May 2, 2006

The Laffey Tax Plan

Carroll Andrew Morse

Republican Senatorial Candidate Steve Laffey gave the fourth of his campaign policy briefings yesterday afternoon. The subject was tax-reform.

The heart of Mayor Laffey’s proposal is tax-simplification. If elected to the Senate, Steve Laffey would work to establish three tax brackets, somewhere in the vicinity of 10, 20, and 30%; the Mayor said he would work with the Office of the Management and Budget to select exact figures that were revenue neutral with respect to present revenues, including the Bush tax-cuts of 2001, 2003, and 2004.

Mayor Laffey proposes replacing the 60,000-page Federal tax code with a greatly-simplified system of six exemptions for individual taxpayers. The exemptions would be...

  1. Yourself and your family ($10,000 per person)
  2. Interest on Home Mortgage
  3. Personal savings for retirement and education
  4. Health savings accounts (HSAs)
  5. Charities
  6. State and local taxes
The exemptions would be designed so that a family making $40,000 or less would owe no income tax. The $40,000 would be adjusted upward for inflation each year. Corporations would all pay the 30% rate.

Mayor Laffey would eliminate taxes on capital gains, dividends, interest and social security, as well as the “death” tax. The Mayor pointed out a major effect of reducing taxes on dividend income would be a reduction on the burden on Senior citizens, about half of whom rely upon dividends for their income. The Mayor further noted that, at present, the exemption on the death tax is scheduled to drop from $3,500,000 in 2009 to $1,000,000 in 2011, meaning people who are “rich” only in the sense that they own their own homes and have diligently funded their retirement accounts may be forced to pay substantial death taxes in 2011 and after.

Mayor Laffey argued that reducing corruption in Washington is mostly a matter of simplfying the tax code. Much of the power of lobbyists comes from their ability to ply Congress into manipulating the tax code to give advantages to favored industries. Without an incomprehensible tax code to manipulate, the influence of lobbyists is 1) greatly reduced and 2) what influence remains -- e.g. the ability to procure earmarks -- is more transparent.

Mayor Laffey presented some interesting historical data regarding tax cuts. There have been three major tax-cuts since 1960, by Presidents Kennedy, Reagan, and Bush the Younger. In all three cases, Federal revenues jumped by more than 10% two to three years after the tax-cuts were implemented.

Finally, Mayor Laffey criticized his opponent’s record on tax-issues. He criticized Senator Lincoln Chafee for voting against all three of President Bush’s major tax cut initiatives. Senator Chafee voted against the 2001 and 2003 tax cut bills reducing individual income, dividend, and capital gains tax rates. According to, which has published briefs criticizing both President Bush for overstating the value of the tax cuts and the Democrats for understating their effect, the Bush 2001 and 2003 tax cuts reduced the tax burden across-the-board, not just “for the rich”. Repealing the Bush cuts would raise taxes on a family of four making $35,000-per-year by $1,897.

In 2004, Senator Chafee was one of just three Senators who voted against the “Tax Relief for Working Families Act” that eliminated the marriage penalty and extended the child tax-credit.

The Chafee campaign has issued an official response that discusses Mayor Laffey's record as Mayor of Cranston, but not issues specifically related to the future of the Federal tax code.

Comments, although monitored, are not necessarily representative of the views Anchor Rising's contributors or approved by them. We reserve the right to delete or modify comments for any reason.

As the campaign moves into high gear this summer more and more Rhode Island voters will begin to tune in to this race.

What they will find is that Steve Laffey is a leader, doer, planner, and reformer, and that Chafee is none of these things.

These voters will have to choose between a self made man and a privileged insider. Between an independent man who stands up for what is right on behalf of the people he serves and an independent man who typically stands alone.

Chafee's positions are unseen and immeasurable while Laffey's are published for all to see. Chafee's "official response" tries once again to paint Cranston's recovery as a debacle instead of telling us what he is going to do. Why is Chafee attacking a sterling record instead of talking about his own accomplishments? This is lame, run of the mill negativism.

Not to overstate it, but the turnaround in Cranston is monumental. When things heat up in July and August Chafee’s unwillingness to debate face to face and his inability to put his plan on the table will make it plain as day that if you want real change in RI and a strong voice in DC then Laffey is your man.

J Mahn

Posted by: Joe Mahn at May 2, 2006 2:12 PM

Powerpoint presentation cartoons aside, this is good work by Mayor Laffey and his campaign.

