“9-9-9” tax reform plan, which called for 1) replacing the tiered income tax system with a flat tax on individuals, 2) cutting the corporate tax rate from 35% to 9%, and 3) imposing a 9% national sales tax. The attacks on Cain’s plan that evening were voluminous but vague and unsubstantiated. John Huntsman said he thought "9-9-9" was "the price of a pizza” (a poke at Cain’s past role as CEO of Godfather’s Pizza), and Michelle Bachmann said that the three 9's should be "turned upside-down” because “the devil’s in the details”.
To my knowledge, no Republican presidential candidate was ever able to rebut Cain’s claim that his plan would be a
boon to the economy, to the individual, and to the Treasury. As a matter of fact, "9-9-9" remains a pragmatic and credible tax reform plan, and should be considered by the Romney campaign.
The U.S. the highest corporate tax rate in the developed world
and a chronic unemployment problem. Many American firms have moved
operations abroad because of the high cost of doing business in this
country. Cain's plan could, however, damper the giant "sucking
sound” that Ross Perot warned us of so many years ago. First of all, it would completely eliminate the payroll tax and the high costs
associated with tax compliance ($400 billion annually). At 9% with limited deductions, it would save corporations billions in tax liabilities while making it nearly impossible for ambitious crony corporations like GE to take advantage of tax loopholes.
Using the Government Accountability Office’s tax calculation methodology (.pdf),
reducing the corporate tax rate to 9% would save American firms $85 billion in annual tax expenditures. The freed capital could
be used to expand operations domestically and to hire new
employees. Cain’s plan would also eliminate taxes on capital gains and
repatriated foreign profits, providing more incentive for doing business
in this country. Regarding the former, zero capital gains taxes would
be a huge boon for small business owners, who, as I pointed out in a previous post, are the nation’s largest employers.
Some people criticized the “9-9-9” plan on the grounds that it wouldn’t be revenue neutral, i.e. it would add
to the nation’s already exploding debt. It is true that, when times are
bad, a tax system that depends on consumption would likely
bring in less revenue than an income tax. However, as the Washington
Times's Joseph Curl pointed out,
the plan would increase revenue to the government in a
non-recessionary ("normal") economy. And, as University of California-Berkeley
economist Alan J. Auerbach wrote
in the Wall Street Journal, replacing the income tax with a
consumption tax, which Cain planned to do by using “9-9-9” to transition into the FairTax,
could boost GDP by as much as 9% annually. A 9% increase in GDP would make the U.S. one of the fastest growing economies in the world (imagine that after years of depression) while increasing tax receipts to the government and reducing the national debt. Furthermore, the consumption tax
component of the "9-9-9" plan would raise additional revenue by capturing the $1
trillion underground economy.
9% income tax component of the “9-9-9” plan would significantly reduce the average
American household’s tax liability, which, after deductions, currently
hovers around 13%. The approximate $2,500 savings could be used to
shore-up mortgages, thereby reducing the threat of foreclosures to the economy if it double-dips next year, as some analysts are predicting.
I see but two problems with "9-9-9". First, three 9's means three taxes congress could raise. As anti-tax activist Grover Norquist opined
at last year’s Conservative Political Action Conference, the plan would create "three different taxes that
could rise in the future.” This problem could be mitigated, however, by giving the three taxes long lifespans, a perfectly reasonable proposition with a Republican-controlled House and Senate. Second, as Dean Clancy, former senior policy
advisor to House Majority Leader Dick Armey suggested, a consumption tax
could set the stage for a value added tax. Contrary to popular belief, VAT’s are export killers (.pdf), and, considering the severity of our trade deficit, the introduction of a VAT could possibly kill off what little manufacturing we have left in this country. This is my greatest contention with the plan, but even this issue can be mitigated by giving the three tax components long expiration dates.
Herman Cain’s “9-9-9” plan wasn’t written by an economist, and it was heavily criticized by the left for being regressive (which could make it a tough sell for a presidential candidate who has a wealthy man's air about him). Still, it's better defined and far more reformative than Mitt Romney's ever-changing weak plan. Besides, former Reagan economist Art Laffer loves it.