Herman Cain, funded by Koch Bros, Says "Let the Little Guys Pay Taxes

by Linda Beale

Herman Cain, funded by Koch Bros, Says “Let the Little Guys Pay Taxes (not the uber-rich)

The New York Times’ “Room for Debate” ran a ‘mini-op-ed’ segment on Herman Cain’s 9-9-9 tax plan, called “What’s So Bad About a Flat Tax?” New York Times (Oct. 14, 2011) (with the subtitle: Isn’t Herman Cain’s ‘9-9-9’ plan essentially what fiscal conservatives and good government advocates have always wanted?). Yours Truly was one of those invited to participate: others include Kotlikoff, Ulbrich, and Gale.

I wrote, in A Plan for the Uber-Rich, that “there’s a lot wrong with flat taxes” (a term used to cover both the flat rate income tax and the flat-rate national sales tax ideas).

Either type of flat tax is regressive, in that it places a high tax burden on the most vulnerable at the lower income scales, for the simple reason that most lower income people use all of their income to pay for food, clothing, shelter and other consumption whereas members of the upper class have lots of cash to spare that they are unlikely ever to consume in their lifetimes. There are additional significant flaws in those tax schemes, like unrealistic economic assumptions, difficult transition paths, rosy revenue scenarios, misleading propaganda about rates and the probability that a national sales tax that cuts deeply into lower income finances will repress consumption that fuels small businesses.

Cain’s plan is even worse, since it:

  • exempts capital income from taxation
  • eliminates the estate tax
  • imposes a flat rate on wage income with no deductions (and apparently only some exemption for the poorest of the poor in certain ‘zones’ defined by the national government, so that if you are poor and live with lots of other poor people, you may not have to pay as much in taxes, but if you are poor and live where there aren’t enough poor people, tough luck)
  • shifts the burden from rich to poor since the rich will only pay on their compensation income and some small additional portion due to consumption taxes, while the poor will pay on all of their income and all of their income again in consumption
  • and continues the regressivity with some type of value-added tax that will also fall mostly on wage earners.

Added since the original positing is Dan Mitchell–conservative spokesperson for the Cato institute, who lauds the flat tax in “The Beauty of the Flat Tax” as “desirable” for its “simplicity, fairness, and transparency.”

  • Actually, the national sales tax version of the ‘flat tax’ supported by Mitchell is anything but simple. It results in the government taxing itself and counting the revenues as a gain. It calculates the tax rate in a way intended to be deceptive and likely to be far too low to raise the claimed amounts of revenues. Since it is a sales tax, we normally discuss that as a tax on top of the price, so a price of $100 and a tax at 23% means a final price including tax of $123. But the way the national sales tax has been discussed is different: they say a tax of 23%, but they calculate that rate by taking the ratio of the tax to the price plus tax–so the rate looks lower than it would look calculated as a ratio of tax to price! In fact, most objective analyses of a national sales tax have suggested that the rate (as a tax to price ratio) would be at least 40% and possibly 50% or even higher, meaning that something purchased foa $100 sales price would have an added national sales tax (not taking into account local and state sales taxes) of betwen $40 and $50 or more. And, worst of all, it will inevitably require an exemption for the poorest of the poor (if not as broad an exemption as currently permitted), thus requiring poor people to pay up front, retain all of their receipts and file a very complex return that will be a request for a refund of the tax. It will, though, be quite simple for the uberrich–they will not have to file income taxes and then would consume only a small amount of their income (and probably even there find all kinds of ways to get around paying their fair share of that limited tax burden). Further, part of the “simplicity” assumption about the tax is that you can get rid of any federal tax collection bureaucracy and that tax enforcement will be minimal. Both of those assumptions are either naive or intentionally misleading: the tax collection responsibilities will fall to the states (imposing significant costs, especially with state systems that still rely on income taxation) and the federal government will nonetheless have to retain a national enforcement system. Most experts say the opportunities for crookedness will be as big in the sales tax system as in any other tax system.
  • What about fairness? Well, fairness is one thing that the flat tax cannot offer. The rich get off super cheap, and the poor pay through the nose. Everybody pays only on what they consume (that is actually collected at the point of consumption), but the rich can choose whereas the poor consume all of their income. Accordingly the national sales tax is highly regressive, compared to our somewhat progressive system today. And with the elimination of the income tax and the estate tax, the role that the tax system plays in pushing against gross inequalities will be eliminated.
  • Transparency is missing as well. The points about simplicity should answer that question head on. It is not a transparent system at all, for much the same reasons that it is not a simple system.
    • Mitchell praises the “repeal of most forms of double taxation” in Cain’s 9-9-9 plan. What he is calling “double taxation” is the fact that people currently pay some tax (though too low) on income earned by capital as well as income earned by labor. Cain repeals all taxes on income earned by capital (and taxes income earned by wages particularly hard–at about 27%, with the “income” tax on wages only, the VAT-type business tax which deducts investments but not wages, and the sales tax (on consumption, which for most wageearners is on all or most of their wage income). But the tax on capital is NOT “more than one bite of the apple” as Mitchell asserts. If you invest 20 and that 20 earns 5 in interest, then the 5 in interest is new money that should be subject to tax, just as 5 earned in payment for labor is new money. The idea that any tax on income from capital is a double tax is just “free market” doubletalk to justify the elimination of taxes on the wealthy. Although economists like to say that “only people pay taxes” and use that to justify allocating all corporate income to shareholders and then asserting that shareholders pay the corporate taxes paid on that corporate income, that is an a priori decision that ignores the reality of perpetual life, managerial renttaking, and “personhood” of corporate quasi-sovereign entities in today’s “free market” globalized economy.
    • Mitchell then asserts that getting rid of deductions and “other distortions in the tax code” will mean that “people will make decisions on the basis of good economics rather than clever tax planning.” Wrong on two counts. First, most businesspeople still do not make most decisions based on tax planning. They want to make money in their business, and if a plan will make money, they will do that plan (even if it also means paying some taxes. Second, some deductions are merely common sense–for example, not allowing businesses a deduction for wages will encourage layoffs in favor of capital investments/robotics, which will accelerate job reduction in the US, not create jobs.

Today’s Associated Press revelations about Cain’s longtime ties to controversial Koch brothers’ group key to his surging presidential bid, AP (Oct. 16, 2011) show a harmonious fit between Cain’s 9-9-9 plan, Cain’s various comments scorning the non rich and his links to wealthy plutocratic anti-populists like David and Charles Koch, billionaires who “bankroll right-leaning causes through their group Americans for Prosperity” Id. (The Koch-funded group would be more aptly named America Run for the Super-Rich, since it lobbies for the right’s agenda of New Deal elimination and targeting of earned benefits of ordinary Americans through a campaign for zero taxation on capital, deregulation, militarization, and privatization .)

AFP tapped Cain as the public face of its “Prosperity Expansion Project,” and he traveled the country in 2005 and 2006 speaking to activists who were starting state-based AFP chapters from Wisconsin to Virginia. Through his AFP work he met Mark Block, a longtime Wisconsin Republican operative hired to lead that state’s AFP chapter in 2005 . . ..

The article notes the many people in Cain’s organization now or earlier with links to AFP, including Rich Lowrie, the accountant/investment manager who serves Cain as chief economic adviser.

And the Koch brothers have a quite clear record of wanting to abolish Social Security, all kinds of federal welfare, minimum wage laws, and similar programs intended to redress the economic imbalance that has grown in our economy since the advent of winner-take-all economics in the Reagan era.

originally published at