I like the overall approach of Herman Cain’s 9-9-9 tax plan. As I recently wrote, it focuses on lower tax rates, elimination of double taxation, and repeal of corrupt and inefficient loopholes.
But I included a very important caveat. The intermediate stage of his three-step plan would enable politicians to impose both an income tax and a national sales tax. I wrote in my earlier post that I had faith in Herman Cain’s motives, but I was extremely uncomfortable with the idea of letting the crowd in Washington have an extra source of revenue.
After all, Europe’s welfare states began their march to fiscal collapse and economic stagnation after they added a version of a national sales tax on top of their pre-existing income taxes.
But it seems that I was too nice in my analysis of Mr. Cain’s plan. Josh Barro and Bruce Bartlett are both claiming that the business portion of Cain’s 9-9-9 is a value-added tax (VAT) rather than a corporate income tax.
In other words, instead of being a 9 percent flat tax-9 percent sales tax-9 percent corporate tax, Cain’s plan is a 9 percent flat tax-9 percent sales tax-9 percent VAT.
Let’s elaborate. The business portion of Cain’s plan apparently does not allow employers to deduct wages and salaries, which means – for all intents and purposes – that they would levy a 9 percent withholding tax on employee compensation. And that would be in addition to the 9 percent they presumably would withhold for the flat tax portion of Cain’s plan.
Employers use withholding in the current system, of course, but at least taxpayers are given credit for all that withheld tax when filling out their 1040 tax forms. Under Cain’s 9-9-9 plan, however, employees would only get credit for monies withheld for the flat tax.
In other words, there are two income taxes in Cain’s plan – the 9 percent flat tax and the hidden 9 percent income tax that is part of the VAT (this hidden income tax on wages and salaries, by the way, is a defining feature of a VAT).
This doesn’t make Cain’s plan bad from a theoretical perspective. The underlying principles are still sound – low tax rates, no double taxation, and no loopholes.
But if I was uneasy when I thought that the 9-9-9 plan added a sales tax on top of the income tax, then I am super-duper-double-secret-probation uneasy about adding a sales tax and a VAT on top of the income tax.
Here’s my video on the VAT, which will help you realize why this pernicious tax would be a big mistake.
Again, this doesn’t make Cain wrong if we’re grading based on economics or philosophy. My anxiety is a matter of real-world political analysis. I don’t trust politicians with new sources of revenue. Whether we give them big new sources of revenue or small new sources of revenue, they will always figure out ways of pushing up the tax rates so they can waste more money trying to buy votes.
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The key benefit of the 9-9-9 plan is that it significantly simplifies the tax system by eliminating several inefficient smaller taxes, levies, concessions and breaks, whilst also broadening the base.
Cain should also advocate for a constitutional amendment to remove the ability of Congress to ‘tack’ revenue measures to ordinary bills, thereby preventing hidden taxes from being introduced.
I don’t understand the comment that Cain’s plan gives the feds an additional source of revenue. It removes the payroll tax, medicare tax, capital gains tax. That leaves them with less sources not more.
Also, you state Europe began its downward march after instituting consumption taxes. Actually, they started downhill before that.
I respect your articles and your videos and share many of them, but you are flat wrong on 999.
“I wrote in my earlier post that I had faith in Herman Cain’s motives, but I was extremely uncomfortable with the idea of letting the crowd in Washington have an extra source of revenue.”
I don’t see how the sales tax is an extra source of revenue. The plan erases the payroll tax, the death tax, and the capital gains tax. It adds a national retail sales tax. That’s a loss of 3 streams and an addition of 1. Why doesn’t your article praise 999 for reducing the government’s revenue by two streams instead of highlighting that it “adds a stream”, which is disingenuous at best in the context of the plan.
“After all, Europe’s welfare states began their march to fiscal collapse and economic stagnation after they added a version of a national sales tax on top of their pre-existing income taxes.”
Did they throw out their current tax code while doing so? If not, then it cannot be compared to 999.
“But it seems that I was too nice in my analysis of Mr. Cain’s plan. Josh Barro and Bruce Bartlett are both claiming that the business portion of Cain’s 9-9-9 is a value-added tax (VAT) rather than a corporate income tax.”
