their early-2006 peak. The new rules and other details have yet to be finalized, but FHFA said that should all be worked out by Nov. 15. Banks may be able to start issuing refinanced loans by Dec. 1. Lifting the loan-to-value restrictions may still only help a limited number of borrowers, according to Jaret Seiberg, an analyst for MF Global Inc.'s Washington Research Group, which analyzes public policy for institutional investors. 0:00 / 03:12 How Fannie Mae spruces up foreclosures The problem: Mortgage holders still must be current on their payments for the past six months -- with no more than one missed payment in the past 12 months --and they also must be able to qualify for a new loan. However, Seiberg believes, the changes should allow banks to refinance loans without worrying that Fannie Mae ( FNMA , Fortune 500) and Freddie Mac ( FMCC , Fortune 500) will force them to repurchase the loans if the borrower defaults. In the past, banks have been reluctant to refinance loans because they didn't want to take on that liability, explained Shaun Donovan, the secretary of the U.S. Department of Housing and Urban Development. By doing away with that liability, more lenders will compete to refinance the loans, which he believes will make them more affordable for borrowers. That should help remove one of the biggest barriers to refinancing through HARP, said Gene Sperling, director of the National Economic Council. What about us? Responsible homeowners get left out in the cold Under the newly-revamped program, Fannie and Freddie will also reduce the fees they have charged in the past in order to enable borrowers to better afford the new loans. Among the fees that may be reduced or eliminated are those for loan level price adjustments. Going forward, borrowers may not be penalized for less-than-perfect credit scores, for example. Fees will also be waived for some underwater borrowers who refinance into 20-year or other, shorter-term loans. By doing so, it could help homeowners get above water faster. A homeowner who has a $200,000 balance on a 30-year mortgage with a 6.5% rate and a home value of $160,000, for example, currently makes payments of $1,264 a month. If they refinance into a 20-year fixed-rate loan at 4.25%, it will reduce monthly payments to $1,238 and slash the balance to $160,000 in just five-and-a-half years. If they refinance to a 30-year loan at 4.5%, however, their monthly payments will be much lower, $1,038, but it will take 10 years to reach $160,000. "It's an opportunity for borrowers to improve their household balance sheets by repaying their mortgages much quicker," said DeMarco.