Thursday, October 27, 2011

Herman Cain's 999 Plan, Part 5: "I don't trust those businesses..."

Big businesses are just going to take unfair advantage of the new tax code. How do we know Warren Buffet and Wall Street won't just cheat the new system?
There will always be people who are trying to game the system. But trying to cheat the system right now is like trying to cheat at a game of Monopoly with real $5000 dollar bills: The stakes are high, and the game is complicated enough that a clever player just might get away with it. Switch to the 9-9-9 plan, and you've lowered the stakes, and made the rules as simple as tic-tac-toe. Sure, you just know someone is going to try to cheat, but it's harder to see how they'll get away with it.

You just want to help the rich, and step on the poor.
Cut that out, we're trying to have a reasonable conversation here. Nobody sane wants a tax code that helps the rich at the expense of the poor. But that doesn't mean that the only other choice is a system that punishes success. Let's have a simple tax code with a simple purpose: Collecting only the necessary funds to pay for the expense of government. I do want to help the poor, but there are thousands of tools that are better suited for that task. Use the right tool for the job if you want to get the job done right.

Okay, but how do we really know big companies won't just pocket the money, instead of lowering prices?
That's a fair question. Let's deal with it analytically. Remember the spreadsheet from the last article? By replacing the current 35% corporate tax with a 9% corporate tax, my subtotal before sales taxes goes from $208.55 to $172.43. That's $36.12 in savings before taxes, and $21.67 after all sales taxes are figured in.

To try out the "greedy store" scenario, I've copied all my calculations over to a new tab. I've added a new field to test how much the greedy store owner can add into the price, before corporate tax and sales tax, until I'm back to my original bill. With a little bit of experimentation, I see that the greedy store owner could deprive me of my $21.67 in savings, but he's only going to get $18.42 out of the deal, at most, and that's only if he limits his price rise to items that are taxed at the lowest state/local rate. Every dollar he doesn't let me keep is a dollar for which he has to pay some tax.

But still, what if he does keep the money? That money still isn't going to end up in Scrooge McDuck's money bin. Amazingly successful businesses don't increase their success by hoarding money, but by using it. How might they use it? Let me count the ways.

Maybe the store owner wants to give his overworked and underpaid employees a bonus. With the double shifts his staff has been working since the layoffs in 2007, they probably deserve it. Or maybe the store owner wants to expand the business. That means new hiring, and we all want unemployment to go down, right?

But let's say that we're dealing with a real greedy corporate fat-cat here, someone who's only interested in grabbing all the money he can, and increasing the value of his stock portfolio. As long as he's not breaking the law, I can live with that! I'd like to get the stock market out of the tank, maybe then we could shore up a few firefighter and teacher pensions, and help my own 401k while we're at it. If he is breaking the law, let's deal with that in the criminal justice system, not the tax code.

Image from Wikimedia
Here's the important thing: Prices go up and down all the time. When businesses are feeling the pinch, and the cost of production has gone up, then prices go up. When a company wants to engage in a good old-fashioned price war with its rivals, prices go down as far as the cost of production will allow. By changing the tax code, we've reduced the "pinch", and introduced more leeway for price lowering. When companies can produce more for less, prices can go down and productivity can go up. That's the power of microeconomics for you.

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