Dumas:Herman Cain’s 9-9-9 plan will not work

Senator Obama’s Social Security Tax Plan

Uploaded by on Jul 23, 2008

In addition to several other tax increases, Senator Barack Obama wants to increase the Social Security payroll tax burden by imposing the tax on income above $250,000. This would be a sharp departure from current law, which only requires that the tax be imposed on the amount of income needed to “pay for” promised benefits. But more important, at least from an economic perspective, the Senator’s initiative would increase the top tax rate on productive behavior by as much as 12 percentage points – and this would be in addition to his proposal to kill the 2003 tax rate reductions and further boost the top rate by 4.6 percentage points. This mini-documentary explains why a big tax rate increase on highly productive people would be very damaging to America’s prosperity, especially in a competitive global economy. Simply stated, pushing top tax rates in the United States to French and German levels means at least some degree of French-style and German-style economic stagnation. Visit http://www.freedomandprosperity.org for more information.

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Max Brantley wrote on the Arkansas Times Blog:

Dumas exposes Herman Cain’s 9-9-9 plan

Herman Cain is the hot Republican candidate at the moment, so Ernest Dumas’ examination of some of his ideas is timely. His easy 9-9-9 tax plan? The details aren’t so hot. More like appalling. 

He would replace all federal taxes—individual and corporate income taxes, and social security, Medicare, disability, unemployment, gasoline, cigarette and all other excise taxes—with three simple tax rates: 9 percent on personal income, 9 percent on business income and a 9 percent sales tax on all commercial activity. That sounds fair enough. There would be no exemptions and deductions. Well, only a few. Investment income—capital gains, interest and dividends, the income of the leisure class—wouldn’t be taxed at all. Your social security? Yes, tax it. As for the 9 percent business tax, it would apply only to the share of a company’s revenue that was spent on wages.It would be a mammoth tax cut for the rich and corporations and a giant tax increase for the middle class, the elderly and disabled.

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I have to say that I am not able to go along with the sales tax portion myself. My views are closer to those of the Cato Institute below:

Herman Cain: How About 15-15-15?

 
PrintPresidential candidate Herman Cain has made a splash with his 9-9-9 tax reform plan. I love his 9 percent income tax, but the skunk at the tax reform picnic is his 9 percent retail sales tax. Mr. Cain is an articulate advocate of free enterprise and I wish him well in the contest, but he should ditch the sales tax.Adding a retail sales tax to the federal government’s powerful tax armada would be a terrible idea from a small-government perspective. Democrats are desperate to find ways to fund soaring entitlement costs, so it’s dangerous to give them conservative political cover to add a new federal funding source.Cain’s 9 percent business tax is also a problem. It is similar to a value-added tax (VAT) because would it disallow a business deduction for wages, which would make the base much broader than the corporate income tax base. And like a VAT, Cain’s business tax would apparently be imposed on all businesses, not just those currently paying the corporate income tax.The result would be that American businesses would be collecting a large tax on workers’ wages — but workers wouldn’t see this major government grab. One caveat is that the Cain business tax would allow a deduction for dividends paid, which would narrow the base compared to the standard VAT.

In sum, two of Cain’s three 9’s are bad ideas. His advocacy of lower marginal rates and reduced taxes on savings and investment are great, but he should drop the 9-9-9 plan.

Instead, Cain and other candidates should consider a 15-15-15 plan. At first blush, that doesn’t sound very appealing because the rates are higher than Cain’s. But the business tax base would be much smaller than Cain’s, and the plan would make existing revenue sources more visible and efficient. Here’s the 15-15-15 plan:

  • 15 Percent Payroll Tax. Cain would abolish the current 15.3 percent payroll tax that funds Social Security and Medicare. That’s odd because Cain — to his credit — is proposing a Chilean-style Social Security system with personal accounts. I’d keep the current payroll tax, but move to a Chilean-style system by allowing workers to put 6 percentage points or more of the tax into a personal account. That would feel like a tax cut for workers because they would retain ownership of the money. I would also require that all 15.3 percent of the tax be listed on employee pay stubs so that the burden is highly visible. Currently, workers only see half of the payroll tax, and thus might be unaware of the high cost of these retirement programs.
  • 15 Percent Personal Income Tax. Like Cain, I’d get rid of just about all deductions and other breaks under the income tax, except pro-savings features such as the 401(k) rules. It’s also reasonable to retain a substantial basic exemption for low-income filers, as under the Dick Armey/Steve Forbes “flat tax” plans. The Armey/Forbes plans had rates in the range of 17 to 20 percent, but they only taxed labor income at the individual level, not capital income. Technically, that is the right way to go under a flat tax, but as a bow to today’s political realities, we might want to tax wages, dividends, interest and capital gains all at 15 percent.
  • 15 Percent Corporate Income Tax. We should cut the 35 percent corporate income tax rate to 15 percent. People say we should trade a rate cut for loophole closing, but loophole closing is not worth the effort. Corporate loopholes are far smaller than loopholes in the individual code, and trying to scrap them just creates a blockade of business opposition to reform. Also, if we dropped the rate to 15 percent, the base would automatically broaden as businesses reduced their tax avoidance and evasion. Corporate profits parked offshore would flood back into the United States, and capital investment would get a huge boost. In the long-run, policymakers should consider switching to the simpler cash-flow business base under the Armey/Forbes flat tax, but if we cut the rate to 15 percent, the distortions caused by the current base would be greatly reduced anyway.

How much revenue would 15-15-15 raise? You could probably make it revenue-neutral by adjusting the basic exemption amount under the individual income tax. Dick Armey’s flat tax exemption was huge at about $35,000 for a family of four. A lower exemption amount makes more sense, but this is a variable that could be fine-tuned.

Of course, tax reform would be much easier if it created an overall tax cut. And that would be much easier to achieve if Congress cut spending. So I’d encourage Mr. Cain and the other candidates to roll up their sleeves and give us their detailed spending-cut plans. As a modest first step, how about a 9-9-9-9-9-9-9-9 plan to slice 9 percent off the budget of every federal agency?

This article appeared on The Daily Caller on October 14, 2011.

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