Herman Keyne’s 9-9-9

Herman Cain Keyne is getting a lot of attention for his 9-9-9 tax plan. I think his plan is something he rushed out to get attention—it worked. One thing about Herman is that he knows how to sell. I wish Ron Paul would pay attention to this. I like Herman a lot, except for his ideas and proposals. He’s a really bright guy, amazing personal story, and a huge success in business. But … he’s a conservative in the new mold, if you will, who fits the needs of social conservatives but has a fuzzy grasp on economics. They all say they support the free market, individualism, lower taxes, and less government. Few understand how it really works. Except for Ron Paul. 

There is a mantra going around that we need a good businessman in the White House to run things. I would humbly disagree. I say give me an ideologue any day, someone I trust will live up to their campaign rhetoric. Mitt and Herman are good guys, but their ideas mostly fail to grasp the real issues that afflict our society. We’ve had “pragmatists” running our government for far too long. Reagan was the last ideologue and he largely failed to achieve his ideas. I know where Ron Paul stands and what he would do when he is elected (his plan, just announced, is coming soon).

I thought I would start publishing criticisms of the candidate’s economic proposals, starting with 9-9-9. It shows that Herman is solidly within the mainstream of economic thought: very similar to Democratic Keynesian, just less of it.

Here is Cato’s take on 9-9-9:

Herman Cain: How about 15-15-15?

by Chris Edwards

This article appeared on The Daily Caller on October 14, 2011.

Chris Edwards is editor of Cato Institute’s Downsizing Government.org.

Presidential candidate Herman Cain has made a splash with his 9-9-9 tax reform plan. I love his 9 percent income tax, but the skunk at the tax reform picnic is his 9 percent retail sales tax. Mr. Cain is an articulate advocate of free enterprise and I wish him well in the contest, but he should ditch the sales tax.

Adding a retail sales tax to the federal government’s powerful tax armada would be a terrible idea from a small-government perspective. Democrats are desperate to find ways to fund soaring entitlement costs, so it’s dangerous to give them conservative political cover to add a new federal funding source.

Cain’s 9 percent business tax is also a problem. It is similar to a value-added tax (VAT) because it would disallow a business deduction for wages, which would make the base much broader than the corporate income tax base. And like a VAT, Cain’s business tax would apparently be imposed on all businesses, not just those currently paying the corporate income tax.

The result would be that American businesses would be collecting a large tax on workers’ wages — but workers wouldn’t see this major government grab. One caveat is that the Cain business tax would allow a deduction for dividends paid, which would narrow the base compared to the standard VAT.

In sum, two of Cain’s three 9′s are bad ideas. His advocacy of lower marginal rates and reduced taxes on savings and investment are great, but he should drop the 9-9-9 plan.

Instead, Cain and other candidates should consider a 15-15-15 plan. At first blush, that doesn’t sound very appealing because the rates are higher than Cain’s. But the business tax base would be much smaller than Cain’s, and the plan would make existing revenue sources more visible and efficient. Here’s the 15-15-15 plan:

  • 15 Percent Payroll Tax. Cain would abolish the current 15.3 percent payroll tax that funds Social Security and Medicare. That’s odd because Cain — to his credit — is proposing a Chilean-style Social Security system with personal accounts. I’d keep the current payroll tax, but move to a Chilean-style system by allowing workers to put 6 percentage points or more of the tax into a personal account. That would feel like a tax cut for workers because they would retain ownership of the money. I would also require that all 15.3 percent of the tax be listed on employee pay stubs so that the burden is highly visible. Currently, workers only see half of the payroll tax, and thus might be unaware of the high cost of these retirement programs.
  • 15 Percent Personal Income Tax. Like Cain, I’d get rid of just about all deductions and other breaks under the income tax, except pro-savings features such as the 401(k) rules. It’s also reasonable to retain a substantial basic exemption for low-income filers, as under the Dick Armey/Steve Forbes “flat tax” plans. The Armey/Forbes plans had rates in the range of 17 to 20 percent, but they only taxed labor income at the individual level, not capital income. Technically, that is the right way to go under a flat tax, but as a bow to today’s political realities, we might want to tax wages, dividends, interest and capital gains all at 15 percent.
  • 15 Percent Corporate Income Tax. We should cut the 35 percent corporate income tax rate to 15 percent. People say we should trade a rate cut for loophole closing, but loophole closing is not worth the effort. Corporate loopholes are far smaller than loopholes in the individual code, and trying to scrap them just creates a blockade of business opposition to reform. Also, if we dropped the rate to 15 percent, the base would automatically broaden as businesses reduced their tax avoidance and evasion. Corporate profits parked offshore would flood back into the United States, and capital investment would get a huge boost. In the long-run, policymakers should consider switching to the simpler cash-flow business base under the Armey/Forbes flat tax, but if we cut the rate to 15 percent, the distortions caused by the current base would be greatly reduced anyway.

