Tax changes

A new tax plan may be simpler, more understandable, and this is very commendable on its own. But it is not possible that a new set of simple rules will have every person paying exactly what they already pay. That requires a huge amount of complex rules to accomplish.

What are the possibilities?

For all the people and corporate entities out there, there will be one of three results:

  1. Every one of them will pay the same or less.

 

  • Every one of them will pay the same or more.

 

 

  • Some will pay more, and some less.

 

Option 1 means that the total income would be reduced. But it also means that various tax oddities that people complain about: GE paying no taxes, half of US taxpayers paying no income tax, et cetera, would continue or be worse. This seems very unlikely for a newly-devised plan, regardless of the details.

Option 2 would be a non-starter, and would not even have been offered.

So we get to Option 3, the mixed bag and the nearly guaranteed situation. Some will pay more, and some less. It is no surprise to me that Herman Cain’s 9-9-9 plan produces this result; I don’t see any other result as possible. But it will, indeed, mean that some will pay more taxes than they are currently.

The exchange, here, is fairness. Yes, many people who have lower incomes would pay an income tax, but this would be (if constructed simply) true straight across the board, from the lowest to the highest.

“Constructed Simply”

That simple construction is not easy to achieve, though. Here’s how it might start: “Everyone who makes an income pays 9%.” Ah, but what is an “income”? Every penny that comes in? (Forget I used the word
“penny” — it seems (hat tip to Finding Ponies) that cash has been outlawed for some purchases in one US state.)

If “income” is all money that comes in, then if you pay some percentage of it as tax, you have a problem. If you buy something for $1, and sell it for $1.05, you can make money in volume — but a 9% (or 35% or whatever) tax on it means you pay out more than you have left. So, clearly, the cost of the product to you should be deductible from income. How about the labor to make it, if you have to build or assemble the thing? Sure. But all of this is beyond “simple”— does paying for the accountant to keep track of the cost count as part of the cost? In the current system, usually “yes.” Even the accountant’s boss is deductible from “income” to get to the amount to pay taxes on.

Reducing Complexity

Herman Cain’s tax plan attempts to reduce this complexity, but it still doesn’t fit on a page. Each component will have to be meticulously defined, and each definition is going to have an impact on taxpayers. This impact will be larger, potentially, than the percentages.

Incidentally, deciding that the deductions are zero because they haven’t been explained well yet is not exactly a fair assumption. But I am certain that some people will pay more taxes, and some less, under the Cain plan. And that the proposed plan will be tweaked massively before being actually made into law anyway.

Here’s a description by Arthur Laffer (originator of the Laffer Curve) of Cain’s plan. As he points out, it would result in higher income people paying more taxes, but now able to pay less to those who figure out how to reduce taxes in the current complex system. This is certainly true; I’ve spent a lot of money on such people myself.

The point of the plan is not to reduce everyone’s taxes, but to simplify the process, make it fair and understandable, so that job creators will once again find the US a mecca for business, and thus for everyone whose income is tied to that productivity — which includes welfare recipients. For without productive businesses paying the taxes, no one will be paid by the government for very long.

At least, Mr. Cain understands the idea of creating incentives for businesses to create jobs.

===|==============/ Keith DeHavelle

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