Bruce Bartlett has a clear record of defaming plans he has never read nor understands. He did the same with the FairTax and was, for lack of a better word, completely owned by Neal Boortz for misrepresenting the plan. Bruce went as far as to claim that the FairTax plan was birthed by Scientologists. Credibility = ZERO.
The 9% corporate income tax in 999 is no more a VAT than the current 35% income tax.
“Let’s elaborate. The business portion of Cain’s plan apparently does not allow employers to deduct wages and salaries…that they would levy a 9 percent withholding tax on employee compensation.”
But they don’t pay 7.65% in payroll taxes, nor the enormous compliance costs, nor the 26% difference in the corporate income tax. If this is the biggest “con” against 999, let’s pass it tomorrow! To say the joke of a tax code we have now is better because businesses can’t deduct payroll (when they’re already paying 30+% less) is insanity.
“But if I was uneasy when I thought that the 9-9-9 plan added a sales tax on top of the income tax, then I am super-duper-double-secret-probation uneasy about adding a sales tax and a VAT on top of the income tax.”
it’s still not a VAT. Bruce Bartlett calls it a VAT because 999 is a step toward the FairTax and Bartlett will go to the grave trying to prevent the FairTax even though he still hasn’t even read H.R. 25.
[…] sales tax, Herman Cain’s tax plan suffers from a fatal flaw, many fiscal conservatives argue. The Cato Institute’s Dan Mitchell explains: Josh Barro and Bruce Bartlett are both claiming that the business portion of Cain’s […]
Whether 9-9-9 succeeds or not, it’s gotten everyone talking about the tax code. Amazingly, there are libs talking about better ways to deconstruct the tax code that think are better than Cain’s plan.
What makes this man such a masterful leader is that he knows how to provoke a conversation and make a point down the road a bit…leading everyone to the conclusion and getting consensus.
What you’ll see is that as more people get to know this man, the more they’ll like his no-nonsense, straight-talk approach. Libs are niggling around the edges with things like the fence commentary. These things are easily debunked. Democrats who are fooled by smear tactics aren’t his target audience. He’ll win over the thinkers.
If anything…Cain is patient; and I think he’s going to win.
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Cain claims that the 9-9-9 plan is “revenue neutral”. This means that the plan itself should neither raise nor lower overall taxes. But 40% of current government spending is additional debt each year. Under the 9-9-9 plan, then, 40% of current government spending would continue to be new debt.
I believe for fiscal years 2010 and 2011, we have about 1.2 trillion dollars in new debt.
But Cain also claims this: The 9-9-9 plan “Lifts a $430 billion dead-weight burden on the economy due to compliance, enforcement, collection, etc.”
That would eliminate 1/3 of the yearly new debt. But it still leaves approximately 800 billion per year in new debt.
Our GDP is about 12 trillion dollars per year. One assumes that the simplified tax system would generate more prosperity, and therefore more tax revenue, which would reduce the yearly new debt. How much more economic activity – and tax revenue – would it generate?
Another major portion of Cain’s platform concerns the fact that “business uncertainty” is a major cause of sluggish economic activity – and this specifically includes the extreme Obama Administration hostility towards business and the Obama “command economy” style of wanting to choose winners and losers, rather than allow a free market economy to do so. The problem of “no new jobs” is also caused by this business uncertainty and Administration hostility. You don’t hire when you don’t know what’s coming and when you are constantly under threat. Cain government policies would remove the uncertainty and hostility.
In addition, he views government spending as out of control, and that the purpose of this government spending is “wasteful programs and expansion of power”. He would drastically cut budgets across the board, demanding target percentage reductions by department, and in addition attempt specific reductions as well beyond that. One assumes that this would also generate more prosperity. How much more?
So the increased prosperity would need to result in about $800 billion of tax revenue. If that increase is to arrive via, essentially, 9% of increased prosperity via GDP, it would need to generate 9% of 12 trillion dollars, or about 1.1 trillion dollars. GDP would have to rise from 12 trillion to 13.1 trillion dollars based on economic prosperity increases. We’d have balanced budgets.
Actually, since under Cain, government would have shrunk, we’d have a taxation surplus if economic prosperity increased by 1.1 trillion dollars. It seems workable to me, but it would be a daunting challenge. Americans would have to rally behind Mr. Cain’s modified tax code AND his slashing of government spending, and that’s where the rubber hits the road, so to speak.