How much revenue would 15-15-15 raise? You could probably make it revenue-neutral by adjusting the basic exemption amount under the individual income tax. Dick Armey’s flat tax exemption was huge at about $35,000 for a family of four. A lower exemption amount makes more sense, but this is a variable that could be fine-tuned.

Of course, tax reform would be much easier if it created an overall tax cut. And that would be much easier to achieve if Congress cut spending. So I’d encourage Mr. Cain and the other candidates to roll up their sleeves and give us their detailed spending-cut plans. As a modest first step, how about a 9-9-9-9-9-9-9-9 plan to slice 9 percent off the budget of every federal agency?

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14 comments to Herman Keyne’s 9-9-9

  • austrian

    /* I like Herman a lot, except for his ideas and proposals. He’s a really bright guy, amazing personal story, and a huge success in business. */

    ROTFL – seriously Jeff? He said Alan Greenspan is the best chairman of the Federal Reserve. That one line should tell everything you need to know about the guy.

    /* Few understand how it really works. Except for Ron Paul.*/

    I would say nobody understands it except Ron Paul. It is highly unlikely that Paul will win the GOP primary. Here’s why: he has a very realistic plan for getting us back on the right track, however there are too many pleading selfish interests who won’t vote for him – because he is cutting their jobs with his plan. As Hazlitt rightly observed, economics is made intentionally obscure and difficult to grasp because of these selfish interests.

    If only everybody in this country read ‘Economics in one lesson’ and understood the fallacies of modern day chicanery economics.

  • austrian

    /* One thing about Herman is that he knows how to sell. I wish Ron Paul would pay attention to this. */

    Ron Paul’s plans are too “drastic” and “fringe” to be sold. The moral character of the people in this country needs reform to wake up for the predicament we’re facing.

    Then Paul’s man does not need to be ‘sold’, it just has to be ‘understood’.

  • Keith Weiner

    What Cain needs to address is the spending. We need to cut spending, like 90%. As Austrian noted, Cain is a fan of Greenspan and of central banking in general.

    Ron Paul has a “radical” spending cut plan: to get us back to the days of George “Breathtaking Deficits” Bush. But the real problems with Ron Paul can be summarized as follows:
    – anti-semitism and racism
    – anti-gay
    – anti-defense
    – southern separatism
    – is he actually in favor of having the Treasury issue currency directly??

    http://sandefur.typepad.com/freespace/2008/01/a-guide-to-the.html

    I am not sure if he has stated his views on banking explicitly (I get the impression he hates banks), but if he holds truck with the Mises Institute people, then he opposes fractional reserve banking, i.e. banking and lending, and of course Real Bills. A gold standard without credit wouldn’t work. People would just conclude “gold is no panacea”, go on to something else, and it would be another 100 years before anyone again dared utter the four letter word again in civil discourse.

    • Wow, Keith, that is just wrong about Ron Paul. His views are far more subtle than that. Is this an Objectivist view? I suggest you dig deeper, quite a bit deeper. See: http://www.lewrockwell.com/vance/vance127.html
      There are things about him I don’t like, but if he isn’t the best candidate out there, who is? What is the point of this diatribe?

