Wednesday, October 19, 2011

In defense of 999: refuting the distortions (UPDATE)

Well, the misconception, misrepresentations and flat out distortions were abound in last night’s debate in their immediate launch against Herman Cain’s 999 Plan. Cain took the attacks and body blows in stride, but if the remaining debates are going to continue like this, (i.e., constraining his allotted time to defend every attack, unlike that allotted to the media’s favorite candidate, Romney) then Cain is not only going to be forced to compact his defensive responses to the rapid fire, but folks are also going to have to do equal research into the 999 Plan, setting aside the demagoguery and misrepresentations.  

Now, lowering your current payroll taxes (your effective federal income tax rate + 5.65% FICA) down to a 9% individual flat tax is probably the easiest part of the plan to comprehend. Before freaking out over no longer having Social Security & Medicare contributions funded out of your paycheck, you must realize the trade off: what you would have gained back in April tax deductions, you're now taking home up front, some of which you're spending back into consumption and dumping back into the general fund, which is where SS & Medicare are funded from anyway (remember, there's actually no 'trust fund'...that's a story unto itself!).

The brunt of misunderstandings and false assumptions/assertions seem to come after that first 9%, and Gengrich had a point when addressing that the plan is more complex than Cain let’s on. However, a winning pitch can’t be bogged down in things like 59 points or even broader proposals, if one wants to excite the constituency. Concise points can be pooled, then deeper research must be involved after the winning pitch, which is the direction that Cain has pursued. So let’s pick apart some of the distortions we heard last night, shall we…

First step: THROW OUT THE CURRENT TAX CODE! It is this crucial step that ALL the opponents to the 999 Plan refuse to relinquish, but without doing so, their assumptions are incorrect.

Although I have deep respect for the congresswoman from Minnesota, Bachmann either misunderstands or purposefully distorts the fact that there is absolutely no VAT included in Cain’s proposal. A VAT taxes every step of production from supplier of materials to manufacturer to retailer to consumer. That's not currently the tax structure, nor is Cain suggesting that. Taxes will still be collected at the END of the line with the consumer’s final cost alone. Wholesale suppliers and manufacturers do not pay taxes, retailers will continue to collect the taxes from consumers (the way it has always been).

Romney and Perry, along with others, also misrepresented how the tax works alongside current state, or local, taxes. Cain’s attempted explanation with the mixing of ‘apples and oranges’ is quite clear if one steps back from the heated rhetoric of the moment:

Here’s the oranges: with our current tax code, all products include embedded taxes. On the top marginal corporate tax rate of 35% that embedded cost equates to around 22%. Under 999, that 22% drops proportionately to 6% under a flat 9% business flat tax, automatically reducing the base price of a product (as well as the taxes on it). Romney and others deduce that after adding a flat 9% national sales tax to that equation, that this will increase the price of the product (and taxes) higher than current prices. That assumption if WRONG, because it doesn’t account for replacing the excessive embedded tax & high corporate tax rate with new lower-capped national & business taxes that no longer allow for the embedding.

Let’s take a sparkling new $1000 flat panel television set:

Under current tax code: actual cost of product is $780 with an embedded tax of $220 (22%) = $1000
Under 999: product is actually $780 + $46.80 (9% corporate tax) + $74.41 (9% national sales tax) = $901.21

That’s where the apples begin to mix in: On top of not allotting for the removal of the embedded tax, Romney claims that the national sales tax will just add another tax on top of state taxes. That may play well in rapid fire sound bites, but that misrepresentation is precisely what Cain meant by ‘mixing apples and oranges’. Let’s continue from the replacement of our currently high corporate tax rate & exorbitant embedded tax with a lower 9% business flat tax & a 9% national sales tax…let’s go back to our $1000 television set and factor in the ‘apples’ or state taxes on that television (I’m going with the 6.25% TX state tax):

Under current tax code: $1000 product + $62.50 (state sales tax) = $1062.50
Under 999: $1000 is actually $901.21 + $51.67 (state sales tax) = $952.88

We could also tack on the extra 2% in local taxes ($18.03), and our total ($970.91) would still come out CHEAPER than under the current system!

In a nutshell, we’ve replaced the embedded 22%, REDUCING it proportionately to the new 9% business flat tax (that's about 6%), then apply the new 9% national sales tax, then state & local taxes, and we find out that it's actually LESS we would have paid in taxes on a CHEAPER final product due to the significant reduction in embedded taxes.

It takes a few moments to explain, and that's something you don't have the luxury of in a debate, which is why Cain uses common comparisons (i.e., ‘apples and oranges’), refers folks to the website, and encourages folks to do the math. CNN & the other candidates had a different goal for Cain's plan last night: crush it with as many false assumptions as possible. Their success or failure will depend on your vigilance in searching for the truth of the numbers and accuracy of info.

