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September 29, 2011
News Analysis: The 411 on Herman Cain's 999 Plan
Joseph J. Thorndike

Full Text Published by Tax AnalystsTM

It was nice of Herman Cain to fill the void left by Donald Trump's exit from the GOP campaign trail. If we can't talk about missing birth certificates anymore, at least we can speculate on the secret authors of Cain's 999 plan -- a masterpiece of politics as policy.

During an interview last month with Chris Wallace of Fox News Sunday, Cain refused to disclose the authors of his marquee economic plan. "They have their own independent businesses, and I don't want to compromise their confidentiality at this point," he said. "When they tell me it's OK to mention their names publicly, I will mention it. But trust me, it was a couple of people you know very well."1

Or not so well, as the case may be. Pressed repeatedly, Cain acknowledged that the chair of his economic team was Rich Lowrie of Cleveland, later revealed to be a wealth management adviser with Wells Fargo.2

Efforts to contact the Cain campaign for more details on the candidate's tax advisers were unsuccessful.

More Than Just a Catchphrase

Although Cain won't name his advisers, he will provide details about his tax plan. Or at least what passes for details from a presidential campaign. The 999 plan is barely more than a catchphrase, even when laid out in all its glory. But the same could be said for almost every tax proposal in almost every presidential campaign. This ain't the Joint Committee, folks -- it's a primary battle.

Cain's economic plan begins, quite reasonably, with what he calls "Phase 1: Initial Boost." (Don't take that sort of clarity for granted -- it won't last long.) According to campaign materials, Phase 1 represents "the minimum for feeding the economic engine." It pursues that modest goal by seeking out (mixed-metaphor alert) the "low hanging fruit" that will provide "the most 'bang for the buck.'"

During Phase 1, President Cain would push through rate reductions for the individual and corporate income taxes, capping both at 25 percent. He would also eliminate all taxes on repatriated corporate profits and on all kinds of capital gains.

Easy enough, right? Can't find fruit much lower than that -- should have done it years ago.

After the passage of Phase 1, Cain would begin his second round of economic reform, known as "Phase 1: Enhanced Plan." This stage, which Cain urges the congressional deficit reduction supercommittee to endorse this fall, would do many things:

  • eliminate the payroll tax entirely (presumably for both Social Security and Medicare);
  • eliminate the capital gains tax (already achieved during the initial boost);
  • eliminate the estate tax;
  • eliminate the double taxation of dividends;
  • institute a business flat tax of 9 percent on gross corporate income less all investments, purchases from other businesses, and all dividends paid to shareholders;
  • establish Empowerment Zones to provide additional deductions for "payroll employed in the zone";
  • institute an individual flat tax of 9 percent on gross income less charitable deductions;
  • provide additional deductions for individuals living or working in designated Empowerment Zones; and
  • institute a national sales tax of 9 percent.

The sales tax is crucial, in Cain's view, because it "gets the Fair Tax off the sidelines and into the game." In fact, the FairTax is the game, as well as the title of Cain's Phase 2. "Amidst a backdrop of the economic boom created by the Phase 1 Enhanced Plan, I will begin the process of educating the American people on the benefits of continuing the next step to the Fair Tax," he said.

The FairTax would "make it possible to end the IRS as we know it," Cain said. (That seems to leave open the possibility of an IRS as we don't already know it -- scary thought.)

Wait, there's more! In a syntactically confusing expression of joy, Cain makes a prediction: "The Fair Tax makes our exported goods and services the most competitively internationally than any other tax system." (Sorry to pick nits, but that wording appears on both his website and in his PDF handout.)

Revenue Estimates

Cain maintains that his tax changes would be revenue neutral. In a September 26 article for The Washington Times, he said his plan was "written and scored" before other candidates even entered the race.3 As he outlined the process for Fox's Wallace:


    Here is how we arrived at it. I had some of the best economists in this country help me to develop this plan. You know, my background is mathematics. It was a simple regression analysis. We took the government data and looked at how much tax revenue from personal income tax, how much tax revenue came from corporate tax, how much revenue came from capital gains tax, how much revenue from the death tax. We added them all up, and you do a simple regression analysis and say in order to reduce this much on corporate income, personal income and national sales tax, what should that number be if we equally break up those three buckets. It was a simple regression analysis.

Gotcha. Quite a coincidence that all those regressions ended up with the same number, again and again, tax after tax? That old number 9 is pretty powerful. Maybe it's divinely ordained. Cain suggested as much in a campaign video: "If 10 percent is good enough for God, then 9 percent should be just fine for the federal government."

Apparently Cain and his advisers are now engaged in a slightly more rigorous effort to estimate the revenue effect of his proposed changes. Now that people are paying attention to the 999 plan, Cain is putting the calculators back on the table:


    We are following up now with an official scoring of my plan, but because the way it was derived was so simple to produce such a simple concept, we didn't make that a priority.

The Best Part

The most compelling aspect of Cain's economic plan isn't actually the plan itself. Rather, it's the skill with which he markets it. Leveraging his business acumen for political effect, he's a master of the money quote:
  • "With all due respect, you don't prune weeds --- you pull them out at the roots. . . . Leave it to a politician to start with the current tax code and then move a step or two in the right direction. Leave it to a real businessman to start with what is right and get there immediately."
  • "The capital gains tax is nothing more than a wall separating those with ideas from those with capital. It makes no sense to wall off those with ideas, for that is where we find the most business formation, innovation and job creation. Mr. Romney: 'Tear down this wall!'"
  • "Our tax code is the 21st-century version of slavery. The IRS has become the overseer of the American people."
  • "We will replace oppression with prosperity."

Cain adopts several talking points popular with Republicans. For instance, he stresses the need for certainty. "You don't pass this for a trial period," he said during an interview with National Public Radio. "You say to the business community, 'This tax structure will be our new tax structure until further notice.' That's how you put some certainty back into this economy."4

Cain also capitalizes on popular discomfort with -- and incredulity about -- the number of people not paying income taxes. The 999 plan seems to include no exemption for its individual income tax (or any sort of refundable credit for its sales tax, for that matter). How else to explain Cain's insistence that it "unites all tax payers so we all pay income taxes and no one pays payroll taxes"? Such an approach might prove unpopular in practice, but it certainly sounds good on the stump.

And that, after all, is the point of all this tax talk. Cain's plan is fanciful and unrealistic. But so are the tax plans proffered by most candidates. Cain's is just more fun, especially when combined with his amateurish but charming approach to the campaign itself. There's something to like about a guy who can turn a phrase the way Cain does and make you laugh while he's doing it.

But it's good to know he probably won't be doing it from the Oval Office anytime soon.


FOOTNOTES

1 Available at http://fxn.ws/olZKou.

2 Available at http://on.wsj.com/rqoSdl.

3 Available at http://bit.ly/rmn2xq.

4 Available at http://n.pr/oWdSHz.


END OF FOOTNOTES