Herman Cain seems likable enough; however, his 9-9-9 tax proposal is not.
His tax plan proposes a 9 percent flat federal individual income tax rate, a 9 percent flat federal corporate tax rate, and a 9 percent federal sales tax.
The flat tax on both corporations and individuals is touted as a solution to the tax complexity problem, but it’s a solution to a problem that doesn’t truly exist. Of greater concern is the proposed federal sales tax.
First, a few facts: The tax rate schedule for individuals and corporations is one of the easiest parts of the American tax code to understand. Anyone with a modicum of spreadsheet capability can construct a lookup table in less than an hour that will give the correct amount of tax for a given level of taxable income, whether for an individual or a corporation.
No, the problem isn’t with the multiplicity of tax rates. The problem of tax complication is exemplified by, among many other things; the interplay of tax credits, the special treatment given to specific types of income, the problem of determining dependency status and, lest we forget, the fact that much of the tax code’s intricacy is driven by political and lobbying considerations.
Another thing seldom considered: from an economic standpoint, corporations pay no income tax. They include the tax into the price of goods sold or services provided, just as they would the light bill, advertising expense and rent charges. The ultimate customer pays the tax.
Sales taxes are regressive. They impact the poor to a greater degree than other groups.
The money paid by a poor family in sales taxes takes a greater portion of their wealth than the same amount from a wealthier family, even though both purchased the same items and paid the same sales tax.
Some would say that the solution to this would be exemptions in the proposed federal sales tax for life’s basic necessities. But, based on the experience of the states that impose a sales tax, exemptions lead to mind-numbing intricacy.
For example, if the proposed federal sales tax would exempt “food,” the very term “food” would have to be defined. Anything fit for human consumption and needed to sustain life? What about soft drinks and chewing gum? If a proposal is made to deny the exemption for these two items, expect to see intense lobbying from their respective industries.
What about food consumed on or off the premises? In many states, food consumed on the premises of a fast food eatery is considered restaurant food and thus taxable. But the same food ordered from the same fast food place and taken off the premises is considered the equivalent of food purchased at the local grocer.
Some states exempt food purchased in bulk from sales taxes. One state defined “bulk purchases” as the purchase of more than six similar items. What followed was a classic example of American ingenuity defeating the tax collector: Dunkin Donuts’ customers would order seven doughnuts. Tax-free.
These are a few examples of the complexity that would result from “tax simplification.” Not mentioned is the impact of the proposed federal sales tax on large purchases (such as cars), or the fact that Cain’s proposal makes no mention of any payroll taxes. What will happen to Social Security and Medicare?
Additionally, each business owner would be required to be a tax collector for Uncle Sam in the same way that many perform that function for the state and possibly a city.
One of Herman Cain’s main selling points is that he has no background in politics.
So much the better, but someone should speak to him about the Law of Unintended Consequences.
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