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Posts Tagged ‘Herman Cain’

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.

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I’m very enthusiastic – but also a little worried – about Herman Cain’s tax plan.

So when I got the opportunity to write a short column for the New York Times, I explained that his proposal was very good tax policy, in large part because it is based on the same principles as the flat tax.

The flat tax is desirable for a wide range of reasons, including simplicity, fairness and transparency. It also would end the widespread and corrupt process of inserting loopholes and preferences in the code in exchange for campaign cash and political support. But public finance economists generally like the flat tax for different reasons, most notably the pro-growth impact… For the same reasons, people should like Herman Cain’s 9-9-9 tax plan. …It is based on the idea that the tax rate should not penalize people for being productive, and even an ardent supply-side sympathizer like me can’t complain too much about a 9 percent rate. Another key principle is the repeal of most forms of double taxation… Cain also takes a chainsaw to the underbrush of credits, deductions, shelters, loopholes, exemptions, and other distortions in the tax code.

But I then expressed my concern that the 9-9-9 plan might morph into something we don’t want.

This doesn’t mean Cain’s tax plan is perfect. The biggest concern, at least from many on the right, is that he would allow the crowd in Washington to simultaneously impose a flat tax, a national sales tax and (apparently) a form of value-added tax. This might not be a problem if there was some way of guaranteeing that none of the rates could ever climb above 9 percent. Unfortunately, the European experience (especially with VATs) does not leave much room for optimism. Sooner or later, politicians who want bigger government can’t resist pushing tax rates higher. And when the dust settles, you become Greece. Which is why Cain should not have reinvented the wheel. If he wants a low rate, no double taxation and no loopholes, the flat tax has all the upsides and none of the downsides of the 9-9-9 plan.

My basic message is that 9-9-9 should be turned into a postcard because the flat tax is a safer way of achieving the same goals.

The worst thing that can happen with a flat tax, after all, is that politicians begin to re-install loopholes and re-impose discriminatory rates and we wind up with something that looks like the current system.

But that’s a lot better than being Greece.

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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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I became a big admirer of Herman Cain back in the 1990s when he was a member of the National Commission on Economic Growth and Tax Reform (aka, the Kemp Commission).

I worked as a staffer for the Commission and was able to observe Mr. Cain in action over a period of several months. Suffice to say I like what I saw. Unlike many people in DC, he is not an empty suit.

That doesn’t means he’s perfect, as illustrated by his support for the TARP bailout, but he’s definitely on the right side of the dividing line between those who want freedom and those who want statism.

And his victory in the Florida straw poll is bringing lots of deserved attention to his campaign, leading several people to ask what I think about his economic agenda.

To get right to the point, it’s a very Reaganesque package of lower taxes and more freedom that can be divided into three parts.

1. His short-run plan, which he calls the “Immediate Boost,” is to slash personal and corporate tax rates to 25 percent and eliminate the capital gains tax.

2. His intermediate plan, which he calls the “Enhanced Plan,” eliminates the death tax and the payroll tax. But the most important part is the 9-9-9 plan, which is a 9 percent tax rate on personal income, a 9 percent tax rate on corporate income, and a 9 percent national sales tax.

3. His long-run agenda, which he calls the “Fair Tax,” is to eliminate all personal and corporate income taxes and adopt a national sales tax.

This all sounds great, but let me do a bit of nit-picking. I want to focus on part 2, particularly the 9-9-9 plan.

It’s fine in theory. Heck, it’s great in theory. It means low tax rates on productive behavior. It means no double taxation of saving and investment. And it means no corrupt and inefficient loopholes.

What’s not to love about a plan that achieves all these principles?

But here’s the problem. If you happen to be one of those people (such as me) who does not trust politicians, then we run a grave risk if we ever let the crowd in Washington impose any sort of national sales tax without first getting rid of all income taxes.

I have faith that Herman Cain’s heart is in the right place, but years of experience in Washington have taught me to always assume politicians will grab more power and more money at every possible opportunity.

This is why I made this video, explaining why a national sales tax is only acceptable if the Constitution is amended to permanently bar any form of income taxation.

Let me put it more bluntly. A national sales tax – such as a Fair Tax or a VAT – would be a less destructive way of raising revenue than the current tax system.

But any form of national sales tax, if imposed on top of the income tax, would be a disaster. The experience of Europe shows that national sales tax are a money machine for big government.

This is why a national sales tax can only be put on the table after the income tax is repealed. But since I don’t trust politicians, we need to also amend the Constitution to repeal the 16th Amendment that allowed income taxes.