Posted by: johnb at May 2, 2006 2:27 PM

The Chafee camp's every move comes from page 1 of the one-page Garry Reilly playbook. (distortions about Laffey's phenominal financial rescue of Cranston, disaffiliation schemes, no plans, no solutions, no ideas)

When I go to bed at night, right after "god bless nieces, nephews, distant relatives and their families", I pray that Ian Lang keeps his job (until it is eliminated in September).

beep beep

Posted by: roadrunner at May 2, 2006 2:47 PM

Andrew, great coverage. The Laffey tax plan is fair and it will help millions of poor and middle-class americans.

In this venue I shouldn't even have to mention that it will stimulate continued economic growth, but the Chafee people play here too.

Posted by: Warbucks at May 2, 2006 2:52 PM

Laffey is the greatest thing since sliced bread! no make that since the wheel! I love it!

Posted by: Sambam at May 2, 2006 5:24 PM

It is a reasonable and quintessentially American task for our public servants to write tax statues that are limited in scope, coherent in language, and accessible in reasoning to all Americans, from the
lawyer to the layman.  In doing so we hearken back—rightfully nostalgic—to the origins of the American revolution, catalyzed in part by the refusal of the colonists to pay taxes to a British Monarch whose economic interests chafed against those of the colonial people,
and who was no stranger to wasteful government spending (imagine your taxes going to gold crowns, velvet doublets, and private stables for
the King).  The principles of taxation that resulted from the success of the Continental Army and subsequent formation of our Union was
straightforward: render unto Caesar that which is Casear's, but keep vigilant guard that Caesar—or Washington, or Roosevelt, or Bush—spends
the economic fruits of American labor effectively and fairly.

That said, in politicians' noble efforts to ensure tax codes remain transparent to the majority of Americans, they often confuse simplicity with effectiveness.  Candidate Laffey is a victim of this
mistake.  In trying to lighten our burden, he will only increase it.

Let me briefly survey the major programs that our tax dollars fund. The top four recipients of federal dollars are as follows: Social Security, Medicare, Defense, and Interest on the Federal Budget.
Together, these programs consume roughly 64% of US tax revenue. Before we look in depth at the deficiencies of Laffey's plan, it's useful to take a look piecemeal at these major costs to the federal

By the most conservative estimate, military spending consumed 20% of our federal tax dollars in 2004.  When martial times test our national
mettle, we often seek comfort in an expansion of military power, now to combat the evils of terrorism and the political insurgents in Iraq, soon to intimidate an Iranian nuclear state, later to protect
ourselves from engagement with the massive forces of China, already antagonistic to our global influence.  Therefore, in soul-trying times
such as ours, it will surprise no one that, since September 11th, military spending has trended upwards, with significant increases in
'03 and '04 coinciding with the War in Iraq (the Taliban War was far less expensive).  Barring some major and unforeseen progress towards
peace in the Middle East, Americans cannot reasonably expect military spending to decrease significantly in the foreseeable future, even if
we reduce the levels of our troops in Iraq.

Social Security accounted for 22% of the federal budget in 2004. Bush's plan for reform is dead as a doornail.  Judging by the vigorous opposition which he faced from his democratic colleagues and his
American constituents in 2004, privatization will not occur during this presidency.  Unfortunately for taxpayers, the legacy of the New Deal program is longer and more burdensome than that of Marley's
ghost—and each year, as the baby-boomers cross the threshold from middle- to "later"-middle-aged the legacy of Social Security will grow.  As with defense, we cannot reasonably expect a decrease in
Social Security spending within the foreseeable future.

Medicare, Social Security's younger sister, consumed 12% of our federal tax dollars in 2004, and the future costs of the former program are even less ambiguous than the latter.  Economic analysts, hailing from all wavelengths across the political spectrum, predict massive increases and the so-called "graying of America" continues.
The science that expands our lives simultaneously slims our pocketbooks.

Finally, we come to payments on the national debt.  Under Bush's tax cuts (which Senator Chafee voted against) our national debt has increased dramatically, by nearly one and half billion dollars to $7.2 trillion.  Associated payments on interest to the national debt have grown at an alarming rate since the cuts were passed in 2001.  The
rate of increase on these payments is far greater than at any other time in the history of the Union, stretching back to the 18th Century. Unless we find trillions of dollars stashed away under the mattress
in the Lincoln bedroom, we can expect interest and debt payments to cannibalize large chunks of our tax dollars for the rest of our and our children's lifetimes.

