Herman Cain’s “9-9-9” tax reform is attracting enough attention
to become the focus of this week’s Presidential debate. As a plan
for overhauling revenues and unleashing the private sector, it’s a
bold gambit that shows Cain is willing to take chances and shake up
the Capital.
The 9 percent business tax is a stroke of genius. It would
give us the lowest business rates in the world and would make us
the “tax haven” for investment from everywhere. The stock market
would barely be able to stay abreast. The 9 percent personal income
rate would eliminate all the deductions and put everyone on a level
playing field. Tax collection from “the rich” would skyrocket
because no one would hide income anymore, but “the other 99%” would
make out as well. Cain’s plan would fold in the 15 percent payroll
tax so the new 9 percent rate would be an improvement - but would
end the immunity that the bottom half has from paying any taxes at
all. Altogether a good show.
The stickler is that 9 percent national sales tax. That’s
where things start to fall apart. As other Republican candidates
point out, a 9 percent sales tax is an ugly departure from the
traditional pattern and raises all kinds of problems.
The sales tax has long been the preserve of the states and
is now imposed in all but five of them (Alaska, Delaware, Montana,
New Hampshire, and Oregon). The informal arrangement has been that
the federal government gets income taxes, the states get the sales
tax and local municipalities are granted the property tax. Often
they poach. States and even cities have imposed income taxes and
have also started trespassing on the property tax. But for the
federal government to demand a 9 percent sales tax would be a whole
new departure. Combined with state and city levies, it puts us near
20 percent, which is black market territory.
People are not going to pay a 20 percent sales tax on
big-ticket items such as cars and appliances. In New York City
there used to be a whole underground where stores would sell you a
computer and then tell you to pick it up at a warehouse in New
Jersey to avoid the city’s 8.75 percent sales tax. (This was before
New Jersey raised its own levy to 7 percent.) People will be
setting up new car drop-offs in the Cayman Islands in order to
avoid sales taxes and smuggling would be reborn.
There would also be all kinds of argument about how it
would apply. Do you pay it on an $800,000 house? On a $200,000
college education? Many states are trying to impose the tax on
services, which immediately gets a buzz from lawyers and other
professionals. Cain tries to distinguish between “new” and “used”
goods, but that would produce all kinds of gaming too. Plus the tax
is highly regressive. Poor people would pay a tax on what they eat.
Retired people with no income would be big losers. Plus the whole
thing would be a nightmare to collect. The states employ hundreds
of inspectors to audit the books of mom-and-pop grocery stores.
Would an army of federal inspectors be necessary as
well?
So a national sales tax is a non-starter. The whole thing
is just too complicated and hard to enforce. So does that mean
Herman Cain’s 9-9-9 is dead? Not quite. There’s another perfectly
plausible tax base that could serve as the other leg to the 9-9-9.
Nobody’s mentioned it yet but it’s worth filing away for future
reference. You may not like this, but before you click over to
Drudge Report give me a few moments to make the case. Are you ready
for this? OK, here goes.
Carbon tax.
ALRIGHT, I CAN HEAR you already. “Carbon tax! That’s like
cap-and-trade. We just got rid of that, for heaven’s sake! That’s
dead and gone, RIP.”
OK, but remember, cap-and-trade was not all that bad an
idea. It just got caught in the buzz saw of global warming. If you
wanted to limit something like carbon emissions — I say “if” —
cap-and-trade was a great improvement over the traditional
command-and-control systems governments inevitably use. In fact,
such “market mechanisms” were originally introduced by Milton
Friedman and other conservatives on the grounds that they would
limit government intervention and let business and industry work
things out for themselves. The result would be more efficient
technology at minimum cost.
Cap-and-trade only became a monstrosity when Obama tried
to apply it to the whole economy. The system just wasn’t up to it.
In fact, the president originally thought he could raise revenue by
selling permits. But by the time Congress got through handing out
credits to their favorite industries, the whole thing was reduced
to a wealth transfer between the dry cleaning stores of America and
the power companies, with money flowing the wrong way. It was an
unmitigated disaster.
