October 23, 2011

Add Steve Forbes to the 9-9-9 supporters. Maybe.

Herman Cain may not have fully disclosed a list of economists in favor of his 9-9-9 plan, but he is getting some high profile praise from Steve Forbes.  While it comes with a Perry caveat, it still provides Cain ammunition that his plan is not some half-baked cockamamie scheme;
The nightmare on Main Street -- the federal income tax code -- is ending, which is fantastic news for our beleaguered economy. Dramatically simplifying this monstrosity would unleash a powerful wave of prosperity and job creation.

Thankfully in 2012 we will get a mandate to make this happen. Presidential contender Herman Cain vaulted to the head of the Republican pack when he proposed his 9-9-9 plan -- a flat 9% income tax, corporate tax and national sales tax. Even better, Texas Gov. Rick Perry will, in a few days, unveil his version of a flat tax, a concept that I have long advocated...

The flat tax would stimulate risk taking and productivity. Combined with a stable dollar, it would usher in a great economic boom. The Cain plan would rid us of not only the federal income tax, but also the Social Security and Medicare payroll taxes. Both plans would end crony capitalism and reduce political corruption: Half of the lobbying in Washington revolves around the tax code as special interests vie for special tax breaks.

The challenge of the Cain plan is that national sales tax, a tough sell given that the average sales tax in the US on a state and local level is already at 9%. Moreover, there is a real danger in introducing a new nationwide tax. Politicians will always be finding a reason to raise it, which is what’s happened to Europe with its consumption tax, called the Value Added Tax. The flat income tax is the easier, better way to go.
Easier yes.  But not necessarily better.  European examples aside, many pundits forget to mention that while politicians can always raise taxes, they can also lower them.  Forbes mentions European examples of VAT taxes (which Cain's tax does not exactly equate to by the way) being raised post implementation.  But in Canada the Goods and Services Tax (GST, which is a VAT) was floated at 9% by the conservative government that brought it in, but it was released at 7%.  It dramatically reduced the national debt (because offset reductions in income taxes deliberately weren't pursued at the time).  Subsequent liberal governments were not cohesive enough to raise the rate.  More recently, conservative governments have twice reduced the rate to 6% and then to 5%.  That's not to say the risk is not there, but it can be managed.  As a trade off for millions fewer words in the tax code, it may not be such a bad risk.

Cain needs to concentrate on the messaging of both why and what.  The apples and oranges exchange with Mitt Romney is a great example.  Allow me to clarify:

State taxes are oranges - sales taxes and any other state taxes.  That does not change and Mitt Romney is being disingenuous to claim Cain isn't addressing them or should be addressing them.  That won't change because the states control their own taxes - the federal government cannot do so,

Federal taxes are the apples.  Cain is arguing that by going with his 9-9-9 plan, overall taxes are reduced for Americans.  In other words, there are fewer apples going to the government because of his plan.  the oranges remain the same. Yes there is a new tax in Cain's mix, but others are scrapped or reduced in exchange for the new tax.

The one thing that Cain could argue for which would help his case is a modified Balanced Budget Amendment that includes some sort of mention of capping or ceiling for taxes.  It would certainly help his 9-9-9 plan not get derailed, more so than a "not bad" type appraisal from Steve Forbes.


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