At the October 11th, 2011 Republican presidential debate, then front-runner Herman Cain came under heavy fire for his
“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.
