I like Herman Cain. I’ve been listening to him for years on the radio. And I just love his debate with President Bill Clinton back in 1994 on health care reform. But the one thing I really like about Herman is his support of the FairTax Plan originally put forth by former Congressman John Linder (R-GA).
To quickly summarize, the FairTax Act (HR 25, S 13) is a comprehensive proposal that abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax administered primarily by existing state sales tax authorities.
While Mr. Cain is still a proponent of the FairTax, he has recently proposed a transitional plan, which he calls the 999 Plan. This plan consists of two phases. Phase 1 would end all payroll, capital gains, and death taxes. And in its place it would implement a 9% flat tax on businesses, individual income, and all retail sales. Phase 2 of the 999 Plan would implement the FairTax plan.
While I like Herman’s ultimate goal, there is one portion of this transitional plan that worries me immensely. And that is the establishment of a national retail sales tax IN ADDITION TO individual income taxes. And, as I have found out by talking and listening to others, this is a concern that many proponents of the FairTax plan share.
The FairTax Plan includes the repeal of the 16th Amendment – this being, of course, the amendment that permits the Federal Government to tax individual income. It is a condition of enacting the national sales tax. This would ensure the two taxes would not exist simultaneously. This is a good thing.
The main problem with the transitional plan Mr. Cain proposes is that no one can reasonably determine what a future Congress or President might do. What would happen if Phase 1 of the 999 Plan is implemented and either Congress or the Presidency then came under the control of the tax and spend Democrats? One could be fairly certain that Phase 2 of the plan would not be implemented. In all likelihood, the transitional rates (i.e., the 9%) would then be demagogued (by both parties, no doubt) to create exceptions, loopholes, and restrictions that would mirror the problems we have with our current tax codes. So rather than simplifying the problem, the problem would now be expanded into the realm of retail sales.
A more reasonable transitional plan would be a “99 Plan” – a flat tax rate for both business income and for individual income – at whatever rates would provide revenue neutrality. In addition, this transitional plan should mandate that a proposed constitutional amendment to repeal the 16th amendment be approved by Congress and sent to the States for ratification. Then, upon ratification of this amendment, the transition to the FairTax plan can be completed and the Internal Revenue Service dismantled.
So, my advice to Mr. Cain is to revise your 999 Plan to eliminate the 9% federal tax on retail sales and to tweak the 9% rates on business and income taxes to ensure revenue neutrality. This, I believe, would be a much more palatable transitional state. Should the plan move ahead to Phase 2 as Mr. Cain proposes, we’ll get the FairTax plan many desire. Should the plan come to a grinding halt after the implementation of Phase 1, we’ll still be much better off than we are now with a much simpler flat income tax structure.