Cain’s 9-9-9 plan would widen income gap
America’s tax system needs reform, and on that point few would disagree. The complexities of the current tax code make it easier for corporations to find loopholes to avoid paying their fair share. Regressive tax policies — those that place a greater burden on the poor than the rich — are contributing to an increasing income inequality. In many cases, billionaires bear a lesser tax burden than that of their secretaries.
Knowing this, Herman Cain’s 9-9-9 plan is not the tax reform we need. While the simplicity of a flat tax is appealing to many Americans, Cain’s version is regressive, impractical and already failing to live up to its own supposed simplicity. Even Republicans as fiscally conservative as Ron Paul have dismissed the plan as far too regressive.
Cain’s original plan consisted of a 9 percent corporate tax, a 9 percent income tax and a 9 percent national sales tax. The corporate tax would be assessed by calculating revenues minus costs, a value-added tax based on sales. The 9 percent income tax would be a tax cut for some, but would raise taxes on the bottom 80 percent of Americans. The national sales tax would be calculated after adding state sales taxes, resulting in a sales tax of over 25 percent in some areas. The Tax Policy Center, a bipartisan think-tank, estimates that in total, Cain’s plan would cost the United States $300 billion in revenue.
All three taxes are types of consumption taxes in practice. The corporate value-added tax and the sales tax are essentially a combined 18 percent sales tax. Consumption taxes are almost always regressive, as the poor naturally spend a greater percentage of their income on consumption than the wealthy. In combination with a significant increase in income tax, Cain’s plan would significantly increase the cost of living for the poorest Americans while decreasing government revenue.
The second phase of Cain’s plan is even more ill-advised. After the economy recovers, he would remove the 9-9-9 system altogether and replace it with a pure national consumption tax of 23 percent, on top of existing state sales taxes. This move not only compounds the problems of the 9-9-9 plan, but also fails to account for the bureaucratic costs of such a shift. As former Reagan-advisor Bruce Bartlett stated, “It makes not the slightest bit of sense to have a plan that requires fundamental changes to the federal tax system twice to achieve its objective.”
Fortunately, Cain is not deaf to these criticisms, and has already started to craft exemptions to the 9-9-9 plan. But in doing so, he has revealed how tax systems become so complex in the first place: a one-size-fits-all plan simply does not work in practical application. His revised plan exempts those at or beneath the poverty line from the 9 percent income tax, and would also create empowerment zones where businesses would be taxed at lower rates. Though it is certainly an improvement over his original plan, the Tax Policy
Center indicates that it would still raise taxes on the poorest households. As of yet, none of the announced exceptions address the substantially increased cost of living presented by the consumption taxes.
Herman Cain may not be a serious candidate but tax policy is a serious issue. Regressive tax policies that only serve to widen the income gap are not the answer.
Much has been said of broadening the tax base and everyone paying something, but we can only get so much blood from a stone. In order for the economy to recover, we must spur aggregate demand, especially in the lower and middle classes, and not inhibit demand by increasing the cost of living for those who can least afford it.