Thursday, October 20, 2011

Why Peter Schiff and Arthur Laffer Are Wrong about Herman Cain's 9-9-9 Tax Plan

Arthur Laffer and Peter Schiff have both come out in favor of Herman Cain's 9-9-9 tax proposal. Laffer's endorsement is full strength:
This is the type of tax increase I wholeheartedly support.
Schiff's endorsement is qualified, and I have taken some heat for calling it an endorsement, but aside from Schiff's qualification as to what he calls a hidden additional 9% tax, it sure sounds like an endorsement to me.

In his analysis of the Cain proposal, Schiff writes:
Cain would replace the current system of income and payroll taxes with a 9% flat-rate personal income tax, a 9% corporate tax, and a 9% national sales tax. Great idea.
and Schiff concludes by emphasising the hidden ninth tax and writes (My emphasis):
In the final analysis, if Cain really wants a 9-9-9 plan that doesn't raise taxes he needs to remove the hidden 9% payroll tax. However, the only way this could be done, without blowing an even bigger hole in the federal deficit, is to combine his plan with significant spending cuts. If he can pull that off, three nines may be a winning hand after all.
But, the problem is as much with the other three nines that Schiff calls "a winning hand after all."

What do Schiff and Laffer like so much about Cain's plan. Here's Laffer:
I support collecting more in taxes from people with high incomes who choose to actually pay taxes at lower tax rates than use lawyers and accountants to avoid taxes at higher tax rates. Some tax revenues at low tax rates is a heckuva lot better than no tax revenues at high tax rates.
Here's Schiff:
Such a [9-9-9] system would unburden businesses, provide a tax cut for most Americans, and shift taxation to consumption and away from income generation
Now, what needs to be kept in mind is that Cain's plan is designed to be revenue neutral. Schiff would like to see elimination of the fourth hidden 9% tax, but overall we are just talking about shifting the structure of taxation, rather than reducing taxation. Murray Rothbard explained what this means:
...in the immortal words of that exemplary economic czar and servant of absolutism, Jean-Baptiste Colbert, the task of the taxing authorities is to "so pluck the goose as to obtain the largest amount of feathers with the least amount of hissing." We the taxpayers, of course, are the geese.
Cain's 9-9-9 tax plan is about cutting down hissing. In other words, it's a scam. He's a con-man playing a shell game.

Now, let's take a detailed look at this Cain con game and what Schiff likes about the plan and what he doesn't.

Schiff writes:
Payroll taxes are, in reality, a cost of employment. From the employer's perspective these costs are part of the wage package. Absent these taxes, employers could raise wages by an equivalent amount without raising labor costs. Inclusive of this portion, payroll taxes currently cost workers 15.3% of their wages.

The Cain plan scraps this tax. But the elimination of wage deductibility from corporate taxes replaces it with a 9% payroll tax. Therefore a more accurate name for Cain's proposal could be the 9-9-9-9 plan. The forth nine changes everything.
Schiff is correct here. The 9% tax resulting from the elimination of the wage deductions will result in this tax cost being passed on to workers. It will mean reduced wages by 9% and is a fourth cost.

Now, let's look at what Schiff really likes about the 9-9-9 tax plan (My emphasis):
Such a system would unburden businesses, provide a tax cut for most Americans, and shift taxation to consumption and away from income generation. This is exactly what our economy needs.
But, Schiff is just plain wrong here. Just as Schiff points out that a tax shift ends up on labor because of the elimination of a tax deduction, a shift, which Schiff doesn't seem to recognize, will result because of the consumption tax. The tax will ultimately fall on labor and capital. Rothbard explains:
Having challenged the merits of the goal of taxing only consumption and freeing savings from taxation, we now proceed to deny the very possibility of achieving that goal, i.e., we maintain that a consumption tax will devolve, willy-nilly, into a tax on income and therefore on savings as well. In short, that even if, for the sake of argument, we should want to tax only consumption and not income, we should not be able to do so.... the sales tax is subject to an extra complication: the general assumption that a sales tax can be readily shifted forward to the consumer is totally fallacious. In fact, the sales tax cannot be shifted forward at all!...In the long run, of course, and that run is not very long, the retail firms will not be able to absorb a sales tax; they are not unlimited pools of wealth ready to be confiscated. As the retail firms suffer losses, their demand curves for all intermediate goods, and then for all factors of production, will shift sharply downward, and these declines in demand schedules will be rapidly transmitted to all the ultimate factors of production: labor, land, and interest income. And since all firms tend to earn a uniform interest return determined by social time preference, the incidence of the fall in demand curves will rest rather quickly on the two ultimate factors of production: land and labor.

