The first two 9’s sound good — no, great — at first blush: a 9 percent flat tax on individual and corporate income! No deductions, exemptions or credits (except for charitable gifts). No payroll taxes, capital gains tax or estate tax.
The last 9 is more problematic on its own: a 9 percent national sales tax. Let’s look first at why this is a potentially large problem, and then look at some broader criticisms of the entire plan.
Cain sells his plan as a first step toward the Fair Tax, which calls for the federal government levying only a consumption tax to fund itself. The problem that I and other people — mostly, but not only, conservatives — have with the plan is the 16th Amendment, which created the federal income tax.
Fair Taxers say their plan includes repealing the 16th Amendment, but in my estimation they gloss over the sheer difficulty of doing so. Amending the Constitution is very difficult, for good reason. I have never seen or heard a credible explanation of how fundamentally altering our federal revenue system is going to be possible to get through Congress and the states. While there are good economic arguments to be made for shifting the tax burden to consumption, in my view it’s not worth the constitutionally necessary effort. Better to work toward something more politically feasible: a flat tax on income.
Cain says his plan “unites Flat Tax supporters with Fair tax supporters.” Then, “amidst a backdrop of the economic boom” he says would result, a President Cain would “begin the process of educating the American people on the benefits of continuing the next step to the Fair Tax.”
But what if this economic boom doesn’t come? Or what if it does — but a contented public decides not to follow through with the amendment process? Or what if it simply proves impossible to garner a two-thirds vote in Congress to forswear taxing individual and/or corporate income? Even if Cain could marshal the support of all Republican members, which is no gimme, does anyone think we’re going to have 67 Republican senators or 290 Republican members of the House any time in the next eight years? Or that a sufficient number of Democrats are going to vote to end the corporate income tax?
So, it seems far more likely that, even if Cain were to be elected president and get the first step of his tax plan elected, we would simply end up with a consumption tax in addition to an income tax on individuals and corporations. At a low rate, yes — but for how long? The likelihood is slim that any or all of those rates would remain so low. And then we’re heading toward European-style taxation — with a hefty consumption tax (the VAT, or value-added tax, rate was 21 percent when I lived in Belgium) on top of punitive income tax rates.
But we also need to look at the “economic boom” Cain says his plan would create. As Kevin Williamson at National Review Online observed:
Mr. Cain says the proposal would be revenue-neutral. I have my doubts. The federal government took in about $2.2 trillion last year. Based on personal-income and business-income figures from the IRS, and consumer-spending figures from the Gallup survey, my English-major math suggests that a 9 percent tax on all of the above produces about $1.7 trillion in revenue, meaning that 2010’s $1.7 trillion deficit would have been more like a $2.2 trillion deficit — from calamity to catastrophe. If Mr. Cain’s team is building in some growth assumptions into the fiscal forecasts, they must be sunny indeed. (emphasis added)
I’m all for using dynamic scoring to try to predict the effects a policy will have in the real economy; basing estimates on the premise that nothing will change is the surest way to get it wrong. However, as I pointed out just this morning in another post, predicting the effects of policy in a large and diverse economy is extremely hard. Yes, reactions to long-term policies, in the aggregate, may be a little easier to predict than changes based on short-term tweaks. But making up an apparent $500 billion revenue shortfall requires a great deal of transparency about the assumptions Cain’s economic advisers are using — and discussion about whether they’re anywhere close to correct.
I would guess that Williamson is right that these assumptions are very sunny in this case. And that relates not only to the impact on revenues — and deficits, since a Congress that nearly blows up over cutting $100 billion can hardly be expected to cut $2.2 trillion anytime soon — but on whether there will truly be an “economic boom” from 9-9-9.
I don’t know how much of all this Cain can explain within the format of a televised debate with limited time for answers. But it’s time to press him on these details and let the public start wrestling with whether his plan is really as great as it sounds.
– By Kyle Wingfield