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by Chris Edwards
Chris Edwards is editor of Cato Institute's Downsizing Government.org.
Added to cato.org on October 17, 2011
This article appeared on The Daily Caller on October 14, 2011.
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Presidential candidate Herman Cain has made a splash with his 9-9-9 tax reform plan. I love his 9 percent income tax, but the skunk at the tax reform picnic is his 9 percent retail sales tax. Mr. Cain is an articulate advocate of free enterprise and I wish him well in the contest, but he should ditch the sales tax.
Adding a retail sales tax to the federal government's powerful tax armada would be a terrible idea from a small-government perspective. Democrats are desperate to find ways to fund soaring entitlement costs, so it's dangerous to give them conservative political cover to add a new federal funding source.
Cain's 9 percent business tax is also a problem. It is similar to a value-added tax (VAT) because would it disallow a business deduction for wages, which would make the base much broader than the corporate income tax base. And like a VAT, Cain's business tax would apparently be imposed on all businesses, not just those currently paying the corporate income tax. .author_pub2 a { float:right; margin: 10px 0 8px 8px; display:block; height: 142px; width: 110px; background: url(/people/pub_photos/edwards.jpg) no-repeat -110px 0; } .author_pub2a a { float:right; margin: 10px 0 8px 8px; display:block; height: 142px; width: 110px; background: url(/people/pub_photos/edwards.jpg) no-repeat 0 0; }
Chris Edwards is editor of Cato Institute's Downsizing Government.org.
The result would be that American businesses would be collecting a large tax on workers' wages — but workers wouldn't see this major government grab. One caveat is that the Cain business tax would allow a deduction for dividends paid, which would narrow the base compared to the standard VAT.
In sum, two of Cain's three 9's are bad ideas. His advocacy of lower marginal rates and reduced taxes on savings and investment are great, but he should drop the 9-9-9 plan.
Instead, Cain and other candidates should consider a 15-15-15 plan. At first blush, that doesn't sound very appealing because the rates are higher than Cain's. But the business tax base would be much smaller than Cain's, and the plan would make existing revenue sources more visible and efficient. Here's the 15-15-15 plan:
How much revenue would 15-15-15 raise? You could probably make it revenue-neutral by adjusting the basic exemption amount under the individual income tax. Dick Armey's flat tax exemption was huge at about $35,000 for a family of four. A lower exemption amount makes more sense, but this is a variable that could be fine-tuned.
Of course, tax reform would be much easier if it created an overall tax cut. And that would be much easier to achieve if Congress cut spending. So I'd encourage Mr. Cain and the other candidates to role up their sleeves and give us their detailed spending-cut plans. As a modest first step, how about a 9-9-9-9-9-9-9-9 plan to slice 9 percent off the budget of every federal agency?
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Global Tax Revolution: The Rise of Tax Competition and the Battle to Defend It
In the increasingly integrated global economy, nations are waging a battle between governments to attract investment and skilled workers by overhauling their tax codes to create a more attractive business environment. The authors challenge the U.S. government to lead the tax competition battle in the international marketplace.
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