Analysis: Cain's 9-9-9 Plan

A couple of you have asked that we provide more detail on Herman Cain’s 9-9-9 plan. With another debate tonight (join us for another play by play), now is a good time to discuss the Hermanator’s plan.

Here’s how the plan works:

● Businesses would pay a flat 9.1% tax on gross income less purchases from other US located businesses, capital investment and net exports.

● Individuals would pay a flat 9.1% tax on income, less charitable deductions.

● A 9.1% national sales tax would be created to make up lost revenue.

Here are the reasons this is a good plan:

● The elimination of deductions ends the incestuous relationship between Big Business and government where Big Business buys politicians who insert deductions into the tax code to allow companies like GE to declare record profits and yet pay $0 in tax.

● This plan ends the economic misallocations caused by the current code because it eliminates the deductions which encourage people to hide their income. It does not give preferences to savings or consumption, capital or labor, or dividends verses income growth. In effect, the government gets out of the business of telling people how to structure their economic lives.

● It reduces the disincentive to work because it lowers payroll taxes. And it boosts the incentive to work, hire and buy new equipment because it lowers the overall tax rates for those activities.

● It encourages spending on American goods and services as only those can be deducted. And it encourages exports.

● This forces everyone to pay taxes, i.e. it broadens the tax base. Right now 47% of the public pays no tax, but gets government benefits. That needs to change to change the incentive these people have to keep demanding bigger government. Making them pay taxes goes a long way toward that.

Here are the arguments against:

● This will create a hidden Value Added Tax! Europe uses the VAT because VATs can be raised without people knowing. But this isn’t a VAT. This is a sales tax and would only apply to the sale of new goods or services to end users. In other words, whereas a VAT gets added at each level, a sale tax only gets added once. Moreover, you would see this tax on your receipts -- something you don’t get with a VAT.

● This weekend Cain admitted that some people will pay more under his plan. So what? Finding a plan under which no one pays more but revenues remain about the same is an impossibility.

● Idiot liberal: “Poor people will pay more!!” Idiot progressive: “The evil rich will pay less!!” A lot of information is being produced to claim this plan shifts the tax burden from the rich to the poor, but that's all fake -- it's based on unreal assumptions about what the rich and poor pay now (like assuming GE actually pays taxes) and it assumes neither rich nor poor will change their behavior in response to the plan. The truth is the 47% of people who currently pay no taxes will pay more. The others (the productive 53%) will pay less. And frankly, that doesn't bother me in the least.

● Grover Norquist: “This raises taxes!!” Grover is again equating the elimination of all those deductions with tax hikes. But if we accept Grover’s logic, then we are trapped in the current tax code forever. What a tool.

● The plan doesn’t raise enough money! Opponents scored the plan and claim it will only raise $2 trillion, not $2.2 trillion as Cain claims. Frankly, that’s more accurate than anything else proposed by Congress. But more to the point, this is standard static scoring where they just take current spending/ income and apply the new rates. They did not determine whether people would work more once they can keep more of their income (they would) or whether people would spend more once they have more income to spend (they would). (They did the same thing to criticize Reaganomics.) No one knows what this plan would actually bring in, but if the critics are claiming $2 trillion, expect it to do much better in reality.

But there is one more problem with the plan. . . this plan ain’t happenin. Our government is specifically designed to prevent radical ideas from being implemented and this plan is deeply radical. This plan would require a complete change in the way Washington works, and that will upset too many vested interest. For example:

● K Street will lose most of its business with the end of the deductions in the tax code.

● The poverty lobby will lose its cherished progressive tax.

● Most tax attorneys and tax accountants would lose their jobs.

● All the people who currently use deductions (everything from home owners to GE) will try to save their own deductions.

● Businesses will whine about the sales tax hurting their sales.

● Foreign countries will complain about “predatory taxation” designed to steal businesses.

That’s too much opposition for Congress to do something this radical. The Democrats will cling like grim death to the old system, as will many Republicans. Still, this plan tells us a lot about Cain and his goals and it is a worthwhile goal.


P.S. Check out Herman Cain singing about pizza: Not, I'm not kidding