Herman Cain��s surprising surge in the race for the GOP nomination this week can be at least partially attributed to the appeal of his 9-9-9 tax plan. Although he is short on specifics, the basic idea is to eliminate all special deductions and move to a flat corporate rate of 9%. Clearly, this former CEO has tapped into something widely appealing.
Democrats and Republicans do not appear to agree on anything in this caustic political season. However, both parties have supported the general idea of simplifying the corporate tax code to lower the rate.
On paper, U.S. corporations pay a very high rate of taxes as compared to their counterparts overseas. However, given the wide array of credits, deductions and subsidies (i.e. ��loopholes��), many companies actually pay a low rate — or no tax at all. Creating a more simple and fair tax code seems commonsensical. But the details of such an endeavor probably are insurmountable.
Although the details of the 9-9-9 plan remain vague, we can surmise the basics. The first phase of Cain��s plan has three main elements: eliminating most credits and deductions for individuals and corporations; imposing a flat tax on income and creating a new national sales tax. Ideally, Cain would like to eliminate all federal taxes and replace them with a national sales tax of 30%.
Eliminating credits and deductions completely and replacing them with a lower, flat corporate tax rate has also been endorsed by Jon Huntsman and other GOP leaders. While the simplicity of this idea is appealing, the effects of such a radical transformation would be extraordinarily complex.
The corporate tax code basically is a massive system of rewards and penalties for certain behavior. (For that matter, so is the individual tax code. We��ll look at that separately.) Some of these rewards are small and specific — tax credits that congressmen have parceled out to their favored constituents. For example, Senat! e Minori ty Leader Mitch McConnell, of Kentucky, already is making noise about keeping the tax credit for horses in Kentucky. Sen. John Kerry, D-Mass., continues to support a credit that benefits the Samuel Adams Brewery in Boston.
Other tax benefits are large and general: allowing deductions for certain types of research and product development. Subsidies that benefit the oil and gas industry are well-known. The tax code also encourages pharmaceutical companies to develop new drugs and advertise them. Even the video gaming industry gets special treatment. It is, in fact, one of the most highly subsidized businesses in the United States.
If you have ever been to a work-related ��conference�� at a swanky, warm-weather, golf-happy resort, you know the company that sent you did not pay full price. They wrote off the cost of that trip as a business expense. The same is true for long client lunches and entertainment.
Clearly, a lot of players have a big stake in maintaining the status quo. Legislators need to be able to reward companies in their states or districts. Tax benefits are among the most effective ways to do that.
Lobbyists make it their life��s work to ensure their clients receive the best possible treatment by the tax code. CEOs have to determine whether other countries will give them a new ��break�� that they can not get here in the United States. (For example, Canada also substantially subsidizes video game developers.) Whether it is encouraging companies to develop new products, explore new sources of energy, plan a conference or schmooze a client, corporations can write off these expenses at every turn.
So what would be the effects of a completely unbiased tax code, where every company paid taxes at the same rate and certain expenses were not also write-offs? It certainly would put a lot of accountants, tax attorneys, event planners and resort managers out of work. It also would radically reduce the power and re! ach of m any lobbyists and congressmen. So for better or worse, the idea of closing all the loopholes will remain the stuff of campaigns — not legislation.
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