Bloomberg News

Cain’s Sales Tax Would Hurt Consumer Spending ’For Some Years’

October 14, 2011

(For more campaign coverage, go to {ELECT <GO>}.)

Oct. 14 (Bloomberg) -- Republican presidential candidate Herman Cain’s plan to create a national sales tax would hurt retailers, threaten economic growth and shift the tax burden onto the middle class and poor, tax experts and business groups said.

Cain’s so-called 9-9-9 plan, which would replace the current tax code with a system of three separate taxes of 9 percent each, has boosted his popularity among voters. The former chief executive officer of Godfather’s Pizza has surged in polls in recent weeks, and a Wall Street Journal/NBC News poll released this week put him in the lead.

Tax experts and business groups interviewed yesterday don’t like his tax plan as much as voters. They said it would shift the burden to middle-income and poor families and would hurt sales across the economy, at least in the short term.

“There will be a noticeable decline in consumer spending for some years,” said Rachelle Bernstein, vice president of the National Retail Federation, based in Washington, in an interview. “We know that that has an impact on consumer spending and GDP.”

Consumer spending accounts for about 70 percent of the U.S. gross domestic product.

Cain has proposed a 9 percent sales tax on all goods and services, another 9 percent on personal income and the third on corporate gross income. During the debate in New Hampshire sponsored by Bloomberg News and the Washington Post on Oct. 11, Cain said the proposal is his top policy goal.

Expanding Tax Base

“It expands the base,” he said during the debate. “When you expand the base, we can arrive at the lowest possible rate, which is 9-9-9.”

That expansion means that long-standing tax breaks, such as the mortgage interest deduction and the exclusion from income of employer-sponsored health insurance, probably would vanish.

Although Cain hasn’t released extensive details of his plan, it also would probably add a sales tax on many products and services, such as new homes, financial transactions and even doctor visits. Several business and trade groups contacted by Bloomberg News declined to comment on the plan because they didn’t want to take a position on the presidential race.

Impact on States

Michael Bird, federal affairs counsel for the National Conference of State Legislatures in Washington, said the sales tax, on top of what state and local governments already levy, could make it difficult for them to adjust their tax rates.

“Would the 9 cents create a ceiling, or would states say, now we have to lower our costs because the cost of goods and services are higher than a lot of people are comfortable with?” Bird asked. “It’s hard to say.”

Robert Dietz, an economist at the National Association of Home Builders, said new homes sales would see a double tax increase. The house itself would be subject to the 9 percent retail sales tax, and then buyers would have to pay tax on the interest on their mortgage, as opposed to now when they can deduct that interest from their income.

“Layering a new tax on top of the sale of a newly constructed home would certainly be bad for the housing market,” he said. Each new home creates the equivalent of three full-time jobs for a year, he said.

Trucking Hit Hard

Small trucking firms and drivers may be hit hard by a sales tax on fuel piled upon already-high excise taxes, such as the 24.4 cent-per-gallon levy on diesel fuel and a surcharge already applied to new heavy-duty vehicles, said Todd Spencer, executive vice president of the Owner-Operator Independent Drivers Association, which represents truckers under contract with larger U.S. companies such as Landstar Systems Inc.

Further taxing fuel “may be a hard sell for Mr. Cain at a time when diesel is headed back towards a $4 per gallon average,” Spencer said. “Adding a 9 percent sales tax and a 9 percent VAT (value-added tax) onto the 12 percent federal excise tax truckers already pay on new trucks and trailers would certainly cause them to think twice about buying new equipment.”

“There’s a lot in this plan that’s just kookie,” said Steve Wamhoff, legislative director at Citizens for Tax Justice, pointing out that it doesn’t tax dividends or inheritance at all, but does tax wages. “It makes the tax system much, much, much more regressive than it is today.”

The proposal would hit middle- and low-income people with a larger tax burden because they spend more of their money on food, clothing and household goods and have less left over to save and invest, which wouldn’t be taxed.

Increased Burden

Ed Kleinbard, a professor of tax law at the University of Southern California in Los Angeles, said Cain’s plan would increase the federal tax burden of a family of four making $50,000 a year by $5,100 to $13,500.

“It’s less money in most people’s pockets after tax and more money in the pockets of the wealthy,” said Kleinbard, a former staff director at Congress’s Joint Committee on Taxation.

The Cain campaign’s own analysis of the plan doesn’t address how it 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.”

Long-Term Boost

Will McBride, economist for the Tax Foundation in Washington, said Cain’s tax plan would spur economic growth in the long run. While the 9 percent federal sales tax would depress consumption now, if consumers know they will have more money in their pockets in the future because of lower taxes, they will spend more.

“This is not a Keynesian plan; this is a long-term growth plan,” McBride said.

Even some conservatives that advocate for a simplified tax system disagree with Cain’s approach.

Ryan Ellis, tax policy director at Americans for Tax Reform, which advocates for lower tax rates and smaller government, said the plan introduced entirely new taxes that are expected to rise with time.

The business tax functions like a value-added tax, he said, where the inputs to a product are taxed along the way. “When you raise the VAT, it’s embedded in the price of the good so it’s a politically easy tax to raise,” he said. “The people who know tax policy in the conservative movement are not responding well to this.”

Not All Bad

Still, Ellis said the plan is better than the current system though not as good as some alternatives.

“It would radically simplify the tax system,” he said. “It would move the tax system toward a consumption base and it would do so at very much lower marginal tax rates.”

Most groups said they aren’t lobbying for or against 9-9-9 yet because it’s unclear whether it will become a viable proposal.

“In general, we are supportive of efforts to simplify the tax code,” said Jason Brewer, spokesman for the Retail Industry Leaders Association, based in Arlington, Virginia. “We are not in favor of a national sales tax. If in the primary season this becomes a hot topic, we will certainly weigh in more publicly,”

--With assistance from Cotten Timberlake, Richard Rubin, Steven Sloan, Jeff Plungis, Megan Hughes and Alex Wayne in Washington, Chris Christoff in Detroit and Mary Jane Credeur in Altanta. Editors: Timothy Franklin, Jim Rubin.

To contact the reporters on this story: Alison Fitzgerald in Washington at afitzgerald2@bloomberg.net

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


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