Herman Cain is on a roll. His bid for the Republican nomination for the Presidency picks up steam every day. He’s recently won three straw polls, including the prestigious Florida poll; talk show hosts can’t get enough of him; and his new book is sure to be a hit. His bold, confident voice and “just fix it” message is resonating across the land as more learn about him. His personal story of a motivated, value-driven African American who grew up poor in the segregated south to conquer the corporate world and now to mount a credible, non-politician’s run for the White House is nothing short of remarkable – and inspiring. It all leads to one key question: Why not Herman Cain?
The answer to that question is the centerpiece of his campaign: his 9-9-9 tax proposal. It’s downright scary. He proposes a flat nine percent income tax, a flat nine percent corporate tax, and a monstrous nine percent national sales tax. Under his proposal, all payroll taxes and estate and gift taxes would be eliminated, and there would be no taxes on capital gains or corporate dividends. Income tax deductions would be limited to charitable contributions and certain undefined deductions for those who live or work in an empowerment zone. Businesses could deduct all investments and dividends, but not labor costs.
The proposal is a Frankenstein combination of the Fair Tax and the Flat tax. Cain’s ultimate goal is to have the plan evolve into a complete Fair Tax, where a broad-based national consumption tax (in the 23 to 30 percent range) would replace all income and corporate taxes.
Cain’s 9-9-9 idea triggers excitement in many who don’t understand what it means. It has some of the basic appeal of both the Flat Tax (everything is nine percent) and the Fair Tax (everyone appears to be treated the same). There are two federal tax bites – an income tax and a sales tax – but, hey, they’re only nine percent. Aren’t two small sliders supposed to be easier on the digestive system than on big whopper?
It’s far beyond the scope of this effort to describe all of the uncertainties and shortcomings of Cain’s tax proposal. But here are five of the big ones.
1. Low- and middle-income taxpayers would get hammered under the 9-9-9 plan. The existing mean combined income and payroll tax rate for the lowest forty percent of earners is now less than five percent. Cain’s plan would slap them with a flat nine percent income tax and a nine percent national sales tax on their retail purchases, and the tax credits that now reward (literally pay) many in the lowest 40 percent would be gone. Even those in next forty percent of earners would end up paying more. The only winners under the plan would be the top 20 percent of all income earners and corporations.
2. The plan would be the ultimate dream scenario for the rich – a flat nine percent income tax rate, tax-free capital gains and dividends, and no more estate tax worries. Sure, there would be a new sales tax, but unlike normal working Americans, the rich don’t spend a huge portion of their incomes on retail purchases. The political result is that Cain’s nomination would be a godsend for Obama, whose only hope (he has nothing else) is a relentless class warfare campaign that portrays him as the savior of the low- and middle-income classes. Obama would have a heyday educating the public about the Cain’s 9-9-9 plan and leveraging undisputable, powerful ammunition to demonize the Republicans as the guardians of the rich. And even if Cain prevailed in a dual with Obama and, by some miracle, got his plan pushed through the Congress, it would just be a matter of time before working Americans discover that they’ve been duped and demand huge changes. The likely result would be more tax chaos, radical U-turns, and debilitating uncertainty that would badly hurt the economy.
3. Corporations also would be big winners under the 9-9-9 plan. There’s no question that a permanent reduction in corporate tax rates would help the economy by improving the competitiveness of America’s companies. But why a mammoth reduction from 35 percent to 9 percent? Wouldn’t a reduction to 25 percent do the job? Why should the corporate rate be the same as the individual rate or the sales tax rate? Is it just a cosmetic gimmick to give the plan some kind of artificial 9-9-9 symmetry?
4. The plan would create massive market uncertainties at a time when we can least afford more uncertainty. How would budget-strapped states cope with a monstrous federal sales tax on all their purchases? What would be the impact on the all-important auto industry? Wouldn’t a combined state and federal sales tax in of 15 to 18 percent range badly hurt auto sales? And imagine the impact on home construction. A couple who builds a new home would no longer get deductions for mortgage interest expenses and real estate taxes and would need to pay an additional whopping nine percent just to cover the national sales tax. The list of market uncertainties and potential nightmares is endless. And overriding everything is the fact that 80 percent of all Americans would end up with a bigger overall tax bite and less money to spend.
5. There is no assurance (or credible explanation) that the 9-9-9 plan would fix the economy and put people to work. It would reward capital, punish labor, and tax the hell out of consumption. But is that a cure for our existing chronic ills? Isn’t it likely that a huge national sales tax would actually drive down demand? With no deduction for labor costs, wouldn’t businesses have a greater incentive to outsource? Wouldn’t all service industries take a beating? Do we have any real assurance that massive tax breaks for the rich and those who own the capital would lead to sustainable, long-term job creation? Isn’t there a far less radical and risky way to create powerful tax incentives for economic growth and job creation?
Cain likes to proclaim that these troubled times demand “bold” solutions. It sounds impressive on the campaign trail as he tries desperately to distinguish himself from other candidates. But his desire to appear “bold” is no justification for an irresponsible and reckless 9-9-9 tax experiment. Cain’s positions relating to government regulations, real energy independence, and senior entitlement reforms appear to be spot-on. But his shallow, gimmicky, ill-conceived plan for reforming the tax code misses by a mile. It’s dangerous stuff.
Dwight Drake is an experienced planning lawyer, law professor, and business owner. He teaches business, tax and planning course at the University of Washington School of Law. He is the author of the PlainTalk Planning online educational service ( http://www.plaintalkplanning.com ). For more information about Professor Drake and access to his other works, go to www.drakeplaintalkplanning.com