Given that federal expenditures will remain high for the foreseeable future, the untenability of Candidate Laffey's tax plan stands out in high relief—indeed, it borders on utter farce.  On the first page of the slideshow depicting his plan he writes: "Fueling economic growth with LOWER and SIMPLER taxes" (emphasis his).  Based on simple math any decrease in taxes without an subsequent decrease in spending (which is unlikely given the four circumstances outlines above) results in expanding deficits and ever uncertain economic outcomes for
this great land of ours.  I elaborate below.

A photojournalism book appeared in 1890 entitled "How the Other Half Lives," illustrating the plight of America's urban poor (then representing about 40% of the nation's population) as they toiled in dangerous factories and returned home to abject squalor.  The Federal Government has done a very good job decreasing the burden of this economic class by decreasing their taxes.  As a result of this, and unknown to most Americans, today the richer half of the American population accounts for 96% of taxes paid.  The richest ten percent of Americans
account for 65% of taxes paid.  The richest one percent of the population accounts for a surprising 30% of taxes paid.  Say what you will about the rich, they pay their fair share of taxes.

Taking these numbers into account, let's take a look at the Elephant seated in Laffey's campaign headquarters room.  Laffey's power-point presentation, though it does a nice job of depicting the current abuses of the tax code, and suggests some ways to ensure that American avoid unfair
taxes (i.e., death tax, AMTs ) does not delineate actual rates that Americans will pay under his plan, beyond a vague mention of 10%, 20%, 30% as the three proposed "simplified" tax brackets, which Laffey does not link to actual income groups.  A clear understanding of the rate that a given income bracket will pay is the single, major,
sine-qua-non tenet of any tax plan.  Lacking this simple illustration of who will pay what makes me wonder how we can take Candidate Laffey's plan seriously.

Since the tax plan power-point itself gives little answers, I can only guess that Laffey understands that reducing taxes in the highest income bracket to 30% will actually reduce federal government revenues by a massive amount, since the richest ten percent that accounts for 65% of our revenue will have a ludicrously fat tax reduction, from 35%
to 30% specifically.  65% of the federal budget is 1.495 trillion—therefore, the top ten percent of taxpayers account for $1.495 trillion in annual revenues.  Under Laffey's tax cuts this number decreases by about $200 billion. I can't carry this analysis forward because Laffey's so-called "tax plan" on his Web site does not delineate actual tax brackets.  There is no way to tell what group of
income-earners beyond the top ten percent will pay the 20% tax and what group will pay the 10% tax.  But we can conjecture that at least another $200 billion will be excised from the federal budget.  Two points: one) American cannot afford this massive tax cut without either vastly reducing medicare, social security, or the military and
two) any "tax reform" that does not actually delineate tax brackets is not a political idea to be taken seriously.  It is political propaganda, designed to incite emotions rather than intellect.

Lincoln Chafee stands for pragmatic approaches to taxation.  His sponsorship of the line-item veto will allow President Bush to cut out from spending bills the pork for corporations that Candidate Laffey—along with most Americans—abhors.  At the same time Linc's Pay-As-You-Go plan assures we have enough money coming in on an annual basis to pay
for—Medicare, Social Security, and Defense so we don't have to increase our payments to the invisible cancer on our budget, interest payments on the debt.  Laffey's plan will feed this cancer and increase our debt to untenable proportions.

Candidate Laffey's tax "plan" reminds me of something the folk singer Pete Seeger said: "Any darn fool can make something complex; it takes a
genius to make something simple." A simplified tax plan would be useful to Americans and it would certainly return us to the ideological spirit of the Revolution. I hope an economic prodigy rides
into Washington one of these days and makes it happen.  But Candidate. Candidate Laffey is not that genius.

Posted by: Adam Smith at May 2, 2006 7:10 PM

Young Man you have no grasp of economics. I knew Adam Smith and you are no Adam Smith!

Posted by: David Hume at May 2, 2006 7:40 PM

>>Laffey is the greatest thing since sliced bread! no make that since the wheel! I love it!

Laffey is better than Chafee, to be sure. But he is not the greatest thing since sliced bread - unless you consider pandering to the illegal alien lobby a good thing. (BTW, did Laffey participate in the demonstrations yesterday???)

