Is Santorum Wrong About 9-9-9?

At the most recent Republican debate, viewers watched Herman Cain take a lot of fire for his 9-9-9 proposal, which scraps our current tax code in favor of three 9% flat taxes: one on business income, one on personal income, and one levied as a national retail sales tax.  Rick Santorum vehemently objected to this plan, levying two charges: it would never get through Congress, and it is unwise to give the government another means of taxation.  What should we make of Santorum's objections to 9-9-9?

Santorum's first objection -- that 9-9-9 could never get through Congress -- carries little water.  We should have a problem with someone shooting down an idea based on their prognostications about what future Congresses may or may not allow, as Congresses do what voters want or face consequences (see the 2010 midterm election).  Who would have thought that national health reform would be pushed through when the citizens were focused firstly (and almost exclusively) on the economy and joblessness? The Santorums of the world would have advised the Democrats never to try such a bold proposal, as it would never get through Congress.

Putting aside the shady backroom deals that led to the passage of Affordable Care Act, one must still recognize that it is now law -- and came about through bold initiative that likely would have never been predicted to succeed.  Santorum may be right that 9-9-9 can't get through a given Congress.  But "can't get through now" and "never could get through" are very different things, and the idea that we shouldn't be open to bold policy proposals in lieu of a system a lot of us consider dysfunctional strikes me as needlessly pessimistic.  Santorum's dismissal of the plan's legislative prospects also reeks of Beltway condescension.

Santorum's second objection resonates more seriously with conservatives, who rightly fear that extending the arm of government closer toward American wallets is a bad idea when that arm is already too close for comfort.  Careful consideration shows, however, that this reflexive fear of further federal reach is irrational in the case of 9-9-9.

First, consider the incredible array of taxes the federal government now levies: income, payroll, estate, fuel, telephone, and on the endless list goes.  How is it that replacing dozens of taxes with a mere three is a step backwards?  How is it that a national sales tax is the straw that breaks this camel's back? Why are any existing taxes set at their present rates and not higher?  Is it not because the people have restrained their government?

A key weakness of Santorum's argument is that it seems to assert that the people cannot restrain the taxing power of the government when the evidence seems to say convincingly that there is restraint -- much to the chagrin of large portions of the D.C. establishment.

Moreover, the ability of the people to restrain the federal sales tax would be greater than almost any other tax because the sales tax would be omnipresent.  Every single thing you buy would remind you that you are sending 9% more off the Uncle Sam.  One way taxes get out of control is when people don't realize that they are paying them (as with corporate taxes, which are effectively additional consumer taxes indirectly paid).  Because this particular rate is plainly understood and paid equally by all, however, it cannot be raised in any stealthy manner.  It is a "naked" tax that doesn't have deductions or depreciations or credits to hide behind; the tax rate is the effective rate.  It is not withheld, so the taxpayer feels the pain of having the money leave every time it's paid.

In short, a national sales tax is more easily restrained than every other form of federal taxation.  Santorum's argument against it is therefore rooted in emotion and not reason.  Furthermore, the national sales tax portion of 9-9-9 is not merely a "safe" tax that can easily be restrained; it would actually do a lot of good, and Santorum completely ignores the positive aspects.

First, implementing a 9% national sales tax establishes the infrastructure for national sales tax collection.  This paves the way to shift taxation away from income and towards consumption, with the attending benefits in tax visibility and linkage of government revenue to economic health.

Second, a national sales tax lowers compliance costs to the bare minimum.  As economist Arthur Laffer recently reported, the current tax code results in about 30% inefficiency just through the cost of compliance with the myriad deductions, schedules, credits, and other complexities.  That means that the taxpayer pays about $1.30 to send the government $1.  With flat taxation, this inefficiency is slashed, resulting in considerable gains in revenue to the government versus the cost to taxpayers.

Finally, the fact that all three aspects of 9-9-9 are flat rates gives American business as much tax certainty as can be given.  Removing the need to plan acquisitions around depreciation schedules or deductibility frees businesses to make acquisitions purely on their business utility rather than their utility in gaming the tax code.  This is additional efficiency.

If we take a step back from Santorum's fear-based position and analyze 9-9-9 on its merits, we see that it is likely to shrink, not expand, the scope of government entanglement in the American economy.

Justin Hohn blogs at www.justinhohn.typad.com and is @justinhohn on Twitter.

