By Dan Beaulieu
Herman Cain’s movement towards a flat tax is his widely coveted 9-9-9 plan which looks very attractive from a distance. However, upon further scrutiny one finds that this system may be much worse than the current flawed system.
For those of you unfamiliar with Herman Cain’s plan it’s a 9% business flat tax, 9% personal income tax and 9% national sales tax. At a glance, 9% is a very attractive number for anyone in the middle class with incremental tax rates ranging from 15% to 35%. What isn’t obvious is that Cain’s plan would be achieved by eliminating most deductions. With the current tax code deductions, a tax rate of 28% could drop to about 17%. That said, keep in mind the National Sales Tax at 9% is a new tax added on top, so this is really just shuffling of numbers.
The 9% business flat tax creates a perverse loophole incentive by lowering the taxation on capital gains and dividends to 0%. This naturally encourages businessmen to pay out 100% of their income as dividends or hide it by “reinvesting” it into the business rather than pay the 9%. So while the people pay both a state and federal tax (up to 33%), the businesses get away with paying no tax. Another thing to take into consideration is that smaller businesses wouldn't be able to utilize this 0% income tax to their advantage because often their only shareholder would be themselves. I find it hard to believe a businessman of Herman Cain's stature could mistakenly overlook a loophole like this.
Before continuing with the final portion of the 9-9-9 plan I’d like to take a moment to explain the challenge with transitioning into the 9-9-9 plan. With our current tax system our national revenue last year was about $2.2 trillion, leaving a national deficit of $1.7. Adjusted to the 9-9-9 plan the total national revenue would be $1.7 trillion, this inflates our deficit to $2.2 trillion. (source) Mr. Cain has not presented a spending proposal that would allow for our current boated government to function on $1.7 trillion dollars, nor has he detailed which, if any, cuts he’d make to make his plan plausible.
Now for the real evil of the 9-9-9 plan; the national sales tax. Since Herman Cain’s 9-9-9 plan is can’t be immediately instituted due to the sheer size of our government. Herman Cain has created a series of phases, that have, in my opinion a low probability of success. Initially the 9-9-9 plan would be more like a 9-9-25 (or so) plan. So initially we would need to begin with a National Sales Tax of 22-30% to fund our government. Which would undoubtedly have detrimental effects on our economy, as the author of the following scenario suggests.
“Generally, when you purchase a final, refined good, you are paying for the raw materials that went into processing it. So let’s use a hypothetical example and compare current tax law with Cain’s 9 / 9 / 9 plan.
Under current law: As a manufacturer, you go to purchase raw materials. Suppose your Widget needs a stack of lumber that costs $1000. Because of state sales tax, that lumber costs, on average, $1070. That cost is built into the end price of the Widget.
Now, you manufacture these widgets. To make up for the expense of the Widget, and to ensure you’re making money to pay for labor, transportation, inspection, regulation, etc. and profit, your final product costs $2000, and one of your customers will pay $2140 it. Your customer has to get the Widgets to market, and charges $3000, or $3210 with final state tax.
Under the Cain 9% plan: Now the stack of lumber comes with a 16% tax on it (state’s 7% plus 9% for Federal), which makes the lumber cost $1160 for raw materials, $2320 for the manufacturer, and $3480. Notice a few things here–
A) The profit margin for the manufacturer has decreased. In order to make up for this, his end product needs to be more expensive. So let’s call his end price to market is $2410 to make up, just in revenue lost from paying the extra tax on raw materials. Notice this now a 20.5% increase in price with built in taxation– not 16% as figured from the state + the Cain 9%).
B) The end distributor for customers now also has to make up for that increase in price, so let’s put that new term at $3750 for recouping what was lost in tax before, so the end price is now 25% higher. If this distributor is pushing items out to stores for end-sales, we’re looking at a 30% increase in prices from a 9% increase due to a NST.” – The Autopsy
In that scenario the author gives Mr. Cain the benefit of the doubt, that is, instead of using a more realistic 23% for his math he uses a 9%. One only needs to extrapolate those numbers to understand what turmoil our country would be in under those circumstances. I agree with the author, as he goes on to conclude, that both businesses and the middle class would suffer greatly from this while the rich would gain.
The Detroit Free Press revealed today that Herman Cain's 9-9-9 plan was written by Art Laffer. Laffer is the same man in this video who laughed at Peter Schiff when Schiff was correctly predicting economic collapse. An impossible plan written by and incompetent man.
Update thanks to view_from_afar of dailypaul.com
Peter Schiff's take on the 9-9-9 plan: http://youtu.be/OjdQsO8D2P8?t=55m