(October 21, 2011) His sales tax is regressive precisely because used goods are exempt.
Most love the first two 9s in Presidential contender Herman Cain’s 9-9-9 plan — a 9% flat personal income tax and a 9% flat corporate tax. Every wage earner wins here, although the poor less so. Most also share Cain’s desire to stop the tax code from social engineering by influencing our economic choices. The plan “is neutral with respect to savings and consumption, capital and labour,” Cain states.
The only big knock against Cain’s plan comes in the third 9% — a national sales tax that, his critics say, would hit the poor hard. Unlike the rich and middle class, who would not only save big on personal taxes but also would invest a good part of their income, and thus avoid the sales tax, the poor would be forced to spend most of their income on taxable necessities. Cain’s answer: With companies being taxed lower, the cost of goods and services will decline because of competition, offsetting most or all of the 9% cost of the tax. And besides, used goods won’t be taxed, benefitting the poor.
In fact, Cain’s 9% national sales tax is more regressive than even his worst critics on the left realize. It is especially regressive precisely because used goods are not taxed.
According to the Bureau of Labour Statistics, the single biggest expense that householders face is housing, which consumes an average of $16,500, or over one third of the average annual expenditures of $48,000. Homeowners or buyers of used houses — disproportionately the rich and the middle class — would largely escape the 9% sales tax. Renters — disproportionately those less well off — would be paying it.
The tax treatment of the next biggest expenditure — transportation, at almost $8,000 — again favours the middle class. Because more than two thirds of car purchases involve used cars, and because those cars disproportionately are bought by the middle class, those with means again tend to be spared the 9% sales tax. The poor, who can less often afford a car and are more likely to travel by public transit within cities and by Greyhound Bus between cities, have no such luck.
Neither is Cain’s plan neutral. For starters, it would interfere big time in housing, one of the country’s largest economic sectors. His 9% sales tax on rentals would arbitrarily tilt the playing field against rental properties and toward home ownership, leading to sprawl and other profound changes in the way cities and suburbs develop. At a personal level, people who would ordinarily rather rent than own — either because they want to invest their capital in a new business, because they expect to soon be moving out to a new job or up to a new neighbourhood, or simply because they don’t want the hassles associated with home ownership — would now be cajoled into making a different lifestyle choice.
More generally, because a tax on goods and services primarily means a tax on services — the service sector is much larger than the goods sector, and becoming more so — the public’s preference to have others perform services for us would be penalized. We would see less of a trend to eating out, to having professional home care for the old and infirm, to vacations other than at family cottages, and to self improvement through art, music or physical fitness training. Personal lifestyle choices would again be leaned on by the government’s choice of tax policy.
Cain’s 9-9-9 plan is not his end state — it is merely the first phase enroute to what’s called a Fair Tax — a much larger federal sales tax of 23% that would entirely replace existing federal income taxes. Here the bias against a service economy becomes far more pronounced. Some may prefer a tax system that encourages us to do more of our own cooking, cleaning, and carpentry, as in the old days, but is that really the role of government?
Rather than 9-9-9, Cain should adopt 9-9-Nein. The third 9 should be scrapped, replaced either by a more neutral tax that minimizes hardship on the poor, or, better yet, by radically shrinking the size of the federal government, so that 9-9 does the trick.
Lawrence Solomon is executive director of Urban Renaissance Institute.
To see Herman Cain’s 9-9-9 proposal, click here.