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Letters to the Editor
February 7, 2012

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The following is in response to our interview, Lacy Hunt on the Roadblock to Recovery, which appeared last week:

Dear Editor,

Lacy Hunt is an economist I deem most practically useful these days, and I read his exchange with Huebscher with great interest.

Policy prescriptive-wise, there was one piece of what Hunt said that did not resonate very readily, if at all, with me.  That was his value-added tax (VAT) suggestion.

I'm very clear and more than comfortable with the idea that we are generally better off taxing and thus dis-incenting consumption activity as measured by spending than we are taxing and thus dis-incenting productivity as measured by income.  Having said that, it seems to me that if there is anything more important than "All having skin in the game..." as you wisely suggest, it is for all to perceive, feel and experience that reality.  A per se sales tax of the variety we have at the state and local level renders this form of government revenue generation quite visible palpable.  A systemically imbedded and largely invisible-to-the-masses layered VAT tax on the other hand, would not seem to be nearly as readily perceptible and therefore behaviorally responded to by payers and voters.  This buried-ness or relative invisibility of a VAT versus a real national sales tax seems very problematic to me as a lay person. It also would tend to exacerbate the already crushing political-economic resource allocation problem variously known as "concentrated benefits vs. dispersed costs",... in modern-day parlance, the so-called "bridge to nowhere" problem.

Don't incentives and disincentives need to be as readily apparent as possible in order to be optimally effective?  If so, wouldn't a real national sales tax be far more effective in terms of "skin in the game" effect?

My other, lesser, yet still considerable VAT concern has to do with the risk of adding a new form of taxation without completely killing off the old one at the same time...the tax creep risk of the VAT only going up and up and up over time, without commensurate decreases on the income tax side.  This was a principle objection that was voiced with respect to Herman Cain's 9-9-9 tax proposal.

I'd very much appreciate Hunt’s thoughts with respect to these two concerns.  It was a great article and exchange.

Thank you very much,

Guy Cumbie
Cumbie Advisory Services, Inc.
Ft. Worth, TX

Lacy Hunt responds:

I like the point on a national sales tax.  Although we didn’t discuss this in the interview, a VAT should be designed like a national sales tax.  

There is always the risk that any tax rate will go up, but I would rather take chances with sales-based taxes rather than with taxes on marginal income.  Also, the discussion in the interview was in terms of a comprehensive program to deal with the multi-faceted problems of fiscal policy – the excessive level of debt, the high likelihood of further increases in debt, the zero to negative government expenditure multiplier and the significantly negative tax-rate multiplier.

Best regards,


The following is in response to Wade Pfau’s article, Safe Withdrawal Rates: A Do-It-Yourself Approach, which appeared January 10:

Dear Editor,

The basis of Pfau’s article is Monte Carlo simulations.  However, those simulations can lead to optimistic results because market returns are not independent of previous returns.  Bad years tend to follow bad years and good years tend to follow good years.  Try applying your results for someone retiring in 1929 or 1960 or 2000.  And it would be similar for someone retiring in 1961.  Those were not 1% events.

Bob Watson

Wade Pfau responds:

Thank you for the comment on my article. Actually, these Monte Carlo simulations are based on the same underlying data that Bill Bengen used – rolling overlapping periods of historical data to show a worst-case scenario withdrawal rate of about 4.1%.  I find there is about a 7-8% chance for the withdrawal rate to fall below that over a 30-year period. So Monte Carlo is more pessimistic than the historical data, despite not considering any serial correlation.  That is because even though the simulated returns are independent over time, there can randomly be a series of negative returns that looks much worse than the Great Depression.  Just like when you flip a coin and get five heads in a row, there is no serial correlation but it can sure look that way.

Both historical simulations and Monte Carlo are useful tools each with their own strengths and weaknesses.

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