Despite long-standing, bipartisan recognition of our counterproductive federal tax code, its size, cost and complexity continue to worsen. Moreover, uncertainties created by persistent changes —14,000 amendments between 1985 and 2008 —reduce U.S. wealth and competitiveness.
Former Republican presidential candidate Herman Cain made tax reform a central plank in his campaign. His “9-9-9” advocacy proposed dumping the current income tax code and replacing it with three tenets: A 9 percent tax on corporate income; a 9 percent tax on personal income; and a 9 percent national sales tax.
Thanks to economic logic and empirical evidence, we are able to evaluate Cain’s “9-9-9” concept, as well as other tax reforms. Let’s look at how it compares to Adam Smith’s four guiding principles for establishing exemplary tax systems and successful public finance.
Smith’s template was simple:
1. Equality Maxim. Every citizen ought to contribute toward the support of government in proportion to the revenue which they enjoy under the state’s protection.
2. Certainty-Clarity Maxim. The timing, the manner and the amount of tax payment must be certain, not arbitrary.
3. Convenience Maxim. Every tax should be levied in a time or manner most convenient to the payer.
4. Affordable-Efficiency Maxim. Every tax must take from the payer as little as possible over and above what it brings to the state coffers.
Viewed in this context, “9-9-9” squares nicely with several of Smith’s axioms. For example, a 9 percent across-the-board flat tax abides by the equality maxim by drawing income tax revenues from all income-earning citizens, and does so in direct proportion to their income and earnings. In so doing, “9-9-9” vastly reduces the intricacies of the current tax code by removing the need for so-called loopholes, rebates, credits, deductions or preferences.
These simplifications, along with the removal of myriad marginal rates on income, would vastly clarify the tax code. This conforms to maxim two: clarity and certainty of taxes. This portion of the “9-9-9” reform has been enthusiastically received because it’s supposed to provide taxpaying firms and individuals the wherewithal to eliminate costly professional help and software required to file returns. In turn, we’d enhance the probability of eliminating half of all costs associated with the IRS, thereby giving life and meaning to Adam Smith’s fourth maxim related to efficiency of tax collection.
Notwithstanding these and other significant advantages to “9-9-9,” especially compared with the current 70,000-page monstrosity (compliance for which costs 7.6 billion hours —an annual effort of 3.8 million full-time workers), there remain two serious hurdles unaddressed by Cain’s package. First, “9-9-9” provides no fail-safe means to assure taxpayers that its installation will coincide with the abolition of existing IRS taxes and tax rates. Unless this simultaneous transition occurs, “9-9-9” becomes a crushing add-on to present burdens. Any such lapse in implementation would spell economic disaster; an endgame for American competitiveness and growth.
Support for this skepticism abounds, domestically and internationally. For example, Michigan’s new governor has let stand the prior governor’s income tax hike, while adding taxes on pensions, homesteads and commodities. A similar fiasco befell Indiana’s proposed tax-easing more than a decade ago. The promised easing of property taxes instead of a hike in sales tax rates evanesced into rate hikes on both. On the international scene, the introduction of 5 to 6 percent value-added tax rates were sold to taxpayers as a means for reducing and removing other tax burdens. Today, however, heavy taxation is ubiquitous, and value-added taxes across the EU exceed 20 percent on average.
A second major problem is the plan’s focus on taxes rather than the central issue: Out-of-control government spending. This is a seminal concern. Why? Because without first ratcheting down government spending, no tax reform will succeed.
Many believe that government’s primary burden on firms and individuals is taxation. But this is not true. The true cost of government is never the revenues it raises for its operation and programs, but its spending. Outlays, not taxes, are the core burdens, because what our government spends today (but fails to raise in taxes today) becomes tomorrow’s higher taxes, higher debt ceilings and borrowings, ruinous inflation and plummeting credit ratings.
Regarding viability of our Republic and the integrity of our financial system, Washington, Jefferson, Franklin, Adams and Hamilton never equivocated on our vulnerability to federal spending overreach. Franklin even cautioned, “Any government that took as much as 12 percent from the pockets of its citizens would be considered a harsh and uncaring government.”
Until public-sector spending is capped and conforms with actual growth of our nation’s private-sector tax base, any “9-9-9” reform will prove another futile exercise.
David L. Littmann is senior economist at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.