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Wall Street Journal


Cain's 9-9-9 Plan, Flat and VAT and Shifting Burdens

October 25, 2011

By Josh Barro

Arthur Laffer’s “Cain’s Stimulating ’9-9-9’ Tax Reform” (op-ed, Oct. 19) is unconvincing. The plan provides fewer economic benefits than Mr. Laffer describes and would raise taxes on the majority of American households.

Mr. Cain’s business tax, as described by his campaign, applies to “Gross income less all purchases from other U.S. located businesses, all capital investment and net exports.” Because wages and salaries are not deductible, this is a tax on much more than business profits; it’s a value-added tax. That means that 9-9-9 basically levies the same consumption tax three times over: once as a tax on wages, once on sales, and once as a VAT.

Mr. Laffer also oversells the degree to which 9-9-9 would lower marginal tax rates. Because all three of the taxes in the plan apply to roughly the same base, they should be thought of as a single tax with a rate just above 25%. This means that many filers would face a lower marginal tax rate than they do today, but it would not lower the rate much for many in the middle class.

Finally, Mr. Laffer fails to address the main drawback of 9-9-9: It would be a major tax increase on most American families. The Tax Policy Center estimates that 84% of households would pay more under the Cain plan than they do today. It’s not hard to see why. Nobody disputes that 9-9-9 would be a huge tax cut for people with very high incomes, and yet the plan is supposed to be revenue neutral. That means somebody has to be paying more, and that means people with low and moderate incomes.

Josh Barro

Arthur Laffer states it well when he says “let’s not make the perfect the enemy of the good.” Whatever the faults of the Cain plan, his courage in putting it forth has stimulated a much-needed discussion about real tax reform in this country. The Cain plan has two characteristics that should form the foundation of any federal tax reform. The first is that it completely disposes of the entire existing federal tax code. It is unacceptable that in a free country we have a federal tax code structured with such complexity that compliance costs run 30 cents on every tax dollar paid.

The second is the transparency that stems from its simplicity and the tempering effect it should have on the proclivity of Congress to raise taxes. Ultimately, Congress is only able to increase taxes to the extent allowed by the citizenry, and a simple transparent tax structure would make it much easier for citizens to be informed and hold their representatives accountable.

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