Lately we’ve seen Herman Cain rise in the polls. It’s mainly because of his straw poll victories as well as Perry’s stumbles, but most I believe would agree that his now famous 9-9-9 plan (a 9 % tax on income, consumption and corporations) has played a part in this as well.
I am now going to list a number of issues I have with the 9-9-9 plan. Before I do so, I want to make clear that I do believe Cain’s plan would be an improvement over the current situation, yet as a FairTax supporter I am disappointed that he has backed down from his previous support of the FairTax plan. Most of my issues with the 9-9-9 plan relates to how it is not as good as the FairTax plan. That being said, and in no particular order, here are my issues with Cain’s plan:
1) The 9-9-9 plan is political poison
Many moderate establishment Republicans are quick to claim that the FairTax, while good in theory, is impossible to pass through congress. The FairTax, for those who don’t know, means a 23 % tax on consumption and no other federal taxes whatsoever. Imagine then how hard it will be to pass the 9-9-9. Everyone has an incentive to vote against it: Republicans because it institutes a new tax (one that can be easily raised, too). Several republicans have pledged not to introduce any new taxes (just another reason to dislike pledges), and even those who haven’t pledged anything would be reluctant. This is a problem for the FairTax too, but not as big – if you can tell voters you abolished all taxes and just introduced one new (that is very easy to pay and requires essentially no administration costs), that’s certainly easier to defend politically speaking than the 9-9-9. Democrats would oppose Cain’s plan because it lowers corporate taxes. I’m worried that President Cain may spend all his political capital trying to pass this plan, which would be very unwise and might lead to Republicans losing their congressional majority in 2014 (similar to Obama, who spent his political capital on the wrong issues).
2) The 9-9-9 plan is not scientific
The FairTax plan was developed by economic researchers, many from prestigious universities like Harvard. I know it sounds elitist, but economics is a science (at least to some extent) after all, and while economic researchers are far from perfect, I think they overall do better than politicians (and that include businessmen like Cain). The FairTax has been tested scientifically and is known to be revenue-neutral (in other words, it neither increases nor decreases tax revenue). The 9-9-9 may be revenue-neutral, but it hasn’t been scientifically confirmed to be so. The last thing the US needs right now is less tax revenue, so why take the risk?
3) Cain may be forced to back down again
Herman Cain used to support the FairTax. Maybe he still does, deep inside – we don’t know. What we do know is that he backed down from his previous position. While I understand it’s possible to change your opinions as facts change (as Keynes so famously quipped), I don’t see what facts have changed since Cain announced his candidacy. I personally think Cain has bad economic advisors and that’s why he’s backed down from his support of the FairTax. Like I’ve already said, the 9-9-9 plan is better than the current tax system, and if it passes in congress, I’ll definitely celebrate. But Herman Cain, through flip-flopping on the FairTax, has shown that he is willing to compromise and makes concessions even when it comes to fundamental fiscal issues. You can count on the Democrats (and possibly even some Republicans) to put pressure on him to make further concessions, so that in the end, you may end up with a 12-12-12 plan or a 15-15-15 plan. Cain failed to draw a line in the sand, and he will pay for that. What he should have done is to start by promoting the FairTax, and then if he just couldn’t get enough support in congress, he should then have suggested his 9-9-9 as a compromise. Then, it would have had a much higher chance of passing than it will have now.
4) The disincentive to work is still there
What you tax, you get less off. It’s really that simple, and that’s how taxes are often used: To discourage consumption of a certain good, be it tobacco, alcohol or gas. The thing politicians, and this sadly seems to include Cain, doesn’t understand is that your motive doesn’t really matter much when it comes to taxation. Taxing income will make people work less, even if that’s not your intention. Taxing corporations will lead to fewer and smaller corporations, and in the end fewer jobs. Taxing consumption does lead to less consumption, but not significantly less as we are forced to consume, but not forced to work (you can always collect unemployment benefits or food stamps if you don’t want to work). Also, consumption is its own reward – it’s fun to go shopping (am I right, ladies?), and so we are likely to do it even if we have to pay a consumption tax. Working on the other hand is not its own reward, which is why we have to be paid to do it. Taxation on work is therefore more harmful than taxation on consumption. I imagine a lot of Cain backers will rush to his defense, claiming he is lowering taxes. He is. But why settle for lowering these harmful taxes, when there is an alternative that would abolish them outright?
5) Corporate taxes are hardly lowered
This is not my biggest issue with the plan, but I believe it deserves mentioning. While the US corporate tax rate today is 35 % in theory, in practice most companies will pay much less because of deductions and loopholes. As a matter of fact, it would not surprise me if a lot of big companies are paying less than 9 % already. These companies would then get a tax hike, not a cut. Yes, most companies still get their taxes lowered, but if we are trying to calculate how many jobs/how much growth this plan would create, we need to use the real numbers and not pretend like corporations are paying 35 % today. Some really big companies (these are the ones who can afford to hire accountants and lawyers to find loopholes and deductions) may actually end up paying more in taxes, which means they’ll probably lay off workers. Other, smaller companies will of course be able to afford to hire again, and the plan will most likely lead to a net increase in jobs – but smaller than the net increase would have been if all companies had paid 35 % in practice and not just in theory like today.
6) The IRS will still be open for business
Let’s face it: The IRS is a disgrace. They are among the worst federal authorities in America, and that says a lot. They violate the integrity of private citizens, they persecute and prosecute men and women who have never intended not to pay their share, and their double standards and muddy rules are keeping small business owners awake every night. It is because of the IRS that April 15 isn’t just another wonderful spring day. I cannot believe a businessman like Cain won’t support a plan that would actually put the IRS out of business, once and for all. Yes, he may reform the IRS, but as long as we have income and corporate taxes, the IRS will still be there. The IRS appears to have an organizational culture which encourages their employees to think of the people as their servants, rather than thinking of themselves as serving the people – which is the way it should be. Unfortunately, and I say this as someone who has actually studied organizational culture at university, such a culture is almost impossible to change. Culture isn’t a set of rules, it’s just a perception in people’s minds that takes different expressions. Outlawing or regulating some of the expressions is not going to change the underlying culture – it would be a classic case of treating the symptoms, not the source.
I’ll say it again: Cain’s plan is better than the current system. Cain is better than Obama. Yet, as I’ve shown above, there are several issues with the 9-9-9 plan that makes it by far inferior to the plan Cain used to support – the FairTax. I am also disappointed with how Cain has handled the issue (this is not the only issue Cain has stumbled on).
I would appreciate a response from any Cain backers there may be out there. And before you criticize the FairTax, check out the FAQ at FairTax.org
Thank you for reading