A straight tax on carbon, however, was a much cleaner
solution and favored by many conservative institutions. At the
beginning of the debate, the Heritage Foundation put out a paper recommending a
$15-per-ton carbon tax as much more direct and to the point.
Whatever money was raised would be offset by reduction in other
taxes. But Congress was afraid to handle anything with the word
“tax” in it and so we got cap-and-trade instead. When Republicans
renamed it “cap-and-tax,” the ballgame was over.
But a carbon tax as a source of
revenue has a simplicity that is hard to
beat. Every barrel of oil and ton of coal in this country is kept
in careful account. Collecting the tax would involve no more than
about 100 or so enterprises. It would essentially be a value-added
tax concentrated in the energy sector but without the problem of
calculating “value.” China just imposed a 10 percent
across-the-board tax on oil and gas production this week as a means
of tamping down demand, reducing imports, and redistributing a
little wealth. It’s hardly an innovation.
So the important question is, what would it mean for our
prices? I’ve done some back-of-the-envelope calculations that
aren’t perfect but give a pretty good idea of what we might
expect.
According to various analyses, Cain hopes to raise a
little less than one-fifth of the federal budget — $380 billion —
from the national sales legs of the 9-9-9 system. (There are those
who say his total levy will fall short of balancing the budget, but
that’s another story.) Adjusting for the carbon content of the
three major fossil fuels, here’s what we would need to raise $380
billion:
Output —- Tax
Levy —- Current Price
—- Total Revenue
Coal: —- 1 billion tons $165/ton
—- $70/ton —-
$165 billion
Oil: —- 6.6 billion barrels $23/bbl
—- $85/bbl
—- $150
billion
Gas —- 2.2 trillion cubic ft $3/mcf
—- $5/mcf —-
$65 billion
TOTAL: $380 billion
The big impact is on coal, where the price would more than
triple. About 92 percent of our coal is used for electricity,
meaning that’s where it would be felt. Fuel makes up 77 percent of
the costs of coal generation and we get 45 of our electricity from
coal. That means the overall impact would be a 130 percent rise in
electrical rates across the country. Now that may seem ridiculously
unbearable to households and industry but don’t forget this is
being coupled with a reduction of both personal and corporate taxes
to less than one-third their present level.
The impacts on oil and gas would not be as severe. The tax
would raise today’s oil prices from $85 a barrel to $108, but
that’s where they were six months ago. There are 42 gallons to a
barrel, which means the increase at the pump would be 55 cents a
gallon. For natural gas the price would only rise from $5 to $8 per
thousand cubic feet. It was $11 a few years ago. Consumers would
hardly notice the difference.
The result would be to move us rapidly out of coal and
into other means of generating electricity. But this is what we’re
doing anyway, only under the ham-handed direction of the EPA.
Solar, nuclear, and wind generation of electricity would suddenly
become very economical and Solyndra subsidies could become a thing
of the past. Gas prices would nudge people into fuel-efficient and
electric cars while the government just sat back and watched.
Foreign oil dependency would decline. Of course tax revenues would
diminish as all these changes took place, but by that time Congress
may have discovered some success in reducing spending. At least
this would dispel MIchele Bachmann’s concern that tapping another
area of taxation would be a new way of expanding the
government.
There is one more thing. A carbon tax, coupled with 9
percent personal and corporate income tax rates, could possibly win
the support of liberals and Democrats. This is important. Even if
Republicans score a resounding victory in 2012, they’re not going
to have a filibuster-proof Senate majority. Any effort to reduce or
level tax rates will be met by a wall of opposition and we’ll be
back to the same old stalemate. But if Democrats are willing to
sign on to a carbon tax — after all, they’ve been crying for it
for the past four years — then we might achieve a bi-partisan
success.
Well, this is all highly speculative. But it’s something
to keep in mind as Herman Cain’s 9-9-9 proposal gains ground in the
public debate.
