Cain’s 9-9-9 plan continues to come under fire
If you watched the Republican debate last night, you noticed the increased scrutiny on Herman Cain’s 9-9-9 plan. The criticism isn’t without risk. If they hit him too harshly, they risk victimizing him and emboldening his base of support. If they’re too lenient, the quick-witted Cain wll turn make sure that it blows up in their face.
But Cain has tipped his hand in what he has to come back with as conservatives lay out very serious concerns about the proposal; and it’s clear that he isn’t ready to argue on substance. His staff has responded to criticism with a simple line, “the problem with that analysis is that it is incorrect.” Cain’s own recent defense of the plan laid out in an editoral leaves more questions than answers.
Even the editors at the conservative National Review are unconvinced that Cain’s good intentions will bring the benefits that he claims:
Herman Cain deserves credit for proposing a tax-reform plan that is specific, promotes economic growth, and has captured the imagination of conservatives nationwide. His 9-9-9 plan builds on the insight that one of the chief defects of the current tax code is its bias toward consumption over savings. But his plan’s peculiarities of design, substantive weaknesses, and political naïveté render it unworthy of conservative support.
Cain envisions his presidency as featuring a quick move to the 9-9-9 plan followed by an educational campaign about the virtues of the national sales tax. He will have to move fast, since he is counting on the massive economic boom he expects his plan to create to enable him to balance the budget in his first year. None of this sounds very achievable, but let’s indulge the candidate. Even if one believes, as we do, that the mortgage-interest deduction should be set on a path to extinction, does its immediate abolition in the midst of a weak housing market seem wise?
And while the plan promotes new savings, it attacks existing wealth. In particular, it is a plan likely to arouse the ire of retirees. They have paid income taxes their whole lives and would now have to pay additional sales taxes on their savings when they try to spend them. On balance, of course, retirees would continue to receive a large net transfer of funds from the federal government. But why fight them in a bad cause?
Ramesh Ponnuru, a contributor to the NRO, also voiced concern:
If you think taxes are complicated now, wait until Herman Cain simplifies them. The former chief executive officer of Godfather’s Pizza Inc., now running for the Republican presidential nomination and selling a book, has been rising in the polls partly because of the appeal of his “9-9-9” plan to reform taxes. At the Bloomberg/Washington Post debate at Dartmouth College last week, he argued that a great virtue of the plan is that it is “simple” and “transparent.”
Cain claims that neither the sales tax nor the VAT will cause prices to increase. His argument is that the cost of the taxes that he would reduce or eliminate is “embedded” in the prices of goods: Reducing that cost and piling on sales taxes would be a wash. It sounds too good to be true, and it is. If taxes are embedded in the prices of goods, they are embedded in the price of labor, too. That means wages would have to fall. And if wages don’t fall, firms will fire people to avoid paying wages above the new market level.
The Federal Reserve could prevent mass unemployment by accelerating inflation to aid the transition to the 9-9-9 system, and then inflating again, even more, for the switch to the 30 percent sales tax. But Cain, who has been complaining about the Fed’s “printing money out of thin air” in recent years, may not support these steps.
He says the plan would “end the IRS as we know it.” But even after the last stage, the federal government would still have to know people’s wages to figure out how large their Social Security checks should eventually be. And since benefits could no longer be tied to payroll taxes paid — Cain would have abolished those taxes — people would, for the first time, have an incentive to fool the federal government into thinking they had earned more than they actually did. Over-reporting income would get you higher Social Security benefits, without raising your tax liabilities. Cain wants to introduce personal accounts as part of a long-term change to Social Security, but during the decades of transition those accounts will be on top of some amount of traditional benefits. An enforcement regime of some kind would be needed.
Even if the candidates did criticize Cain too hard, I don’t think it would help him as much as many think it will; especially now that there are frequent concerns being voiced by prominent conservatives. Some of Cain’s own economic advisers admit that voters are wary of a the national sales tax aspect (really, it’s a value added tax); essentially conceeding that it would likely be a liability in the off-chance that Cain actually wins the nomination.