Herman's big idea is to scrap the entire tax code and start over with three new bases taxed at the same low rate for a temporary period of time, eventually transitioning the country permanently to just one of these bases, taxed at a much higher single rate.
His scheme is quite conventional in that it looks to the existing traditional bases of taxation with which we have been familiar for decades: corporations and individuals.
What is new, however, is the national sales tax, the base for which was fairly sizable in 2008 at $10.1 trillion in personal consumption expenditures [PCE], and running at almost $10.8 trillion annualized through August 2011.
Currently the overwhelming burden of taxation falls on the individual filer whose personal income is taxed in order to provide Social Insurance and Federal revenues, which in 2011 are currently running at an annualized rate of $2.3 trillion, as shown here by the Bureau of Economic Analysis. Corporations, excises and tariffs provide puny sums by comparison: less than $500 billion in 2008.
This means that in 2011, Herman Cain's ultimate idea of taxing consumption to replace current revenues of approximately $3 trillion would imply a national sales tax rate of 28 percent on $10.8 trillion in goods and services expenditures this year. That's a pretty hefty rate by comparison with present conditions.
Currently the personal income base on which we exact that $2.3 trillion in Social Insurance and Federal taxes is just over $13 trillion. This implies an overall tax rate of 18 percent. If personal income in that aggregate amount had to do all the pulling to generate the full $3 trillion in revenues, personal income would have to be taxed at a rate of 23 percent to do the same thing as the consumption tax. Not as high, but still much higher than the 9 percent Herman Cain has called for currently, if only temporarily, in deference to the God of the Bible who asked for just 10 percent from his chosen people.
By way of comparison, if there were some way to easily tax GDP, currently running at $15 trillion, the effective tax rate would have to be 20 percent.
So is there a tax base which is broader still, from which we can derive the necessary sums and get that rate even lower?
Given that people by definition receive income in consequence of the conduct of business of one kind or another (aside from gambling, prostitution and bank robbery), it seems reasonable to look at the size of the various tax bases available strictly from businesses, without whom none of the other tax bases would exist in the first place. If we really mean it when we say we want to tax income only once, we need to go to its source, and for nearly everyone in our society, that source is business.
Corporations in 2008 had total receipts of $28.5 trillion, 2.8 times the size of Herman Cain's PCE tax base. It would have taken a gross receipts tax of merely 10.5 percent on this sum to have generated $3 trillion in tax revenue in tax year 2008, a year when revenues were actually lower at $2.5 trillion. That implies a gross receipts tax of only 8.8 percent on corporations in 2008.
In such a world, there would be no more income taxes on individuals, no Social Security or Medicare taxes either, and no capital gains taxes nor taxes on investment income or savings of any kind, and government would not go wanting. Nor would business be constrained by other taxes and fees imposed on it if we were to throw out the current code and replace it with this simple levy.
But the base could be made broader still in order to lower the effective rate even more.
Add in partnerships, which had $5.9 trillion in total receipts in 2008. And S corporations, which had $6.1 trillion in total receipts in 2008. Both of these added to corporation total receipts yields a gargantuan tax base for 2008 of $40.5 trillion in gross receipts.
All of that could have been taxed at a mere 6.2 percent to meet the federal revenue of $2.5 trillion collected in 2008.
No more talk of a flat income tax, nor of a progressive income tax, nor of a consumption tax. No more compliance costs of $450 billion because of the current code. No more lost time equivalent to 3 million full time jobs. Just one, low, simple, rate on business. That's it.
In addition to God, John Tamny might go for it, too:
"The answer as always is for the government to simply get out of the way. If it must tax corporations, its taxation should be blind in the way that justice is. A flat gross receipts tax would make all corporations equal before the IRS. That would ensure the most economic allocation of capital on the way to rational, market-driven growth."