At the most recent Republican debate, viewers watched Herman Cain take a lot of fire for his 9-9-9 proposal, which scraps our current tax code in favor of three 9% flat taxes: one on business income, one on personal income, and one levied as a national retail sales tax.  Rick Santorum vehemently objected to this plan, levying two charges: it would never get through Congress, and it is unwise to give the government another means of taxation.  What should we make of Santorum's objections to 9-9-9?

Santorum's first objection -- that 9-9-9 could never get through Congress -- carries little water.  We should have a problem with someone shooting down an idea based on their prognostications about what future Congresses may or may not allow, as Congresses do what voters want or face consequences (see the 2010 midterm election).  Who would have thought that national health reform would be pushed through when the citizens were focused firstly (and almost exclusively) on the economy and joblessness? The Santorums of the world would have advised the Democrats never to try such a bold proposal, as it would never get through Congress.

Putting aside the shady backroom deals that led to the passage of Affordable Care Act, one must still recognize that it is now law -- and came about through bold initiative that likely would have never been predicted to succeed.  Santorum may be right that 9-9-9 can't get through a given Congress.  But "can't get through now" and "never could get through" are very different things, and the idea that we shouldn't be open to bold policy proposals in lieu of a system a lot of us consider dysfunctional strikes me as needlessly pessimistic.  Santorum's dismissal of the plan's legislative prospects also reeks of Beltway condescension.

Santorum's second objection resonates more seriously with conservatives, who rightly fear that extending the arm of government closer toward American wallets is a bad idea when that arm is already too close for comfort.  Careful consideration shows, however, that this reflexive fear of further federal reach is irrational in the case of 9-9-9.

First, consider the incredible array of taxes the federal government now levies: income, payroll, estate, fuel, telephone, and on the endless list goes.  How is it that replacing dozens of taxes with a mere three is a step backwards?  How is it that a national sales tax is the straw that breaks this camel's back? Why are any existing taxes set at their present rates and not higher?  Is it not because the people have restrained their government?

A key weakness of Santorum's argument is that it seems to assert that the people cannot restrain the taxing power of the government when the evidence seems to say convincingly that there is restraint -- much to the chagrin of large portions of the D.C. establishment.

Moreover, the ability of the people to restrain the federal sales tax would be greater than almost any other tax because the sales tax would be omnipresent.  Every single thing you buy would remind you that you are sending 9% more off the Uncle Sam.  One way taxes get out of control is when people don't realize that they are paying them (as with corporate taxes, which are effectively additional consumer taxes indirectly paid).  Because this particular rate is plainly understood and paid equally by all, however, it cannot be raised in any stealthy manner.  It is a "naked" tax that doesn't have deductions or depreciations or credits to hide behind; the tax rate is the effective rate.  It is not withheld, so the taxpayer feels the pain of having the money leave every time it's paid.

In short, a national sales tax is more easily restrained than every other form of federal taxation.  Santorum's argument against it is therefore rooted in emotion and not reason.  Furthermore, the national sales tax portion of 9-9-9 is not merely a "safe" tax that can easily be restrained; it would actually do a lot of good, and Santorum completely ignores the positive aspects.

First, implementing a 9% national sales tax establishes the infrastructure for national sales tax collection.  This paves the way to shift taxation away from income and towards consumption, with the attending benefits in tax visibility and linkage of government revenue to economic health.

Second, a national sales tax lowers compliance costs to the bare minimum.  As economist Arthur Laffer recently reported, the current tax code results in about 30% inefficiency just through the cost of compliance with the myriad deductions, schedules, credits, and other complexities.  That means that the taxpayer pays about $1.30 to send the government $1.  With flat taxation, this inefficiency is slashed, resulting in considerable gains in revenue to the government versus the cost to taxpayers.

Finally, the fact that all three aspects of 9-9-9 are flat rates gives American business as much tax certainty as can be given.  Removing the need to plan acquisitions around depreciation schedules or deductibility frees businesses to make acquisitions purely on their business utility rather than their utility in gaming the tax code.  This is additional efficiency.

If we take a step back from Santorum's fear-based position and analyze 9-9-9 on its merits, we see that it is likely to shrink, not expand, the scope of government entanglement in the American economy.

Justin Hohn blogs at www.justinhohn.typad.com and is @justinhohn on Twitter.

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