Wednesday, November 2, 2011

9-9-9 vs 20%

I'm enjoying the GOP's jousting flat tax proposals. Isn't it nice to be debating the best ways to limit government, instead of the best ways to expand it?

We have two real proposals on the table here. Herman Cain's 9-9-9 plan would tax personal income at 9%, corporate income at 9%, and levy and national sales tax at 9%. Rick Perry's 20% plan would create an optional 20% flat tax, with exemptions, that taxpayers could choose as an alternative to paying existing taxes.

Of the two systems I prefer Perry's, for a few reasons.

First, it's less radical. Cain's plan radically cuts income taxes and replaces the revenue with a sales tax. This would require the United States to create a system for administering a national sales tax, and would create uncertainty both for government revenue and businesses affected by the sales tax. State sales tax policies are extremely varied: some have few exemptions, while others have various carve-outs in an effort to make such taxes less regressive. In New Jersey, there are "enterprise zones" in which sales taxes are halved. The negotiations necessary to bring about a 9% national sales tax - higher than most states' - would be complicated to say the least.

Second, it's more politically feasible. Such a major change is going to engender lobbying efforts from industries that may be negatively affected. Take an inexpensive clothing retailer - Old Navy, say, just to pick one. In many states there is no sales tax on their products because clothing is exempt below some limit. Would a national sales tax also exempt them? You can be sure they would prefer it does, and would lobby to bring about that outcome. Remember the rent-seeking behavior that went on during the negotiations for Obamacare.

True, the Cain plan is simpler. Perry's plan has been attacked as "more complicated than the existing tax code", because it adds yet another layer onto an already complicated tax system. That is true. But the end result will likely be simpler for large numbers of people. My judgment is that total hours spent calculating income tax will be lower under the Perry plan than under the current plan, and that's what really matters. If large numbers of people choose the 20% flat rate, that provides a path to simplifying the rest of the tax code, as parts of it will be rendered irrelevant.

I wish I had more confidence that either plan would ever be debated by Congress.

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