Is the Cain Tax Plan Fair?
Herman Cain’s tax reform plan is called 9-9-9. It calls for a 9% flat-rate income tax, a 9% corporate profits tax and a 9% national sales tax.
Bruce Bartlett has called it “a distributional monstrosity. The poor would pay more while the rich would have their taxes cut.” A New York Times editorial called it “ridiculous” and accused Cain of advancing “a formula designed to cut taxes for the rich and increase them for the poor.” Washington Post blogger Ezra Klein says the plan shows “lack of policy seriousness.”
On the other side, Larry Kotlikoff in The New York Times this morning gives the plan a mixed review and argues that it deserves serious study. As Kotlikoff points out, the critics are missing an important spending side of the equation. No matter what you do on the tax side, you still have to make sure the lowest-income families have health care and are not destitute during their retirement years.
In 2005, Kotlikoff and I modeled a number of tax reform proposals: replacing personal and corporate federal income taxation with: (1) an 11 percent flat-rate income tax, or (2) a 14 percent flat-rate tax on personal consumption, or (3) a 14 percent value-added tax (VAT), or (4) a 16 percent federal retail sales tax with the same effective tax rate as the tax on personal consumption and the VAT. The first reform taxes all income at one low rate. The next three reforms tax all consumption at one low rate. We also remove the cap on the Social Security payroll tax, so that the tax rate on all wage income is the same.
Under each tax reform, the new tax is rebated to the lowest one-third of income earners for health insurance and personal retirement accounts.
We found that all these tax reforms increase progressivity, relative to the current system.
What I like about the Cain proposal and the Goodman-Kotlikoff proposal is that they simplify the tax code. But I will say that there needs to be strong legislation in place that makes it very difficult if not impossible for Congress to raise the taxation rates. A two-thirds majority should be required.
Another thing I will add is that I feel as though lower-income individuals receiving the rebate under the Goodman-Kotlikoff proposal might be given a choice of whether to use their rebate toward health insurance OR/AND a personal retirement account…..or even perhaps into something else, like stock. Young people who are healthy may not want health insurance and a personal retirement account seems a ways off to most. Why not allow them to invest some of that into the stock market? Short of just giving people the rebate, the more options people are given to use their rebate the more we maximize individual choice.
Anything would be better than the current monstrosity.
The problem with a Value Added Tax (VAT) that Bartlett supports is it conceals the amount of money that is actually being paid in taxes by imbedding the tax into the price of goods. Moreover, the double taxation of corporate profits also embeds taxes into the products we purchase. The current system of income tax withholding and (the annual tax refund) also designed to lessen the feeling of paying taxes since taxpayers rarely have to write a check. Any change to the tax system needs to increase transparency – not reduce transparency.
I like the idea of a low flat rate and a national sales tax. In recent years, the sales tax rates have risen to near double-digit levels in some states. If the federal government imposes a national sales tax, maybe that would prevent the states, cities and local areas from jacking up the sales tax rates because consumers would soon complain.
On the right, too many people are arguing that it is a bad idea because it may lead to something else, like a VAT tax or an increase from the 9% rates. This is fallacious reasoning. You can’t argue against doing X because Y might happen. Y might always happen with or without X.
This has been so common a complaint that I am beginning to wonder if it isn’t a case of rent seeking — i.e., there is now an industry that is invested in complaining about the current tax code. It is how they make their living. Do away with the current tax code and these groups will have no reason to exist. So they have come to oppose any serious reforms.
Greg, that’s a very insightful point and I have been wondering about that myself for some time. I have spoken to many grassroots conservatives in recent years that seem skitish of a sales tax as a replacement for the federal income tax because they fear a VAT.
Creative proposals like the above might be the only way to achieve tax reform in light of the intense opposition from progressives in Congress that the Forbesian Flat Tax would face (i.e. only a 17% income tax across the board). Cain’s idea or something close to it deserves serious discussion in Washington.
I like the Cain plan.