Laffey's criticism of big business, unbalanced by any criticism of the welfare state (social welfare, Social Security et als.) also makes him suspect.

P.S. How refreshing to see Adam Smith and David Hume posting here! Probably have nowhere else to go now that they've been branded "dead white European males" and banished from American institutions of "higher learning."

Posted by: Tom W at May 2, 2006 8:47 PM

To the so-called Adam Smith:

Are you sure that you don't teach transgender studies or some such course? You can't possibly be an economics teacher. Maybe home economics for junior high schoolers, at best.

Laffey's plan clearly states that it is revenue-neutral. Numerous studies by real economists (To wit: not you) demonstrate that with $40-45,000 in allowances/exemptions - and no deductions - revenue neutrality would be achieved with a flat tax rate of 19-21%. Laffey's 10-20-30 proposal would clearly fall in that range.

What you have totally missed is that Laffey's plan eliminates all deductions and replaces them with the six allowance options up to $40,000. Thus, lowering the top tax rate by no means causes a revenue shortfall by the percentage amount of the reduction, as you claim. The lower tax rate is offset by the lack of deductions. This is very elementary, Mr. "Adam Smith".

The Laffey plan is also quite creative and more politically-feasible than pure flat rate plans such as those offered up by Armey or Forbes. Those initiatives used one flat rate, eliminated all deductions, and offered generous personal and family member allowances. Laffey's cafeteria-style plan in essence retains the six most popular deductions and rolls them into the $40,000 maximum allowance, which comes right off the top. This kind of "hybrid" plan might actually stand a chance of getting through Congress, unlike pure flat tax proposals that are greeted with dead on arrival rhetoric almost immediately upon introduction.

There is one thing that you share with some economists, though, and that is a ponderous and virtually unintelligible writing style. Word count is a poor substitute for cogent thought in your case.

Posted by: bountyhunter at May 3, 2006 3:12 AM

Bounty Hunter,

Not sure of Adam Smith is completely correct but he does have one point: Laffey's tax plan fails to lay out an actual tax bracket (i.e., doesn't say which earners will pay 10%, which will pay 20%, whichi will pay 30%). This is a glaring omission.

Also, I'm wary of the term "revenue neutral." It sounds like a Washington corporate insider word that Laffey was taught by the Club for Growth.

Also, Adam Smith, don't be discouraged by the disparaging remarks. I thought your entry was extremely cogent (although the formatting was a little distracting :)


Posted by: Anthony at May 3, 2006 8:40 AM


Revenue-neutral is standard Senatespeak for tax changes that neither increase or decrease revenues coming into the government. Search for the term on the US Senate website, and you'll see it pop up over 100 times.


Tax simplification is a separate issue from whether taxes should be high or not.

Your argument seems to be that you can't have a simple tax-system that generates as much revenue as a complex one. That's not true. That 60,000 pages of complexity in the tax code isn't helping the guy who makes $35,000-per-year all reported on a single W-2 knock all that much off of his taxes.

Divide current government revenues by currently taxable dollars, and you could determine a true flat tax-rate that would generate current revenue.

Mayor Laffey is proposing only a slightly more complex version of this. Divide government revenues by (currently taxable dollars - exemptions to be added + exemptions to be eliminated) to find a single tax rate that would theoretically work, then adjust downward the tax rate for incomes below a certain cutoff and compensate by adjusting upward the tax rate for incomes above a another cutoff.

Posted by: Andrew at May 3, 2006 10:10 AM

I'm a Laffey guy but Adam Smith is right. This tax plan is incomplete. We need to know what income brackets would be paying what rate before we can see if the plan would work or not. Say anything you want about the potential of a flat tax or a simplified tax. Until Steve gives me the details I can't really judge is plan. At this point, I hate to say it, it looks like a cheap political ploy.

Posted by: Pete Geffer at May 3, 2006 10:16 AM

How can we debate an unfinished plan? Laffey himself responded to ProJO reporter questions about the actual details of the plan by saying "It's not all set in stone." Steve, go back to the Rhody Reformer and finish your tax plan before you try to pawn it off on Rhode Islanders. We're not stupid and we can smell propoganda.

Posted by: Gus Allen at May 3, 2006 11:42 AM


You can debate "an unfinished plan" by telling us if you believe that taxes should be simplified in a way that is revenue neutral or if you believe there is an intrinsic value in having a complex tax code.

