Thursday, October 13, 2011

The Problems with Herman Cain's 999 Plan

So, Herman Cain has his 999 plan that completely reworks the tax code. He would replace the progressive income tax with a flat 9% income tax, a 9% national sales tax, and a 9% corporate tax. Take away the deductions, the loopholes, make it flat and simple. Seems a great first glance.

We replace income taxes with consumption taxes, something that many conservatives like because, they argue, it spurs investment which in turn spurs growth. Whether this is true or not, we'll leave open, but there is good evidence that it does not. But the big claim is that it ends up being revenue neutral, that is, it brings in the same amount of money. If that is true, and again, it is a claim I doubt, but if we grant it for the sake of argument, we see the real point behind the move.

Money can be used for two things: (1) to buy stuff, (2) to make more money. If you look at the way the wealthy use their money compared to the middle class, working class, and poor, you see a marked difference in the percentage allotted to 1 versus 2. The less money you have, the greater the percentage you spend. The more money you have, the smaller the percentage you spend. By taking the basis of taxation from income to consumption, what you do is make the poor and the middle class pay the lion's share of taxes. If the same amount of money is coming in from taxes, the rich pay MUCH MUCH less.

But what about the flat income tax part? That's more fair isn't it? The problem with the flat tax argument is that it confuses “wealth” with “value.” Money can be used to do two things, it can be used to purchase goods or services and it can be used to make more money. If you have greater wealth, more money, each dollar has a greater value. Consider two brothers, one a poor philosopher and the other a wealthy new economy entrepreneur. Both brush their teeth with equal frequency, for the same amount of time, applying the same amount of tooth paste. One is barely scraping by and can only spare a little money for toothpaste each week and so must buy the small tube. The other has plenty expendable income and so can buy the larger tube, the economy sized. Over the course of the year, the poorer brother has had to spend more on tooth paste because he had less money. If you have more money, each dollar is more valuable in that it can purchase more goods. Similarly, suppose you were given the following offer, “Either you can invest one million dollars for a year and keep all the money you make with it or you can have ten million dollars to invest and keep one tenth of what you make.” You should choose the ten million because having more money opens up more lucrative opportunities. If you have more money, each dollar is worth more because it can be used to make more money.

Finally, the income tax does not really touch the rich whose income primarily comes from capital gains -- that is, income from investments, not incomes from actually going out there and working for a living like the rest of us slobs. So, by moving to income and consumption taxes, you pretty much make sure that the middle class and working poor completely support the country with the rich not pitching at all.