Why Herman Cain's 9-9-9 tax plan?
What is the purpose of taxation? The obvious answer is to put money in the treasury so that the government can fulfill its obligations. But is that the purpose of our current tax code?
When I was in law school, (1989-92) our textbook for tax class was an abridged edition of the tax code from the Government Printing Office. The code was printed in size 8 font, on ultra thin paper, and every bit of four inches thick. That was right after Ronald Reagan chopped chunks out of the tax code in 1986. I recently heard that the current tax code contains more than three million words. My semi-educated guess is that the tax code is now approximately double in size. It is impossible for a normal human to understand.
I don't think that there is any real dispute that the primary purpose of the U.S. tax code is not for raising revenue, but is to regulate behavior, for social engineering, and to help incumbent congressmen hold their elected office by giving favors. Raising revenue, frankly, is secondary.
Most congressmen are reluctant scrap the current tax code because it would be scrapping a substantial source of their power. But it seems that only people in Congress, or the people and entities closely tied to it, believe that the current tax code is basically fine.
If "the power to tax is the power to destroy" (John Marshal, U.S. Supreme Court, 1819) then American citizens should not be taxed unnecessarily. Taxation effects commerce. The need to raise revenue for the government is competing with the need of the citizens to profit from commerce. Where should the balance lie?
Under our Constitution, the "needs" of the government should never exceed the rights of the people. Under the U.S. Constitution, it is the citizens who are the sovereign source of all governing power who have voluntarily loaned some of that power to elected representatives. Remember, "we the people" formed this new government to protect our rights to life, liberty, and pursuit of happiness -- all of which are intertwined in economic liberty.
Taxes should be structured so that they minimally impact the citizens while funding the constitutional obligations of the government.
What is Herman Cane's plan?
Herman Cain's 9-9-9 plan starts with abolishing all existing federal taxes. For example: no hidden tax on fuel, tobacco, alcohol, telephone and cell phone service, tires, train tickets, carbon emissions, etc. There would be no IRS code.
The new tax law would have basically three lines. All personal income is taxed at nine percent. All corporate income is taxed at nine percent. All purchases by consumers (not manufacturers and retailers like a VAT tax) are taxed at nine percent.
Why should income tax be a flat nine percent?
I can't write a pamphlet, so I have to skimp on the details.
The original U.S. Income tax was one percent. There are several countries around the world with flat tax rates. U.S. history and current foreign examples show over and over again that flat tax rates in the 10 percent to 15 percent range stimulate tremendous economic growth and yield huge amounts to the treasury. Much more than produced by higher rates and complex tax systems.
Why should the corporate tax be at nine percent?
You would get similar economic results as the personal income tax. It would stimulate growth in domestic businesses while increasing revenues to the U.S. Treasury.
Multinational corporations avoid high corporate taxes by doing the following: Open a subsidiary business in a tax-haven country. Produce a 50-cent widget. Sell it to the American company for $50 or $100. The American company makes little or no corporate profit and pays no U.S. tax. The foreign subsidiary makes millions to billions and pays the low foreign tax rates.
If U.S. corporate rates were nine percent, companies from all over the world would be flooding our shores with new manufacturing plants, hiring American workers, to shift their profits over here to pay the low American tax rates and avoid their higher domestic rates. These companies would even gladly pay higher wages to American employees for the benefit of the low tax rates. The U.S. treasury would struggle to hold all of the revenue from taxes on income from foreign businesses and there wouldn't be enough American workers to take all of the new jobs.
Why a nine percent sales tax?
A sales tax is the single most effective way for a government to raise revenue. That is why every state in America has one and a great many foreign countries have national sales taxes.
Some people try to hide income, work "under the table" or even work in the "underground economy." Some people exaggerate deductions and exemptions. However, you can't shelter spending. Illegal aliens, smugglers, and drug dealers spend money and would wind up paying sales tax. Rich people who buy expensive luxury items would pay a lot of sales tax. Poor people who spend modestly would pay little sales tax. Savings and investments, which are not consumer sales, would be "encouraged" as they would be non-taxed.
Are there other benefits?
Yes! It takes power away from Congress, corporations, and lobbyists, to get favors by manipulating the tax code. There are no hidden taxes so Congress can't make changes without everyone being fully aware of it and suffering the consequences. Government policy that hurts the economy will have a direct 1 to 1 resulting reduction in receipts to the treasury. Good economic policy would do the inverse. Everyone would be able to understand exactly what they owe and why.
What are the negatives?
Basically all tax deductions go away. If you remember how people howled and cried when the deductibility of credit card interest went away in 1986, wait until the mortgage and charitable contributions deductions go away. Also, there is always the danger that rates will go up, and with deductions gone; the increase would squeeze everybody.
Inevitably people will claim it is grossly unfair for everyone to pay the same rate; the rich should pay higher rates. The Cain Plan does not require the repeal or modification of the 16th Amendment to prevent congress from slowly making changes to give favors, etc. and screwing the little guy again. These are massive changes in the tax code. Everyone is familiar with the devil they know and fear the devil they don't know.
Nothing is perfect. As we are all at least a little different, it will never be possible for one policy to be best for everyone. There are definite risks and changes, especially big changes, are very unsettling.
Our current tax system has been in place since 1913. It is broken beyond reformation, which is typical of legal code systems after about 100 years. (You see it in European legal history over and over again.)
Our current economic situation is much more precarious than Washington politicians want us to know. If we measured unemployment as we did in 1980, the rate would be twenty three percent. If we measured inflation as we did in 1980, the rate would be seventeen percent. Socialist systems are presently starting to fail the way the communist systems did in 1990. Some believe that we are on the cusp of the Greatest Depression in American history.
If we do nothing, we can readily predict what will happen. If we make a radical change in our tax and spending systems, it may fail, but it may lead us to recovery. Places like Hong Kong, which have a flat personal and corporate income tax of fifteen percent, speak strongly that it is the right move to make.
Personally, I support Herman Cane's 9-9-9 tax plan.