9-9-9 Part II: Coming Apart At The Seams

Now that Cain's campaign has put some more of the 999 Plan in print, we can begin discussing the misconceptions and deceptive language found in this proposal.

The reader should notice immediately, when reading the above link, that most of the "proposal" is meaningless soundbites, non sequiturs, and strategic rather than economic justification for the plan. Once we sift through all of that, however, we run into problems.

The "big secret" about 999? It's really four taxes, not three. It's an income tax, a sales tax, a VAT tax, and a hidden payroll tax, all rolled into one package.

1) It's a payroll tax. Cain has been touting a feature of 999: that it would eliminate payroll taxes. I think it's safe to say that most thinkers agree that eliminating the burden of payroll taxes will help stimulate hiring.

One problem: Cain's plan doesn't do that.

Let me explain: Currently, employers are allowed to deduct payroll as a business expense, so long as payroll taxes are paid on the amount. Under Cain's plan, however, most business expense deductions would be eliminated:

"Gross income less all purchases from other U.S. located businesses, all capital investment, and net exports"

In other words, the 7.65% tax on payroll would be replaced with a 9% tax on payroll and almost every other business expense. This is, of course, in addition to state payroll taxes.

7.65% of payroll is enough of a burden to hiring; 9% of almost everything would be even more so.

Allan Bourdius makes an even graver case: 9-9-9 isn't just a substitute payroll tax, but that it's the mother of all payroll taxes, and would effectively kill service-oriented businesses such as personnel services.

Eliminating the payroll tax paid by the employee, while increasing the payroll tax burden on the employer, is exactly the opposite of needed reform. If government is going to be involved in retirement, low-income health care, unemployment insurance, and the other services funded by payroll taxes, the cost should borne by the employee who might recieve these benefits, not the employer who won't. Burdening job creators with funding social programs is the core of wealth redistribution, and 9-9-9 will only increase that burden.

2) It's a VAT. How do we know? Cain's campaign says it is.

In this PDF from Hermancain.com, the business portion is described as a "subtraction method value added tax". Bizarrely, Cain supporters continue to claim it isn't a VAT.

Most of my readers already know the destructive potential of a VAT; to refresh our memories, here is a classic description of this effect from Murray Rothbard, reproduced by Reason.com.

In fact, it's worse than a VAT. It's a gross receipts tax with VAT-like qualities.

Hank Adler uses Safeway grocery stores as an example of this destructive effect:

One need only look to the annual report of Safeway to understand the impact of 999 on grocery prices. Because the grocery business is incredibly efficient and there is significant competition, there are very, very low margins in the industry. The pretax profit in good years for Safeway is only about 2% of sales and the Federal income taxes therefore are less than 1/2% of sales. After making a reasonable guess based on other information in the Safeway annual report, the total Federal income tax plus Safeway’s portion of their employees’ payroll taxes is less than 2% of sales. Assuming that would all be passed through to the customer in the way of price reductions, the price of food must increase by about 7%.

In addition to this estimated 7% increase in food prices, there's a new sales tax, which brings us to this:

3) It's a national sales tax. And it's not just any sales tax, either. As Adler questions (above), Cain's campaign isn't clear about whether this will be an exclusive sales tax (as state sales taxes in the US currently are), or an inclusive tax. I argue that this ambiguity points toward Cain's intentions: The tax will be inclusive.

We can readily deduce this: Cain is an ardent FairTax advocate. Cain has stated his desire to implement full FairTax. He has described 9-9-9 as an introduction to full FairTax. FairTax is an inclusive tax. Hence, his "introductory" FairTax will also be inclusive. And if the sales tax portion of 9-9-9 were intended to be exclusive, like current state sales taxes, wouldn't Cain would just say so and alleviate any concern?

If the reader is still in doubt about this point, there are two more pieces of evidence:

a) The scoring tables for 9-9-9 (PDF) from Cain's own website include tables for a "poverty grant" to offset the regressiveness of 9-9-9 (see Point 6, below). In other words, it would include a "prebate", just like FairTax. Interestingly, Cain is simultaneously claiming no "poverty grant" would be included, citing the reasons I cited in a previous post about "prebate" becoming yet another welfare entitlement.

b) Cain has renewed his intent to use 9-9-9 as a step toward full FairTax. From the 9-9-9 link at the beginning of this article:

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.

I think it's safe to assume that Cain's "FairTax Lite" will be an inclusive tax- one which is hidden in the shelf price of goods and services.

4) It's a flat income tax. This is terrific- I'm a flat income tax advocate. However, as I have warned before, authorizing the federal government to collect both income and sales taxes simultaneously is dangerous. Does any reasonable person honestly believe that Congress, once authorized to tax both incomes and sales (and clandestinely embed the sales tax in the cost of goods and services), will keep the rate at a mere 9%?

There are two other points which need to be made about 9-9-9:

5) It's unconstitutional. The Constitution does not authorize the collection of a sales tax. Period.

Additionally, part of Cain's plan is the creation of "empowerment zones"- areas of the country where tax rates are lower, or special incentives would be offered. This clearly violates Article I, Section 8 of the Constitution: "...all Duties, Imposts and Excises shall be uniform throughout the United States".

We have enough Constitutional violations embedded in Federal law today, without adding more.

6) It's regressive as hell. While it would cut taxes for the wealthiest taxpayers- which is fantastic, because they pay too much in taxes as it is- it shifts the tax burden toward the poorest. Indeed, an estimated 84% of Americans would experience a tax increase. While it's true that 47% of Americans pay no income taxes (other than payroll tax), what about the other 37%- the middle class who pay income tax now and will pay more under 9-9-9? One goal of tax reform- and of government spending reform- must be to reduce the tax burden on all taxpayers, without incurring more national debt.

So, there you have it. 9-9-9(-9): an unconstitutional, regressive plan which will embed taxes and endanger our economy. It's ill-conceived, unnecessarily convoluted, and potentially dangerous to our economy.

Which is why I'm voting for Rick Perry, who supports a flat tax. (UPDATED 10/25/11)