Cain’s 999 Plan ultimately leads to the Fair Tax. A move towards the Fair Tax has been attempted before, but received immense criticism and was squashed by many in the political elite, many of the same opponents who cast aspersions on this plan. Herman Cain recognizes that a different approach must be taken to ease the People towards that ultimate goal of personal responsibility and out of the hands of Washington bureaucrats, who overtax and misspend.

Here’s a few questions that I’ve been personally asked in defense of the 999 Plan:

Do you think if the 999 Plan was passed that corporations would reduce the price of their goods and services?

I've heard that question asked A LOT. There are a couple of answers for that one. First, the free market always encourages competition. Through competing markets and the basic principles of supply-side economics (lower taxes/regulations benefits consumers with greater supplies at lower prices), prices will go down. But let's just say all business wants to keep the prices high...then enters the additional answer: Prices, specifically EMBEDDED PRICES, will be FORCED down by a lower 9% business flat tax, as opposed to the current averages (15% under $50,000, 25% not exceeding $75,000, 34% from $75G to $10M, then 35% above $10M). Thus, the base prices of products will automatically fall. And when those prices are less, taxes are less. And just as you would now, if you have a company that still wants to jack up the prices, consumers will seek new sources for those goods (getting back to the free market answer of competition).

Could the "9" of income tax easily go to 30?

With all due respect, I think it's presumptuous to claim that 9 could so 'easily' go to infinity. Not only would it be more transparent than the current tax structure, allowing the People to hold their representatives even more accountable, but look how difficult it is for the current Congress & administration to raise taxes under the progressive tax code (and Obama's trying)! To reiterate, I would insist that because of the 999 transparency, it'd be that much harder to blatantly raise the percentages. There’d be more public outcry and resistence, and it'd be political suicide, more so than trying to raise them under the current structure.

What about a flat tax, shouldn’t everyone have skin in the game?

999 does that with 3 separate flat taxes; then shifting to Phase 2 (the Fair Tax) will assure that with a single flat tax. No more income tax, no more corporate tax, other taxes already alleviated by the implementation of 999, and all that's left is a single national sales tax. And to assure its certainty and stability, Cain has also called for the repeal of the 16th Amendment! The people control their own tax based on their own consumption. It's out of the hands of the bureaucrats and EVERYONE has skin in the game.

Remember, the first step is to THROW OUT THE CURRENT TAX CODE before making any assumptions about this plan. Then ask yourself, am I taking current payroll taxes (all of them), throwing them out, and replacing with a 9% individual flat tax, effectively LOWERING my income tax rate? Am I taking the average corporate tax rate, reducing it to a flat 9%, accommodating proportionately for the embedded taxes, then adding the flat 9% national sales tax to potential purchases, and coming out with what will equate to LESS COSTS than what I’m paying now? Cain's math is sound, and here’s a link for help.

I have no illusions that passing this will be any easier than passing any other piece of major legislation. It will be difficult, and it will receive even more scrutiny, along with fierce demagoguery and distortion. It’s very likely there’d be some attempted tweaking, and perhaps that would fly depending on the particulars, but if we get more conservative majorities in the House and Senate, especially in the leadership positions (replacing Boehner & McConnell), I have no doubt that a Fairer tax system could be passed. Again, I have no illusions as to the difficulty in acheiving such a system, but this is REAL REFORM, and something that doesn't result in just another band-aid pivoting off the current structure.

Herman Cain is thus far the ONLY candidate that suggests not simply pivoting off the appropriately dubbed 'progressive' tax system to achieve reform, but to look towards other avenues of personal responsibility and remove the power of the federal bureaucrats to constantly tinker with our current code & all its cumbersome imperfections. Certainty breeds stability for business and individuals alike, and removing the control of taxes away from the federal gov't, also removes Congress's ease to overspend. The implications of this idea reach so much further than merely 'taxes'...we're talking debt control and reduction, individual responsibility, and ultimately Liberty.

Our economic crisis requires real tax reform.  Half measures and far-off fixes won't mend our broken jobs engine.

ADDENDUM: An article found at North Star Writers also provides additional responses to many of the false attacks out there.  And today, Arthur Laffer, THE supply-side economist of the Reagan era, once again reinforced his support of the 999 Plan.

NOTE: I made a small adjustment/elaboration in discussing the 9% individual flat tax at the top of this post.  From additional personal discussions after writing this piece, I quickly discovered that there were false assumptions taking place as pertains to this category as well circulating out there.  Hope that helps clear more up!

UPDATE: On the heels of Thursday's lead in the Iowa Caucus, Herman Cain spoke to supporters in Detroit on Friday addressing the finalized details of "Opportunity Zones" in his 999 Plan, which allow for those at or below the poverty level to be exempted from the 9% individual flat tax, thus effectively making the plan 9-0-9 for the poor.

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