30
Sep
11

Herman Cain’s 9/9/9 Plan and Why It’s a Bad Idea

Much has been made lately of Herman Cain’s 9/9/9 tax plan. I like the simplicity of the plan (9% national sales tax,  a 9% personal income tax, and a 9% capital gains tax). However, there are some serious problems with the plan as is, and there are better tax models out there that are just as simple, but do not involve a National Sales Tax (NST).

Cain’s plan, if I read his campaign website correctly, is to eventually do away with all the little taxes and regulations and shift everything over to a NST. In order to keep the government afloat, he would need a NST that runs to about 22-27%. Unfortunately, this kind of NST has a hidden consequence which could seriously affect all sectors of the economy.

Generally, when you purchase an final, refined good, you are paying for the raw materials that went into processing it. So lets use a hypothetical example and compare current tax law with Cain’s 9 / 9 / 9 plan.

Under current law: As a manufacturer, you go to purchase raw materials. Suppose your Widget needs a stack of lumber that costs $1000. Because of state sales tax, that lumber costs, on average, $1070. That cost is built into the end price of the Widget.

Now, you manufacture these widgets. To make up for the expense of the Widget, and to ensure you’re making money to pay for labor, transportation, inspection, regulation, etc. and profit, your final product costs $2000, and one of your customers will pay $2140 it. Your customer has to get the Widgets to market, and charges $3000, or $3210 with final state tax.

Under the Cain 9% plan: Now the stack of lumber comes with a 16% tax on it (state’s 7% plus 9% for Federal), which makes the lumber cost $1160 for raw materials, $2320 for the manufacturer, and $3480. Notice a few things here–

A) The profit margin for the manufacturer has decreased. In order to make up for this, his end product needs to be more expensive. So let’s call his end price to market is $2410 to make up, just in revenue lost from paying the extra tax on raw materials. Notice this now a 20.5% increase in price with built in taxation– not 16% as figured from the state + the Cain 9%).

B) The end distributor for customers now also has to make up for that increase in price, so let’s put that new term at $3750 for recouping what was lost in tax before, so the end price is now 25% higher. If this distributor is pushing items out to stores for end-sales, we’re looking at a 30% increase in prices from a 9% increase due to a NST.

It gets worse. If Cain intends to apply a NST for all Federal revenue, we’re looking at a NST which hits around 20% at the absolute bottom of the scale, which could double market prices for standard consumer goods!

Of course, if this replaces things like payroll tax, you’re looking at a reduction in costs to businesses there, but it’s not going to matter because the VAT is multiplied through the system with each additional step you take.

If you’re buying corn at $1 / 5 ears directly from Farmer Joe, then a 20% increase is only going to make it $1.20, not something huge. However, imagine sugar from Hawaii. Building in costs for transportation, fuel, manufacturing, etc., you’re looking at sugar price exploding. That would make cookies way too expensive.

Also, the NST has a disproportionate impact on the poor. If your milk costs $3.00 a gallon, and you now have to pay $4.00 a gallon, that’s a significant increase. And you’re going to see that for all of your staples. Unless incomes increase dramatically under Cain’s plan (and there’s no reason to think they will), the dollar in the hands of the poor will become less powerful for basic goods.

So what’s better? A Flat Tax is a better alternative. It has the advantages Cain wants (simplifying the tax code, reducing the IRS footprint, and reducing tax-collection burdens on the Government and tax-payer), but it doesn’t have a multiplier effect towards consumer goods. The Flat Tax is higher (you’d need a 17-21% Flat Tax rate currently to get to about $3 trillion Federal revenue from GDP) and therefore “scarier” (although Cain’s 9/9/9 plan comes out to 27%). Bear in mind this works with number gathered during a recession, and this kind of tax reduction would certainly spur the economy.

Putting in a Capital Gains Tax about 75% that of of the Flat tax (so 15% capital gains at 20% Flat tax) would spark investment as well.

Setting standard deductions at $15000 for a single person, add $10000 for a spouse, and $5000 per child until you get to a maximum deduction of $50000. Also, end EIC. The government should not be paying you to not earn enough. It’s enough of a boon to pay 0% in taxes. Maintain deduction for mortgage interest, and include a deduction for health insurance premiums, elementary and secondary tuition, and child care. No other deductions.

Combine this with the Ryan plan to reform Medicare and combine it with a similar plan to rescue Social Security from insolvency as well as plans to curb the growth of government and run with a balanced budget, and you will start running surpluses to pay towards paying the national debt off. And once that debt is gone, shift the flat tax downwards.

Also, to prevent government tax increases, pass an amendment to set the national tax rate, as well as an amendment which requires any increases in that rate to have 2/3 majorities in Congress, WH approval, and finally approval by a majority of states. To reduce the tax level, only a simple majority in Congress is needed– no ratification by states.

I look forward to any feedback in the comments section.

(And my math may be a bit off– I’m writing this under duress!  :)  )

UPDATE: I did some corrections.  Cain is not proposing a VAT, he’s proposing a National Sales Tax.  A VAT would have a much smaller impact as the tax is not compounded as it moves on, and only the tax itself is passed onto the consumer.


6 Responses to “Herman Cain’s 9/9/9 Plan and Why It’s a Bad Idea”


  1. 1 Dan
    October 7, 2011 at 7:43 am

    very nice entry. You’ve made the 9-9-9 plan very clear.

  2. 2 buck jones
    October 13, 2011 at 9:22 am

    Is the VAT only added at the initial producer stage, say timber, and is it the only added VAT carried throughout the processing steps to get it to the comsumers. Or, are more VAT’s added, in addition, at ever step of the process? To restate: Is a VAT added only to the initial stage of the process?
    PS. I can see how Cain’s NST is added at every step of the process.

    • October 13, 2011 at 9:56 am

      According to the VAT (and I get this from some basic reading off of wikipedia and a few other “basic” sites) the VAT is more of a consumption tax, so it’s added at the terminus of the manufacturing product so only the consumer is hit with it. Also, the VAT is applied to international sales as well, so if China buys your goods at any stage of the process, the VAT is applied.

  3. 4 b
    October 22, 2011 at 4:20 pm

    cains plan has no capital gains tax… prob typo but at the beginning u mention his 9% capital gains tax

  4. May 21, 2013 at 12:20 pm

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My name is Doc. Welcome to my blog. If you're visiting from another blog, add me to your blogroll (and I'll happily reciprocate). I have a Ph.D. in Chemistry and live in Wisconsin. If you have any questions, feel free to email me. My email is docattheautopsy at gmail. (No linking to deflate the incredible spam monsters).

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