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Commentary By Diana Furchtgott-Roth

A Better Way For Herman Cain's 9-9-9 Plan

Economics Tax & Budget

With Republican presidential primary candidate Herman Cain overtaking front-runner Mitt Romney in the latest Wall Street Journal-NBC News poll, some Americans may be looking forward to a top income tax rate of 9 percent.

But are they ready for a new 9 percent national sales tax?

Cain’s 9-9-9 plan would replace all federal taxes with three flat taxes of 9 percent each — on individual income, corporate income and sales. He would abolish payroll taxes, levies on capital gains, estate taxes and all individual deductions except for charitable contributions.

Cain deserves praise for drastically lowering individual and corporate taxes, doing away with most deductions, abolishing taxes on capital gains, and letting businesses “expense,” or write off in one year, outlays for investment. Such fundamental reform would likely spur economic growth.

If passed, would taxes stay low? To avoid an upward creep in tax rates, Cain would require that future rate increases be approved by supermajorities of two-thirds of the House or Senate. But by a simple majority, a Congress bent on raising tax rates could repeal the two-thirds requirement.

Congress adopted a 28 percent maximum rate in the Tax Reform Act of 1986 when President Ronald Reagan was in the White House, but it was raised more than once, under presidents George H.W. Bush and Bill Clinton.

The most troublesome part of 9-9-9 is the new national sales tax. In the second phase of the plan, it would replace all income and corporate taxes with the Fair Tax, introduced in 1999 and now sponsored by Rep. Rob Woodall, R-Ga., and Sen. Saxby Chambliss, R-Ga. The Fair Tax has a 23 percent rate.

National sales taxes have risen steadily where they have been implemented. For instance, the U.K. sales tax, born in 1973 at 10 percent, has now grown to 20 percent. The temptation to increase it a little at a time seems to be irresistible.

Thirty countries have sales taxes in the form of value-added taxes, and only three, namely Canada, Japan and Switzerland, apply rates under 10 percent. In many countries the sales tax is the largest source of revenue.

Perhaps a President Cain could keep a national sales tax at 9 percent. But after two terms, he might be succeeded by President Joe Biden or President Harry Reid, who would not stand up against Congress’ wishes to increase revenue.

Further, a national sales tax clashes with state and local sales taxes. Now, the sales tax is the province of the states. Adding a 9 percent federal sales tax on top of state sales taxes would reduce states’ revenue from sales taxes because it would discourage shopping.

However, it’s possible to have a tax on consumption without a sales tax. Here’s how: Rather than taxing consumption, we could achieve the same results by making savings tax-free.

What is not consumed, given to charity or paid in taxes is saved. In other words, the income tax would apply only to income spent, not on income saved.

Congress could move toward a consumption tax by taking the tax-preferred savings accounts we have now, such as college savings plans, retirement accounts, and Health Savings Accounts, and melding them into one large tax-free savings account without limiting annual contributions. Income going into this savings account would not be taxed.

Corporations could be allowed to expense purchases of equipment in one year, rather than depreciating them over several years, as is done now.

Such reforms would move the United States toward a consumption tax without giving Congress a new revenue stream.

Cain’s 9-9-9 proposal is a bold step towards tax simplification. But how about 15-15, without the sales tax?

This piece originally appeared in San Francisco Examiner

This piece originally appeared in San Francisco Examiner