Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Thursday, October 13, 2011

National Sales Tax... Worst idea ever

Herman Caine is surging in the polls as the latest "Not Romney" As he is, the media is falling all over themselves to do halfassed analyses of his 9-9-9 tax plan. As you may have heard this refers to a 9% flat income tax, 9% flat corporate tax and a 9% national sales tax. Most of them focus on whether it will raise or lower the over all tax burden on the average family or whether it will generate enough revenue to cover existing spending. It is probably not surprising that a plan put forward by a Republican reduces revenue and further shifts tax burden away from the wealthy and corporations and onto middle class families. But the problems with the 9-9-9 are, if anything, even more catastrophic than simply yet another screwing the middle class the Grand Old Plutocrats. That 9% sales tax is a like a bomb let off in the heart of the US economy.

Right now, retail sales/household spending make up about 70% of the US economy overall. If we suddenly imposed a 9% sales tax to everything bought in the US, it would certainly cause that vital sector of the economy to shrink. Consumer demand in the United States is not only a vital part of our economy it is an important driving force for the entire world economy. For example, China exports about 20% of all their exports to the US alone. If the US demand for Chinese stuff suddenly drops, it would be a serious blow to the Chinese economy as well. The same goes for Mexico, Canada, the EU, etc etc etc.

With the world economy in a fragile state now, Herman Caine's plan could plunge the world into a demand slump depression along the lines of what we saw in 1929. Imagine, just as we are showing the faintest hints of recovering from a capital crisis recession and just as the Europeans are getting their collective act together about Greece, Cain would have us voluntarily jump off the cliff again. You can't run a global economy like a pizza delivery joint.


Monkeyman said...

I don't find it obvious at all that a sales tax would reduce retail spending. It really only influences nominal prices. I grant you that there might be a psychological effect at first that reduces purchases. But that should really be a short term consideration only. After that, I can't gain from not spending, because I only have the choice between spending now and later, and it's almost sure that the sales tax never decreases.

Having said all this, I agree with you that the 9-9-9 plan is not particularly great, but I think the main issue is that more tax burden is shifted from the rich to the middle class, as you pointed out.

Raised By Republicans said...


I'm not sure I follow your implied distinction between "nominal prices" and the kind of prices that factor into supply and demand models.

Also, if we look at the societies in countries with sales taxes of the magnitude that would result from 9-9-9 (remember there are already state and local sales taxes), we see that they buy a lot less stuff.

Finally, whenever there are discussions at the local or state level of raising sales taxes, local retailers go apeshit complaining about how it will put them all out of business. Either they are being universally misleading (a distinct possibility) or increasing sales taxes really will depress consumer demand.

Monkeyman said...

RbR, what I mean is that prices are higher, but disposable incomes are higher, too; the real prices, i.e. prices divided by income stay constant. So people can buy as much stuff as before. Also, the sales tax doesn't really make saving more attractive; the whole point of savings is that you can spend them at some time, in which case you will still end up paying the sales tax. In essence, introducing a sales tax creates a momentary burst of inflation and therefore has only monetary effects.

I take your word that people in countries with higher sales tax by less stuff, but I'm not sure that proves a causal connection.

As far as your final point goes, it's possible that retailers are deliberately misleading. I think it's more likely that they fear losing business to neighboring states that don't have the tax increase. In many cases it's pretty easy to buy in another state; for a national sales tax, though, buying from another country is much harder.