By Dick Morris - 10/18/11 10:44 PM EDT
In 1980, facing a terrible economy, Ronald Reagan called for a new tax program: 10-10-10. Based on the Kemp-Roth bill, he called for 10 percent cuts in income taxes for three years. He got it, and it kindled 20 years of prosperity.
Now, Herman Cain understands that we need fundamental reform to get our economy moving. He calls for replacing the current system with just three levies of 9 percent each on personal income, corporate income and consumption. There would be no capital gains tax, inheritance tax, Social Security tax or Medicare tax. Just 9-9-9.
The proposal, naturally, attracts critics and skeptics.
Some worry that it will add to the deficit. But that’s not likely.
· Americans now earn $12.5 trillion of personal income. Tax it at 9 percent with no deductions and you generate about $1.125 billion.
· We spend $10.3 trillion. A 9 percent tax would yield about $927 billion.
· Net corporate income (after dividends) is $1.1 trillion. A 9 percent levy would generate $100 billion.
· That comes to $2.152 billion, about the same as our actual revenues of $2.162 billion for fiscal 2010.
And then, when you factor in the economic growth this plan will engender, the scenario becomes even better.
Liberals worry that the tax would shift the burden from the rich to the middle class. No, sir. Americans making $50,000 to $60,000 a year now pay an average of 6 percent of their income in income taxes. But they also pay 6.5 percent in FICA levies and 2.9 percent in Medicare payroll taxes (a total of 15.4 percent). The Cain proposal would replace these with a flat 9 percent, saving them 6.4 percent.
Of course, the middle class would also have to pay a 9 percent sales tax, but it would be largely offset by the savings in their payroll taxes.
Cain says that competitive pressures would hold down prices and force businesses to eat much of the 9 percent sales tax. Employers would not have to pay their 6.5 percent share of payroll in Social Security taxes, and their corporate taxes would be cut. For commodities with high price elasticity — like cars — competition will hold down prices. But for inelastic purchases — like food and drugs — some of the tax would probably be passed on. For the middle class? It’s a wash.
More compelling is the possible impact on the poor. A family making $20,000 to $30,000 a year pays only 3 percent of its income in taxes (much of it more than offset by tax credits). But it still pays 6.5 percent in FICA and 2.9 percent in Medicare taxes. So the requirement that such a family pay 9 percent in personal income taxes would probably be fully offset by the cut in payroll taxes. But the poor might face higher prices. Cain plans to spell out how he can mitigate the impact on the poor through special empowerment zones. We need to see the details. Certainly, the poor would benefit from the increased employment, wages and growth the Cain tax cuts would generate.
Conservatives worry that 9-9-9 will open the door to a European Value-Added Tax that starts at 9 percent but goes up each year. Cain proposes that a two-thirds vote be required to raise rates. But a simple act of Congress could change that.
The real answer is political. If the Republican Party surges back to power in 2012, captures the Senate, keeps the House and takes the presidency, it can make sure the rates don’t go up. Republicans usually can count on 40 votes in the Senate; we just have to use them.
The 9-9-9 is a good, good plan that can save our economy.
Morris, a former adviser to Sen. Trent Lott (R-Miss.) and President Clinton, is the author of Outrage, Fleeced, Catastrophe and 2010: Take Back America — A Battle Plan. To get all of his and Eileen McGann’s columns for free by e-mail or to order a signed copy of their latest book, Revolt!: How To Defeat Obama and Repeal His Socialist Programs — A Patriot’s Guide, go to dickmorris.com.