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Cain's Responses on 9-9-9 Answered


Posted by Ryan Ellis on Monday, October 17th, 2011, 3:08 PM PERMALINK


Herman Cain has nine responses to nine criticisms of 9-9-9 which is making the rounds.  Below is what he said, and what are my responses to his responses:

Claim 1: The 9 percent sales tax, which is one third of the formula, is regressive and hurts the poor, many of whom pay no federal income taxes now. Response: This claim ignores some important aspects of the plan. One is that we eliminate the 15 percent payroll tax, which allows for no deductions at all – not even for charitable contributions. Some critics have argued that the poor still come out behind because employers pay much of the payroll tax. That demonstrates a basic misunderstanding about how compensation works in the business world. An employer decides to accept a certain cost-of-employment for each employee, and the employer’s share of the payroll tax is part of that cost. It comes out of your compensation whether you realize it or not. Also, a flat tax is not – by definition – a regressive tax. Everyone pays the same rate. And it is not an added tax, but a replacement tax, whose total burden is determined by the consumer’s spending decisions.

Finally, the best way to help the poor is by spurring economic growth, which the current tax code will never do, and which the 9-9-9 plan is specifically designed to do.

My response: ATR is not concerned about the regressivity argument.  However, Cain misses the fact that 9-9-9 would repeal the outlay effects of various refundable credits, replacing them with nothing.  This would result in lower cash flow for low-income households, even with payroll tax repeal.

Additionally, the compensation effects Cain mentions are true, but only in the aggregate and only over time.  It's not as if every employer is going to increase everyone's salary by the exact amount of the former FICA liability.  Over time, the compensation will even out, but there will be many people caught in the middle, waiting for labor markets to recalibrate.

Claim 2: Creating a new tax is merely setting the stage for higher rates on all taxes, as untrustworthy politicians will surely raise them. Response: First of all, that is not a criticism of the 9-9-9 plan. It is a criticism of politicians. If you don’t want the rates raised, don’t elect politicians who will raise them. Even if we repealed the 16th Amendment and eliminated the income tax, as some demand in return for establishing a consumption tax, politicians could raise that rate too. What’s far more important here is the fact that the very simple, flat-rate structure of the 9-9-9 plan, which allows no deductions, loopholes or exemptions (with the exception of charitable contributions for the income tax), is a far more growth-friendly tax structure than the mangled mess of rates, taxes, exemptions and ill-conceived incentives we have today. It virtually eliminates the massive compliance costs of the current tax code, and it restrains the size of government.

By taking away the politicians’ gateway drug of loopholes and deductions, we make it much more difficult for them to mess with the tax code. Having said that, any plan could be criticized for what it would look like if someone messed it up. The plan as I’m proposing it is a huge improvement over the status quo.

My response: What Cain is missing here is that some plans invite politicians to screw them up.  9-9-9 is one of those plans.  By not having a poverty exemption, or excluding politically-popular purchases, or holding the elderly harmless, 9-9-9 begs for politicians to carve out the tax base.  If they want revenue-neutrality, the rates will then have to rise.  Sound familiar?  This is exactly what happened with a VAT in Europe.  By the way, one of the 9s is a VAT.  All taxes rise, over time, to their highest politically-sustainable level.

Claim 3: The plan redistributes wealth from the poor to the rich. Response: It does no such thing. It is fair and neutral, taxing everything once and nothing twice. What’s more, we are getting ready to propose empowerment zones for economically struggling areas in which the rates will be even lower. That will allow the poor to benefit even more from the plan than they already would.

My response: Cain is correct that there is no income redistribution here.  For that, you would need a transfer scheme which 9-9-9 does not contain.  However, the plan does tax something twice: wages.  Wages would not be deductible from the VAT's base, and would be taxable in the income tax base.  There is a double taxation of wages in 9-9-9.

Claim 4: The plan should have included a pre-bate to offset the sales tax. Response: The last thing we need is to establish another federal entitlement, which the proposed pre-bate would quickly become. And it’s not necessary. The consumption tax replaces ones already embedded in prices. It’s not the prices that would increase, but the visibility of the taxes being paid. Right now, money is deducted from your paycheck and you never see it, so it doesn’t feel like you paid a tax. But you did. With the 9-9-9 plan, you feel it, and I suspect a good many people who clamor for higher taxes will start to feel differently as a result. But they won’t be paying more than before. They’ll just be more aware of it.

