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Michele Bachmann’s Dishonesty Re: Cain’s 9-9-9 Tax Plan

First off, I’d like to say that last night’s GOP debate was the most entertaining yet. I think it is important that primary debates be substantive and that the candidates challenge each other on their weaknesses. This is how the candidates, which (hopefully) includes the eventual nominee, improve themselves and their responses in preparation for the general election title match.

I do take exception, however, to outright dishonesty and deception being paraded as fact. This has unfortunately become a feature of Michele Bachmann’s campaign, and was on full display in last night’s debate. The other candidates took exception to Herman Cain’s “9-9-9″ tax plan on the basis that it would impose a new federal sales tax without repealing existing revenue streams. Bachmann took the criticism one step further. It is that last step that lands her into the outright dishonesty category.

While it is legitimate to criticize Cain’s decision to propose that payroll expenses be non-deductible, it is absolutely and fundamentally dishonest to characterize the business tax as a value-added tax.

Bachmann extended her criticism of Cain’s plan by claiming that the “business” tax portion of the plan was actually a value added tax (or “VAT” tax) masquerading in disguise. According to Bachmann, then, Cain’s plan not only creates a national sales tax as a ‘new’ revenue stream, but also creates a European-style VAT tax, a tax widely accepted to be one of the worst offenders of open and honest taxation transparency.

The only problem is that this is an outright lie. Apparently, Bachmann knows that it is a lie. The “business tax” portion of Cain’s plan is absolutely not a VAT tax. The overall Cain plan proposes a 9 percent personal income tax, a 9 percent national sales tax, and a 9 percent business tax. The business tax portion of Cain’s plan absolutely does not resemble a VAT tax. In order to demonstrate this point, it is important to understand what a VAT tax actually is, and what Cain’s business tax is designed to replace.

A VAT tax is essentially a sales tax, with the caveat that it is levied at every stage of production, on the increase in value of production, instead of on the final retail product. For a detailed comparison of VAT to other types of taxes, see Wikipedia’s article on the subject. In the United States, in most states the end consumer pays a state sales tax on the final retail product at the checkout counter. Manufacturers and other ‘production line’ businesses do not pay sales tax on wholesale purchases. For example, a gas station that buys a carton of cigarettes at Costco or Sam’s Club for resale at their operation location is exempt from paying the sales tax.

As an example of what a VAT tax involves, consider R.J. Reynolds, manufacturer of cigarettes. Hypothetically, R.J. Reynolds purchases a pound of tobacco for $5.00, filters for $10.00 and paper to roll cigarettes for $1.00. These products are used to create a carton of cigarettes, which is then sold to Costco or Sam’s Club for $20.00. The VAT tax would be paid by R.J. Reynolds on the $4.00 profit realized during the manufacturing and eventual sale of the cigarettes. $4.00 is considered to be the “value added” to the product by R.J. Reynolds. In Europe, this VAT tax is levied on top of the consumer’s end-product sales tax and the corporate income tax on net profits (for which the VAT tax is a deduction).

Cain’s “9-9-9″ business tax is absolutely not a VAT tax. Stated succinctly, Cain proposes that businesses pay a flat 9 percent tax on “net” income, basically calculated as gross revenue minus raw material costs, with other deductions. The only difference between today’s thirty five percent corporate income tax and Cain’s 9 percent business tax is that certain deductible expenses would be eliminated, the most important of which is payroll expenses. However, the basic structure of the income tax on businesses remains intact. The tax is NOT collected on inter-business sales, but rather is reported and collected in the same way as the personal income tax; the main difference being that a different deduction rule set applies. While VAT taxes look just like sales taxes, Cain’s business tax does not. It looks just like an income tax.

Most importantly, however, is to consider what Cain’s business tax replaces. Cain’s plan is designed to replace the destructive thirty five percent corporate income tax.

While it is legitimate to criticize Cain’s decision to propose that payroll expenses be non-deductible, it is absolutely and fundamentally dishonest to characterize the business tax as a value-added tax, and then imply that this would be levied on top of the income tax and sales tax. Cain’s business tax would replace the income tax, and businesses typically don’t pay sales taxes on production-line purchases. Fundamentally, VAT taxes are reported and collected using entirely different mechanisms.

Michele Bachmann’s disturbing history of distorting and outright lying about her opponents’ records should be denounced in the strongest terms. Like Cain said at the debate, “apples and oranges.”

(cross-post)

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