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October 19, 2011

Herman Cain's Website: The 9-9-9 Business Flat Tax Is a Modified VAT

This should put the argument to bed once and for all.

From page 7 of the Fiscal Associates report (PDF) linked to Cain's website:

A business transactions tax would radically broaden the base for businesses. Each business would pay tax on gross receipts less payments to other businesses. Allowing the subtraction of payments for intermediate goods yields the value added by the company. Subtracting investment as well yields a subtraction method value-added tax.

In keeping with the basic value-added structure, the tax is treated as border adjustable. That is, the tax is on a territorial basis and applies only to sales in the U.S. rather than the worldwide treatment under the current tax system. This approach exempts exports while subjecting imports to the tax. (emphasis and color coding added)

From Cain's description of the business flat tax on his website.

Gross income less all purchases from other U.S. located businesses, all capital investment, and net exports. (color coding added)

Differences:

  • Receipts versus gross income. Receipts implies cash-basis, while gross income implies accrual. There could be other differences as well.

  • Payments to other businesses versus purchases from other U.S. located businesses. The same cash versus accrual question plus a little protectionism thrown in.

So according to Cain's own experts, his business flat tax is a modified VAT.

Also, there's an old but good piece at Forbes where Bruce Bartlett explains what a subtraction-method VAT is and how it is different than a Flat Tax.

The flat tax, originally devised by Hoover Institution scholars Robert Hall and Alvin Rabushka, is a subtraction-method VAT with one twist. Businesses are permitted to deduct cash wages paid from the base on which they calculate the VAT.

... a point which has been made countless times here at the HQ.

In summary, Cain's business flat tax and a VAT are like apples and apples.

I encourage you to read the full report (PDF). It doesn't specifically support 9-9-9 as much as it does list several alternatives and say choosing one would be nice.


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posted by Andy at 12:19 PM

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