Cain's 9-9-9 Plan Is (Roughly) 3 VATs in 1

Odd that a plan whose main virtue, according to supporters, is its simplicity should be causing such confusion. I had a moment of confusion myself yesterday. I haven't been paying close attention to Herman Cain, so when I read Laurence Kotlikoff describe 9-9-9 as a personal income tax plus a sales tax plus a VAT, I thought he had blundered--even though I know he knows a lot about taxes. 9-9-9 is a personal income tax plus a corporate income tax plus a sales tax, right? Why would anybody propose both a sales tax and a VAT? A VAT is just a sales tax collected another way (in slices rather than all at once). Why have a retail sales tax of 9% and a VAT of 9% when you could just have a single sales tax (collected one way or the other) of 18%? Absurd.

I would be interested to hear Cain's view on this because it turns out of course that Kotlikoff is right, as Bruce Bartlett and Josh Barro noted a while back, and as the Tax Policy Center further explains. Cain's "business tax" has been widely reported as a proposed tax on earnings (eg in the FT), and just yesterday Arthur Laffer defended it as such in the Wall Street Journal: the "now famous" plan includes a tax on "net business profits", he said. But Cain's policy document makes it clear (fairly clear) that he is proposing a business transfer tax--a tax on revenues, with deductions for purchases (and dividends) but not for wages. That, my friends, is a VAT.

Strange, is it not, that this has been so widely overlooked? And while we are adding up the VATs in Cain's plan, the Tax Policy Center reminds us that the personal tax component in 9-9-9 is a variant of the well-known Individual Flat Tax--Cain's document uses that term--first proposed by Robert Hall and Alvin Rabushka.

The flat tax is a subtraction method value-added tax, similar to the [business transfer tax], with the exception that businesses may deduct wages paid and workers must report and pay taxes on their wages. With a single rate, however, it makes no difference whether the worker or the business remits the tax. (The original flat tax proposal would have allowed workers to claim exemptions for themselves and dependents, but the Cain proposal has no such adjustment.)...

We assume that the national sales tax and business flat tax are imposed independently on businesses so they sum to sales tax rate of 18 percent. The individual flat tax, however, is applied to real wages that have been reduced by 18 percent by the other two taxes. The 9 percent individual tax thus applies to only 82 percent of tax-inclusive consumption, making its effective rate 7.38 percent of all consumption. Therefore, the three taxes combined are equivalent to a 25.38 percent national sales tax... [emphasis added].

I can see the case for making consumption the base for the tax system. (Important point: this need not be regressive, as Kotlikoff points out.) I can see the case for a VAT. But I can't see the case on grounds of simplicity for a sales tax collected one way plus plus a sales tax collected another way plus (in effect) a sales tax collected a third way. Maybe Cain can explain.

Presented by

Never Tell People How Old They Look

Age discrimination affects us all. Who cares about youth? James Hamblin turns to his colleague Jeffrey Goldberg for advice.

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register.

blog comments powered by Disqus

Video

Never Tell People How Old They Look

Age discrimination affects us all. James Hamblin turns to a colleague for advice.

Video

Would You Live in a Treehouse?

A treehouse can be an ideal office space, vacation rental, and way of reconnecting with your youth.

Video

Pittsburgh: 'Better Than You Thought'

How Steel City became a bikeable, walkable paradise

Video

A Four-Dimensional Tour of Boston

In this groundbreaking video, time moves at multiple speeds within a single frame.

Video

Who Made Pop Music So Repetitive? You Did.

If pop music is too homogenous, that's because listeners want it that way.

More in Politics

Just In