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Herman Cain: Who came up with the 999 plan?

With Herman Cain now a GOP front-runner in some polls, DCDecoder offers a four-point primer on Cain's 999 plan.

By DCDeocoder / October 14, 2011

Republican presidential candidate businessman Herman Cain speaks at a "Faith and Freedom" rally at Ohio Christian University on Oct. 13, 2011 in Circlevile, Ohio.

AP Photo/Mike Munden

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Washington

Herman Cain, it may be your moment - as Decoder wrote yesterday, Cain is leading the entire GOP field in the latest Wall Street Journal/NBC poll.

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Want to understand what all the fuss is about when it comes to Cain’s “999” tax plan? Here you go.

1. The Plan itself. What may surprise many is that the “999 plan” - a 9 percent personal income tax, 9 percent national sales tax and a 9 percent business tax - is actually only phase two of Cain’s overall tax vision. In phase one, Cain would cut individual and corporate tax rates to a maximum of 25 percent. Then, in phase two, he would implement the “999” rates. Phase three is the implementation of a “fair tax.” That tax would amount to a single national sales tax (typically formulated at 30 percent) in lieu of all other taxes. Why not just go straight to the fair tax? Cain writes, somewhat nebulously:

Amidst a backdrop of the economic boom created by the Phase 1 Enhanced Plan, I will begin the process of educating the American people on the benefits of continuing the next step to the Fair Tax.

2. What do economists think about this plan? There are plenty of economists with plenty of opinions, but The Christian Science Monitor’s Ron Scherer caught up with a boatload of them. In general, they aren’t very bullish:

“Every CEO says the reason they’re not hiring is because they’re not seeing demand,” says Rachelle Bernstein, a vice president and tax counsel at the National Retail Federation, a lobbying group, in Washington. “An additional tax on consumer spending will negatively impact that already weak demand.”

Some economists worry the plan would result in national tax cheating since retailers might offer items for sale at two different prices: one with tax and one without tax for people paying with cash. “The incentive to cheat is huge,” says Nigel Gault, chief US economist for IHS Global Insight in Lexington, Mass.

Mr. Gault says this is the reason why most countries have enacted a Value Added Tax (VAT) that gets tacked on during the different phases of producing a product. As each tax gets added on, there is an incentive to pass it on.

Since Cain would eliminate the business deduction for labor but not investment, the plan would most likely cause distortions that might add to the unemployment rate, says [John] Silvia [chief economist at Wells Fargo Securities in Charlotte, NC]. “This would favor heavy industries that use lots of capital and penalize companies where labor is significant and capital is small,” says Silvia. The entire service sector would be disadvantaged, he adds….

But probably the largest economic impact would be shifting the tax burden. “It’s a huge tax reduction on the very top and a huge tax increase for moderate and low income people,” says Michael Graetz, a professor at Columbia University who has testified before Congress on taxes.

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