October 15, 2011

Nein, Nein, Nein!

Hatched by Dafydd

So why do I so adamantly oppose Herman Cain's "9, 9, 9" tax plan -- 9% income tax, 9% corporate tax, 9% national sales tax -- even though I like him personally as a candidate?

Several reasons, each of them as simple and non-technical as the plan itself.

First of all, I shudder at the thought of any kind of national sales tax (NST) at all. I have long opposed the tendentiously named "Fair Tax" pushed by so many so-called conservatives; if you want a glimpse of tax hell, look what's happened to all the nasty NSTs and VATs throughout Europe and in Japan: They start low but almost immediately begin quietly creeping upward.

(A value-added tax, VAT, is a sales tax on every incremental step of creating a product; it's even more insidious than an NST, because you can't even tell how much you're being taxed... it's a little bit here, a little bit there, so opaque that even the feds often have no clue.)

If an out-of-control government raises your income or property taxes, you feel it good and hard the next time you write a whopping big check to the government. You can even compare today's tax bill to yesteryear's. But when the feds slyly raise the NST, you can't immediately tell: You only know prices are higher; you can't distinguish the effects of the NST from inflation. Therefore, raising taxes is infinitely easier when tax victims aren't sending a check to the feds every year.

Second, if we ever instituted an NST, I believe that all those states that have sales taxes would begin raising them, secure in the knowledge that shellshocked taxpayers wouldn't be able to distinguish how much of the increased sales tax on a purchase was due to the federal sales tax and how much due to the state sales tax: When voters start screaming, each side can point a finger at the other; in the confusion, voters never know whom to punish.

Third, Cain's 9, 9, 9 proposal shoots at the wrong target. We do have a minor tax problem; income and corporate taxes should be lower, simpler, and less riddled with social engineering loopholes. But the real problem we face, the existential problem, is not taxing but spending: under both Democratic and Republican Congresses, we are spending ourselves into oblivion. (Worse under the Left, of course, but unconscionable even from the GOP.)

Cain has said virtually nothing about how he would reduce spending; he seems to believe that shifting the revenue source -- he himself says that 9, 9, 9 would be "revenue neutral," meaning we get no tax reduction at all -- will automatically make Congress more fiscally responsible.

But why? What would cause politicians to stop spending money we don't have? We have a transcendental deficit right now; that means that congressmen and senators (and presidents) care nothing that we spend multiples of all revenues collected. What about 9, 9, 9 would change that fundamentally unbalanced equation?

And even if it did, we're right back to problem number one: With so much pressure to "balance the budget," what could be easier than turning 9, 9, 9 into 9, 9, 11, then 9, 9, 15, then eventually 9, 9, 22?

Then with all that bright, shiny new tax money, isn't the most likely congressional response to be... more spending? As "Che" sings in Evita:

When the money keeps rolling in, you don't ask how
Think of all the people guaranteed a good time now!

Herman Cain's biggest problem is that, so far at least, he's a one-note pony; and that single note, his 9, 9, 9 plan, crumbles to dust under scrutiny.

His other problem is that he has no experience running any kind of a government bureaucracy, none, nada. Government agencies simply do not function like corporations, even very large corporations. I'm sure we'd be better off if they did; but it's a mug's game trying to transmogrify the former into the latter. (Cain's only quasi-governmental experience was serving on and chairing the board of directors of the Federal Reserve Banks of Omaha and of Kansas City, which are not government agencies.)

With not one day spent running such a beast, he'll be punked by the permanent administrative state, guaranteed. Kind of like what happened to Merv Griffin when he got involved in a big hotel real-estate deal with Donald Trump: the Donald drank Merv's milkshake and ate him alive.

Herman Cain is a great guy, so far as I can tell; and he can do a great service by focusing debate on what really matters right now: the existential threat posed to the United States by Barack H. Obama and the demented Democrats. He might make a good vice president; one hopes he can learn to handle a bureaucracy in time to run for the big chair again in eight years. But right now, his only trick -- 9, 9, 9 -- is just a catchy and clever red herring.