Hence, the seemingly common-sense view that a retail sales tax will readily be shifted forward to the consumer is totally incorrect. In contrast, the initial impact of the tax will be on the net incomes of retail firms. Their severe losses will lead to a rapid downward shift in demand curves, backward to land and labor, i.e., to wage rates and ground rents. Hence, instead of the retail sales tax being quickly and painlessly shifted forward, it will, in a longer-run, be painfully shifted backward to the incomes of labor and landowners. Once again, an alleged tax on consumption, has been transmuted by the processes of the market into a tax on incomes.
Bottom line, the part of Cain's proposal that has Schiff most excited, the consumption tax, will ultimately not fall on consumers, but on the incomes of labor and landowners, exactly where Schiff doesn't want it to fall!

Schiff should be commended for pointing out that there is a fourth hidden 9% tax in Cain's proposal. But, there is a lot more that is wrong with Cain's plan. It first and foremost, through shell game antics, cuts down the hissing relative to the tax burden. It creates a new pipeline by which taxes can be raised, which Michelle Bachmann has correctly warned can easily lead to tax increases down the road. And, further, approval of elements of the plan (the consumer tax) in the fashion that Schiff gives approval, in addition to being wrong, lead to a grander endorsement of government micro-management of the economy. "Well, we cut this tax and increase that tax and it will really boost the economy." The problem is not the direction from which the taxes come, but the massive amount of government spending that goes on. Yes, Schiff does call for a cut in spending to eliminate the problem of the fourth 9 tax, but this is about micromanagement and fails to discuss the horrors of overall government spending in the economy.

Cain's 9-9-9 proposal does nothing to address that. It is designed to stop the hissing. It's understandable why Laffer is for the plan. He is all about stopping the hissing and keeping taxes revenues high. It is much more difficult to understand how Schiff can say anything positive about this Cain move of tricks to con the masses.

40 comments:

  1. Stop fishing for clicks.....you're losing credibility.....this will be my last visit to this website

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  2. Thanks for that particular Rothbard quote, because I have heard Schiff use the whole "shift taxes from income to consumption" argument before. In fact, I was kicking around how I was going to respond to the commenters on the last post, and that was one of the things that I was going to bring up (i.e. that it ultimately falls on the originary factors).

    Oh well, you beat me to it.

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  3. You're Schiff quotes certainly make the case that he has NOT come out against the plan, contrary to argument on the other post. Laffer is just wrong.

    Thanks for clearing it up.

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  4. Fitz,
    When has Laffer ever been right?

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  5. Has anyone called in to Peter's show to ask him about this criticism? I usually listen to him all the time but haven't had a chance since his comments on 999 came out. It'd be awesome if someone knows which day he discussed it on air so I can download from the show archive. Thanks!

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  6. Fetz:

    When has Laffer ever been right?

    Probably when Bob Murphy was working for him.

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  7. Schiff also endorses mass murdering Iranians.

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  8. Yeah Bob! Stop fishing for clicks with nuggets of truth!

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  9. "Fishing for clicks"? Really, do you not think this is a legitimate argument?

    It's obviously for the better if you never return to this site.

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  10. Anonymous at 1:19 pm, stop being an idiot. No one (well, except for maybe the ayatollah and dinner jacket) is for mass murdering anybody, especially not Schiff. Though, I disagree with Peter's take on that situation.

