Friday, October 14, 2011

999 - too simple??

In the last few weeks GOP candidate Herman Cain has generated a lot of attention to his plan for reforming the tax system.   It would eliminate the current income and corporate tax systems in favor of a greatly simplified system which assessed personal and corporate income taxes on the basis of 9% and would simultaneously create a new tax on consumption of 9%.    A couple of caveats to the plan.  First, the income tax for individuals exempts investment income.   Second,  the new income tax would be greatly simplified.  All income (except investment income) taxed at 9%.   Cain is not clear as to whether there would be a zero bracket amount (a level of income which is not taxed to help protect equity in the system).

The left has begun to go ballistic on the plan.  They claim that because of the way the corporate tax is implemented that the poor will have an effective rate of 27% (they will pay on all three).  Interesting that I have never heard of the left arguing that all corporate taxes get shifted forward to the consumer.   They also claim that the tax would only raise about 14% of GDP (when the historic rate of tax revenue is about four points higher).  Not sure how they can be confident of those numbers.  

But as a conservative I also have some concerns about the proposed plan.  First, the record of adding one tax to substitute for another is not very promising.  The new consumption tax (and actually the income tax would function a bit like a consumption tax) would be added to the state levies so many consumers might end of paying up to 20% for purchases.   It is not clear from the plan whether services would be included in the plan.   That might well reduce the costs of compliance for taxes but the combined rate would put a significant damper on consumer expenditures.   My best guess, based on the make-up of the Congress (present or future) is that the consumption tax would have some exemptions to improve equity - so the rate might be pushed up to 10-12%.    Second, while the income tax looks an awful lot like a consumption tax, my suspicion is that at least a couple of the current parts of the tax code would survive.  High on my list would be some recognition of the charitable impulse (either as a deduction or a credit).   The realtors and construction industry would push for the mortgage interest deduction (which does not make a lot of economic sense but has a lot of political force around it).

So two questions - how do you play this against the President's Buffett rule?  And, what should be the alternative?   The President is clearly trying to suggest that his alternative, to raise rates, is the best alternative.   Anyone with half a brain can figure out that the tax code is as popular as a skunk at a picnic. So the best response for any other GOP candidate is to recognize that Cain's simplification of the tax system is a good first step.   As to the alternative, we need to begin to think about the outlines of the 1986 Tax Act - broaden the base and lower the rates.   In this year, where big government and big corporations are unpopular from all fronts that would seem like a winner.

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