Hatched by Dafydd on this day, October 15, 2011, at the time of 1:27 PM


The following hissed in response by: Baggi

I'm not sure how I feel about the 9-9-9 plan yet. I'm pretty sure it will raise my taxes I pay each year, but i'm not sure if that should matter. I'd rather look at what's best for the country, rather than what's best for my own personal finances.

So far though, it seems like all the opponents of the 9-9-9 plan have been pushing me toward it. Maybe it's because I like Herman Cain so much, it's push back against those who criticize him? I'm not sure. What I do know is that more things Hugh Hewitt says against it, the more I like it.

As to what you wrote about, I believe you're in error.

The first error, I believe, is comparing it to a VAT. Or maybe I just misread you. I know you said it wasn't, that a VAT was worse, but it seems like you were making the connection above. Just for clarity sake, it's not a VAT.

Moving on. How would I know here in Washington State if the tax went up or remained the same (Down is never an option with taxes).

For one, I pay attention.

But, most people don't. Here's the kicker though with his tax. It's only on new products. Not on used goods. This would be immediately recognizable on something like the purchase of a new car vs a used car. I bought a used car recently and I still had to pay 2k in taxes to Washington State. Under the Herman Cain plan, I wouldn't have paid any taxes to the Federal Government. On the other hand, I go in and purchase brand new, I pay the extra amount.

Does that hurt new car sales? It might.

But that's the beauty of a tax like this. If it becomes too outlandish, we can always buy used goods and avoid the tax.

This means that the government clearly hurts itself by making the tax too punitive. Not only does it hurt itself, it hurts the rest of the economy.

We have an electorate (Tea Party) that has brought a lot of attention to taxation in the United States. Suddenly, we started talking about how much to cut taxes.

So, I think it would be harder than you think to raise from the 9% and I think there is a possibility that if it collected more money than expected, it could be lowered as a "stimulus".

The above hissed in response by: Baggi [TypeKey Profile Page] at October 15, 2011 6:10 PM

The following hissed in response by: Baggi

Not that this will convince you, Dafydd, but the Club for Growth has endorsed Cain's 9-9-9 plan.


The above hissed in response by: Baggi [TypeKey Profile Page] at October 15, 2011 10:53 PM

The following hissed in response by: wtanksleyjr

I don't see a 9-9-9 system being useful; it has all the overhead of a completely income tax system, plus all the overhead of a corporate tax, plus all the overhead of a sales tax.

However, are you joking about writing checks? Income tax is constructed of necessity in such a way that you DON'T write checks. The system depends on most people receiving a refund most of the time. Withholding is the characteristic evil of the system, and there's no way around it.

A sales tax system is FAR more transparent, especially one built the way all of the state systems I've seen are built (with a tax percentage you have to know because all prices are required to be listed without tax). It's possible that the system might be modified to not work that way, but it would take politicking to change from the currently normal way of doing things.

Now, I'm especially surprised you think this, because you live in CA, and you know how our sales tax works, complete with the fact that we have county-level and metropolitan variations in our sales taxes.

I do admit that the "Fair Tax" has problems, although I also think it's far superior to what we have now. But any way we do it, we won't fix our tax problems until we manage to switch to some kind of consumption tax, instead of our insanely awkward so-called "income tax" (which is impossible to define, hence the controversy about capital gains, gifts, death taxes, and so on). Not to mention the problems with undocumented people like illegal aliens and under-the-table payments.


The above hissed in response by: wtanksleyjr [TypeKey Profile Page] at October 16, 2011 8:12 AM

The following hissed in response by: Dafydd ab Hugh


However, are you joking about writing checks? Income tax is constructed of necessity in such a way that you DON'T write checks. The system depends on most people receiving a refund most of the time. Withholding is the characteristic evil of the system, and there's no way around it.

