Last week we published an analysis of Herman Cain’s 999 tax plan as it relates to taxation of individuals and promised a second article examining the proposal’s tax treatment of business and investors. In the meantime Mr. Cain, and others purporting to have been informed by or to speak for the campaign have written editorials and made statements that contradict each other. The campaign website lacks important details and the picture is not yet complete. Following is what we know for sure.
Because of it’s simplicity the 999 plan would dramatically reduce the power of politicians to intervene in the economy, reducing political influence and interference in favor of market driven outcomes. Cain’s vision is, in his own words is to get…
…Washington D.C. out of the business of picking winners and losers, using the tax code to dole out favors, and dividing the country with class warfare.
An October 4 Wall Street Journal article titled Hedge Funds Pay Top Dollar for Washington Intelligence provides insight into the counter-productive results of an over-regulating, over-taxing federal government. The title includes a hilarious oxymoron, but the sobering article demonstrates the harm done to the private economy by the complexity imposed by overreaching government.
Instead of paying researchers to hunt for promising business opportunities, hedge funds and other Wall Street operators pay thousands of Washington insiders for advance knowledge of impending changes in laws, regulations and the corporate tax code. Unfortunately, investors have learned that with their clumsy interventions politicians can often move stock prices as much or more than entrepreneurs and innovators.
Cain’s tax plan is designed to support his vision of a liberated private sector, free from political interference and political determination of winners and losers through subsidies, tax breaks and tax punishments.
This chart compares current tax law with the changes President Obama wants to impose beginning in 2013 and with what we know so far about Cain’s 999 plan.
At 35% the current corporate tax rate is one of the highest rates in the world. But, thousands of special tax preferences help companies with the wealth and power to influence Congress pay little or no tax (GE, whose CEO is an economic adviser to President Obama paid zero last year) while smaller companies that can’t afford lobbyists pay the full 35% rate.
The net result is the worst possible tax outcome, a high tax rate that serves as a barrier to investment in smaller start-ups and expansions, while at the same time not collecting very much tax revenue from larger, established companies. Cain’s 999 plan would reduce the rate to a competitive 9% and strip out all the tax avoidance preferences in the thousands of pages of the current tax code.
America is the only industrialized nation to tax “repatriated profits” earned by American companies from operations in foreign countries, when those profits were already taxed by foreign governments. To understand how this works, consider two car companies:
- The German company Diamler manufactures Mercedes Benz cars at a plant in Alabama and sells them in the US. Diamler pays corporate income tax to the US Government on profits generated here from making and selling cars.
- General Motors manufactures and sells it’s Opel brand of cars in Germany. GM pays corporate income tax to the German government on profits generated there.
So far both companies are treated the same way, and each government has a source of tax revenue. But the equal treatment ends when profits are brought home.
Germany, and virtually every other first world nation, recognizes that profits generated in a foreign country have already been taxed and welcomes those profits back, to be invested at home without additional tax burden. But the American corporate tax code requires GM and other corporations that operate internationally, such as Apple, Microsoft and Google, to pay US corporate income tax on profits that are brought home or “repatriated,” even though those profits were already taxed by a foreign government. The result is profits that could be brought home and invested in America instead pile up in foreign jurisdictions waiting for foreign investment opportunities. Cain’s 999 plan would eliminate this stupid policy with a tax rate of 0% on repatriated profits.
Cain’s corporate tax would apply after payment of dividends. This is a clean, simple way to eliminate the double taxation of corporate profits in the current tax code. Stockholders would pay personal income tax – at 9% – on dividend income. President Obama would dramatically increase the tax on dividends bringing the combined tax on corporate profits to a stunning 78%. In a world where capital flows freely from country to country seeking the highest return this tax regime would drive thousands of companies and the jobs they provide out of America.
Unfortunately, the lack of answers to some questions raised by the incomplete information published so far by the campaign make any further analysis more speculative than factual. We’ll publish more analysis as soon as the Cain campaign provides more clarification.