The Missing Piece of 9-9-9

The Missing Piece of 9-9-9
By Green Lantern on 10.13.11 @ 6:08AM

Herman Cain's plan is all fine and good, but a national sales tax won't wash. So what will replace that component?

Herman Cain's "9-9-9" tax reform is attracting enough attention to become the focus of this week's Presidential debate. As a plan for overhauling revenues and unleashing the private sector, it's a bold gambit that shows Cain is willing to take chances and shake up the Capital.

The 9 percent business tax is a stroke of genius. It would give us the lowest business rates in the world and would make us the "tax haven" for investment from everywhere. The stock market would barely be able to stay abreast. The 9 percent personal income rate would eliminate all the deductions and put everyone on a level playing field. Tax collection from "the rich" would skyrocket because no one would hide income anymore, but "the other 99%" would make out as well. Cain's plan would fold in the 15 percent payroll tax so the new 9 percent rate would be an improvement - but would end the immunity that the bottom half has from paying any taxes at all. Altogether a good show.

The stickler is that 9 percent national sales tax. That's where things start to fall apart. As other Republican candidates point out, a 9 percent sales tax is an ugly departure from the traditional pattern and raises all kinds of problems.

The sales tax has long been the preserve of the states and is now imposed in all but five of them (Alaska, Delaware, Montana, New Hampshire, and Oregon). The informal arrangement has been that the federal government gets income taxes, the states get the sales tax and local municipalities are granted the property tax. Often they poach. States and even cities have imposed income taxes and have also started trespassing on the property tax. But for the federal government to demand a 9 percent sales tax would be a whole new departure. Combined with state and city levies, it puts us near 20 percent, which is black market territory.

People are not going to pay a 20 percent sales tax on big-ticket items such as cars and appliances. In New York City there used to be a whole underground where stores would sell you a computer and then tell you to pick it up at a warehouse in New Jersey to avoid the city's 8.75 percent sales tax. (This was before New Jersey raised its own levy to 7 percent.) People will be setting up new car drop-offs in the Cayman Islands in order to avoid sales taxes and smuggling would be reborn.

There would also be all kinds of argument about how it would apply. Do you pay it on an $800,000 house? On a $200,000 college education? Many states are trying to impose the tax on services, which immediately gets a buzz from lawyers and other professionals. Cain tries to distinguish between "new" and "used" goods, but that would produce all kinds of gaming too. Plus the tax is highly regressive. Poor people would pay a tax on what they eat. Retired people with no income would be big losers. Plus the whole thing would be a nightmare to collect. The states employ hundreds of inspectors to audit the books of mom-and-pop grocery stores. Would an army of federal inspectors be necessary as well?

So a national sales tax is a non-starter. The whole thing is just too complicated and hard to enforce. So does that mean Herman Cain's 9-9-9 is dead? Not quite. There's another perfectly plausible tax base that could serve as the other leg to the 9-9-9. Nobody's mentioned it yet but it's worth filing away for future reference. You may not like this, but before you click over to Drudge Report give me a few moments to make the case. Are you ready for this? OK, here goes.

Carbon tax.

ALRIGHT, I CAN HEAR you already. "Carbon tax! That's like cap-and-trade. We just got rid of that, for heaven's sake! That's dead and gone, RIP."

OK, but remember, cap-and-trade was not all that bad an idea. It just got caught in the buzz saw of global warming. If you wanted to limit something like carbon emissions -- I say "if" -- cap-and-trade was a great improvement over the traditional command-and-control systems governments inevitably use. In fact, such "market mechanisms" were originally introduced by Milton Friedman and other conservatives on the grounds that they would limit government intervention and let business and industry work things out for themselves. The result would be more efficient technology at minimum cost.

