Herman Cain and the 9-9-9

Posted: Nov 01, 2011 12:50 PM

Herman Cain recently shot up in the GOP polls, demonstrating that he could be a threat to President Obama in the general election. With such positioning however, comes increased scrutiny. To that cause, critics have chosen the centerpiece of Cain's message as their attack point: the 999 Tax Plan.

The power of articulate persuasion in light of such criticism will be critical if Cain is to maintain momentum. Among the largest concerns is that the business portion of the plan amounts to a de-facto Value Added Tax.

A value added tax is a consumption-based tax levied on every stage of production, which ultimately leads to a higher tax incidence for the consumer. Most European nations have adopted such a tax structure in modern times, and the reputation of their results cause unease among some American tax reformers. I agree that this claim is palpable (with the exception of exported products, which are exempt under 999).

The latest debate did not grant Mr. Cain the opportunity to truly address his critics, but the American Enterprise Institute recently granted him a better platform from which to defend himself. Cain acknowledged that one could technically describe the business portion of his tax as a VAT. He reminds us however, that the primary fear of a Value-Added Tax is to have it imposed on top of other tax codes, as opposed to having such plans replace such codes.

"It is frustrating when people want to call it a VAT Tax. It doesn't matter what you call it." said Herman Cain. "The reason that some of my opponents want to call it a VAT, is because they want scare people because of what happened in Europe. They have both. They have a VAT tax, but they got multiple VAT Taxes. Technically, that last retail tax of 9%, you can call it VAT, but it only happens one time. The difference is that in Europe, it happens multiple times."

Mr. Cain then made the point that at every stage, profits are already taxed in an invisible VAT-like manner. In a loaf of bread, a farmer must pay taxes on his profit, truck driver who delivers the flour pays taxes on his profit, as does the baker, the grocery store owner, etc. Ultimately, these compound taxes are paid by the consumer in the final pricing of items. The difference is that his plan makes such taxes more visible.

Mr. Cain went on to explain that as someone who has been studying tax policy for 15 years, he believes that the Fair Tax would be superior over the long run, as it puts the consumer completely in charge in how much they pay in taxes. With a 100% consumption tax he believes, we would see a significantly boost the economy.

Personally, I held doubts concerning 999 as a viable reform plan. But in the aftermath of his AEI defense, I concede that the plan is nonetheless a viable improvement to the current tax structure, so long as his claim of a "single VAT" rather than a multiple one holds true.