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  11. JFF,

    Ah, yes. Laffer probably was right to hire Murphy over other economists. Of course, I'm pretty sure that that is not what you meant, oh well.

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  12. JFF,
    I take that back, maybe that is what you meant. After all, one of the greatest insights of an entrepreneur is to hire people that are smarter than youself.

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  13. @ anon 1:09:

    I listen to his show daily. Haven't listened to today's, but the past few days when talking about the 9-9-9 plan it's not his favored plan. His favored plan is no taxation and no debt. But in the absence of such a thing, he believes Cain's plan would be an improvement over what we have now.

    Let me quote him from yesterday's show, the second paragraph is particularly important (he talks about this at around the 12 minute mark in yesterday's show, which is still available for download at schiffradio dot com):

    "Here is what nobody wants to acknowledge: if we really want a pro-growth tax structure, if we want the economy to grow and we want a lot of jobs, we have to lower taxes on the people who produce those jobs. We have to lower taxes on capital so we can have more private sector investment [...]. The only way we can lower taxes on wealthier taxpayers (which as it happens are the ones doing the investing and creating the jobs) [...] is to raise taxes on people who make less money.

    Now I don't want to do that, I don't want to raise taxes on the people who make less money, but I do want to lower the taxes on people who make more money, and the way you do that is to slash government spending, that's the only way to make that possible. What the liberals don't want people to know is that the only way that we can have a growing economy and still have huge government is to make the middle class pay for it with higher taxes. If we want to grow the economy and jobs, we can only do that if we raise taxes on the middle class unless we want to cut government spending. Those are the choices."

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  14. "No one is for mass murdering anybody."

    I guess you've never heard of the neocons.

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  15. One can make an economic case for Cain's proposal being superior to the "system" we now live under. But arguing about the economics of this plan is a fool's exercise. What are the politics of the plan? Does it reduce or enlarge the power of the state? And on that point there can be no debate. At the end of the day, when you set aside the economic arguments, Cain's proposal will accomplish only one sure thing: to empower the federal government to levy sales taxes on all private financial transactions in the country. This is not progress. It further erodes what's left of the republic, vastly empowers the central government and likely crushes the tattered remains of constitutional limits upon federal regulation of commerce. The point of this exercise is to reclaim lost liberties, not relinquish even more for the promise of greater material comfort. 9-9-9 is a bad idea.

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  16. "...In fact, the sales tax cannot be shifted forward at all!...In the long run, of course, and that run is not very long, the retail firms will not be able to absorb a sales tax; they are not unlimited pools of wealth ready to be confiscated. As the retail firms suffer losses..."

    Question -- why do the retail firms suffer losses in the first place? Is it because the sales tax forces consumers to buy fewer goods, resulting in lower revenue by the retail firms?

    The link of logic was missing, and I am trying to fill it.

    Thanks!

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  17. Your point about shifting taxes from production to consumption is taken. But you still are really reaching here and misleading. If you think he should have come out stronger against it and why, then you can say that. But to claim he endorses it is way off. I've heard him advocate no income tax in the past and replacing it with nothing. As well as come out against it being crazy to add a consumption tax without repealing the income tax. I don't think you are "fishing" for anything, but we assume you know these things and thats why some people are making those statements.

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  18. You should really try to get on the Peter Schiff show (again) and debate this out.

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  19. Thanks for the post, Bob. I'm hoping this leads to an interview/debate on his show, it's annoying that he is praising 999 at all.

    Schiff has been a proponent of replacing the income tax with a consumption tax (see this video blog: www.youtube.com/watch?v=v4KfVM5Ed3c).

    Interestingly, in that vblog, he says the last thing we want is a sales tax on top of an income tax, which is obvious. Has he forgotten this?

    His arguments that a consumption tax is better than income tax are persuasive, but I'm going to take a closer look at Rothbard on this.


    @Anonymous 1:19 PM-
    Schiff actually said he said that so he wouldn't look so crazy to the republican voters. He is no purist but he's not pro-mass murder either. He just called for a quick take out of Iran's nuclear capability if it was proven it existed, not an insane invasion and occupation like Iraq. I disagree with him, too, though.