    • austrian

      – anti-semitism and racism

      Where did you get that? Libertarianism is not racism, what you say is collectivism and Ron Paul is far removed from these collectivist ideas.

      – anti-gay

      He said the Federal Government has no business worrying about these laws. That doesn’t make him anti-gay, he leaves it to the states. Delegation is not the same as anti-gay.

      – anti-defense

      Spending beyond one’s means to fight wars that one cannot win lead to the fall of Roman Empire, it will lead to the fall of America if the course is not corrected soon. You have clearly a lot to learn in this regard. Watch ‘the war you don’t see’ documentary for instance.

      – southern separatism

      where did you get that? I had no idea, have never read about his position in this regard.

      – is he actually in favor of having the Treasury issue currency directly??

      If it is gold/silver, I think he is. He is in favor of competing currencies, if I understand correctly.

  • Californio

    Instead of trimming 9% off all federal agencies how about closing some – Dept of Energy and Education come to mind. Both costly failures.

  • Pete

    I still like the Fair Tax idea. Cain said his 9-9-9 is the precursor to trying to get The Fair Tax plan implemented. Yes, what politician would ever agree to the Fair Tax? Guys like Cain and newer conservatives. So, while flawed, 9-9-9 is a step in the right direction, if it brings us closer to The Fair Tax.

  • BCanuck

    How about:
    - 15% personal income tax
    - Except for a $20,000 basic personal exemption -no deductions or exemptions – no mortgage interest, kids, spouses, charities, etc, etc.
    - everyone files as an individual.
    - Each individual gets a retirement account where (after tax) contributions can grow tax free and withdrawls are tax free if withdrawls are after the age of 65.
    - All income – wages, dividends, capital gains – taxed at the same rate.
    - 0% corporate income tax. Ends all discussion (and compliance expense) about exemptions, deductions, credits, jets, expatriate companies, etc, etc. Also ends a good chunk of the lobbying in DC.
    - 5% national VAT; fully credited for business purchases. Exemption for basic groceries. Low income individuals get a credit.

    Taxes should be about raising money for common public government services. Taxes should not be about rewarding or punishing any specific group or behavior.

    Admittedly, a near poltical impossibility; corporate villains get off ‘Scott-free’, middle class deduction goodies eliminated, dreaded Euro-style (but Canada rate) VAT in everyone’s face on every purchase.

    Thoughts on total amount of taxes raised (as % of GDP) or economic impact?

    • Kevin Beck

      My biggest objection to the VAT is the effort to comply with it; every business has to maintain too many records. The idea of simplification is to REDUCE record-keeping.

      The idea with the Fair Tax is to make it less painful to have to worry about some government thug coming into your house to look through all your personal records. Since every state except 5 has a method established for collecting sales taxes, they can use this same set-up for collection of the Fair Tax. No business is going to risk loss of the right to do business by failing to pay sales taxes, which are the easiest to audit for the states. This alone would eliminate %400 billion annually that is spent by businesses and individuals in just complying with the current tax system.

      I definitely agree with turning over retirement planning to individuals and keeping government bureaucrats out of the picture. We need to wind down (this does NOT mean eliminate immediately) Social Security so that there is a definite cut-off for when new funds will be added to the program, and everyone will start by making contributions to plans that have their own name to them, for planning for their own retirement. We need to stop basing all decisions that should be for the individual on a least-common-denominator style of planning.

      I also agree about the purpose of taxes; we just need more basic sensibilities to define what common government services are, instead of the hosers that make those decisions now.

  • Leslie Goudy

    Great Article Jeff. Keith – where on earth did you get that negative propaganda on Ron Paul? He is the only one that tells the truth of all the candidates. I have learned in my old age to discern the truth as you well know. I am very surpised at you. Do you consider this the Truth? To be against Zionism, the Politics, is nothing to do with being an Anti Semite. I talk to Jewish people that make sure I know they are against the Zionist Banks http://www.youtube.com/watch?v=Zx1Jpxel-1k