Our current tax system is a messy, complicated, costly mess. It’s so convoluted and counterproductive that it could only result from decade upon decade of misguided work done by politicians.
But now we have a person seeking the Republican presidential nod who, until this campaign, has not been a politician. Herman Cain has offered the “9-9-9” plan for tax simplification.
It’s tempting to sign on. After all, we certainly need to toss out the current code for something fairer and simpler, that’s pro-investment, pro-business, and pro-growth. A summary of the 9-9-9 plan proclaims: “According to former Reagan Treasury official Gary Robbins, of Fiscal Associates, the 9-9-9 Plan will expand GDP by $2 trillion, create 6 million new jobs, increase business investment by one third, and increase wages by 10 percent.”
Besides, Cain must know what he’s doing given his business background, right? After all, he had success working for Coca-Cola and Pillsbury, and as president and CEO, he turned around Godfather’s Pizza and then led his management team in a buyout of the company.
However, there’s more to Cain’s 9-9-9 than one might catch from an initial, perhaps pleasing glance.
The current tax code indeed would be thrown away. For example, Cain would end payroll taxes, capital gains taxes, the death tax, and double taxation of dividends. In addition, expensing of business investment (i.e., writing off capital spending in the year made) would be allowed for all firms. Those certainly are huge plusses for risk taking, economic growth and job creation.
Then comes the 9-9-9 part of the plan. Three taxes would be imposed.
The personal income tax would continue, but with a flat rate of 9 percent. Only charitable deductions would be allowed. Again, this would be a huge improvement over the current progressive income tax, with rates reaching 35 percent, along with a 2.9 percent Medicare payroll tax, and even higher rates to come under ObamaCare and the President’s tax agenda. Under Cain’s income tax, the incentives for working and entrepreneurship would be given a big boost.
Unfortunately, the other two “9s,” and how they would combine with an income tax, are where the Cain plan presents serious risks for taxpayers and the economy in the long run.
While the corporate income tax would go away, businesses would pay a 9 percent value added tax. That is, the 9 percent tax would be applied to, as explained in the plan, “Gross income less all purchases from other U.S. located businesses, all capital investment, and net exports.” The U.S. does not have a value added tax, and for good reason. It’s a powerful revenue raiser. And especially since it is hidden from the eyes of consumers, it’s an easy tax to increase.
And the third “9” would be a 9 percent retail sales tax. From an economics perspective, retail sales taxes make sense because they impose taxes at the end point of the economic process, that is, at consumption. But a retail sales tax, on top of a VAT and state and local sales taxes, would point to a heavy tax burden on consumption. Any tax has negative effects on the economy. And while a consumption tax offers the fewest problems, negatives still mount as the tax burden climbs.
Most troubling is the fact that government’s big three taxes would be imposed on consumers and businesses under the Cain plan. While starting out at low rates, nothing would stop politicians from hiking each of these levies. Whereby today, federal elected officials are basically limited to screwing up the economy via income-based taxes, under Cain’s plan, they would have income, VAT and sales taxes at their disposal with which to wreak havoc.
The only Cain-like plan safe for current and future economic growth would repeal the 16th Amendment to the U.S. Constitution that allows for an income tax, and then move to a consumption-based tax, preferably the retail sales tax as opposed to the hidden VAT.
Interestingly, Herman Cain seems to understand this. His tax plan actually does not stop at 9-9-9. Instead, Cain states in the plan: “Amidst a backdrop of the economic renewal created by the 9-9-9 Plan, I will begin the process of educating the American people on the benefits of continuing the next step to the Fair Tax.” That is, he eventually would replace individual and corporate income taxes, repeal the Sixteenth Amendment, and impose a retail sales levy.
Nice idea. Indeed, as an economist, I love it. But political reality makes a repeal of the 16th amendment quite unlikely. Not only do vast interests have a stake in maintaining an income tax — especially since it’s such a powerful fuel for big government — but to raise similar revenues as the current system does, the retail sales tax rate would have to approach or even exceed 30 percent, as estimated by the report done for Cain’s tax plan. Throw in state and local sales taxes, and this creates massive incentives for tax avoidance.
Herman Cain’s tax plan has the virtue of pointing the tax policy debate in the right direction, but as a final product, it simply would not be a sound in economic or political terms.
Raymond J. Keating is the chief economist for the Small Business & Entrepreneurship Council. His new book — “Chuck” vs. the Business World: Business Tips on TV — has just been published.