Actually, the title of this post should probably read, “The Good, Good, Good, Bad, and the Ugly.”
That’s because Herman Cain’s 9-9-9 tax plan has low tax rates, it eliminates double taxation, and it wipes out loopholes, and those are three very big and very good things.
The bad part, as I explain here, is that Cain would let politicians impose a national sales tax at the same time as an income tax.
And the ugly part is that he also would let them impose a value-added tax as well, as I discuss here.
I pontificate on all these issues in the latest Coffee and Markets podcast, which you can listen to by clicking here.
In closing, I will admit that it’s been very frustrating to deal with Cain’s plan. Supporters of Cain accuse me of being too critical and opponents of Cain accuse me of being too nice.
Normally, I don’t like being in the middle of the road, but that seems to be the only logical place to be since 9-9-9 has some really good features and some really bad features.
I had always liked Herman Cain — he seems like the best of the bunch to me. But this 9-9-9 stuff leaves a little throw-up taste in the back of my mouth. First, as Peter Schiff says, it should be 9-9-9-9, since the payroll tax is completely ignored, and we all know that workers pay that tax, not companies.
Second, with all these taxes being implemented simultaneously, what are the odds that the bad and the ugly will completely dominate the system? What would prevent this from becoming a 15-15-15 tax in short order? or 30-25-40? Nothing really. I’d say the chances of that are somewhere between 90-100%.
Have been reading your comments on 9-9-9, and appreciate them. There is good and bad in it, and that is important to recognize if you are to be fair.
I would like to add my comments to the 9-9-9 plan.
I think this is Cain’s Achilles heel when it is really examined. It is an appealing marketing slogan, and seems fair and simple, but……It is a BIG increase in taxes for the median income and retirees.
Politically I don’t see how that works for him. Will 9-9-9 “fairness and simplicity” trump “my personal cost”?
I don’t know, but when his T-party supporters recognize that this is really violating the spirit of the GOP, “No tax increases” pledge, I think he might be vulnerable.
I have a friend who has been an avid Cain supporter for over 9 months now, and will be a Precinct Captain in Nevada… He is a “true believer”.
I sent him my analysis of the plan, when he first came up with it a few weeks ago.
The big problem with Cains plan lies in the tax example he keeps providing for those in the Median income range of $50,000 paying $10K in total Income, Payroll, Medicare and taxes (IPM) right now. He says his 9-9-9 is going to lower the combined IPM tax portion to $4,500. He just repeated it in Scott Simon’s interview on NRP Weekend Saturday Program yesterday.
First problem….. When you do these examples, you have to compare what a person’s “effective tax rate” is now, not a “tax table rate” against an AGI, which I think Herman is going. (that is not clear, but seems to be the case)
If you do that, no one, in America who is in the median income range pays as much as Cain’s example! Hell, they don’t even pay $4,500 in total IPM which he says they will under 9-9-9!
Let me give you a personal example: Right now, I am semi-retired, and my wife works less than 6 months a year, so we fit that median category.
I calculated my effective tax rate against our Gross Gross income, not just an AGI. That is where we back up and took out all the exemptions, deductions, credits, 401K and IRA reductions, etc….everything that the current tax code uses to allow you to lower your income to arrive at a “taxable income amount” which is way way below your actual earnings in a year.
Using that comparison, our total IPM vs Gross gross income, means our effective tax rate is 8. 78% which is less than the 9% flat tax Cain proposes, and then, of course, I will need to add a 9% VAT burden on top of that.
So this is a significant tax increase for us, not a decrease.
Ok, now, setting aside personal selfish considerations, maybe I need to have my tax increased to help share in the cost of all the services and wars that American’s seem to want. The reality is, that the middle class may need to pay more taxes, and not just tax the rich. But, of course, this tax scheme really lowers taxes for those in the upper income levels (Rich) who are now only paying 15% on their qualified dividends and capital gains. They will only have to pay 9% now. Great deal!
I have several good friends that are all making north of $500K a year right now, and paying “effective” tax rates of ~29%. (not the 35% tax table rate) They love this idea that their “effective” tax rates would go down to 9%. Why wouldn’t they?
