Sorry, Wrong Number - The American Spectator | USA News and Politics
Sorry, Wrong Number
by

If there’s one thing people notice about Herman Cain during the recent presidential debates, it is that he consistently focuses on specific solutions to specific problems. He is a consummate executive. Even Mitt Romney whose managerial experience is unquestioned somehow seems unfocused compared to the laser-like intensity with which Cain sticks to problem-solving.

A perfect example came in the recent Fox News/Google Republican debate in which Mr. Cain was asked to name a department of the federal government which he would eliminate. After responding (to applause) that he’d get rid of the current EPA and start over, he pivoted to a solution for another problem: “Now, with the rest of my time, may I offer a solution for Social Security, rather than continuing to talk about what to call it? I have proposed the Chilean model. It’s been around 30 years, and it works.” Typical Cain, and part of what is so appealing about him.

Of Mr. Cain’s many ideas, the most well-known — in part because of its clever sound-bite name — is his 9-9-9 plan which aims to replace most current federal taxes (including income tax, death tax, payroll tax, capital gains taxes, and double-taxation of dividends) with a 9% flat tax for business income, a 9% flat tax for individual income, and a 9% national sales tax. The plan would eliminate almost all deductions.

While Mr. Cain’s consistent results-oriented approach is admirable — not least for its contrast with the other candidates — voters should be wary of the 9-9-9 plan despite its initial appeal. In short, it is somewhere between folly and economic suicide to implement a national sales tax, even at a modest rate, without simultaneously repealing the 16th Amendment to the Constitution (which permits a national income tax.)

There is in economics a relatively new concept known as Hauser’s Law, named for its creator, economist Kurt Hauser of the Hoover Institution. Hauser’s law posits that the federal government cannot take more than about 19.5% of national income through taxation and that soaking the rich (or those whom President Obama defines as rich) will not generate the tax revenue that supporters of those higher taxes predict: “None of the personal income tax or capital gains tax increases enacted in the post-World War II period has raised the projected tax revenues.” (You can read Hauser’s original 1993 Wall Street Journal article here.)

The Heritage Foundation notes that the 3-year average level of federal tax receipts as a percentage of GDP is about 18 percent. This number, as with Hauser’s number, represents all federal tax receipts, not just revenue from the individual income tax.

To be sure, federal revenues as a share of GDP fell below that average in the current recession, down to about 15 percent in 2010, largely because the Bush tax cuts, so hated by the left, made our system more “progressive” than ever in our history. When the top 1 percent of earners pays more tax than the bottom 90 percent, and the top 10 percent pay 70 percent of all federal income taxes, it’s not surprising to see government revenue drop during economic turmoil and recession. However, the key point of Hauser’s law is not the low end of tax revenue as a share of GDP. It’s that the ability of high-income earners to time and shelter income, and the ability of many of them simply to quit working if the tax and regulatory environment becomes too onerous, make it extremely difficult to collect more than about 19.5% of the nation’s total income in federal taxes.

But the only reason that Hauser’s law holds in America — because it doesn’t in Europe — is that America does not have a national sales tax.

For a fair comparison, we must look at total tax burden as a percent of GDP, since our states collect sales taxes whereas European countries collect sales tax, usually called Value Added Tax (“VAT”), at the national level. According to OECD data, using an average of the years 2000, 2007, 2008, and 2009 (with 2000 being an usually strong year and 2009 an unusually weak one), the United States’ total tax revenue (not just federal) as a share of GDP was 27.8 percent, fifth lowest on a list of over 30 names. Here are a few European countries for comparison:

• United Kingdom: 36.1% total taxes/GDP, with a VAT rate of 17.5 percent taking 6.8% of GDP. (The UK’s VAT rate has since been raised to 20 percent.)

• Germany: 36.7%, with a 19 percent VAT taking 6.7% of GDP.

• France: 43.7% total taxes/GDP, with a 19.6 percent VAT taking 7.3% of GDP

In other words, governments of these countries which have national sales taxes take far more of the national wealth than we do in the United States. There are several European countries with even more punishing VAT and income taxes, with Denmark’s government confiscating an astonishing 48.8 percent of national income.

