October 21, 2011

Arthur Laffer and Peter Schiff have both come out in favor of Herman Cain’s 9-9-9 tax proposal. Laffer’s endorsementis full strength:

This is the type of tax increase I wholeheartedly support.

Schiff’s endorsement is qualified, and I have taken some heat for calling it an endorsement, but aside from Schiff’s qualification as to what he calls a hidden additional 9% tax, it sure sounds like an endorsement to me.

In his analysis of the Cain proposal, Schiff writes:

Cain would replace the current system of income and payroll taxes with a 9% flat-rate personal income tax, a 9% corporate tax, and a 9% national sales tax. Great idea.

and Schiff concludes by emphasising the hidden ninth tax and writes (My emphasis):

In the final analysis, if Cain really wants a 9-9-9 plan that doesn’t raise taxes he needs to remove the hidden 9% payroll tax. However, the only way this could be done, without blowing an even bigger hole in the federal deficit, is to combine his plan with significant spending cuts. If he can pull that off, three nines may be a winning hand after all.

But, the problem is as much with the other three nines that Schiff calls “a winning hand after all.”

What do Schiff and Laffer like so much about Cain’s plan. Here’s Laffer:

I support collecting more in taxes from people with high incomes who choose to actually pay taxes at lower tax rates than use lawyers and accountants to avoid taxes at higher tax rates. Some tax revenues at low tax rates is a heckuva lot better than no tax revenues at high tax rates.

Here’s Schiff:

Such a [9-9-9] system would unburden businesses, provide a tax cut for most Americans, and shift taxation to consumption and away from income generation

Now, what needs to be kept in mind is that Cain’s plan is designed to be revenue neutral. Schiff would like to see elimination of the fourth hidden 9% tax, but overall we are just talking about shifting the structure of taxation, rather than reducing taxation. Murray Rothbard explainedwhat this means:

…in the immortal words of that exemplary economic czar and servant of absolutism, Jean-Baptiste Colbert, the task of the taxing authorities is to “so pluck the goose as to obtain the largest amount of feathers with the least amount of hissing.” We the taxpayers, of course, are the geese.

Cain’s 9-9-9 tax plan is about cutting down hissing. In other words, it’s a scam. He’s a con-man playing a shell game.

Now, let’s take a detailed look at this Cain con game and what Schiff likes about the plan and what he doesn’t.

Schiff writes:

Payroll taxes are, in reality, a cost of employment. From the employer’s perspective these costs are part of the wage package. Absent these taxes, employers could raise wages by an equivalent amount without raising labor costs. Inclusive of this portion, payroll taxes currently cost workers 15.3% of their wages.

The Cain plan scraps this tax. But the elimination of wage deductibility from corporate taxes replaces it with a 9% payroll tax. Therefore a more accurate name for Cain’s proposal could be the 9-9-9-9 plan. The forth nine changes everything.

Schiff is correct here. The 9% tax resulting from the elimination of the wage deductions will result in this tax cost being passed on to workers. It will mean reduced wages by 9% and is a fourth cost.

Now, let’s look at what Schiff really likes about the 9-9-9 tax plan (My emphasis):

Such a system would unburden businesses, provide a tax cut for most Americans, and shift taxation to consumption and away from income generation. This is exactly what our economy needs.

But, Schiff is just plain wrong here. Just as Schiff points out that a tax shift ends up on labor because of the elimination of a tax deduction, a shift, which Schiff doesn’t seem to recognize, will result because of the consumption tax. The tax will ultimately fall on labor and capital. Rothbard explains:

Having challenged the merits of the goal of taxing only consumption and freeing savings from taxation, we now proceed to deny the very possibility of achieving that goal, i.e., we maintain that a consumption tax will devolve, willy-nilly, into a tax on income and therefore on savings as well. In short, that even if, for the sake of argument, we should want to tax only consumption and not income, we should not be able to do so…. the sales tax is subject to an extra complication: the general assumption that a sales tax can be readily shifted forward to the consumer is totally fallacious. In fact, the sales tax cannot be shifted forward at all!…In the long run, of course, and that run is not very long, the retail firms will not be able to absorb a sales tax; they are not unlimited pools of wealth ready to be confiscated. As the retail firms suffer losses, their demand curves for all intermediate goods, and then for all factors of production, will shift sharply downward, and these declines in demand schedules will be rapidly transmitted to all the ultimate factors of production: labor, land, and interest income. And since all firms tend to earn a uniform interest return determined by social time preference, the incidence of the fall in demand curves will rest rather quickly on the two ultimate factors of production: land and labor.

Hence, the seemingly common-sense view that a retail sales tax will readily be shifted forward to the consumer is totally incorrect. In contrast, the initial impact of the tax will be on the net incomes of retail firms. Their severe losses will lead to a rapid downward shift in demand curves, backward to land and labor, i.e., to wage rates and ground rents. Hence, instead of the retail sales tax being quickly and painlessly shifted forward, it will, in a longer-run, be painfully shifted backward to the incomes of labor and landowners. Once again, an alleged tax on consumption, has been transmuted by the processes of the market into a tax on incomes.

Bottom line, the part of Cain’s proposal that has Schiff most excited, the consumption tax, will ultimately not fall on consumers, but on the incomes of labor and landowners, exactly where Schiff doesn’t want it to fall!

Schiff should be commended for pointing out that there is a fourth hidden 9% tax in Cain’s proposal. But, there is a lot more that is wrong with Cain’s plan. It first and foremost, through shell game antics, cuts down the hissing relative to the tax burden. It creates a new pipeline by which taxes can be raised, which Michelle Bachmann has correctly warned can easily lead to tax increases down the road. And, further, approval of elements of the plan (the consumer tax) in the fashion that Schiff gives approval, in addition to being wrong, lead to a grander endorsement of government micro-management of the economy. “Well, we cut this tax and increase that tax and it will really boost the economy.” The problem is not the direction from which the taxes come, but the massive amount of government spending that goes on. Yes, Schiff does call for a cut in spending to eliminate the problem of the fourth 9 tax, but this is about micromanagement and fails to discuss the horrors of overall government spending in the economy.

Cain’s 9-9-9 proposal does nothing to address that. It is designed to stop the hissing. It’s understandable why Laffer is for the plan. He is all about stopping the hissing and keeping taxes revenues high. It is much more difficult to understand how Schiff can say anything positive about this Cain move of tricks to con the masses.

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