|9-9-9 Trial Balloons: Popped|
By Quin Hillyer
Wednesday, October 12 2011
Herman Cain’s vaunted 9-9-9 tax proposal is brilliant in theory, and in a political vacuum. In principle, there is good reason to admire it. We don’t live in a political vacuum, however, and in practice it could cause major problems.
The first problem is, common sense says 9-9-9 can’t raise enough revenue even for the slimmed down federal government conservatives desire. The second problem is that unless it’s defined and limited via constitutional amendment, it seems particularly vulnerable to future tax hikes. The third problem is, it would put most state and/or local governments in a bind. The fourth problem is that it could breed an underground economy – a black market – that, as all black markets do, provides a venue for further lawlessness (beyond the original act of participating in the black market itself).
Let’s consider each of those drawbacks. First, a detailed, very complicated paper by respected economist Gary Robbins supports the claim that 9-9-9 would be revenue neutral. It’s an impressive paper. The arithmetic is meticulously documented. For a non-economist, though, something still seems wrong. Common sense says government can’t replace income tax rates of 15, 25, and 35 percent with a nine-percent rate; and replace corporate income taxes of 35 percent and dividend and capital gains taxes of 15 percent with a nine-percent business tax; and replace a payroll tax rate of 15.3 percent with a sales tax of 9 percent (that last isn’t really apples to apples; the nine percent might actually do the trick there, and then some), and still raise the same total revenue.
Cain responds that he does this by so vastly expanding the tax base (by eliminating virtually all exemptions and deductions except for charitable contributions) that the proper revenue does accumulate. Really? Try convincing Congress to eliminate the child tax credit, or to tax the first dollar of a poor person’s income. Is that politically realistic?
All that said, let’s assume the plan is revenue-neutral. That still doesn’t solve problem number two. As a number of critics have argued, the possibilities for tax rates to creep up would be especially acute with 9-9-9, just as local sales taxes always seem to creep upward because a half-cent here and a half-cent there, each for a specified cause, usually always seems like not much money (until aggregated, that is). Once federal policy-makers have access to both an income tax and a sales tax, their lust for tax-hiking economic mischief would be almost uncontrollable. The new business tax and sales tax combined would act essentially as a value-added tax (VAT). The very man who did the revenue analysis, Gary Robbins, co-wrote with Ernest Christian of the Center for Strategic Tax Reform a column in the Aug. 24 Wall Street Journal warning that a VAT is an open invitation to bigger government. Grover Norquist also gives related reasons for doubting if 9-9-9 would be good real-world policy.
Third, because for so many decades the feds have avoided sales taxes, most states – at either the state, county, or local level – have become dependent on sales taxes as a, or the, major revenue source. Their tax systems have been designed around the federal system in somewhat complementary ways; suddenly, they would be forced to scramble to make local systems again seem reasonable.
Fourth, consumers in most places are accustomed to paying total sales taxes of between six and nine cents per purchase. Abruptly adding nine cents on top of that would make the tax portion of each purchase seem outrageously high. Sure, in effect the national sales taxes would be bringing into the open taxes that now are hidden – but that won’t salve the public’s frustration. Indeed, because people tend to rebel more against what they see than against something of which they are oblivious, the tendency would be for angry consumers to more actively try to evade such high sales taxes. Result: Black market. And, as this nation's disastrous experiment with Prohibition demonstrated, significant black markets produce large-scale criminal activity, corruption and violence.
A Google search shows that analysts across the political spectrum concur that a growing black market would be a danger with a VAT-like system.
Perhaps Cain can put these doubts to rest. One hopes he can. For a paean to growth economics, he’s singing the right tune. But in practice the acoustics may not be quite right.
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