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THE CAIN PLAN -- ANOTHER TROJAN HORSE

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Let's Get Real by Herman Cain

You've got to hand it to Herman Cain.   From among all the Republican candidates for nomination to the presidency of the United States, he stands apart.   He is the only one to have offered a specific, quantifiable plan to bring about the changes he advocates.   In fact, some would say that his ideas are so revolutionary as to be completely impractical.   I hope so. 

To his credit, he has identified one of the fatal poisons in the economic soup -- the internal revenue code.   He correctly observes that it is cumbersome, ineffective, and so complex as to harbor all manner of vice and corruption.   He and I agree on one thing only:   that the US income tax code needs to be thrown out in its entirety.

But here's the first problem with the Cain plan:   like so many of the ideas coming from his side of the aisle, this proposal is a Trojan Horse, hiding within it the glue with which to cement the gains of the past three decades that have been made by America's ruling class and their corporations.   This is accomplished in three ways:   (1) Income from interest, dividends, and capital gains is exempted from tax of any kind, thus leaving a system that can only tax income from labor.   By definition, the tax burden is transferred to the working class from the investing class.   (2) By transferring a significant burden to consumers as a sales tax, irrespective of income, the tax becomes even more regressive.   Money that is earned and not spent escapes the national sales tax -- but only the wealthy and their corporations can afford to save their money instead of spending it.   (3) By reducing corporate taxes to 9% and allowing the deduction of both capital investment and depreciation, this largely eliminates the $222 billion corporate tax revenues collected in FY 2010. 

Here's the second problem with the Cain plan:   the numbers simply don't add up.   A close look at the federal budget for FY2010 shows that total revenues would be about $1.9 trillion, including all three components of the proposal.   This falls more than $200 billion short of the $2.1 trillion actually collected, and that amount was nearly $1.7 trillion short of expenditures.   The Cain plan would add $200 billion to an already mounting national debt each year!   In summary, it falls short of revenue-neutrality, thus forcing even deeper cuts in outlays that may be needed more than ever in a faltering economy.   The analysis is my own, but it will be interesting to see if the CBO comes in with numbers that are even worse.

Here's the third problem with the Cain plan:   his platform purports to unite advocates of fair tax with advocates of flat tax.   "Fair tax" is code for a national sales or consumption tax, and "Flat tax" is code for a standard rate, non-progressive income tax structure.   The 9-9-9 Plan is designed to be the first step in a phased introduction of a national sales tax structure for funding the entire federal budget.   This is described on the Cain Website (http://www.hermancain.com/999plan) as "Phase 2 -- the Fair Tax".   In other words, all corporate and personal income taxes would be eliminated and replaced with a national sales tax.   Historically, national sales tax proposals have ranged from 17% and above, and would not be revenue-neutral today.   In fact, given the need to fund Social Security and Medicare, a sales tax of about 35% would be needed to balance the budget.   And with the entire federal tax burden shifted to consumption, the working and middle class would be footing even more of the bill than ever! 

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Here's the final and fatal problem with the Cain plan:   with each explanation of the details in which the devil resides, the plan gets more and more complex.   The need for corporations to keep multiple sets of books will still exist, because GAAP doesn't allow for the reduction of income by the amount of business investment as 9-9-9 does.   Personal income tax returns will still be required in order to document charitable deductions and unearned income exclusions.   Family size still affects your tax rate, and the government is still a "silent partner" in your most personal decisions about what to do with your income and wealth.   With complexity comes abuse, and nothing in the plan prevents the efforts of the wealthy and powerful from hijacking the system.

Having given Mr. Cain credit for coming up with something specific, I'd be remiss not to do the same myself.   Allow me to present my 48/24 plan, in the imperative:   Tax all income from any source above $48,000 at a rate of 24%, allowing no other deductions, exemptions, incentives, or loopholes.   Include corporate GAAP income as well, reduced by the amount of dividends paid to shareholders. 

Yep, that would be the entire income tax code.   Annual tax revenue would increase by more than $300 billion, an additional $300 billion would be captured from those presently evading taxes in today's complex system, and another $150 billion in costs of collection and audits would be saved.   Working and middle class people would benefit from lower income taxes.   Corporations would benefit by being able to deduct dividends, and the wealthy would benefit from much higher payout ratios in their equity portfolios.   The ultra-simplicity of the system would create a business and economic environment with the kind of vitality we haven't seen in decades.

If you want a real economic renaissance in the US, put this proposal on the table along with some reasonable spending cuts.   It would level the playing field between rich and poor, corporation and individual, Democrat and Republican.   It would stimulate the economy by placing after-tax income in the hands of those most likely to spend it.   And it would usher in a new age of prosperity in the US, unencumbered by the interference of tax rewards and penalties in the exercise of our personal freedoms.

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Years ago I made a decision to commit to a life of business management. Kids do the dumbest things! After thirty five years as a small business consultant, CFO, and university educator specializing in quantitative business and economic (more...)
 

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Just  because Obama has given up on tax progr... by Larry Kachimba on Sunday, Oct 16, 2011 at 9:20:20 PM
Larry, thank you for your feedback, Larry. Speaki... by Larry Butler on Monday, Oct 17, 2011 at 9:15:43 AM
My comment did not question "that complexity goes ... by Larry Kachimba on Tuesday, Oct 18, 2011 at 1:24:43 AM
Larry, thanks again for your comment. A family wit... by Larry Butler on Wednesday, Oct 19, 2011 at 6:09:48 PM
A flat tax is a fraud, and it is not enough to hav... by Larry Kachimba on Sunday, Oct 23, 2011 at 11:25:07 PM
Besides the problems pointed out in the article, t... by Dave Corbin on Wednesday, Oct 19, 2011 at 4:49:34 PM
Dave, I agree that demand is the key component to ... by Larry Butler on Wednesday, Oct 19, 2011 at 6:17:14 PM