Bloomberg News

Cain’s 9-9-9 Tax Code Scrap Keeps Levies on Gasoline, Beer

October 13, 2011

(Updates with details on proposal starting in ninth paragraph and Cain comments starting in 15th paragraph.)

Oct. 13 (Bloomberg) -- Republican presidential candidate Herman Cain, who has pledged to throw out the U.S. tax code, now says he would keep excise taxes on goods such as gasoline, beer and cigarettes.

The price of a gallon of gasoline includes 18.4 cents in federal excise taxes. According to the Cain campaign’s first detailed revenue estimate released yesterday, his 9-9-9 plan would add a 9 percent sales tax. Cain has surged to the lead of a new national poll on the popularity of his tax proposal.

Including these excise taxes and fees, his campaign’s estimate says the plan would bring in the same amount of revenue as the tax system it aims to replace. The U.S. collected $66.9 billion in such taxes and $122.2 billion in other fees and revenue in 2010, according to the White House Office of Management and Budget.

That’s a small portion of the more than $2 trillion the estimate anticipates the 9-9-9 plan would raise each year. It’s notable because Cain has made a point of saying that he is the only Republican presidential candidate seeking to replace the current tax system.

“It starts with, unlike your proposals, throwing out the current tax code,” he told the other candidates at a debate sponsored by Bloomberg News and the Washington Post on Oct. 11. “Continuing to pivot off the current tax code is not going to boost this economy.”

Climb in Polls

Cain has jumped to the top tier of the Republican race in part because of the popularity of the 9-9-9 plan, which would tax sales transactions at 9 percent along with 9 percent levies on businesses and individuals. He would eliminate estate and payroll taxes.

During the Oct. 11 debate, Cain challenged a Bloomberg News calculation that his plan would have generated $2 trillion in revenue if it were implemented in 2010, or about $200 billion shy of what the government collected that year. That estimate was based on Cain’s assertion that he would scrap the entire tax code.

Until yesterday, the Cain campaign had provided little detail, making a complete analysis and revenue estimate of the 9-9-9 plan difficult. The campaign’s website description of the plan includes fewer than 500 words.

The analysis also showed that the revenue-neutral rate would need to be 9.1 percent, not 9 percent. The campaign has described the plan as a first step toward a so-called fair tax, which would eliminate income taxes and impose a single national retail sales tax.

Representatives of Cain’s campaign didn’t discuss the details of the revenue estimate yesterday.

Good-Faith Effort

Douglas Holtz-Eakin, former director of the Congressional Budget Office and adviser to John McCain’s 2008 presidential campaign, said the Cain estimates were a good-faith effort at a rough calculation of the rate needed to be revenue-neutral.

“I don’t think it’s dramatically out of line with reality,” he said. “It’s just hard to do this without having access” to the sophisticated tax system models in the government.

Alan Viard, a senior fellow at the American Enterprise Institute in Washington, which favors smaller government, said the revenue estimates were “in the ballpark in some vague sense.” He said the rate might need to be a percentage point or so higher to generate the same amount of revenue that the current tax code does.

The estimate, he said, includes too small of an adjustment for underreporting of income and sales.

Figuring Out Details

Cain, who touts simplicity as the key element of his plan, is still working on the more complex details of how it would be structured. Discussing his proposal with reporters yesterday in Concord, New Hampshire, Cain said the sales tax would apply only to new goods, exempting such items as houses and used cars.

He also underscored that the tax system would include at least one break from the existing code -- the deductibility of charitable contributions -- and add one that would allow companies to deduct from the 9 percent tax they would owe if they purchase new equipment made in the U.S.

Pressed on whether such a made-in-the-U.S. equipment deduction would apply, for example, to a computer manufactured by a U.S. company and assembled overseas with non-U.S. components, Cain replied, “I have no idea,” adding that he hadn’t examined the issue in detail.

Similar to VAT

Viard said Cain’s description of the business tax has been misleading as it is nothing like the current corporate income tax, which applies only to profits of companies organized as corporations. The 9-9-9 regime would operate as a value-added tax, or VAT, similar to those in the rest of the industrialized world, which Republicans have often opposed.

A value-added tax is applied at every level of production on most goods and services.

“The elephant in the room is the fact that Cain is proposing a value-added tax,” said Viard, a former economist at the Federal Reserve Bank of Dallas who says a VAT will be necessary to cover the government’s long-term fiscal needs. “The question of whether the revenue numbers add up is almost secondary to that.”

Cain has climbed in the polls in recent weeks and a Wall Street Journal/NBC News poll released yesterday put him in the lead, with 27 percent of primary voters supporting him. U.S. Representative Ron Paul of Texas, who is lower in the polls, supports repealing the 16th Amendment to the Constitution, which allows Congress to impose an income tax.

Tax Transformation?

Representative Michele Bachmann of Minnesota raised concerns about the sales tax turning into a VAT as she criticized the 9-9-9 plan during Tuesday night’s debate.

“A sales tax can also lead to a value-added tax,” she said. “Once you get a new revenue system, you are never going to get rid of it.”

Expanding the tax base in the way Cain envisions means that long-standing tax breaks, such as the mortgage interest deduction and the exclusion from income of employer-sponsored health insurance, would likely vanish to keep the rates low. In the past, Congress has been unwilling to eliminate these provisions; the mortgage deduction survived the last tax code overhaul in 1986.

The analysis released by the campaign also doesn’t address how the proposal would change the distribution of the federal tax burden, other than including a provision for some sort of “poverty grant,” which Cain has described as a lower rate in targeted “empowerment zones.”

Difficult Task

Given these challenges, advancing the proposal through Congress will be difficult, said Larry Sabato, the director of the University of Virginia’s Center for Politics in Charlottesville.

The plan’s success in turning Cain into a household name underscores the frustration with the current U.S. tax system.

“We all know that the tax code is rotten and we’re looking for a way out, and who doesn’t want a simpler way out?” Sabato said.

In the debate, Cain said the simplicity of his plan will build momentum behind it on Capitol Hill and prevent Congress from eroding it or raising the rates.

“Because it is visible, simple and transparent, the American people are going to be the ones to hold Congress’s feet to the fire,” he said.

--With assistance from Julie Hirschfeld Davis in Concord, New Hampshire. Editors: Jodi Schneider, Leslie Hoffecker

To contact the reporters on this story: Steven Sloan in Washington at ssloan7@bloomberg.net; Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net


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