The Real Agenda Behind the Cain Tax Scheme

The tax plan of Republican candidate Herman Cain is the best current example of the real agenda of the GOP. It is a masterpiece of marketing, with its simple “9-9-9” label being reminiscent of a two-for-one pizza special. It would lower all Federal income tax rates to a single 9-percent rate, set the corporate    rate at 9 percent, and levy a national sales tax of 9 percent. It has the sort of meretricious simplicity that appeals both to the simple-minded and the mainstream media. True to its “horserace” philosophy of covering politics, early on most of the the press declared Cain’s plan a brilliant campaign move without making any effort to evaluate its substantive merits.

Bruce Bartlett, formerly an economist in the Reagan and George H.W. Bush administrations (and a fellow Republican apostate), analyzed the 9-9-9 tax plan. His conclusion: it decreases revenue as it drastically cuts the taxes of the wealthy and – here’s the kicker – raises taxes on the least well-off. And it does not in fact tax all income at 9 percent (so much for its appealing tripartite simplicity): it lowers the capital gains and dividend rates to zero. Generally, the richer the individual is, the more likely his income is to be derived from capital gains and dividends, which are already taxed at less than half the top marginal income tax rate. This current inequity in the tax code accounts for the fact that the 400 richest Americans have been paying an average effective Federal income tax rate of 17-18 percent since passage of the Bush tax cuts: little more than half the effective rate they had paid since the early 1990s – even as their combined income quadrupled. Cain’s plan would sharply increase this disparity.

The usual rationale for reducing tax rates on capital below the rates on labor – and Cain abolishes them entirely – is that capital gains and dividends are “double taxed,” that is, the corporation that pays them out is taxed, and the recipient is taxed. But this is a smokescreen. The American revenue system is about taxing individual legal entities. Taxes on an individual, be he a wager-earner or sole proprietor of a business, are only levied once; that said, all income from whatever source (unless it is specifically exempt) is taxed in those cases. Corporations, on the other hand, pay rates on profits, a narrower category whose definition is more susceptible to creative bookkeeping. This is how GE can pay zero Federal taxes in a given year; yet that does not preclude its shareholders from realizing capital gains. Those GE shareholders are individual entities who are legally separate from the corporations whose shares they own. They are taxed once on the investment income they receive.

While Bartlett did not do a net estimate of the total revenue change, it appears to me that just executing the tax cuts in only the second phase of Cain’s three-phase plan would result in gross revenue losses of over a trillion dollars per year (so much for the GOP’s abiding concern for the deficit). The plan’s revenue raisers, on the other hand (including its Federal consumption tax with no allowance for deductions, even for food), would fall disproportionately on the non-rich and would in any case be unlikely to make up the revenue loss.

As Bartlett describes it, the Cain plan would eliminate deductions to corporations for the workers they hire. Therefore, Corporate America would have even less incentive to hire workers than now, when they are sitting on close to $2 trillion in cash. They would have all the more incentive to park their loot at a commercial bank (which would in turn park the deposits at a Federal Reserve bank), or arbitrage sweat labor overseas. On the other hand, according to Bartlett’s reading, corporations could borrow money to pay shareholder dividends and deduct the expense!

The Tax Policy Center did a distributional analysis of Cain’s plan. The Center’s conclusion: “A middle income household making between about $64,000 and $110,000 would get hit with an average tax increase of about $4,300, lowering its after-tax income by more than 6 percent and increasing its average federal tax rate (including income, payroll, estate and its share of the corporate income tax) from 18.8 percent to 23.7 percent. By contrast, a taxpayer in the top 0.1% (who makes more than $2.7 million) would enjoy an average tax cut of nearly$1.4 million, increasing his after-tax income by nearly 27 percent . . . a typical household making more than $2.7 million would pay a smaller share of its income in federal taxes than one making less than $18,000.”

So much for the policy; what of the political strategy? At first I wondered: did Herman Cain dream this plan up himself? If not, who whispered it in his ear, and what interests did that person represent? Now we know: Rich Lowrie, a Cain economic advisor who lives in Gates Mills, Ohio, a village of 2400 inhabitants east of Cleveland, and one of the wealthiest suburbs in the country. Lowrie’s day job is as an investment advisor, and he has been involved with such groups as the Koch brothers-funded Club for Growth and Americans for Prosperity. His plan has had substantive input from long-time Republican operatives Arthur Laffer (who, with his Laffer Curve, is one of the fathers of the current generation of crackpot right-wing economists), and Steve Moore, a pioneer in the operation of 501(c)4 organizations that promote the political views of billionaires while remaining tax-exempt.

