Hermain Cain did more than any candidate, ever, to elevate the discussion about tax reform. His 9-9-9 plan brought attention to the reform of the tax code.
The devil is in the details and Cain’s was lacking in detail and specifics needed to score it for validity. It is, however, a great starting point.
Over the years flat taxers like Steve Forbes and others have talked about a 15 to 20% rate, eliminating all deductions. Fair taxers, like Mike Huckabee and others (Fair tax, consumption tax, VAT are pretty much the same national sales tax) have pretty much all talked about exceptions.
Cain’s plan also addressed payroll tax deductions for medicare, social security and the funding of the entitlement state. Many conservatives have been saying for years that opting out of Social Security for private retirement should be considered. Of course, we now have ObamaCare, which will most definately lead to higher payroll taxes to pay for health insurance. That’s not partisan bickering, that is straight from the CBO and ObamaCare supporters.
The great challenges of our time, jobs, government debt, runaway healthcare costs are all addressed by these three rails. Cain had the right idea, maybe not the right plan.
Now I’m not a politician, tax code genius or health-care expert, but I think the basic idea of reforming the tax code with fairness and simplification will lead to increases in revenue while stimulating job growth. Here is my plan.
SIMPLE TAX RATES
We should have three tax rates. If you make less than $30,000 per year you pay no income tax. Nothing held out of your check, no refunds back from the government of any kind. By todays living standards, $30,000 per year, or $2500 per month is just about what you need to get by with the basics. Food, shelter, transportation with some extra left over. It is about twice the minimum wage. This means a large majority of working Americans would pay no income tax and have nothing withheld from their check. (We’ll address payroll tax and health care later.)
If you make between $30,000 and $120,000 your flat tax on income is 10%. No deductions. No credits. One page tax return. This is the majority of the middle class, from lower to upper and would cover about half of our tax revenue.
If you make above $120 your flat tax rate is 15%. This is basically the upper 10% of income earners, but it’s got some broad leaps in income. A family making $120,000 a year is nothing like a family making $1.6 million per year. Generally speaking thought, this group would generate the other half of our income tax revenue.
Income from capitol gains, stock dividends, interest earned on retirement accounts, etc would be taxed at the 15% rate. 15% would also be the corporate or business tax rate. (More on that later)
VAT OR SALES TAX
Now with income taxes down to one page for indivuduals and businesses,(no deductions easy to understand) there will probably be a deficit. Remember, we still have to pay our way out of the mess we are in. That’s where the VAT or National Sales Tax comes in. It would be set at a percentage based on two criteria, a.) what is the projeted deficit from income tax revenues and b. what do we need to make payments to bring down our national debt. The VAT would also have a cap and be tied to a balanced budget amendment to the constitution. In other words, Congress would have to establish a budget, based on the projected income tax revenue and then vote every year to make up the difference by raising or lowering the VAT tax within pre-determined limits. If they couldn’t balance the budget within the VAT limit then they would have to cut the budget. The VAT would not apply to housing, utilities, food, fuel and health care. It would apply to any retail goods and services.
Simplifying the tax code in this way would be progressive, but fair. While lower rates would reduce tax revenue, simplification would increase it. We could eliminate the IRS as we know it. There would be no refund checks or paying taxes on April 15th. What you owed would be withheld.
The VAT/Balanced Budget Amendment would also force congress to act on budgetary matters. They would have no choice. For example, the law would state that the VAT could not increase more than 1% a year. Leading up to a fiscal year the congress would be given projected income tax revenues. (Which would require a super majority to change) They would also be given a projected VAT tax revenue. The budget would be set accordingly with wiggle room of 1% increasing the vat tax. If they couldn’t balance the budget by increasing the VAT 1%, they would have to cut spending. Any exces revenue would have to be used to pay down the national debt. The VAT is also very progressive in nature because it is tied to how much money you spend as opposed to what you take in.
There are obviously more details to be considered, but that’s my basic proposal. What to do about health care and entitlements are the next parts of the puzzle.