Do you file a 1040 form? Everybody who makes more than a very small amount during the year must do so (or 1040 EZ). Take a look at line 60: That tells you the total income tax you paid.

Everybody who fills out the form, whether by hand or by some software like TurboTax, anticipates line 60 with dread. If it turns out that we already paid more than we owe, we're relieved; if we still owe even more tax than we paid, we're devastated -- and scared we might not be able to pay. But there's no getting around knowing exactly how much income tax you paid (and how much SE tax, if you have a business).

But with the sales tax, you have no idea at the end of the year how much NST you paid, unless you're anal enough to keep a record of every purchase you made and the tax assessed; nobody here in California sends me an itemized receipt for my CA sales tax... do you get one of those?

Over the last couple of years, CA sales tax was jacked up; there was very little outcry from Californios -- why not? Well, because you only knew about the increase if you paid attention to the news (which most people don't). If the state income tax had gone up as high a percent as the sales tax (a 16% increase), I think many, many more people would have noticed; they would have realized they had to pay more on April 15th, or that their refund was significantly smaller than last year's.

Bottom line to all commenters: I do not trust the government not to raise the sales tax once implemented. I do not trust them to make NST raises transparent; I expect they will do everything they can to make it as opaque as possible.

I do not trust the feds to make the new tax scheme "revenue neutral;" I don't see how they could possibly resist tossing in a percent here and there to raise it.

In my opinion, the only tax plan that would work would be a straight-up reduction in corporate and income-tax rates, coupled with a Paul Ryan-like slashing of spending.

No entirely new way of taxing Americans until we first reduce taxes, because I do not trust our government. Remember what happened the last time Republicans were in charge of the whole shebang?

Let them first demonstrate that they have learnt from the horsewhipping they got in 2006 and 2008... and then maybe I'll support some radical change to taxing us.


The above hissed in response by: Dafydd ab Hugh [TypeKey Profile Page] at October 16, 2011 1:33 PM

The following hissed in response by: wtanksleyjr

Dafydd, I'm dead certain that most people never notice line 50. The only line that matters is the one that tells you what to mail in, and what to wait for. I've filled out forms in every possible way; by hand, by PDF, by software, and via professional; but I've never really noticed the moment of decision (line 50), because it's not a decision I EVER get to make. It's just another number on another form.

I notice my paychecks; I sometimes have to re-compute my yearly salary and/or takehome; and I know my local sales tax (and one or two neighboring ones). I have NO idea how much income tax I'll owe, even in general; and I'm fairly sure that the only people who bother knowing are people who are gaming the withholding system (long life and prosperity to them).

OTOH, I agree entirely that I don't trust the 9-9-9 proposal. It's a MORE complex system, with more opportunities to finesse. I love Cain for trying, but I don't think he came up with a good idea.


The above hissed in response by: wtanksleyjr [TypeKey Profile Page] at October 16, 2011 5:45 PM

The following hissed in response by: wtanksleyjr

Oh, I forgot to mention: "In my opinion, the only tax plan that would work would be a straight-up reduction in corporate and income-tax rates, coupled with a Paul Ryan-like slashing of spending."

What is needed is a total replacement of our current system with a system that works on principle, rather than on a complex system of exceptions. Roll ALL of the government programs into a single bill (no more separate programs for Social Security and so on); and tax on that. The principle involved should ideally be that we tax consumption; even if we use an income tax that's possible (see TheMoneyIllusion blog), even though a sales tax is obviously a MUCH more natural choice.

Implementing something like this, as wonkish as it is, will reduce the cost of compliance enormously, putting a ton of tax preparers and enforcers out of business. That's a sector of the economy that could stand to lose some weight.