Here’s the important history lesson: Sales taxes almost never fall.

The UK’s VAT was introduced in 1973 with an initial rate of 10 percent, which was shortly thereafter changed to 8 percent for most items but 25 percent on gasoline. Since then, other than a recent one-year experiment lowering the rate from 17.5 percent to 15 percent, it has never been lowered.

Germany implemented the tax in 1968 at a rate of 10 percent. It has been raised many times but never lowered. France implemented the first VAT in 1954, and raised the rate to 20 percent by 1976. It has stayed between 18.6 percent and 20.6 percent since 1984.

As Milton Friedman taught us, “In the long run government will spend whatever the tax system will raise, plus as much more as it can get away with.” This is why major European countries, even while taking between 8 percent and 16 percent more of their national incomes in taxes than the US does, continue to run budget deficits. Thus the 9-9-9 plan, while well intentioned, is the first step toward a tax system that will surely bleed America dry.

Once a VAT is in place, it is like fiscal heroin to the welfare-staters, earmarkers, and subsidizers. As the Cato Institute’s Dan Mitchell explains, “we run a grave risk if we ever let the crowd in Washington impose any sort of national sales tax without first getting rid of all income taxes.”

If the United States implements a national sales tax without simultaneously eliminating the income tax and eliminating its constitutionality we will be doomed to the persistent lower growth and higher unemployment that has characterized Europe relative the United States for most of the last half century. (It’s true that Europe is doing somewhat better than the U.S. is at the moment but that is because — and these are words I never thought I would write — the U.S. has a more leftist, anti-capitalist government than most western European nations do. Indeed, our current executive branch is less capitalist than the government of Communist China is.)

As Laurence Vance has written in a broader critique of the Fair Tax, a national sales tax will make it easy for Congress to raise taxes. Each tax hike in a multi-generational death by a thousand cuts “will be sold to the American people as ‘a penny for progress,’ or some other deceitful scheme.” Even the people at FairTax.org say that “No current supporter of the FairTax would support the FairTax unless the entire income tax is repealed.” Mr. Cain, are you listening?

When asked in last week’s Republican presidential debate whether there was a risk in his 9-9-9 plan that “some government down the road after President Cain is going to increase three forms of taxation on Americans,” Mr. Cain responded with unusual glibness, “No, there’s no danger in that.” But of course there’s danger in that, and the history of Europe (and other places where national sales taxes have been implemented) proves it. As Kurt Hauser noted in reprising his “law” last year, “Even amoebas learn by trial and error, but some economists and politicians do not.”

It is also worth remembering that 9-9-9 is just “Phase 1” of Mr. Cain’s tax system ambitions; Phase 2 is implementing the Fair Tax, a national sales tax that has far more flaws than its proponents let on. These include turning millions of Americans into tax collectors, continuing to allow the federal government to pick winners and losers (with preferential or punitive tax rates on particular items, or by tinkering with tax credits to offset the sales tax), and encouraging a black market. Perhaps it is not surprising that Mr. Cain’s Phase 1, the 9-9-9 plan, is a step in a dangerous direction if the path’s end, the Fair Tax, is an economic swampland.

Herman Cain is a man focused on solutions, and for bringing that kind of focus to the debate I am grateful. But just having a catchy, easily defined plan does not mean he has a good plan. A national sales tax has, as the UK Guardian put it, “proved to be one of the EU’s most enduring exports.” While I’m all for free trade, I would suggest that just as the US bans the import of haggis due to safety concerns, we should similarly ban the import of a national sales tax. But such a comparison would be unfair to haggis. 

Sign Up to receive Our Latest Updates! Register

Notice to Readers: The American Spectator and Spectator World are marks used by independent publishing companies that are not affiliated in any way. If you are looking for The Spectator World please click on the following link: https://thespectator.com/world.

Be a Free Market Loving Patriot. Subscribe Today!