Still, it is a little surprising that after the greatest financial meltdown in 80 years, widespread unemployment and destitution, and rising public anger over the greatest income disparity in America since the 1920s, a declared presidential candidate would tout a plan that would raise taxes on low and moderate income-earners while drastically reducing them on the wealthy. Potential Republican primary voters are notoriously tolerant of lunatic-fringe nostrums, but one would think even they might blanche at a plan that would raise taxes on the majority of them.

But, at least so far, not a bit of it. Cain surged in the polls after unveiling his tax plan. According to the mainstream media, he surged because of it. The underlying causes of this phenomenon would make a fascinating case study in psychopathology. Nevertheless, one suspects that Cain will begin to sink in the polls now that the big media have finally begun to evaluate 9-9-9 and as his rivals start to chip away at his front-runner status. Still, Cain’s tax plan is a startling illustration of how to use kamikaze tactics to advance a political agenda.

In the case of other policies with substantial fiscal (and social) consequences, for instance the privatization of Social Security, right-wing think tanks fronting for billionaires have worked for decades to mainstream heretofore politically unthinkable policies by endlessly repeating simple, misleading memes and touting faked “analysis.” Eventually they succeed in changing the debate and dragging the Washington Consensus (regardless of what the country at large thinks) in the direction of serving our ever-more-entrenched plutocracy.

Viewed in the light of how he advanced the GOP’s tax agenda, Cain is not a “vanity” candidate or a joke, even if he has no realistic chance of winning. His strategic purpose would appear to be to normalize bad policy and shape the Beltway’s hive mind gradually to accept a tax system with few major precedents – save that in France’s ancien régime, where the aristocracy was exempt from taxes while the poor were squeezed. And we all know how well that historical episode ended.

While Cain’s lowering of taxes on the wealthy is a well-known formula in the GOP’s playbook, the really interesting and heretofore less well-known aspect of his plan was its increase in taxes for the working poor. Republicans have of late become quite uncharacteristically enamored of raising taxes, but not on the rich. They are targeting the less well-off.

The first public laying of the groundwork for the idea of taxing low-income earners came in a November 2002 Wall Street Journal editorial page comment. The working poor, less well-off retirees, and others who do not pay Federal income taxes were “lucky duckies.” The Journal followed up with two additional editorials using that infantile phrase.

Most Republican office holders did not yet come out publicly to make the Journal’s argument. But a few, like Jim DeMint and Orin Hatch, occasionally commandeered the Senate chamber to denounce a tax policy that has allegedly allowed almost half of Americans to avoid paying Federal income taxes.

Since Obama’s election, Republicans have amped up the “soak the poor” theme. They are strangely lukewarm about maintaining a payroll tax cut, despite the fact that it would increase the purchasing power of tens of millions of Americans who would have no choice but to recycle the money into the economy in order to buy necessities.  Strange behavior indeed from a party that never met a tax cut it didn’t like.

And now Rick Perry is said to be producing a flat tax, one likely to be similarly regressive in the manner of 9-9-9, even if differing in details. The normalization of bad policy continues.

Cain has never bothered to put together a proper campaign organization. Given that his campaign is spending tens of thousands of dollars of scarce funds to buy copies of his auto-hagiography, it is possible that his whole candidacy, like that of Donald Trump or Sarah Palin, is mainly a bid to boost his personal income: book sales, speaking fees, a gig as a Fox News commentator. As year chased weary year in the pizza pie business, Cain no doubt grew tired of being a huckster for his own brand of ketchup sauce and easer-like mozzarella on a soggy cardboard crust; he wanted to augment his income in the more respectable realm of ideas. The Club for Growth, Americans for Prosperity, Americans for Tax Reform, and all the other front organizations for billionaires would agree: regardless of what happens to his candidacy, Herman Cain has succeeded in the world of ideas.

Mike Lofgren is a former professional staff member of the House and Senate Budget Committees. He retired this year.






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