Herman Cain's slogan-ready "9-9-9" tax reform proposal reminds Jon Huntsman of the price of a pizza pie.
I think of a monstrous, underrated Keith Richards guitar riff.
And I think, too, of Mike Huckabee's national sales tax plan (dubbed the "Fair Tax")—and how it never gained much traction.
A national sales tax is just one third of Cain's plan, which on closer scrutiny doesn't come close to passing the smell test. It won't raise adequate revenue, and it disproportionately affects the poor and middle class.
Which means more bad news for those of us who'd like to explore the possibilities of consumption taxation and its potential to encourage saving and investment, as opposed to penalizing success.
The need to transition into such a system is more urgent than ever. We got into trouble in no small part because of a decade-long overextension of easy credit, negative savings rates, and illusory real-estate wealth.
Throughout the 2000s, ordinary consumers, with stagnant real wages, were encouraged by their government to spend, spend, spend, and spend some more. The crunch arrived when they finally had to stop spending money they never truly had. The resultant pile of debt—not "uncertainty," not regulation, not overtaxation—is the most significant stumbling block to sustained economic recovery.
Taxing consumption isn't necessarily an impregnable bulwark against debt bubbles. Great Britain has a value-added tax (VAT), and citizens there have racked up plenty of debt and experienced a housing bust just before we did. But it remains true that savings rates in the Eurozone are significantly higher than in the U.S., despite the fact that we generally earn higher incomes.
Resistance to a consumption tax boils down to two things: It's regressive, as the poor and middle class devote a higher share of their income to goods and services. And retirees would hate it, since the income they've already paid taxes on would get double-whammied.
But the more I look into this issue, the more I see that others, much smarter than I, have anticipated these sticking points. In 1995, for example, a bipartisan trio of senators—former Sen. Pete Domenici, a Republican, and former Sen. Sam Nunn, and Sen. John Kerry, both Democrats—proposed the Unlimited Savings Allowance (USA) tax.
Nunn, himself now retired, noted that the USA tax retained the current system's progressivity and avoided double taxation:
Taxpayers would subtract the amount they saved and invested from what they earned during the year. The balance would then be subject to progressive tax rates. We would provide a generous exemption for spending on essentials—a tax-free ‘family living allowance—and a credit to lower-income Americans for payroll taxes paid to finance Social Security.
In a 1995 speech at the libertarian Cato Institute, Stephen Moore, the former Club for Growth president, similarly addressed the regressivity issue:
If we were to provide a rebate on a generous portion of the tax that every American pays, then the regressivity disappears. I advocate that every individual receive a rebate on the tax paid on the first $5,000 of purchases he makes during the year. This would mean that a family of four would pay no tax on its first $20,000 of purchases each year. There are various ways of providing this rebate. Assuming that the sales tax were set at 18 percent, a family of four would be entitled to a rebate of $3,600 ($20,000 x 18 percent) for the year. The government could send a quarterly rebate check of $900 to every family of four; a $450 check to every family of two; and so on.
Another possibility would be to provide every family with an annual "smart card" that would have a sales tax credit based on family size. A married couple with no kids would receive a $10,000 credit on its card. Each time the couple made a purchase, the smart card would deduct that amount until the card's $10,000 credit was used up. After the first $10,000 of purchases, the family would begin to pay the sales tax.
Regardless of how the rebate is offered, the main point is that a sales tax need not be regressive.
For more technical explanations of how we could transition into the various permutations of consumption taxation, see the work of economists Laurence S. Seidman of the University of Delaware and Daniel S. Goldberg of the University of Maryland School of Law.
This is the direction we need to move in—and it would be a pity if this got lost in all the laughter over 9-9-9.