Advertisement

Herman Cain’s murky 9-9-9 tax plan

Herman Cain’s 9-9-9 plan would probably be seen as just another cockamamie tax scheme were it not for his surprising ascendance to front-runner ranks in the Republican Party primary.

Yet one of the more interesting questions raised by the plan hasn’t gotten much attention: What accounts for the enduring popularity of such tax nostrums, when they never pencil out?

Cain’s proposal, which purportedly would replace today’s federal tax code with a flat 9% personal income tax, a flat 9% corporate tax and a flat 9% national sales tax, has the surface appeal of an advertising slogan. He maintains it would be “fair” and “simple,” get the government “out of our pockets,” allow for the abolition of the IRS and create a huge surge in economic growth.

There’s reason to be skeptical about these claims, because every tax scheme mooted during a political campaign makes the same promises, and none ever seems to be rooted in political or economic realities here on planet Earth. One feature they all share, as it happens, is their murkiness, and 9-9-9 is no exception.

Advertisement

“Almost all of these visionary tax proposals leave out details you really want to know,” observes Joseph Bankman, a tax policy expert at Stanford Law School. He says these schemes play on people’s fear of taxes and on the complexity of the tax code — but that it’s a long way to get from there to the idea that everybody paying the same percentage of income to the tax man is necessarily “fair.”

Let’s take a quick historical tour. In the 1930s, Louisiana’s Democratic Sen. Huey Long tried to make himself a presidential contender on the strength of his “Share Our Wealth” program, which would tax out of existence all income over $1 million and wealth over $3 million.

The revenue thus raised would be spent on what the historian Arthur Schlesinger Jr. dismissed uncharitably as “a hillbilly’s paradise” — guaranteeing every family $2,000 in annual income and a $5,000 “homestead” grant, along with old-age pensions and free college educations. Long finessed questions about his plan’s shaky economic foundation mostly by refusing to answer them.

During the same era, a nationwide movement advocated funding old-age pensions from a tax on every transaction in the economy (the movement’s spread helped scare Congress into passing Social Security), and in California the Socialist author Upton Sinclair ran for governor by proposing to “end poverty in California” — his platform was known as “EPIC” — by replacing the sales tax and most property taxes with an income tax pitched at the wealthy and a sharp increase in the inheritance tax. The revenue raised by the new taxes would be a fraction of the old. Anyway, Sinclair almost won.

Advertisement

In the 1990s, the Big Idea was the Flat Tax, promoted by the presidential campaigns of magazine executive Steve Forbes. The Forbes plan derived from a program cooked up by two Hoover Institution fellows, Robert E. Hall and Alvin Rabushka. Their idea was to replace the multiple brackets and deductions of the tax code with a straight 19% levy.

As Bankman observed in 1995, even as Hall and Rabushka were claiming that their tax was “the fairest tax of all” because it treated all income earners pretty much the same, they acknowledged that it would be “a tremendous boon to the economic elite from the start.”

Mostly this was because it cut the top rate from nearly 40% and exempted investment income — interest and dividends — from the individual tax. Inevitably, this meant a shift in the tax burden onto wage income, which of course constitutes a much larger proportion of income of those at the lower end of the scale.

The Hall-Rabushka Flat Tax wasn’t truly a flat tax: by incorporating a large exemption for low-income families, they effectively created a progressive rate schedule, though less so than the existing system. The tax rate on wage income started at 0% for families under the exemption threshold, rose to 18.5% for incomes of $1 million, and crept closer to the full 19% as incomes rose.

Advertisement

Cain’s plan dispenses with the exemption, which makes his tax flatter. But that doesn’t mean it pencils out fiscally, distributes the tax burden fairly or serves an economic purpose any better than its ancestors from Long, Sinclair, Hall and Rabushka, or Forbes.

To some extent, making those determinations is impossible, because 9-9-9 as publicly presented is quintessentially half-baked. Cain’s website offers what it describes as a “summary” of 9-9-9, but that’s misleading because the “summary” is all there is. That makes subjecting the program to hard analysis rather a gloppy process, like trying to analyze a squid by hitting it with a hammer.

Cain says his plan replaces the payroll tax and eliminates the inheritance tax, provides few incentives for evasion, and is fair, neutral and transparent. According to a cogent analysis by Edward D. Kleinbard, a USC law professor who was chief of staff to Congress’ joint committee on taxation from 2007 to 2009, none of these claims holds water.

In fact, as Kleinbard shows, Cain’s plan doesn’t replace the payroll tax — it is a payroll tax, or more precisely a wage tax, amounting to the equivalent of about 27% on wage income. Wage earners would pay 9% income tax and 9% sales tax on income from first dollar to last. Because their employers would lose the existing tax deduction for their wages, in economic terms that would amount to an effective additional 9% tax on the worker.

Advertisement

Kleinbard estimates that 9-9-9 would cut the after-tax disposable income of a family with gross wage income of $120,000 by $541 compared with current law; a family with $50,000 in wages would be poorer by $4,848. On the other hand, entrepreneurs and other business owners would have a convenient option to cut their own tax bill, simply by paying themselves not in wages but in dividends, which would be tax-exempt.

Cain suggests that his plan would expand U.S. gross domestic product by $2 trillion (about 14%), create 6 million new jobs, and raise wages 10%. He doesn’t cite an economic model to substantiate that result, and in any event these sorts of projections are the last refuge of those desperate to make fantasy seem real. Kleinbard calls the phenomenon “magical thinking,” because one thing we know for sure about tax nostrums, such as the Bush tax cuts of 2001, is that taken in isolation they neither spur economic growth nor pay for themselves through increased revenue.

So the best that can be said about the Cain plan is that it sits securely in the historical continuum of tax-related snake oil and parlor tricks. In olden days the targets of such scams were rubes and children. Is that what Cain takes us for?

Michael Hiltzik’s column appears Sundays and Wednesdays. His latest book is “The New Deal: A Modern History.” Reach him at mhiltzik@latimes.com, read past columns at latimes.com/hiltzik, check out facebook.com/hiltzik and follow @latimeshiltzik on Twitter.


Advertisement