Posted by: Andrew at May 3, 2006 12:24 PM

When Laffey says that his plan would eliminate "taxes on . . . social security," I assume he is saying that he would eliminate having to declare social-security income as earned income for the year. He's not suggesting that the payroll tax be eliminated, is he?

Posted by: AuH2ORepublican at May 3, 2006 1:29 PM

Who knows? Trying to get inside the head of Steve is an impossible task. This plan is really embarassing for him. It's some vague outline of a plan, but not an actual plan The Chafee clan should be all over him...but in typical fashion they're letting the ball drop.

Posted by: Gus Allen at May 3, 2006 3:10 PM


Sorry for any ambiguity I may have caused. The first interpretation is correct; the Laffey plan calls for eliminating taxes on Social Security benefits.

Posted by: Andrew at May 3, 2006 4:10 PM

Wow, there are now 2 Anthony's posting comments on this blog!

Posted by: Anthony at May 3, 2006 7:15 PM

Not spelling out the precise details on income brackets by tax rate is a high integrity move on the part of the Laffey campaign. Since the raw data is not readily available, they could have just made something up and gotten away with it. What any casual observer does know is that the rate will have to blend out to somewhere between 19-21%.

Even the serious researchers on the topic are not in agreement as to what a revenue neutral flat tax would have to be - 19, 20, or 21%. If they can't nail down the flat rate, then how can Laffey nail down a more complex hybrid rate with the high degree of precision that his work normally entails?

There are two reasons for the lack of agreement: 1) The main one is lack of raw data which only the IRS has; 2) the secondary one is that there is some difference among the flat rate plans regarding the amount of the exemptions.

What is clear from serious research on the flat tax topic is that high earners with lots of deductions and only moderate capital gains and dividend income are the ones who end up paying more. In short, those who make a lot but don't save much. Everyone else pays less. The Laffey plan would work out no differently, but is far more creative and politically-palatable because of the cafeteria-style exemption feature.

Andrew made a good point basically stating that tax simplification is the real issue here. Add back $200 billion/year to the economy from lost time due to preparation, factor in more certainty regarding tax code non-tinkering in the future, and include significantly more savings and investment from people (who are no longer taxed on it) and you get a recipe for much stronger economic growth.

We have a negative savings rate in this country at present - and have the tax code largely to thank for this disasterous fact that if left unchecked will end up taking our country out of the ranks of the world's economic leaders. The Laffey plan would immediately reverse this achilles heel.

Posted by: bountyhunter at May 4, 2006 6:14 AM

How can you reverse an achilles heel? Talk about anguished english and tortured metaphors. Who is this Bounty Hunter Shill?

Posted by: Dunston Brown at May 4, 2006 12:07 PM

Please try and provide analysis rather than "tortured" (and incorrect)comments. You sound pissed off. Let me make you feel worse by providing some Webster dictionary definitions. No one other than my mother questions my english and gets away with it, son. You must be a transgender studies teacher too, just like Smith.

Achilles heel--vulnerable or susceptible spot

Reverse--change to the opposite, alter completely

Yup! "Ccmpletely alter a vulnerable spot". That sounds crystal clear to me. Now crawl back in your hole and actually post something so we can evaluate both your analytical and writing skills. My guess is that they both will be found severely wanting. Leave the reversal of Achilles heels to Laffey.

Posted by: bountyhunter at May 4, 2006 12:30 PM

Mr. Smith:

It sure takes you a long time to make your point.

Here's what you say about the plan:

"indeed, it borders on utter farce."

"It is political propaganda, designed to incite emotions rather than intellect."

Here's what I say about your commentary:

"indeed, it borders on utter farce."

"It is political propaganda, designed to incite emotions rather than intellect."

(I couldn't resist.)

The plan is simple: Make the Bush tax cuts permanent. Super simplify the tax code. Eliminate all lobbying in Washington and thereby end or at least severely limit corporate welfare and corruption. Very simple. Very easy… well at least very simple.

Laffey will be the next US Senator from Rhode Island because he is a great communicator who will get the job done. The people know it. Chafee is not a pragmatist, he is an indecisive and confused liberal masquerading as a Republican. The people know that too.

You're not from around here are you?


PS. Please straighten out your hard return problem.

Posted by: Sol Venturi at May 4, 2006 8:00 PM