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Herman Cain's No-Growth Formula
Posted by David M. Katz | CFO.com | US
October 14, 2011 10:28 AM ET

Simplicity, as Steve Jobs taught us, is beautiful. Simple-mindedness, as Herman Cain is currently teaching us, is, well, simple-minded. It seems that Cain, looking for a catchy campaign slogan for his bid for the Republican presidential nomination, reportedly procured one from an accountant friend of his, who scrawled it on a paper napkin: 9-9-9.

Besides adding up to 27, the numbers Cain?s friend dreamed up boil down to 9% flat taxes on businesses and people, respectively, and a 9% national sales tax, according to the candidate?s Website.

The business flat tax would be based on the enterprise?s gross income minus its investments, purchases from other businesses, and dividends paid to shareholders. The individual tax would be based on gross income less charitable deductions.

Since Cain hasn?t spelled out any exemptions from his national sales tax, New York Times blogger Bruce Bartlett assumes ?that it will apply to food, medical care, rent, home and auto purchases and a wide variety of other expenditures now exempt from state sales taxes.? In short, that would increase everyone?s cost of living by 9%.

That?s simple enough, but senseless. You don?t have to be a Keynesian (and Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the congressional staff of current Republican presidential hopeful Ron Paul) to know that the nation?s current economic woes stem from a lack of consumer demand.

Corporate America is relatively debt-free, cash-flush, and largely recovered from the economic crisis of 2008-2010. Yet companies are wary of spending on growth in the absence of signals that demand will rise enough to justify that spending. Into that scenario, Cain interjects the idea of taking money out of consumers? pockets.

True, the huge deficits that the federal government is carrying make the large injection of sales-tax revenues somewhat alluring. But even in Europe, where consumers commonly pay value-added taxes, adjustments are made to pick up the demand side.

For instance, countries with VATs have cut income taxes on low earners and installed direct payments to lower-income groups. Cain?s sales tax would actually amount to a tax increase on such groups. What?s more, it?s a truism that as sales taxes start to near 10%, people start looking for ways to avoid them. Not a very efficient way to raise revenue.

The conservative Bartlett goes further. ?At a minimum, the Cain plan is a distributional monstrosity. The poor would pay more while the rich would have their taxes cut, with no guarantee that economic growth will increase and good reason to believe that the budget deficit will increase,? he says. It?s a strange kind of math that Cain is proposing: 9-9-9 = no growth.

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