Several New Problems For 9-9-9

by Josh Barro

Last week, I wrote that Herman Cain’s 9-9-9 plan includes a “lightly-modified VAT.” Since then, his campaign has modified the plan posted on the web, and the proposal got even vattier.

Previously he proposed a 9 percent tax on the following: “Gross income less all investments, all purchases from other businesses and all dividends paid to shareholders.” But now that has changed to “Gross income less all purchases from other U.S. located businesses, all capital investment, and net exports.” That’s a straightforward value-added tax: a tax on business receipts less inputs, with the tax applied to imported goods (i.e., imported goods are not deductible) and deducted on exports.

By making this change, Cain addresses one of the criticisms of the plan: that corporations could act as tax shelters by borrowing money and then paying it out as dividends. But the change also makes it more puzzling that Cain won’t describe his proposed tax as a VAT, and that so many reporters have gone along with his terminology, calling the proposal a “business tax” or, worse a “corporate income tax,” instead of properly identifying it as a VAT.

There are other quirks in the plan that need ironing out. Cain says his personal income tax applies to “gross income less charitable deductions.” But he also says that capital gains won’t be taxed, so I suppose they will newly be excluded from the definition of gross income. Will the plan treat capital gains more favorably than dividend and interest income? If so, it will introduce new distortions to corporate finance–corporations will be encouraged to finance themselves with equity instead of debt, and to distribute earnings through share buybacks instead of dividends.

These sorts of ambiguities are the reason I said the plan “reads like it was written on the back of a napkin.” But trying to fix the tax treatment of interest in 9-9-9 is a bit like rearranging deck chairs on the Titanic. Here, from the Tax Policy Center, is a table of the distributional impacts of the plan. You can stick a fork in it: this tax plan is done.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.