One final thing, for my friend, I wanted to show him how little Americans are actually paying as compared to another country, that I know well. New Zealand.
New Zealand, my “effective” rate, for same income using an apples to apples comparison, would be 22.47% plus 15% VAT.
Currently my effective rate is 8.78% and no VAT
Cains plan, I would go to 9% and 9% VAT.
So, that is the story of why I think his tax plan is vulnerable, and it is my contention, that the T-party types who think they are taxed enough already, really have no idea of…
1. What their real “effective” tax rates are and,
2. How they compare to other OECD countries..
The marketing slogan sounds nice, 9-9-9, but in reality, this is a Big increase in the very constituency Cain is supposedly appealing to..
How does that work out for him?
Great analysis, Dan.
Cain’s idea of a clean-sheet re-design of the entire tax code is excellent and I, too, like the flat income tax, even though I prefer sales taxes for a number of reasons.
The VAT part of his package puzzles me. Technically, it is a value-added tax, especially because it complies well with the definition of value added in national accounts theory. Without being a tax expert, I get the impression though that there are a couple of important differences between the Euro-Canadian VAT system and Cain’s plan. One example is the calculation of the VAT. Let’s say BMW buys transmissions for its cars from Getrag. They pay VAT on the price that Getrag charges for the transmissions. When they sell the car to the car buyer they charge a VAT on top of the sales price. When BMW delivers the VAT payment to the German tax agency they deduct the VAT they paid on the transmissions. That VAT is of course paid in by Getrag.
Perhaps I have not read Cain’s 999 plan in enough detail, but it seems to me that this element is absent in his plan. He has a calculation formula that allows for deduction of inputs, so it might be that in the end he handles this part anyway. But the deductions also do not seem to quite match the standard EU VAT.
I don’t want to see his plan tweaked to be a full-blown VAT. That said, what realistic or workable alternatives are there? In the end, his tax plan has to comply with his spending plan, and if there is no significant plan to cut federal spending, he will need several revenue sources.
Any system that establishes a European style hidden tax like VAT should be avoided at all costs.
The fact that virtually every European country, was independently set along the politico-economic path of ever increasing VAT — even before the European Union started applying legislative and political pressure towards unified economic policy – should be a stark warning that once the hidden tax VAT mechanism is born, America cannot avoid the same fate. It is just another delusion along the lines of: “America is different! It can copy the mistakes of others but avoid the consequences”. In other words, every European country, independently went through this experiement and the outcome was virtually the same: a VAT of around 20-25% and rising. The wealth transfers needed to keep Europe together is already applying pressure for further increases in VAT.
Alas, Europe will not decline fast enough to show Americans what it means to be in the declining embrace of Mitchell’s Law.
Tax tweaks alone will do little to alter America’s historical path of decline. The elephant in the room is that there is virtually NO PUBLIC SUPPORT, or enough momentum, to substantially curtail the central planning redistribution shemes that will make America decline before enough corrective action is taken.
It is like flying towards a ten thousand foot mountain ten miles ahead at five thousand feet altitude, without the will to seriously pull on the throttle. It is futile. You might as well look for other options, like parachuting… (to places that are on the ascent… and more hospitable to competence…)
The bottom line is that no-one can tell voters the truth. That :
“You cannot counter and make up for the increasing competitiveness of three billion emerging world competitors – and thus decline of your own relative competitiveness in the world — through redistribution and central planning AND maintain growth rates that keep you in the privileged wealthiest ten percent of this planet – as you the middle class American have been accustomed to. Had it been that easy, don’t you think that the myriad redistribution and central planning cultures before America would have figured that out?”
Anyone who publicly utters this obvious “There Ain’t no Perpetual Motion Machine of Prosperity” truth will be ostracized by voters.
I’m afraid that would also be Mr. Mitchell’s fate if he dared say something along these lines on his next TV interview…. and I don’t want to entice him to sacrifice by challenging him to do so…
If I ever see that this message starts gaining majoritarian traction, then indeed, I’ll have hope in America. Barring that, what I see is the familiar movie of decline seen in many other nations the world over, current and past.
Like the electrician who, when electrocuted his hand involuntarily closes and hangs on to the wire: Hang on tight to Mitchell’s Law into economic destruction.