Politics & Policy

Bold, Brash, and Wrong

Herman Cain deserves credit for proposing a tax-reform plan that is specific, promotes economic growth, and has captured the imagination of conservatives nationwide. His 9-9-9 plan builds on the insight that one of the chief defects of the current tax code is its bias toward consumption over savings. But his plan’s peculiarities of design, substantive weaknesses, and political naïveté render it unworthy of conservative support.

Cain’s ultimate objective is a 30 percent national sales tax, but his interim plan is to replace the current income, payroll, and corporate tax codes with three new taxes. A 9 percent income tax would apply to a very different tax base: Capital income would go untaxed, but the exemptions that keep the basic cost of living from being taxed would disappear. A 9 percent value-added tax would be levied on corporations. And consumers would pay a 9 percent retail sales tax as well.

This tripartite scheme makes for a succinct slogan but has little else to recommend it. In particular Cain’s inability to choose between a sales tax and a VAT is puzzling. The two are very similar in their economic effects. The chief advantage of the sales tax over a VAT is that the latter is considered easier for governments to raise, because it is hidden. The chief advantage of the VAT over the sales tax is that it is easier to enforce without stimulating black markets. (Another is that it reduces the risk of taxing business-to-business purchases.) Opting for both as a transitional step means courting the danger of a VAT with none of its rewards: In the first stage, the government would get a new money machine, and in the second it would supposedly destroy that machine and opt for something hard to enforce.

The two-stage scheme is self-defeating in another respect as well. The 30 percent national sales tax, whatever its other merits, would be significantly softer on the poor than the 9-9-9 transitional step, since the larger sales tax includes a “prebate” check to all Americans to exempt the basic necessities of life from being taxed, while 9-9-9 includes no similar provision. Leaving aside whether a major tax increase on people at the bottom of the income scale is a good idea, what is the point of first raising their taxes and then cutting them?

Cain envisions his presidency as featuring a quick move to the 9-9-9 plan followed by an educational campaign about the virtues of the national sales tax. He will have to move fast, since he is counting on the massive economic boom he expects his plan to create to enable him to balance the budget in his first year. None of this sounds very achievable, but let’s indulge the candidate. Even if one believes, as we do, that the mortgage-interest deduction should be set on a path to extinction, does its immediate abolition in the midst of a weak housing market seem wise?

And while the plan promotes new savings, it attacks existing wealth. In particular, it is a plan likely to arouse the ire of retirees. They have paid income taxes their whole lives and would now have to pay additional sales taxes on their savings when they try to spend them. On balance, of course, retirees would continue to receive a large net transfer of funds from the federal government. But why fight them in a bad cause?

A better way to tax consumption would be to start with an income tax and then exempt the returns to capital. This approach may have less superficial appeal than the alleged “simplicity” of 9-9-9. But it would run none of the risks of a VAT, it would leave home values unaffected, and it would give seniors no reason for concern. And it could conceivably happen, unlike 9-9-9.


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