Fair, Flat and Final

John Ransom
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Posted: Oct 19, 2011 12:01 AM

It’s moving in the right direction, but after digesting many of the pros and cons of Republican nominee Herman Cain’s 999 plan, I’d have to give it a thumbs down.

I think he’s a great candidate, just like many of the other potential nominees, but there is too much uncertainty about 999 to give it an endorsement, yet. There are some features that I like and there are some that I hate.

It’s good start, but only just that.

That doesn’t mean I wouldn’t like Cain as the conservative nominee. Today more than ever, policy is written by constituencies, not candidates.  So I don’t see 999 as a un-get-aroundable road-block to his nomination. In fact, he should get high marks for raising the level of debate and introducing serious tax reform into the national conversation.

It’s something that politicians with more miles and more experience have failed so far to do on the campaign trail. But it’s just another damning piece of evidence to be used against leaders who got us to this point in history to begin with.      

I won’t go into the dispute about how much money 999 will raise. Differing assumptions net different results among economists and so-called fact-checkers. But economists I trust, including our contributor Larry Kudlow, think the plan will raise enough to pay.    

But still there is no consensus on exactly what the plan entails or if a national sales tax is even constitutional for transactions that happen within one state.  

Will it create jobs? I think it will be a wash.

The double taxation effect of a sales tax on top of an income tax and a business tax (VAT) has to be a drag on the economy, in my opinion. It also radically shift taxes to lower income families disproportionately while lowering taxes on high income/high net worth families.

I think everyone should pay taxes, including the idle rich, like Warren Buffett, who makes mainly investment income. Under Cain’s plan investment gains and investment income in Warren Buffet’s portfolio would be tax-free. That doesn’t wash with me, especially if earned income is going to be taxed across the board.

Before you know it, people will be compensated solely in preferred stocks that pay a dividend. I’m not kidding about that either. It’s human nature to avoid paying taxes if you can get around it. By creating a favored, tax-free income source through investment gains and income, you will see more and more compensation move to the tax-free sources, especially on the upper income end of the scale.

It’s not just unwise economically, it’s also poor politics. The combination will make it DOA eventually.      

One of the strengths of the United States historically has been our capital markets. To exempt all investments from taxation would be to weaken our country without strengthening the capital markets at all.

Call me a radical progressive, but should the insurance salesman scratching out $60,000 per year for his family pay a 9 percent tax on his income and another 9 percent on his purchases while the E-Trade speculator sits in his crib and pays nothing?    

No. I don’t think so.

Plus there will be the temptation that any one of the 9s may be raised at any time by a Congress eager to buy votes.

I also don’t see how we end up scrapping the IRS under Cain’s plan. In fact, I think you’d need to have a pretty big army of regulators in order to enforce collection of sales taxes and VAT taxes. Those regulators would be involved in every aspect of business. It would be especially burdensome for small businesses. 

I’d prefer to see a true flat tax on all income- earned and unearned and capital gains; a tax code where everyone’s tax burden is out in the open: fair, flat and final.

Which brings us to the real problem with tax reform: Government spending is out of control.

In order to have a flat tax- or a fair tax- and raise enough revenue to pay for everything DC is spending, we’d have to set rates at about 24 percent of GDP; 24 percent is the percentage of our GDP that goes to just federal spending.  If you add in state and local spending we’re at 40 percent of GDP to pay for everything.  

That’s why politicians are reluctant to embrace the flatter tax concept.

It’s much easier stick to the progressive tax code, while cutting taxes here or there and call that reform than it is to admit that spending as a percentage of GDP is higher than all but the three years of World War II.

We’ve out-New Dealed the New Dealers. Spending by the government as a percentage of GDP is double what the government spent as a percentage of GDP from 1931 to 1940.

In the 10 year period between 1941 and 1950 we averaged 32.4 percent of GDP on government. In the last ten years, we’ve averaged 36.4 percent of GDP on government.

If government spending was an answer, there never would have been a question to begin with.

The billionaires and millionaires don’t have our money, the government unions do.

And we can thank Mr. Cain for having a serious, grown-up, conversation about it. 

Let’s keep taking.  

John Ransom