My response: Interesting that Cain bashes a pre-bate here, considering it's a central feature of the FAIR Tax, which is what he wants to move to after the withering of the proletariat in 9-9-9.

Claim 5: The business tax represents a new tax on labor. Response: Paul Krugman of the New York Times makes this claim because we do not allow businesses to deduct the cost of labor from their taxable revenue. But the claim is bogus for several reasons. First, we are reducing the corporate tax rate from 35 percent to 9 percent, so the tradeoff is a much lower rate paid on more of a company’s income. Second, we treat capital and labor the same, both with the corporate tax and with the income tax. That is fair and neutral. What’s more, the current system taxes both capital investment by business and capital gains by individuals. That’s a double tax, and the 9-9-9 plan eliminates it.

My response: The fact that you have a much lower tax rate doesn't mean that it's untrue that wages are taxed twice under 9-9-9.  They are.  The resulting double tax would be lower for most workers than today's single rate of tax, but that doesn't mean the double tax isn't there.

Also, companies are allowed a dividends deduction under 9-9-9.  Dividends are taxed once, but wages are taxed twice.  This may or may not be good policy, but you can't argue you are treating wages and capital the same under 9-9-9.

Claim 6: The numbers don’t add up. The 9-9-9 tax wouldn’t generate enough revenue. Response: Several groups apparently “ran the numbers” and came to this conclusion, including Bloomberg News and the Center for American Progress. Our report, which they do not appear to have read, demonstrates that it generates the same revenue as the current tax code, and our methodology is visible for anyone to see. Those who are making this claim should release their scoring so their methodology is as visible as ours.

My response: Given the arbitrary nature of scoring, I will accept that Cain's intention is to raise tax revenues of 18 percent of GDP on a static scoring basis, with the hope that economic growth will generate even more.

Claim 7: The 9-9-9 plan is a really an 18 percent value-added tax plus a 9 percent income tax. Response: That’s an argument? That some might be able to give it a disagreeable label? What we have done is split the incidence of the tax so it is harder to evade – since you’d have to dodge two taxes, not just one, to save the 18 percent. And by eliminating loopholes we’ve made that virtually impossible to do anyway. I don’t really care what people call it. What matters is how it works.

My response: So it is an 18 percent VAT with a 9 percent sales tax?  You've just split the incidence to keep tax evasion down?

If that's Cain's logic, than how can he also support the FAIR Tax, which commingles all taxes into one giant sales tax?  Cain seems to be accepting here that high tax rates create black markets, an argument that critics of the FAIR Tax have made for years.

Claim 8: Some people (like Herman Cain) who may live off capital gains, would pay no income taxes. Is that fair? Response: First, one of the benefits of the 9-9-9 plan is that, even if someone doesn’t pay much or any of one of the taxes, he or she is still likely affected by the other two. More to the point, though, everyone has the same opportunity to work hard, earn capital and put that capital at risk. Whatever I have earned has come from hard work, good decisions (and some bad ones), a willingness to take risks and a constant honing of strategy. Nothing is stopping anyone else from doing the same thing. I realize many are being told there are no opportunities available to them, but that is not true and I wish people – for their own sakes – would stop listening to such doom and gloom and come to understand all the opportunity that truly exists, and learn how to access it.

My response: Clearly the best answer.  The capital gains tax is often a redundant second tax on savings.

Claim 9: It won’t pass. Response: Politicians propose things that can pass. Problem-solvers propose things that can work. One of the worst instincts of Washington types is to judge an idea not on its substantive merits, but on their perception of its political viability. I do not underestimate the challenge of getting any good idea through Congress, but I have said all along that if you propose a good idea, and the people understand the idea, they will pressure Congress to pass it.

My response: Then why not just run on the FAIR Tax (as he claims to ultimately want) and be done with it?  If pragmatism and political reality are for the hobgoblins of little minds in Washington, what's the point of 9-9-9, since it's a transitional system?

The fact is, political reality matters if you want to have a substantial policy conversation, as Cain claims.  9-9-9 would never pass, so what should we do?  Simple--reform the current tax structure so that the best features of 9-9-9 (lower rates, full expensing, capital taxed once, territoriality) are realized in a viable way.

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