Further Thoughts on Herman Cain’s 999 Plan

Yesterday I passed along some thoughts on Herman Cain’s 999 plan, and on thinking about it some more, I probably underestimated the amount that would be paid through the Business Flat Tax.  I estimated it assuming the tax base would be corporate profits, but it appears the tax base, which is gross revenues minus purchases from other companies, capital investment, and net exports, includes wages paid to the firm’s employees.  That adds up to about one-third of GDP, so a 9% tax on it would add another 3% to my earlier estimate that the 999 plan would raise revenues of about 13.5% of GDP.  I’ll revise that to 16.5%.

This is a rough “back-of-the-envelope” estimate, and I conjecture it overstates what the plan would really raise because I assumed all labor income would be taxed and all consumption purchases would be taxed.  No income tax in the real world, and no consumption tax in the real world, comes close to taxing all of its tax base.

If I had my way, federal spending would be far less than 16.5% of GDP—or 13.5% of GDP for that matter—and the 999 plan would raise more than enough revenue for the federal government.  President Reagan’s experience shows it is easier to cut taxes than it is to cut federal spending.  So even with this higher estimate of revenues under the 999 plan, it wouldn’t balance the budget.

One commenter on my earlier post said that economic growth would increase under the 999 plan, increasing GDP and government revenues, and I think that is true.  High marginal tax rates impede economic growth, and Cain’s plan proposes to keep the marginal rate on all federal taxes below 10%.  But as I stated yesterday, I do fear that with a national sales tax in place, we would see rising tax rates in all those taxes without a constitutional amendment preventing it.  Deficit spending could easily turn the 999 plan into the 15-15-15 plan, or worse.

I like Herman Cain’s bold thinking, the 999 plan has much to recommend it, and I don’t mean to criticize Cain’s plan with my comments yesterday and today.  Taking a realistic look at the likely implications of the plan isn’t a criticism.  Should Cain win the presidency, we know that the president’s plans are rarely implemented without modification.  It does appear that Cain is pushing in the right direction here.

Randall G. Holcombe is Research Fellow at the Independent Institute and DeVoe Moore Professor of Economics at Florida State University. His Independent books include Housing America: Building Out of a Crisis (edited with Benjamin Powell); and Writing Off Ideas: Taxation, Foundations, and Philanthropy in America .
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