Cain’s 9-9-9 The Wrong Choice

When I was doing my taxes last year, I found that my wife’s employer left out a block on her W-2 form.  As expected, IRS had a publication that explained how to handle the problem.  I followed their worksheet and came up with a figure.  I then followed TurboTax’s on screen instructions and came up with a different number, so I called the IRS.  I got a friendly IRS call-center agent and explained my problem to her.  She plugged my figures into IRS’ in-house application and I got a third set of numbers.  The lowest number won and that is what went into my return.

Herman Cain probably underestimates the size of the IRS code and accompanying instructions when he says it is ten million words.  I spent a career working for the federal government including working with (but not for) the IRS and I can tell you between the actual code, the publications, worksheets, regulations, instruction manuals, website information and electronic applications, I am sure it exceeds Cain’s estimate.  Even IRS’ senior managers expressed their frustration with its procedures to me.

Cain is right in his core assertion – the tax code has to go.  Every year, IRS holds three day tax forums around the country to teach tax preparers; CPAs, enrolled agents, bookkeepers, etc. how to handle the changes in the tax code for the upcoming year.  There is no need for a code that is so convoluted that it requires its own industry to determine how much of your money you owe to the government.  One that penalizes you if these specialists make a mistake when they prepare your taxes.

Herman Cain should be praised for having the vision to come out and tell the American people that he will scrap this leviathan of a tax code and simplify it.  His rise to the top tier of presidential nominee contenders reflects Mr. Cain’s willingness to actually tackle this problem.  Nobody likes the basic unfairness of our tax system.  It is the tool used by liberals to wage the class warfare that divides the American people and it has to go.

Cain recognized that tax reformers fall into two camps – the Fair Tax and the Flat Tax.  His 9-9-9 plan merges the two plans with the hope of bringing both camps together.  The problem is the inherent weakness of one leg of his plan, the fair tax.

The fair tax is a national retail-level sales tax.  Mr. Cain’s plan levies a 9 percent tax on anything purchased at the retail level.  A fair tax differs from Europe’s VAT, the Value Added Tax, in that the VAT levies its tax at every level of production.  So if you buy a car in Europe you are paying the VAT on the materials that the manufacturer buys; on the parts that come from suppliers; on the final assembled vehicle at the showroom.  All these levels greatly inflate the price of a car or anything else purchased in Europe under their VAT. 

The fair tax differs in that it only applies at the final point of sale, the retail level.  Proponents of the fair tax call for the abolishment of all federal taxes and replacement with a 23 percent fair tax.  FairTax.org has an excellent explanation of their plan. 

The wrinkle with the fair tax is it is very hard on people with low incomes.  Low income/no income people already pay very little or no income taxes and most of their income is spent at the retail level.  A national retail sales tax would hit them very hard, whether it is FairTax.org’s 23 percent rate or Cain’s nine percent rate.  To mitigate the tax’s impact, the fair tax has a provision called a “prebate”.

The prebate, or pre-rebate, is a payment made monthly to low income people to offset the impact of the national retail sales tax.  The government would send a check to them each month to help “pay” for the sales tax.  The amount of the government check would be based on the person’s income.

The government is not capable of determining everyone’s income on a monthly basis so it would use a figure based on the previous year’s income.  IRS and the Social Security Administration already developed a system for determining a person’s annual income when they implemented the Medicare Part D prescription drug premium subsidy program.  A fair tax would most likely use this computer system for its prebate calculation.  However that means that a revised IRS would still need to keep comprehensive income records.  This means that the IRS would essentially have to keep their cumbersome and intrusive record keeping system in place to capture everyone’s income.  There would be a lot of incentive to hide income in order to maximize the prebate, which in turn, would require the enforcement structure that currently exists within IRS.  The prebate aspect of the fair tax would not simplify our tax system.

There is also the issue of collecting the national sales tax at the retail level.  In states such as New Hampshire where there is not a sales tax, implementing a national sales tax would be new layer of bureaucracy on businesses and could open the door for a new state sales tax.  In high sales tax states like New York, another nine percent on whatever you buy would be sticker shock.  People would look for ways to avoid paying the tax, requiring more tax collection enforcement by the government.  One fair tax spokesman told a local Tea Party meeting that the system would rely on the inherent honesty of the people.  I don’t think so.  The fair tax has vulnerabilities and there will always be people who will take advantage of it.

The flat tax is a more equitable program.  To Mr. Cain’s credit, one leg of his program is a nine percent flat tax.  The flat tax would eliminate the myriad exemptions, deductions and the like and replace them with a single rate for all people.  There would be deductions for taxpayers and their dependents but essentially the rest of a person’s income would be taxed at a flat rate.

Despite liberals’ accusations that the flat tax is “regressive”, it is fair.  Our current graduated income tax is actually regressive with its concept that the more money you make the higher the tax rate goes.  The current system is not satisfied with the fact that a person who earns $100 thousand would pay ten times the amount of taxes under a flat tax plan than a person earning $10 thousand a year.  The current system jacks the rates up on the high earner so he pays even more. 

The graduated income was not constitutional under the original version of our Constitution.  Article 1, section 9 states that “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken.”  This means that any direct tax, such as the income tax, has to be equal.  It did not allow for different rates for different people.  It took the 16th amendment to empower Congress to enact a graduated income tax.  The flat tax goes back to the original intention of the founding fathers and removes the tax code as the liberals’ primary tool in their class warfare against the American people.

So Herman, we love your “get it done” attitude and your willingness to take on the tax issue.  This is what we want in a leader.  But lose the fair tax!  You’re just asking to trade one bureaucracy for another.

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