The above hissed in response by: wtanksleyjr [TypeKey Profile Page] at October 16, 2011 5:52 PM

The following hissed in response by: Beldar

Let's just presume for a moment that as a policy matter, Mr. Cain is correct, and that we should abandon our current revenue-raising system in favor of his 9-9-9 plan. Let's leave aside our objections over such matters as whether sales taxes/VATs are regressive, or whether they make it too easy for the government to raise taxes in the future. Let's join in Mr. Cain's optimistic assumptions about how the economy's better performance would make up any revenue gaps between his plan and what's currently in place. Just assume with me for a moment, in other words, that we all want the kind of reform Cain proposes, where we go to a flat tax on businesses, a flat tax on individuals, and a flat national sales tax.

And assume we set out to figure out the optimum rates for each of those three kinds of flat-rate taxes, to accomplish a Goldilocks ("just right") combination of those three.

What are the odds that the optimum number for each of these three types of taxation -- each very different from one another -- would happen to be the very same single-digit integer?

This isn't economics. It's a gimmick. This is national economic "plan" that was obviously reverse-engineered from a catchy slogan.

Mr. Cain can't tell you why 9-9-9 would be better or worse than 8.311 - 12.897 - 5.135. No one's ever run the numbers on anything except 9-9-9 because those are the numbers that had to be accepted in order for the name to be catchy.

I'm in favor of big, bold reforms. I'm very wary of either a national sales tax or a national business VAT for the same sorts of reasons Dafydd has mentioned. But I'm not going to bother taking seriously something this gimmicky; it's not serious enough to trigger a discussion on any of the policy pros and cons of these kinds of taxation in general, because this plan is tied to rates that can be easily chanted by a crowd/mob.

The above hissed in response by: Beldar [TypeKey Profile Page] at October 17, 2011 5:29 PM

The following hissed in response by: Beldar

Should have ended with "because this plan is tied to rates that were picked specifically and solely because they can be easily chanted by a crowd/mob."

The above hissed in response by: Beldar [TypeKey Profile Page] at October 17, 2011 5:33 PM

The following hissed in response by: Dafydd ab Hugh


This is bizarre: Your point is so obvious -- the absolute best possible rate for income, corporate, and sales tax just happens to be 9% in each case by sheer coincidence! -- yet I swear it never even occurred to me until I read your comment.

I never cease to be amazed by how focusing on point A can completely blind one to equally obvious point B. Yeesh.

So... what Beldar said!


The above hissed in response by: Dafydd ab Hugh [TypeKey Profile Page] at October 17, 2011 11:35 PM

The following hissed in response by: Beldar

Ping: "Beldar on Herman Cain's 9-9-9 plan."

The above hissed in response by: Beldar [TypeKey Profile Page] at October 19, 2011 1:24 AM

The following hissed in response by: Bart Johnson

The Harvard Business School study estimated that about 30% of the cost of items is due to the taxes and the avoidance of taxes. A $1 loaf of bread would cost $0.70 without the taxes already built into the price. 7% state plus 9% federal is still less than the current cost. Throw in the cancellation of the 15% fica and ss taxes plus the reduction to 9% income tax, and you are making major money on the project.
Please stop confusing a RETAIL tax with a VAT. They are totally different.
The receipt you get at checkout shows the sales tax. It could easily show the state sales tax as one amount and the federal tax as a separate amount. People would notice.

The above hissed in response by: Bart Johnson [TypeKey Profile Page] at October 20, 2011 1:49 AM

The following hissed in response by: Nicholas Psaki

I see that I am late to the party, but I want to reinforce Wm's comment in re Line 60 on the 1040. As a financial planner, I can tell you that most people are unable to tell you how much total tax they paid. However, they can tell you to a penny how much of a REFUND they received! (Or, much less common) how much more they had to pay.) The insidious effect of the withholding system is to blind people to their total tax bill. Other than that minor quibble, however, I think Dafydd is right on the mark in his assessment of the 9-9-9 idea.

The above hissed in response by: Nicholas Psaki [TypeKey Profile Page] at October 23, 2011 5:40 AM

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