He freely admits his spending reductions require “hard choices” but thinks the American people are ready for it. Are they? Government bureaucracies are like animals – they will fight tooth and nail rather than reduce their own size and power. Can Cain, a non-politician, accomplish any significant reduction in size and power among these bureaucracies? He believes he has an ability to do so – moreso than the other candidates. Is he right?
Finally, you’re right that politicians on the whole will always constantly seek to raise taxes. Cain claims that the simplified code of a 9-9-9 plan makes those efforts to raise taxes much harder, because their efforts become much more visible, and much easier therefore to fight. Is he right that the simplicity – and simplicity’s natural transparency – makes it much more difficult to raise taxes? I think so.
So, the whole thing seems supportable to me. Is it the best choice out there, among the candidates’ plans, for one to support? That’s a judgment call each of us has to make for ourselves. In addition to all the other factors driving the choice of our favorite candidate. Personally, I’m not ready to select my favorite candidate yet, but I’d be perfectly comfortable voting for Mr. Cain over Barack Obama. He’d be a fine GOP nominee for me.
Look, I’m a Christian, and I believe we are in the end times, but seriously, stop with the 9-9-9 = 666 stuff… its ridiculous and makes evangelicals look like idiots…
If it was an 8,8,8 plan… I might be for it. Sigh.
Nobody with any credibility… can or will explain where these specific numbers came from.
Why not a 5,5,5… a 4,4,4 or god forbid… 0,10,10 or a 0,25,0… etc, etc, etc.
When you have a former FEDERAL RESERVE bankster selling you a 999 plan… and you’re buying… you better, look in the mirror, and start thinking about… 666. Because this lemon was packaged just for you…
My anxiety is a matter of real-world political analysis. I don’t trust politicians with new sources of revenue.
Precisely, Dan.
It is such nonsense that there is an “additional” revenue stream to be leery of for many reasons:
#1 – the plan ELIMINATES several other revenue streams: Cap Gains, Death Tax, Alternative Min Tax, and the biggest of all, PAYROLL taxes.
#2 – would you rather keep all these different revenue streams and pay as high as 50% rates?
#3 – with 999 it’s so visible and transparent, unlike the code now, the American people will immediately be able to discover if Congress tries to mess with it
#4 – this plan is going to make every future politician run on a promise not to mess with the code and when they try, they will lose their job!
Hmmmmmmmm let’s see what the career politicians have for a plan. Oh that’s right they don’t.
I don’t get your spill about your hidden VAT. The plan seems simple enough to me.
9% for a working individual. 18% for the small businessperson taking a salary.
I don’t know what the current corporate tax rate is, but I bet it’s more than 18%.
I guess what we’ve got is fair enough, let’s elect Romney because he’s presidential or it’s his turn or however it works.
I’m not sure how a 2/3 majority vote to increase taxes could leave ANYONE with ANY feeling other than relief!!! This is the beginning of the answer. His Phase 2, the transition to the Fair Tax finishes it off!!!
Cain is no dummy and he understands “real world” implications better than career politicians and community organizers. If you’re concerned about 9/9/9 going to 20/20/20, remember, if passed, it will take a 2/3 vote to change rates. This 9/9/9 plan wipes out the ENTIRE monstrosity of a tax code as we know it (no payroll tax, no death tax, no “sneak-a-taxes”, etc.)and is just one piece of his overall approach to growing the economy, reducing spending and empowering the private sector to create jobs. It is not a VAT, either. Read more at hermancain.com and watch for additional info to be released as the campaign progresses.
Why replace the current incomprehensible complex multi-tax system with another multi-tax system, even if it is simpler and fairer? Mr. Cain says his ultimate goal is the Fair Tax system. Well, we can start that overnight. Local and State governments already collect sales taxes. It shouldn’t be hard to have them collect the national sales taxes and pass it on to the Treasury.
I still have a problem with the Fair Tax as I worry it will just create a black market to avoid paying it. Of course tax evasion is a problem in any system. The key is making the opportunity cost of evading the tax less than just paying it. This means low rates and simple, easy to follow rules.
It sounds more like…wait for it…an indirect payroll tax, effectively 9% employer and 9% employee. Herman Cain claimed to be getting rid of payroll taxes, and yet, for the portion of corporate income spend on employees, you effectively have one.