Politics & Policy

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The wild world of Cainonomics

Herman Cain’s 9-9-9 proposal — a 9 percent personal-income tax, a 9 percent corporate-income tax, and a 9 percent federal sales tax, to replace all current federal taxes — is attractive in many ways. It is not a flat tax, but it is a flattish tax; it eliminates some (but by no means all) of the divide-and-conquer features of the federal tax code; it simplifies taxes for most households and many businesses; it might reduce compliance costs. All to the good.

A few things should be understood about the 9-9-9 plan. The first is that 9-9-9 is not Herman Cain’s real fiscal plan. He proposes 9-9-9 as an intermediate step en route to his preferred solution, the so-called Fair Tax, about which I have some serious reservations, along the lines of those spelled out by Ramesh Ponnuru here. In fact, Mr. Cain proposes an unwieldy and unnecessarily complex multistep program on the way to the Fair Tax, 9-9-9 being Phase 1, Part 2 (“Phase 1 Enhanced,” in his words). Getting Phase 1, Part 1 would be difficult enough, and the program is marked by Mr. Cain’s most distressing hallmark: wishful thinking that borders on fantasy. How is he going to get to Phase 2, the Fair Tax, a radical restructuring of U.S. public finances that invites not only fiscal questions but constitutional ones as well? “Amidst a backdrop of the economic boom created by the Phase 1 Enhanced Plan,” Mr. Cain writes, “I will begin the process of educating the American people on the benefits of continuing the next step to the Fair Tax.” May I propose a Williamson’s Rule of Politics? Here it is: “Any plan that includes the words ‘educating the American people’ will fail.” Mr. Cain’s proposals are always bolstered by that economic boom he sees just around the corner, but he never is able to answer the question: What if the boom fails to show up on schedule? What then? And that is one important reason Herman Cain should not be the Republican nominee. (Based on my single encounter with Mr. Cain, at a meeting with National Review’s editors, I would have hesitated to hire him to run a pizza company, much less the country.)

But let’s take a look at 9-9-9 on its own merits. Mr. Cain says the proposal would be revenue-neutral. I have my doubts. The federal government took in about $2.2 trillion last year. Based on personal-income and business-income figures from the IRS, and consumer-spending figures from the Gallup survey, my English-major math suggests that a 9 percent tax on all of the above produces about $1.7 trillion in revenue, meaning that 2010’s $1.7 trillion deficit would have been more like a $2.2 trillion deficit — from calamity to catastrophe. If Mr. Cain’s team is building in some growth assumptions into the fiscal forecasts, they must be sunny indeed.

In any event, Mr. Cain has not spelled out in any detail a spending proposal that would allow the federal government to get by on $2.2 trillion, much less on $1.7 trillion. If the Tea Party stands for anything, it stands for smaller government, meaning lower spending. And yet the allure of magical thinking on taxes is so powerful that the tea-party favorite has given a great deal more detail about his tax proposals, with actual figures and everything, than he has about his spending proposals, which remain remarkably vague: Spending must be “reviewed with a keen eye and a red pen,” he says. Well, gee willikers, why didn’t I think of that? (Other than his pie-in-the-sky growth assumptions, my least favorite thing about Herman Cain is that his response to every challenge is to appoint a committee of smart guys to do the right thing. He seems incapable of appreciating the fact that moral failing is not the only reason Washington fails to do the right thing.) As I have argued before, the real danger of tax-cuts-and-growth utopianism is that it draws attention away from spending cuts, which is where the real action is needed. Mr. Cain is nibbling at that bait.

The 9-9-9 proposal also creates some perverse incentives. With business income taxed at 9.0 percent while dividends and capital gains are taxed at 0.0 percent, there is an excellent reason to pay out something approaching 100 percent of business income as dividends, or to hide it by “reinvesting” it in the business. I like dividends and am sympathetic to the case for giving them preferential tax treatment — a company that concentrates on paying a high dividend rather than on raising its share price probably is a better-behaved company, in most cases — but it is always and everywhere true that if government creates a tax shelter it will be exploited to maximum effect.

What about that national sales tax? Though I remain hesitant about imposing a federal sales tax, on both Burkean and prudential grounds, Andrew Stuttaford and others have argued persuasively that income shouldn’t carry the entire tax burden, and that consumption has to carry a piece, too. I can live with that. But Fair Tax enthusiasts ought to be ready to deal with the emergence of a very large black market in untaxed consumer goods — a 30 percent sales tax will ensure that. You may get to abolish the IRS, but the sales-tax enforcers might prove just as expensive and intrusive.

Which is to say: There is no easy way out of this mess. Cain’s 9-9-9 program and the Fair Tax might very well constitute improvements on the status quo, but neither is a substitute for comprehensive entitlement reform and deep cuts in discretionary spending, the sine qua non of serious fiscal-reform efforts.

— Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, just published by Regnery. You can buy an autographed copy through National Review Online here.


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