Cain's Valuable 9-9-9 Plan

I like Cain's 9-9-9 scheme.  It is bold, tries to balance all methods of taxation, and contains many valuable ideas.  It's not just for true Conservatives and Independents; some of its features should appeal to Democrats, populists, and to the sensible fringe of environmentalists and "Occupy Wall Street"ers.  And it will put Cain in the White House.  This in spite of the New York Times doing everything possible to build up Mitt Romney and belittle or destroy his rivals for the Republican nomination.

The Plan's valuable ideas will persist even if there are modifications, so when Cain gets into the White House, there will be many who will try to change some of the detailed features.  But the central ideas are sound and call for serious discussion.   My former colleague, economist Bruce Bartlett, writes a blog column for the New York Times.  Predictably, he has attacked the details of Cain's plan but lost sight of its basic strengths.  So lighten up, Bruce, corporations don't "benefit" from tax cuts!

We might start with the plan to lower the corporate tax rate from its present 25% to 9%.  (I think it should be lowered to zero percent; but whatever.)  Here's why: Corporations are not people; they don't "benefit" from profits.  They don't consume their profits -- they don't spend them on things that ordinary people consume.  They distribute their profits as dividends -- or they should.  And the dividends go to a lot of seniors who own some shares of stock and who survive because of quarterly dividend checks.  And don't forget the pension plans, which own a good part of the US stock portfolio.  Who benefits from these pension plans?  Why it's a lot of public employees, teachers, firemen, policemen -- and, yes, members of labor unions.

Let me tell you about my own experience, serving on the board of a major NYSE corporation -- for a while as chairman of the (Executive) Compensation Committee.  And here's what I heard: "Let's give our CEO, Mr. X, a million-dollar salary. After all, if we don't, a lot of it will just go into taxes to the IRS."   So, I see lowering the corporate tax rate as a way of fighting some of the obscene salaries and bonuses being given to incompetent and undeserving executives.  Think about this for a while and see if it makes sense.  Instead of wasting their net revenues on needless expenses, fancy executive salaries, executive jets, other executive perks, etc., companies will just report their increased profits and raise their dividends.  Is that bad?

Now let's turn to the part about the personal income tax.  Have you noticed that there are really two parts to that proposal?   In return for lower rates, the Plan closes all of the tax loopholes, all of the deductions that have accumulated over the years, which have enabled high-income earners to legally evade paying taxes.  The other part of this proposal is the so called "flat tax" -- a 9% tax rate that does not depend on the level of income.

Now, I'm not a supporter of the flat rate at all; I see no virtue in having just one rate.  Most Americans appear to favor a progressive rate structure, but overall lower rates to match lower government spending.  I also believe that everyone should pay a tax.  Perhaps the tax should be just 1% if family income is less than $20,000 per year and rise gradually to 25% (or whatever) for those making a million or more.  If a millionaire pays $250,000 as tax, he will be left with $750,000 -- which should be enough to live on if he's careful.

And now to the 9% sales tax.  What I like about it is that it's a consumption tax, which encourages people to spend less and save more.  Almost every economist agrees that a consumption tax is better than an income tax for promoting economic growth and fighting poverty.  Every dollar saved is a dollar invested somewhere in a business that creates jobs.

But every consumption tax is regressive and hurts the poor more than the rich.  After all, the poor spend a larger fraction of their income on necessities, and therefore save very little.  So it's a matter of finding the least regressive kind of consumption tax.  To overcome its regressiveness, nearly all jurisdictions provide categories of goods that are exempt from their current sales taxes, or taxed at reduced rates: for example,  food sold in grocery stores and prescription medicines.

A major objection to a sales tax might be that it requires a new bureaucracy - - although it is not nearly as bad as the VAT, a European-style value-added tax.  Many forget that nearly all states already impose a sales or use tax, which is generally itemized, transparent and out in the open.   Alaska boasts no general tax but has local surtaxes that amount to 7%; most states already run between about 5 and 10%; only New Hampshire and Delaware have a zero total sales tax.  So an added federal tax would tend to make rates more equal, reducing interstate competition and tax evasion. 

By the way, we already have a federal consumption tax -- not counting the tax on whiskey and such.  It was President Eisenhower who introduced the federal gasoline tax  to pay for the Interstate Highway System, he said.  And it was Ronald Reagan who raised this federal tax to the present level of 18.4 cents per gallon (24.4 cents for diesel); with state and local tax included, the US average tax is now 48.1 cents for motor gasoline.  Sure, this federal tax on motor fuels is regressive, but not nearly as regressive as some imagine; the very poor may not even own cars.  Besides, environmental regulations, plus the mandate for adding ethanol, have already raised the cost of motor fuels considerably.

I don't know what's going to happen to Herman Cain's tax plan.  It'll certainly be modified, fine-tuned, and improved by experts and by politicians.  The single digits of 9-9-9 may present a psychological barrier to any increase, even a small one.  But whatever happens, it should be phased in gradually but predictably.  We will also need an iron-clad commitment from Congress that whatever plan is finally arrived at, it is one that people can count on for a number of years.

Its effect on the American economy will be electric.  The stock market will rise meteorically, businesses will expand and invest in new ventures, unemployment will drop (like a real meteor).  But any tax plan must be coupled to a budget plan of lower federal spending.  That will take effort and leadership.  I think the next few years are going to be very exciting.

S. Fred Singer is professor emeritus at the University of Virginia and director of the Science & Environmental Policy Project.  He is a Senior Fellow of the Heartland Institute and of the Independent Institute.  Trained as a physicist, he has also taught economics to engineers and written a monograph on the world price of oil.  He has held several government positions and served as an adviser to Treasury Secretary Wm. Simon.