Can GOP's pizza man fix the economy?

Herman Cain, the former chief at Godfather's Pizza, is making waves in the Republican primary campaign with his 9-9-9 economic plan. Sounds gimmicky, but it has merit.

By MSN Money Partner Sep 29, 2011 1:47PM

By Rick Newman, U.S. News & World Report 

 

He's a fringe candidate with controversial views on Muslims and a soft spot for the Chilean retirement system. But Herman Cain also has a few economic ideas that are arguably better than those of his GOP rivals.

 

Mitt Romney, Rick Perry and most other Republican presidential candidates basically follow the conservative script when it comes to economic policy: Cut taxes, cut regulations, cut government spending and watch prosperity flower. Cain's ideas are radical by comparison.

 

There's probably no chance they'd ever pass -- in a Cain administration, or anybody else's -- but they shouldn't be flippantly dismissed, either. It seems obvious that we need some new ideas for how to recharge the economy, and the former pizza-chain CEO has a few clever ones.

 

Cain calls his program the 9 – 9 – 9 plan. In theory, it's pleasingly simple. He'd scrap the current income tax system and impose a 9% flat tax on everybody, while cutting the corporate income tax rate from 35% to 9% and imposing a national sales tax of -- can you guess? – 9% on most goods.

 

Cain says his scheme would free up capital, boost production and create jobs, while raising roughly the same amount of revenue the government takes in now. The fact-checking Web site Politifact thinks Cain's revenue estimate may be a bit low, but is generally plausible.

 

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In practice, of course, there would be all sorts of problems with Cain's plan.

 

Liberals would howl about working-class people paying taxes at the same rate as the wealthy and about Cain's complete exemption for capital gains.

 

Conservatives hate the idea of a national sales tax because it would generate a huge new pool of money for the government to spend and because France has one.

 

And upending so many entrenched tax shelters would cause paroxysms among the lobbyists who have worked so hard to ensure favored treatment for their clients. One can imagine they might resist.

 

Still, Cain is on to something. I can't vouch for his numbers and he's sketchy about many specifics. But he has highlighted a few principles that ought to be explored if policymakers in Washington ever get around to fixing the overcomplicated tax code or making America more competitive. Such as:

 

Emphasizing saving over spending. Cain's national sales tax, which would be similar to the value-added tax some economists favor, would obviously make stuff more expensive. So people would probably buy less. That might sound like a bad idea, since more than two-thirds of U.S. GDP comes from consumer spending. But if people spend less they save more, and more national savings could provide a powerful economic boost in the long run.

 

A bigger nest egg would obviously help many families improve their finances, pay down debt and prepare better for downturns.

 

A higher savings rate would also generate more investment, since the money has to go somewhere; even if you put it in the bank, the bank lends most of it out. Assuming that banks learned the hard lessons of the last few years about taking appropriate risks when lending, more investment could be one of the key things that shakes the economy out of its torpor and generates the kind of growth we need.

 

There's also a cultural element to our spending addiction, and it's not hard to imagine that American society might become a bit more productive if we shopped less.

 

Like any major policy shift, altering the tax code to deter spending and encourage saving would be controversial and disruptive. Cain doesn't say anything about taxing services, which are a big part of the economy that shouldn't be overlooked. With any kind of national sales tax, there would probably have to be exemptions for food and staples. Many people would argue that a national sales tax should be progressive, so that the poor don't pay a disproportionate amount. But the basic idea has strong merit and the details ought to be negotiable.

 

Encouraging work and industry. Lower taxes on workers and businesses would in effect raise the return on work and on the risk required to start and run a company. So more people would be likely to do both.

 

This basic principle should not be confused with trickle-down economics, which is the dubious idea that simply cutting taxes will leave people and companies with more money to spend, which will ultimately help create jobs and boost growth. In a closed economic system it might work that way, but if your taxes go down and you use the savings to buy a Lexus made in Japan or an iPad made in China, you're helping create overseas jobs; the impact on the U.S. economy is highly diluted.

 

And companies don't hire workers just because they have extra cash; they might be more inclined to buy equipment (which could be made anywhere), raise the dividend paid to shareholders, or simply hold the money for a rainy day, as many companies are doing now.

 

Enriching the incentive to work or run a company in the United States, however, would have a more direct impact on the economy. The problem with many tax-cut proposals isn't low taxes; it's the huge cut in government spending that would usually have to accompany them, since most advocates of tax cuts don't suggest ways to replace lost government revenue. But Cain's national sales tax would provide cover for cuts to personal and corporate income tax rates and allow expensive programs like Social Security and Medicare to keep functioning normally.

 

Again, there are many complexities, and Cain's math probably isn't bulletproof. But the principle of higher consumption taxes paired with lower income taxes is a sound one.

 

Simplicity. I don't know if Cain meant to mimic dollar-store discounts by calling his plan 9 – 9 – 9, but it does have an agreeable ring -- and it hints at a bargain. In fact, my brain wants to call it Nine Ninety-Nine, like the price of an off-brand pair of sneakers or last year's version of Madden Football. Sure, it's gimmicky, but everybody knows we need a far simpler tax system that's not gamed in favor of those who can afford to hire accountants, tax attorneys and lobbyists to work all the loopholes. So what's wrong with the populist appeal of a tax code that sounds like a two-for-one pizza special?

 

In fact, the complexity of so many things about the economy -- globalization, overlapping layers of regulation, financial engineering, the new Netflix video-rental plans -- must certainly be one of the factors depressing confidence and stoking cynicism.

 

Politicians exploit the information overload of the digital era by firing barrage after barrage of maybe-true claims that are too time-consuming or convoluted to check out. Many people feel overwhelmed, powerless and angry. Meanwhile, everybody knows that complexity is often a shield for graft, deceit and other shenanigans. A tax code that ordinary people can easily understand would in itself be a confidence-booster.

 

Cain will probably step off the national stage soon, as Republicans choose a more prominent candidate to face off against President Barack Obama. But whoever wins might want to study the 9 – 9 – 9 plan. There are a lot worse ideas, including some that might ultimately make it into the official GOP platform.

 

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