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Herman Cain's 9-9-9 would be good for the economy

By Peter Morici
web posted October 17, 2011

Herman Cain's proposal to replace all federal taxes with a 9 percent income tax, 9 percent national sales tax, and 9 percent corporate tax makes good economic sense.

This plan would impose the least administrative costs for raising the money needed to finance the federal government, better promote growth than the current tax system, and be a darn sight fairer than the current burdensome and complex personal and corporate taxes structures.

Administrative Costs

The current tax code imposes enormous compliance costs on private individuals and businesses. The vast array of complex deductions and credits intended to encourage private citizens to do more of some things and less of others have made accounting and tax law two of the most stable and recession proof professions on the planet.

Simply wiping away all those loopholes, not only permits a much lower and more certain average rate of taxation for all individuals and businesses, but it would also eliminate the costs of millions of hours of private tax professionals time from annual filings, and require fewer employers monitoring and auditing the returns of honest taxpayers. IRS agents could spend more time chasing tax evaders and get along with fewer employees in the bargain.

Economic Growth

The current personal income and corporate tax system -- with marginal rates up to 35 percent -- is full of incentives that reward individuals and businesses for investing to get the biggest tax write offs instead of pursuing the soundest commercial opportunities. By closing virtually all loopholes and lowering rates, 9-9-9 would make such tax prospecting obsolete and increase after tax profits for growing businesses and creating jobs. It would encourage investing to make products people want to buy rather than engineering balance sheets to avoid the tax collector.

The national sales tax component would essentially be a value added tax. Under WTO rules, those taxes are refunded on exports and levied on imports -- an advantage Chinese and European exporters and import competing industries have, but U.S. businesses currently lack. And being a consumption tax, it would encourage saving and investing instead of overspending for immediate gratification -- something liberals and conservatives have long advocated.

Equity and Fairness

The present system permits about 40 percent of all taxpayers off without paying income taxes, and most heavily taxes folks earning from $50,000 to $1million. Many richer folks often escape paying much lower rates, because hedge fund managers and manipulators of paper assets have the money to lobby Washington for special treatment.

The unfairness applies to sole proprietorships and small corporations -- those can't avoid the accountants, lawyers and lobbyists to avoid taxes with the ease of a GE or a dedicated Wall Street hedge fund, and they can little exploit low capital gains rates through financial engineering.

At the other end of the spectrum most low income individuals pay no income tax now, and would be required to pay 9 percent income and national sales taxes. If they saved ten percent of their incomes, they would have effective rates of about 17 percent.

Currently, they share with their employers a combined 15.3 percent social security and Medicare tax, and those would be ended by 9-9-9. Implementing legislation could require employers to raise wages by the amount of their saved employer contribution, and the IRS to provide a 2 percent tax credit for individuals earning less than the poverty line. Alternatively, the legislation could exempt basic groceries and a few similar essentials from the sales tax to address those equity concerns.  

The additional growth fostered by such a simple and elegant solution to financing the national government would more than compensate for the lost revenue those small concessions to fairness requires.

Herman Cain may be no PhD economist -- and he doesn't appear to be listening to many -- but he has stumbled onto something America should embrace. Two other Presidents -- Harry Truman and Ronald Reagan -- embraced similar simplicity and common sense, and they were arguably two of the most successful Presidents. ESR

Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission.





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