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  20. This is a gross misrepresentation of Schiff's opinion on the 9-9-9 plan. Even your own quotation of him can be basically summed up as "if we remove the extra 9% payroll tax AND cut government spending enough to offset it, its better than what we have now". I hardly see that as endorsing the plan when he is saying that its not viable in its current form.

    I had finally just forgiven Wenzel for his attempted belittling of Murphy, and now he attacks Schiff. Are we not all on the same team? Apparently Wenzel doesn't understand the concept of a team. You support, not ridicule, each other.

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  21. @anon 4:05

    If you've come around here for more than this article you'll know this is a site for purists. It should be pretty obvious after a few articles. RW doesn't pull any punches either.

    I'm not sure what you're referring to about a 'team'. RW isn't insulting the Schiff, he's criticizing Schiff's arguments. Big difference in this corner of the internet.

    I value Schiff's take on things and the only reason I found EPJ was RW's interview with Tom Woods on the Schiff show. But RW has a deeper understanding of Austrian theory and central banking. I'm looking forward to RW to once again be a part of the Schiff show!

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  22. Thank you for posting a very well thought out rebuttal. What really bugs me is that wealth redistribution is so engrained in society that all we do is play "shifting sands" with where it comes from, instead of working to educate the masses to eradicate it.

    The reality is TAXATION IS THEFT and class warfare. It is a leech on the productive class so that those who do not generate wealth can continue to live their lives doing unproductive things. Government is not efficient, does not create wealth, and does not use a price model (or any other model) to measure performance. To have any premise that taxation creates wealth is nothing more than propaganda and a facade in order to prop-up a specialized class at the expense of everyone else.

    Taxation is a price factor. And with such, it modifies behavior like time preferences and personal motivation, and it creates market distortions downstream from any original intention it may have had. Taxation is akin to allowing the Federal Reserve to manipulate interest rates for the whole country. It does nothing that those say it does, except screw up productivity and investment.

    It's high time that this non-sense about taxation and it's facade of benefits come to an end. The government needs to stop putting a gun to our heads and stealing the wealth from those that actually create it.

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  23. Bob,

    I read the whole Schiff piece and even though it may appear as an "endorsement" from Schiff, he is just making an honest analysis of Cain's proposal. The question he starts from, "Would the 9-9-9 tax structure be an improvement?" is nothing more than a baseline from which to analyze the issue. He has to be honest about the potential results (as well as the pitfalls) of Cain's plan so as not to sound like a partisan hack. Indeed, Cain's tax system would be an improvement IF he lowers spending as well, IF and WHEN it results in increased investment, and IF the problem of the hidden payroll tax is solved. THEN, maybe, one would see an improvement over the current system.

    I, like you, do not support ANY tax system of any kind or flavor, and I am sure Schiff doesn't either. But to say he's "endorsing" a plan because he concedes it would lead to better economic results compared to the current system is stretching things a bit. It's like if pointing out that loosening the noose will lead to improved breathing is construed as an endorsement of strangulation.

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  24. In light of the fact that Herman Cain has explicitly admitted more than once that his "9-9-9" plan is revenue neutral I don't see how anybody, even Peter Schiff, can claim there's anything to get excited about in it.

    The revenue neutrality alone should be enough to reject it wholesale IMO.

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  25. "Apparently Wenzel doesn't understand the concept of a team. You support, not ridicule, each other."

    So, if say, you're on a football team and the wide receiver keeps running toward the endzone on the plays that he is supposed to do a buttonhook, your recommendation would be to just let him keep running toward the endzone? After all, he's your teammate and it would be insensitive to correct his error.

    Def.
    Ridicule- the subjection of someone or something to mockery and derision.

    Did Wenzel ridicule Schiff? I don't think he did...

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  26. Why not start a Wenzel Show and have Schiff on your turf? :)

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  27. Listen to Schiff's show. He favors the 9/9/9 plan only because it is an improvement over the current disaster of a tax plan.

