Cain's Plan May Not Need a Sales Tax (Part of 9-9-9 causing the most discontent not necessary)

Republican presidential candidate Herman Cain has done the nation a great service by proposing major changes in the byzantine way the U.S. government collects its revenue. Cain maintains that his so-called "9-9-9" plan restructures the nation's tax system in a way that significantly boosts real growth. He also claims that his program is revenue-neutral. This means that it is designed to replace the revenues generated by the current tax system.

Restructuring the U.S. tax system along the lines Cain proposes might promote explosive economic growth. However, there are serious problems with tax proposals that claim to be revenue-neutral. One potential flaw is a tendency to assume that individuals will behave the same way regardless of the tax system. If this were true, there would be no reason to change current system.

The main reason to change the tax structure is to remove impediments to economic growth. If the new structure succeeds in doing so, it can improve economic activity and raise both incomes and revenues.

The failure to account for the dynamic impact of a positive structural change in taxes can inadvertently lead reformers to propose changes that increase the overall tax burden. This is the case with the proposed "Fair Tax," which would replace all federal taxes with a national sales tax.

Insisting on revenue-neutrality places the government's need for revenue above the needs of individuals. In an effort to ensure that government receives the same claim to revenue as before, estimates of the necessary national sales tax often amount to 20-30 percent. While the structure of such tax may appear superior to current system, the immediate impact of an abrupt shift to such higher rates risks retarding economic growth rather than promoting it. That will lead to a spiral of less-than-expected revenues, higher tax rates, and so on.

Aren’t you forgetting the 7.65% payroll tax your company would pay on the $900M in payroll ? Remember, the 9% Business Tax replaces the payroll tax as well as the corporate profits tax.

No, because when explaining his 9-9-9 plan Cain always counts the entire payroll tax as an expense borne by the employee which is how he justifies his flat tax and sales tax. I guess he's assuming that when FICA is done away with the companies, out of the goodness of their hearts, will pass that entire savings on to the employees in the form of higher wages. Regardless, you cannot have the same expense be a cost to both individuals and companies. So since Cain doesn't count it as a savings to the corporation then neither did I.

I have never heard Cain count the half of the payroll tax paid by the employer as belonging to the worker. Nor do I care.

You’re argument was that a company would pay more under Cain’s 9% Business Tax. The only real-life comparison that can be made is to what that company ACTUALLY pays today. You could argue that all business taxes are paid by the customers and not the business. You can play whatever philosophical games you want but you are fooling yourself. The business is the one LEGALLY required to pay their half of the Payroll Tax. Comparing tax plans without regard for who is legally liable to write the check under each plan is a nonsense circular argument.

Then there is the actual point of this article, which is that omitting the 9% Sales Tax from Cain’s plan would still collect enough revenue. So the worker would be paying a 9% Income Tax instead of both a 7.65% Payroll Tax plus a progressive Income Tax with rates as high as 35%. No Sales Tax.

I have never heard Cain count the half of the payroll tax paid by the employer as belonging to the worker. Nor do I care.

Then you haven't paid attention to what the man has been saying.

Then there is the actual point of this article, which is that omitting the 9% Sales Tax from Cain’s plan would still collect enough revenue.

That is true only if A: you are happy with annual deficits in the $2 trillion range, or B: you have a plan to cut federal spending in half. I'm not prepared to sign on with the first and I haven't heard any details on the spending cuts necessary to accomplish the second.

Or C: as this article points out, explosive economic growth making those two 9% taxes raise more revenue...

What if it doesn't? If companies are paying higher taxes, or are being taxed regardless of whether they make money or not, then how will that foster explosive growth?

...and an immediate cut in spending of 30%.

An immediate 30% cut would mean $810 billion in reductions. So what goes under the Cain administration?

So all we have to do to fix the deficit is to use the FY2000 Budget and adjust all figures by actual inflation. Then let each Department figure out how to work within their budgeted amount.

Simple as that, huh? So cut Social Security spending by about 60% and Medicare by 2/3rds and defense spending in half and what exactly do you do away with.

“If companies are paying higher taxes, or are being taxed regardless of whether they make money or not, then how will that foster explosive growth?”

If a business DOESN’T make money today, they must still pay 7.65% of their payroll in taxes. They must pay 15.3% if they are self-employed. Under the Cain 9% Business Tax applies to payroll and profits, so if there are no profits then it applies only to wages. So if a business doesn’t make money, their taxes increase by 1.35% of payroll.

If a business DOES make money, they must pay 7.65% on their payroll (or 15.3% if SE) PLUS 35% of their profits. Under Cain’s 9% Business Tax, they pay 9% of Payroll PLUS 9% of Profits. So they pay an extra 1.35% of payroll costs but they save 26% of their profits.

Every economist agree that the corporate tax rate of 35% puts America at a disadvantage compared to the rest of the world. Lowering it to 9% is therefor pro-growth.

“An immediate 30% cut would mean $810 billion in reductions. So what goes under the Cain administration?”

Wrong. A 30% cut from the current $3.6T means $1,080B in cuts, making total spending $2.5T, which is essentially FY2000 spending increased by inflation.

“Simple as that, huh?”

Yes.

“So cut Social Security spending by about 60%”

No. Social Security has only increased by CPI, so there are no cuts to SS.

“... and Medicare by 2/3rds ...”

Quite possibly. All medical costs are out of control due to litigiousness, CYA testing, and over consumption. Medicare and Medicaid are even worse because they are pay-for-procedure models. The Medical Industrial Complex of Doctors, pharma, Insurers, and hospitals have attempted to make more money from these programs by increasing the number of tests and procedures. The government responds by trying to cut how much it will pay for each procedure. The doctors, in turn, find additional procedures to bill. The patient doesn’t limit their consumption because they are not the payor, and doctors can always justify extra procedures based on cautious preemption of malpractice lawsuits and being “thorough”. Change Medicare and Medicaid to HMO’s with significant co-pays and extend the Federal government immunity from lawsuits to those doctors and hospitals providing services. This would radically cut the cost due to eliminating all the overhead of billing and the unnecessary procedures done only to CYA. Doctors and hospitals would perform the necessary services to keep from being dropped from the program due to bad results, but no more than that since they don’t get paid per procedure.

“... and defense spending in half and what exactly do you do away with.”

Almost. 40%. Defense spending has increased much faster than inflation. Had it increased only as fast as inflation, it would be $387B rather than $700B. With Iraq over and Afghanistan pointless, getting back under $400B shouldn’t be tough at all. Give it to the DoD and let them figure out how to spend it instead of 535 members of Congress all feathering their own nests.

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