But since many Supreme Court Justices seem oblivious to the Constitution, we would actually need to replace the 16th Amendment with a new amendment that is completely unambiguous about banning any tax on income in perpetuity.

In other words, the income tax needs to be sealed in a lead vault, buried under 10 feet of concrete, and then covered by a foot of salt so nothing can ever grow back to haunt the American people.

Once these things happen, then we can adopt a national sales tax. See, I can be open-minded and reasonable.

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My opinion of politicians is so low that it is always a surprise when one of them does something to cause a radical downward revision, but Newt Gingrich has achieved this dubious distinction. His shallow attempt to score political points led him to attack House GOPers who are trying to reform Medicare to protect America from becoming a bankrupt, Greek-style welfare state.

Ryan’s proposal, which was passed by the GOP-controlled House in April, would have people 54 and younger choose from a list of coverage options and have Medicare make “premium-support payments” to the plan they chose. “I don’t think right-wing social engineering is any more desirable than left-wing social engineering,” Gingrich scoffed in an interview on NBC’s “Meet the Press.” House Republicans, including Speaker John A. Boehner, have stood behind Ryan’s plan, which was the subject of fierce debate at town-hall meetings nationwide. Other Republican presidential contenders have praised Ryan’s political courage without going so far as to endorse the budget blueprint.

As I’ve posted before, I don’t think there is such a thing as a perfect (or completely flawed) politician. The real issue is whether a candidate is willing to balance personal ambition with a sufficient level of concern with the future of the nation. Newt Gingrich has failed this simple test.

But I also want to take this opportunity to raise a question about a candidate who seems to be on the right track, but has a very worrisome blemish on his record. I’ve already said nice things about Herman Cain, but someone needs to ask him whether he still thinks TARP was a good idea, as he wrote back in 2008.

Wake up people! Owning a part of the major banks in America is not a bad thing. We could make a profit while solving a problem. But the mainstream media and the free market purists want you to believe that this is the end of capitalism as we know it. …These actions by the Treasury, the Federal Reserve Bank and the actions by the Federal Depositors Insurance Corporation (FDIC) are all intended to help solve an unprecedented financial crisis.

I’m not implying that this is a kiss-of-death revelation for Cain. Many people thought we had to recapitalize the banking system, but didn’t realize there was an alternative that didn’t involve bailing out well-connected shareholders, bondholders, and managers.

And just as Gov. Pawlenty has recanted on his support for cap-n-trade legislation, the real issue is whether Cain has the maturity to admit a mistake and explain how he made an error on TARP.

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As a long-time fan of Congressman Paul, I am very disappointed that he recently said he would not have approved the raid on Osama bin Laden’s compound. Here’s an excerpt from The Hill.

Likely GOP presidential candidate Ron Paul said this week he would not have authorized the mission that killed Osama bin Laden, raising concerns about international law. …The likely candidate indicated that to capture bin Laden, he would have worked with Pakistan on a mission like the one that nabbed 9/11 mastermind Khalid Sheikh Mohammad, who was captured by Pakistani intelligence forces and transferred into U.S. custody. …Paul said that international law was an overriding concern.

I’m particularly mystified that he cited “international law” as a reason for his position. I’m not trying to take a cheap shot. Heck, I voted for Ron Paul way back in 1988 when he was the Libertarian candidate for President and I voted for him again in the GOP presidential primary in 2008. But Surely he doesn’t want to cede American sovereignty to the klepto-crats at the United Nations or some other international bureaucracy filled with statists and appeasers?

Herman Cain, on the other hand, has enjoyed a bit of a boost since the debate in South Carolina. I’ve known Cain since the 1990s when he was a member of the Kemp Tax Reform Commission and I was a staffer. On tax matters, Cain has embraced the national sales tax, which may come back to haunt him if he manages to become a first-tier candidate. But he also has proposed a five-part package of incremental reforms, and I was recently interviewed about that set of proposals. With one exception, I was very favorable. Here’s the opening part of the article in the International Business Times.

Herman Cain’s 5-step plan would boost the US economy and create jobs, according to Daniel Mitchell, an economist and senior fellow at the Cato Institute. Mitchell said in the 21st century, globalization has made it easy for businesses to shift their money (investments) and operations (jobs) internationally. Therefore, it’s of the utmost importance for the US to have the right policies and economics in order to win those operations and monies. Mitchell said the Obama administration’s policies do the opposite. Cain’s proposed policies, however, would work to achieve those goals.

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