Friday, September 23, 2011

Herman Cain's "999 Plan": Worse Than Godfather's Pizza

Some weeks ago, Presidential hopeful (and former Godfathers' Pizza CEO) Herman Cain announced his "9-9-9 Plan" (PDF). No, it isn't a pizza special. It's a 9% flat personal income tax, a 9% flat corporate income tax, and a 9% national sales tax ("FairTax"), replacing the current federal tax system. Cain has been touting this plan at each Presidential debate since the announcement, and it has found some support among tax reformers.

I believe Cain's "999 Plan" is nothing less than an attempt to achieve an aspect of FairTax I have been warning about: Authorizing the federal government to tax both incomes and sales.

Let's understand something first: Herman Cain is an ardent FairTax advocate. He has said, on many occasions, that he favors implementing the full FairTax act. He has argued passionately in favor of FairTax.

However, in his 999 brief (PDF above), he also states he is in favor of a 25% income tax and the elimination of capital gains tax. Quote:
• As I have outlined, the following represent the minimum for feeding the economic engine and are the "low hanging fruit" offering the most "bang for the buck"
• Reduce individual and business income taxes to a maximum 25%
• Eliminate taxes on repatriated foreign profits and capital gains
• The capital gains tax is a wall separating those with ideas from those with money
So far, his committment to both an income tax and a sales tax could be debated. Until you add this:
• Current circumstances call for bolder action
• The Phase 1 Enhanced Plan incorporates the features of Phase One and gets us a step closer to Phase two
• I call on the Super Committee to pass the Phase 1 Enhanced Plan along with their spending cut package
• The Phase 1 Enhanced Plan unites Flat Tax supporters with Fair tax supporters

• Achieves the broadest possible tax base along with the lowest possible rate of 9%
• It ends the Payroll Tax completely – a permanent holiday!
• Ends the Death Tax
• Business Flat Tax – 9%
• Gross income less all investments, all purchases from other businesses and all dividends paid to shareholders
• Empowerment Zones will offer additional deductions for payroll employed in the zone
• Individual Flat Tax – 9%
• Gross income less charitable deductions
• Empowerment Zones will offer additional deductions for those living and/or working in the zone
• National Sales Tax – 9%
• This gets the Fair Tax off the sidelines and into the game.
FairTax has been recieving sharp criticism from many Flat Income Tax advocates (I personally am but one voice in a choir). Herman Cain is betting- and may be correct- that much of the opposition to FairTax is the notion of a sales tax rate of 30% (pardon, 23% "inclusive"), rather than opposition to the many conceptual problems (some of which I have covered here and here). So, Cain has decided to resort to the sort of trickery used to pass the income tax amendment a century ago- promising an inoffensively low rate as part of a familiar "hybrid" system ("familiar", since most US states already have both a state income tax and a state sales tax), using the flat income tax portion of his plan to bring his sharpest critics- flat tax advocates- into his camp.

Stated differently, Cain is proposing to implement FairTax at a "teaser rate"- without repealing the 16th amendment- and acclimating the American public to paying both forms of federal tax. As happened with the federal income tax, the rate will climb: A century ago, the federal government claimed income tax would never exceed 7%.

Adding to this dubiousness is Cain's own explanation of how he arrived at his 9% formula:

By his own words, "all the revenue coming into the federal government" can be replicated with a 9% personal income tax, a 9% corporate income tax, and a 9% national sales tax, and elimination of payroll taxes (like FICA).

For clarity, here is the pie chart of federal revenues for fiscal year 2010, from Wikipedia:

You should notice right away, 40% of the federal government's total revenues come from the 15.3% payroll tax (the green wedge), which Cain proposes to eliminate (and replace with a 9% sales tax). You should also notice that individual income taxes are the largest wedge- which Cain believes can be replicated with a 9% flat tax. Though I'm a firm believer in the Laffer curve principle, I have no doubt that Cain's 999 Plan can't possibly replicate these revenues.

I do agree with Cain on one important point: Notice the red wedge. This is corporate income tax. Our corporate rate is the second-highest in the world (35%), yet it only accounts for 9% of total federal revenues. This tax cripples our economy- and this chart should remove all doubt that drastically cutting (or eliminating) it would be an absolutely positive step (again, the Laffer curve at work).

So, to review: Cain is proposing to institute a FairTax "teaser"- to introduce federal sales tax along with income tax. He must know that his "teaser" rate cannot possibly sustain current revenues, and will have to be raised. We know from American history that an introductory tax rate will be raised. And Cain has just shown us that he is willing to decieve his audience with impossible math.

And this plan, if instituted, sets the stage for Americans to eventually pay both massive income taxes (as we do already), and a massive federal sales tax.

Does this sound "Fair" to you?

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