COMMENTARY | Herman Cain is making waves in the GOP presidential race with his 9-9-9 tax plan. The radical proposal has helped to catapult the former CEO of Godfather's Pizza into the race's top tier. However, the plan also receives its share of criticisms. Some critics question whether it will generate enough tax revenues. Others criticize the plan for benefiting the wealthy at the expense of low-income Americans. Is the 9-9-9 tax plan the right solution for U.S. economic malaise?
In Herman Cain's proposal, there will be a 9 percent flat tax on personal income, business income and consumption. The biggest criticism against the plan is that it may create a revenue shortfall at a time of big federal deficits. According to Yahoo! News, the top 10 percent of income households pay more than 70 percent of all federal income taxes. By lowering the income tax rate, which is essentially a big tax cut for the rich, the proposal puts a serious damper on tax revenues.
Supporters of the plan may argue that the loss of revenue will be made up by the 9 percent national sales tax. However, the effectiveness of any consumption tax hinges on the strength of consumer spending. According to Fox Business, U.S. consumer spending in September was near 2011 lows continuing a declining trend. With American consumers already having to contend with state sales taxes, the added tax will drive even more of them away from stores.
The brightest spot in Cain's proposal is the 9 percent business tax, which will replace the current deductions-heavy system. According to the Cato Institute, the U.S. has the highest corporate tax rate among the OECD countries at 40 percent. The 9 percent tax will immediately make the U.S. one of the most attractive countries to do business. This will undoubtedly accelerate growth and create jobs. Most importantly, it will prevent big corporations like GE from avoiding paying their share of taxes with deductions and exemptions. Other than charitable donations, deductions will be completely removed in Cain's plan.
The dynamic nature of Cain's 9-9-9 tax plan is both its greatest strength and biggest weakness. The proposal assumes the low tax rate on personal and corporate income will lead to economic expansion and robust job creation. It also assumes an improved economy will induce consumers to spend more despite the national sales tax. There are just too many assumptions in Cain's plan.
- Herman Cain