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Cain Needs to Give Voters the 411 on His 9-9-9 Tax Plan: View

October 13, 2011

Oct. 14 (Bloomberg) -- “The 9-9-9 plan that I have proposed is simple, transparent, efficient, fair and neutral.” That’s Herman Cain defending his tax overhaul plan at the Oct. 11 Bloomberg-Washington Post Republican presidential candidates’ debate in New Hampshire.

Cain is correct in claiming that his plan, which has vaulted him to the top of the opinion polls and was the debate’s unofficial theme, is simple and efficient. But he misses the mark on the other three: It’s not transparent, fair or neutral. Still, he’s on the right track, and we encourage him, along with those who call 9-9-9 unworkable, to come up with a better plan.

The former chief executive officer of Godfather’s Pizza would replace the current tax code with a 9 percent tax on personal income, a 9 percent tax (down from 35 percent) on corporate income, and a new 9 percent national sales tax. That’s really the extent of it. Gone would be deductions for mortgage interest and charitable contributions. Gone would be business deductions for workers’ wages. Gone, too, would be paycheck deductions that fund Social Security and Medicare.

Rival Republicans around the debate table mocked the plan as simplistic, but we side with voters who yearn for simplicity in the tax code. At 72,536 pages, it’s mind-numbingly complex. It forces taxpayers to adopt inefficient tax-avoidance strategies. Many Americans view the system as biased toward special interests, which can afford lobbyists to wring favors from Congress and tax lawyers to exploit loopholes.

Laudable Goals

Cain is also right to say his proposal is efficient. It would expand the tax base so more Americans and corporations contribute to the government’s coffers. At the same time, government would no longer pick winners and losers through the tax code. Those are laudable goals.

But 9-9-9 is far from perfect. One small issue is its lack of transparency. Cain’s campaign website devotes all of 500 words to the plan. Reporters have had to wrest important details from him, including who devised it (Rich Lowrie, an accountant and investment adviser in Gates Mills, Ohio). Only now are we learning that it would actually set income and sales taxes at a decidedly non-catchy 9.1 percent to raise the same amount of federal tax as the current system.

Cain insisted at the debate that his plan would raise no more and no less than the $2.3 trillion the federal tax system produced in pre-recession 2008, but the next day he had to admit that the plan wouldn’t replace $67 billion in excise taxes on gasoline, beer and cigarettes. Cain now says he would keep those levies. The bigger problem is that, by aiming for neutrality, 9- 9-9 would raise no new revenue to address chronic budget deficits or lower the U.S.’s $14.8 trillion debt.

Regressive Plan

The biggest issue of all is that 9-9-9 is regressive. It would unfairly give the wealthy an enormous tax break while placing a greater burden on middle- and lower-income Americans. The affluent would get the same top tax rate of 9 percent as everyone else. Investors would pay no taxes on capital gains, and inheritors would escape taxes on estates. Low-income households would lose the deductions that complicate the tax code but that also keep it progressive.

Taxes would most definitely rise on the nearly one-half of households that pay no federal income taxes at all, a category that includes many older Americans who don’t have jobs and whose Social Security benefits aren’t taxed. It also includes the working poor, who can combine the standard deduction, the $1,000 per-child tax credit and the earned-income tax credit to reduce their tax liability to zero, or to get a check from the IRS.

Poverty Grants

Cain argues that lower-income workers would pay less because payroll taxes, which total 15.3 percent of wages, of which half is paid by employers, would disappear. He would also create “poverty grants,” vaguely described as lower rates for those living in designated empowerment zones.

But what 9-9-9 would give with one hand (scrapping payroll taxes), it would take with the other (child and earned-income tax credits). Here’s another example: By not allowing companies to deduct the cost of labor from taxable income, 9-9-9 would cause the true cost of hiring workers to rise. Companies would probably make up for the extra cost by lowering pay.

Cain would also require low-income and middle-class families to pay 9 percent national sales taxes on such essentials as housing, clothing, medicine and food, which many states don’t tax at all. If those items were excluded, less tax would be collected, and Cain might need to change his plan to 10-10-10.

Political Problems

The 9-9-9 plan also has political problems. Conservative lawmakers dislike the sales tax because it would give Congress a new stream of money to spend. It would come on top of -- not instead of -- existing state sales taxes, and that won’t sit well in New Hampshire, an early voting state with no sales tax. In Florida, another early primary state, 9-9-9 is likely to be unpopular among older voters.

Cain ultimately would eliminate individual and corporate income taxes in favor of a national sales tax. We have said before that a consumption tax offers the best route to broader tax reform, if coupled with tax credits for the elderly, low- income workers and the very poor.

A revamped tax system must offer more than a snappy slogan that fits on a bumper sticker. We encourage Cain to keep refining his plan to make it truly fair, transparent and neutral. As for rival candidates who say 9-9-9 is unworkable, show us your plan.

--Editors: Paula Dwyer, Mary Duenwald

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To contact the Bloomberg View editorial board: view@bloomberg.net.


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