Cain's 9-9-9 Good for the Economy

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- Herman Cain's proposal to replace all federal taxes with a 9% income tax, 9% national sales tax and 9% corporate tax makes good economic sense.

This plan would impose the least administrative costs for raising the money needed to finance the federal government, better promote growth than the current tax system and be a darn sight fairer than the current burdensome and complex personal and corporate taxes structures.

Administrative Costs

The current tax code imposes enormous compliance costs on private individuals and businesses. The vast array of complex deductions and credits intended to encourage private citizens to do more of some things and less of others have made accounting and tax law two of the most stable and recession-proof professions on the planet.

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Simply wiping away all those loopholes not only permits a much lower and more certain average rate of taxation for all individuals and businesses, but it would also eliminate the costs of millions of hours of private tax professionals time from annual filings and require fewer employers monitoring and auditing the returns of honest taxpayers. IRS agents could spend more time chasing tax evaders and get along with fewer employees in the bargain.

Economic Growth

The current personal income and corporate tax system -- with marginal rates up to 35% -- is full of incentives that reward individuals and businesses for investing to get the biggest tax write-offs instead of pursuing the soundest commercial opportunities. By closing virtually all loopholes and lowering rates, 9-9-9 would make such tax prospecting obsolete and increase after-tax profits for growing businesses and creating jobs. It would encourage investing to make products people want to buy rather than engineering balance sheets to avoid the tax collector.
Former Godfather's Pizza CEO Herman Cain

The national sales tax component would essentially be a value-added tax. Under World Trade Organization rules, those taxes are refunded on exports and levied on imports -- an advantage Chinese and European exporters and import-competing industries have, but U.S. businesses currently lack. And being a consumption tax, it would encourage saving and investing instead of overspending for immediate gratification -- something liberals and conservatives have long advocated.

Equity and Fairness

The present system permits about 40% of all taxpayers to get off without paying income taxes, and most heavily taxes folks earning from $50,000 to $1 million. Many richer folks often escape paying much lower rates, because hedge fund managers and manipulators of paper assets have the money to lobby Washington for special treatment.

The unfairness applies to sole proprietorships and small corporations -- those can't avoid the accountants, lawyers and lobbyists to avoid taxes with the ease of a GE or a dedicated Wall Street hedge fund, and they can little exploit low capital gains rates through financial engineering.

At the other end of the spectrum most low-income individuals pay no income tax now, and would be required to pay 9% income and national sales taxes. If they saved 10% of their incomes, they would have effective rates of about 17%.

Currently, they share with their employers a combined 15.3% Social Security and Medicare tax, and those would be ended by 9-9-9. Implementing legislation could require employers to raise wages by the amount of their saved employer contribution, and the IRS to provide a 2% tax credit for individuals earning less than the poverty line. Alternatively, the legislation could exempt basic groceries and a few similar essentials from the sales tax to address those equity concerns.

The additional growth fostered by such a simple and elegant solution to financing the national government would more than compensate for the lost revenue those small concessions to fairness requires.

Herman Cain may be no PhD economist -- and he doesn't appear to be listening to many -- but he has stumbled onto something America should embrace. Two other presidents -- Harry Truman and Ronald Reagan -- embraced similar simplicity and common sense, and they were arguably two of the most successful presidents.

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Professor Peter Morici, of the Robert H. Smith School of Business at the University of Maryland, is a recognized expert on economic policy and international economics. Prior to joining the university, he served as director of the Office of Economics at the U.S. International Trade Commission. He is the author of 18 books and monographs and has published widely in leading public policy and business journals, including the Harvard Business Review and Foreign Policy. Morici has lectured and offered executive programs at more than 100 institutions, including Columbia University, the Harvard Business School and Oxford University. His views are frequently featured on CNN, CBS, BBC, FOX, ABC, CNBC, NPR, NPB and national broadcast networks around the world.

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