Thursday, October 20, 2011

Herman Cain and the 9-9-9

Herman Cain has recently shot up in the GOP polls, demonstrating himself even as a general election threat to President Obama. With such positioning however, comes increased scrutiny. To that cause, critics have chosen the centerpiece of Cain's message as their attack point: the 999 Tax Plan.

The scrutiny is hot concerning the proposal, and the power of articulate persuasion in light of such criticism will be critical if Cain is to maintain momentum. Among the largest concerns is that the business portion of the plan amounts to a defacto Value Added Tax.

A value added tax is a consumption based taxed levied on every stage of production, which ultimately leads to a higher tax incidence for the consumer. Most European nations have adopted such a tax structure in modern times, and the reputation of their results cause unease among some American tax reformers. With background training in economics, I was able to personally conclude that this charge a defacto VAT was indeed palatable (with the exception of exported products, which are exempt under 999).

The latest debate did not grant Mr. Cain the opportunity to truly address his critics, but the American Enterprise Institute recently granted him a better platform from which to defend himself. Cain acknowledges that one could technically describe the business portion of his tax as a VAT. He reminds us however, that the primary fear of a Value-Added Tax is to have it imposed on top of other tax codes, as opposed to having such plans replace such codes.

"It is frustrating when people want to call it a VAT Tax. It doesn't matter what you call it." said Herman Cain. "The reason that some of my opponents want to call it a VAT, is because they want scare people because of what happened in Europe. They have both. They have a VAT tax, but they got multiple VAT Taxes. Technically, that last retail tax of 9%, you can call it VAT, but it only happens one time. The difference is that in Europe, it happens multiple times."

Mr. Cain then made the point that at every stage, profits are already taxed in an invisible VAT-like manner. In a loaf of bread, a farmer must pay taxes on his profit, truck driver who delivers the flour pays taxes on his profit, as does the baker, the grocery store owner, ad nausea. Ultimately, these compound taxes are still paid by the consumer in the final pricing of items. The difference is that his plan makes such taxes more visible.

Mr. Cain went on to explain that in the long run, as one who has been studying tax policy for 15 years, the Fair Tax would be superior over the long run, as it puts the consumer completely in charge in how much they pay in taxes. WIth a 100% consumption tax he believes, we would see a significantly boost the economy.

Personally, this economist held doubts concerning the 999 Plan as a viable reform plan. Mr. Cain himself remains confident in his carefully constructed plan. In the aftermath of his AEI defense, I concede that the plan is nonetheless a viable improvement to the current tax

So long as in practice, his claim of a "single VAT" rather than a multiple one holds true.

~David Morris~

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