    Look at it this way: You are eating a shit sandwich and someone offers you an old hamburger instead.

    You guys are too busy talking down the old hamburger to notice that you are eating shit right now.

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  28. I agree with Rothbard, that tax should be eliminated, but the one positive of a sale tax is that the consumer is reminded every time they buy something the amount of their money that is being confiscated. Even if it is revenue neutral, shifting all tax to consumption tax will cause a greater awareness of the theft.

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  29. Labor and owners would absorb SOME of the tax, yes. But I don't see how a consumption tax wouldn't lower the overall consumption of a nation.

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  30. Since I pay an 8% state sales tax already, adding another 9% fed sales tax would really suck.

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  31. Has everyone forgotten that the income tax started out as a 1-2-15; 1% for all but the rich, 2% for the rich, and "temporary for 15 years to pay off the national debt???

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  32. Anon @ 10:18pm, it's more like this: you are eating a shit sandwich, and someone offers you three little shit appetizers instead. Turns out you still have to eat the same amount of shit.

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  33. Damn.

    I have begged Wenzel to ban anon comments, since most of them are "hit & run" bullshit attacks with no reasoning, no valid argument. You know, like "you people hate education and think that them moosleems should run the world" kinda BS.

    Many of the Anon comments on this post are GREAT! They really address the issue, and deepen the discussion and force readers to augment their arguments.

    Thank you, various anon posters, for bringing up great points. I really look forward to the Schiff/Wenzel debate on Pete's show, and I'm sure that your input will greatly inform the discussion.

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  34. Thanks for the Rothbard quote. Truth and clarity is always preferable to political manipulation and lies.

    There IS NO tax plan "better" than the current plan. ANY political plan will create the exact same results, as the market will always adjust to the negatives of such plan.

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  35. Fitz, I agree.

    There is absolutely nothing wrong with posting anonymously, but to have numerous people post under the screen-name "anonymous" just makes things confusing. I used to post under the screen-name "Jaffi Joe". This offered me personal anonymity, but allowed for smoother debate. I cannot tell you how frustrating it is to have "anonymous" reply to something that you said, then after your rebuttal, "anonymous" replies back from a completely different angle (because it is actually a completely different person). Generally, it creates intellectual havoc.

    I still use screen-names on the internet for personal anonymity. But, when it comes to economics, politics, history, philosophy, etc, I always use my real name. I have very strong positions with regard to those fields of study and if I am going to pose these strong positions in any forum of discussion then I should stand behind my words fully and openly. It is a matter of principle, I guess.

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  36. LOVE those anonymous comments! Keep 'em comin'

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  37. @ Anonymous, 10/20/2011, 10:42 p.m.

    The income tax has the same positive effect as the consumption tax, i.e., promoting greater awareness of the theft, if it does away with income tax withholding. Income tax withholding is the source of all evil. The goose grows oblivious to the relentless plucking to which it is subjected throughout the year. Then, when the goose gets its refund for excess plucking, it thinks it's getting free feathers!

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  38. The thing I like about anonymous posting is that it prevents ad hominem attacks and keeps the focus on the argument itself, rather than on the person who happens to present the argument.

    Long Live Anonymity!

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  39. Fetz-

    I don't always post from the same computer, but I always sign my name to anon posts so people can keep track. Anon posters should at least offer a pseudonym so they don't get lost in the shuffle.

    Anon@xx:xxPm gets old after a while.

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  40. so much talk and it appears the main problem has been forgotten. This country spends more than it takes in, the States spend more than they take in, and the local munis do as well and also the people on balance.

    Nothing will be good enough to fix the problem. One thing a 999 tax will do (that Obama's fair tax will not) is get the consumption side of the underground economy-maybe--I'd bet ways around that will be discovered.

    zero based budgeting would be "cool" to justify next years spending and not just roll it over and increase it.

    But then again we have gone 2 years without a federal budget so how can we expect the yutzes in DC to go one step higher?

    I think we have to go bankrupt before anything gets done--which in the end is a real indictment on our elected leaders (who I just called yutzes who are really schmucks)

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