Cap-and-trade only became a monstrosity when Obama tried to apply it to the whole economy. The system just wasn't up to it. In fact, the president originally thought he could raise revenue by selling permits. But by the time Congress got through handing out credits to their favorite industries, the whole thing was reduced to a wealth transfer between the dry cleaning stores of America and the power companies, with money flowing the wrong way. It was an unmitigated disaster.

A straight tax on carbon, however, was a much cleaner solution and favored by many conservative institutions. At the beginning of the debate, the Heritage Foundation put out a paper recommending a $15-per-ton carbon tax as much more direct and to the point. Whatever money was raised would be offset by reduction in other taxes. But Congress was afraid to handle anything with the word "tax" in it and so we got cap-and-trade instead. When Republicans renamed it "cap-and-tax," the ballgame was over.

But a carbon tax as a source of revenue has a simplicity that is hard to beat. Every barrel of oil and ton of coal in this country is kept in careful account. Collecting the tax would involve no more than about 100 or so enterprises. It would essentially be a value-added tax concentrated in the energy sector but without the problem of calculating "value." China just imposed a 10 percent across-the-board tax on oil and gas production this week as a means of tamping down demand, reducing imports, and redistributing a little wealth. It's hardly an innovation.

So the important question is, what would it mean for our prices? I've done some back-of-the-envelope calculations that aren't perfect but give a pretty good idea of what we might expect.

According to various analyses, Cain hopes to raise a little less than one-fifth of the federal budget -- $380 billion -- from the national sales legs of the 9-9-9 system. (There are those who say his total levy will fall short of balancing the budget, but that's another story.) Adjusting for the carbon content of the three major fossil fuels, here's what we would need to raise $380 billion:

Output --- Tax Levy --- Current Price --- Total Revenue
Coal: --- 1 billion tons $165/ton --- $70/ton --- $165 billion
Oil: --- 6.6 billion barrels $23/bbl --- $85/bbl --- $150 billion
Gas --- 2.2 trillion cubic ft $3/mcf --- $5/mcf --- $65 billion

TOTAL: $380 billion

The big impact is on coal, where the price would more than triple. About 92 percent of our coal is used for electricity, meaning that's where it would be felt. Fuel makes up 77 percent of the costs of coal generation and we get 45 of our electricity from coal. That means the overall impact would be a 130 percent rise in electrical rates across the country. Now that may seem ridiculously unbearable to households and industry but don't forget this is being coupled with a reduction of both personal and corporate taxes to less than one-third their present level.

The impacts on oil and gas would not be as severe. The tax would raise today's oil prices from $85 a barrel to $108, but that's where they were six months ago. There are 42 gallons to a barrel, which means the increase at the pump would be 55 cents a gallon. For natural gas the price would only rise from $5 to $8 per thousand cubic feet. It was $11 a few years ago. Consumers would hardly notice the difference.

The result would be to move us rapidly out of coal and into other means of generating electricity. But this is what we're doing anyway, only under the ham-handed direction of the EPA. Solar, nuclear, and wind generation of electricity would suddenly become very economical and Solyndra subsidies could become a thing of the past. Gas prices would nudge people into fuel-efficient and electric cars while the government just sat back and watched. Foreign oil dependency would decline. Of course tax revenues would diminish as all these changes took place, but by that time Congress may have discovered some success in reducing spending. At least this would dispel MIchele Bachmann's concern that tapping another area of taxation would be a new way of expanding the government.

There is one more thing. A carbon tax, coupled with 9 percent personal and corporate income tax rates, could possibly win the support of liberals and Democrats. This is important. Even if Republicans score a resounding victory in 2012, they're not going to have a filibuster-proof Senate majority. Any effort to reduce or level tax rates will be met by a wall of opposition and we'll be back to the same old stalemate. But if Democrats are willing to sign on to a carbon tax -- after all, they've been crying for it for the past four years -- then we might achieve a bi-partisan success.

Well, this is all highly speculative. But it's something to keep in mind as Herman Cain's 9-9-9 proposal gains ground in the public debate.
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