"Most people are in arrested development and cannot use logic." Jacob.
"Competition and capitalism are hated to-day because of their tendency to destroy poverty and privilege." William Hutt
"America is unique in that our economy is totally dependent on global charity." Peter Schiff

Friday, October 21, 2011

9-9-9, Peter Schiff, and Bob Wenzel.

There's been a lot of back and forth about Herman Cain's 9-9-9 plan over at the mises.org forums, at Bob Wenzel's blog, on Peter's radio show and other places. It's all deep stuff, if theoretical [cause Cain won't get elected, and if elected will not set up his 9-9-9 program], so here is Smiling Dave to lay it all out.

Just a note before we begin. If you don't even know how to find the source for the stuff I will attribute to the various people, then this whole thing is way over your head anyway. That is my excuse for not linking to everything.
[Second note: Had to rewrite parts of this, after JJ over at mises.org made some trenchant comments].

First, here are the points everyone agrees on:

1. The scheme will will not reduce the amount of taxes actually being collected. Cain said this himself, in Orwellian language, of course.

2. A much bigger problem than how the taxes get divvied up is the total amount of taxes being collected. If we think of the economy  as a human being, and the govt as a vampire, what counts is not so much whether the vampire bites one in the arm or the leg, but how much blood he sucks out. The govt is collecting way too much money for a healthy economy [without even entering into moral considerations]. Cain's 9-9-9 scheme ignores this vital question completely.

3. Cain's scheme is not a triple 9, but a quadruple 9, because there is a hidden payroll tax he is trying to pretend isn't there. Peter has gone into the details in his articles.

4. The scheme is not ideal by any means. The topic of discussion is merely whether it is an improvement, however slight, over the train wreck we have now.

5. The scheme will, to some extent, replace part of the income tax with a new sales tax, at least on paper. More on this in what follows.

OK, now for things they disagree on.

1. Peter argued that a sales tax is better than an income tax because that means if you don't spend, but save or invest, you won't get taxed. And what our mess of an economy needs is to increase production, which happens if there is saving and investment. Thus, the 9-9-9 scheme is giving an incentive to people to do the right thing, meaning save their money.

Bob Wenzel quoted Rothbard at length, who argued that every sales tax is really an income tax, because the business will not be able to pass on the tax to the consumers, since the consumer has only so much money, but will have to go to his landlord and his workers and tell them he cannot afford to pay them what he used to, because his profits are less due to the sales tax. [This is in keeping with Rothbard's thesis, which sounds reasonable to me, that it's not the costs of production that determine the final price of the good, but vice versa. But this is getting off our main topic].

In other words, the sales tax will "turn into" an income tax, meaning the money to pay the tax will really come out of the income the workers and landlords were going to have.

Note that Wenzel is not saying that the 9-9-9 scheme is worse than what we have now [by this reasoning], only that it is not an improvement.

Well, did Peter have a reply? I don't think so. Both sides seemed to understand that the reasoning is too subtle to get across in a sound byte. Indeed, there was a lot of confusion, both sides not really understanding each other for a while.

Wenzel said he would post Rothbard's argument in writing and at length over at economicpolicyjournal.com, which he did. Peter said he'd try and take a look.

I think Wenzel wins this round, at least till we hear a rebuttal from Peter.

2. Peter argued that Cain's plan has a huge advantage if carried to its furthest conclusion.

The thing, is if we get rid of the income tax totally and replace it with a sales tax only, even if there is no decrease in the amount taxed, and even if we concede that every sales tax wounds up being an income tax in the sense Rothbard argued above, it would still be great for the economy. The reason? Much less red tape. As it stands now, billions of dollars and and untold amounts of time get wasted filling out those tax forms, and of course keeping the records needed to fill them out.  So we save a lot of money, and thus improve the economy, right there.

In addition, lawyers, accountants, tax preparers, and tax collectors, all gobble up a lot of money from businesses and individuals, with nothing produced. Those are all parasitic jobs that would be eliminated and the job holders sent off to do something productive. The economy benefits from that, as well.

Bob did not reply, because he was discussing the 9-9-9 system as Cain wants it, which preserves an income tax and adds a sales tax.

So I see this round as a tie.

Bottom line: As it stands now, Wenzel wins his point that in theory every sales tax winds up being an income tax, because of Rothbard's argument.

But Peter came up with a surprise argument that in practice switching to a sales tax [completely] could save us all a lot of money, even if the amount of taxes collected was the same. Of course this applies to eliminating the current system as well as 9-9-9.

A footnote: Wenzel links to Bob Murphy's piece, which he admits was written in haste. I think he did not remember Rothbard's argument correctly, because he seems to present something that Wenzel showed to be unrelated to the topic at hand.

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