Monday, October 17, 2011

9-9-9 Would Kill Manufacturing

The arguments have already been made in the past that a national sales tax would hurt retailers and manufacturers because of the dramatic increase of the cost of goods with a new, large sales tax. The rebuttal from supporters of a national sales tax respond that the cost of manufacturing will go down due to reduced corporate taxes and that those saving would be passed on to the consumer by reducing the prices on goods. I respond with the words of Charlie Brown, "I don't mind your dishonesty, half as much as I mind your opinion of me."

If we randomly assembled 10,000 economists we would have 10,000 different economic theories. Economic theory looks great in an academic setting, but in real practice it rarely matches the academic predictions. When gas prices go through their periodic spikes in prices we are told that it is a supply issue, but when demand later drops the prices fall much more slowly than they rose and they never drop to anywhere close to what they had been. Retailers and manufacturers are in business for one thing, to make as much money as they can and pass those profits on to their stock and bond holders, not the consumer.

However, this argument has been beat to death already and I want to interject a different argument into this debate. My new argument is that demand for durable goods will drop through the floor if a new, massive, national sales tax is implemented.

Currently 47% of American households do not pay federal income taxes. That means that 47% of US households would have a large income tax increase under 9-9-9. To offset this onerous and draconian increase there would be an enormous shift in consumer spending away from new goods, which are subject to a national sales tax, and to used goods, which are supposedly going to be exempt from the national sales tax.

Additionally, 9-9-9 provides no means to police or enforce collections of the new sales tax. Will we double the IRS so that there will be enough agents to audit and enforce the collection of these taxes from retailers? And there will be a huge rise in grey market sales where distributors who are on the verge of bankruptcy will try to move excess inventory to try to stave off insolvency.

There is a further problem here, used goods won't last forever. When half of the country turn away from new goods to used goods, and thereby drive manufacturers out of business, where will they turn a few years later when their used goods finally expire? Who will be producing the new goods that need to infused into the economy?

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hamaca said...

Interesting points, Dan. It's questionable whether those who are pushing 9-9-9 have thought things through, especially the knock-on effects.

It's not to say that an overhaul of much of government isn't a good thing, including the tax code. But whatever it is, it needs to instill confidence for businesses, not uncertainty.

Ohio JOE said...

For the record, even though I am leaning towards voting for Mr. Cain out of default, I am not sold on 9-9-9 per se. However, at the risk of sounding like a smart alec, the status quo cannot stand either and I admire Mr. Cain for opening a can or worms that needs to be open.

To the point at hand, if you are saying that 9-9-9 would make thing rather challenging for business, I cannot disagree with you. However, if you are argueing that 9-9-9 would all, but kill manufacturing, I cannot agree. To be sure, 9-9-9 (in its literal) can and will raise some taxes on certain American individuals (maybe even both of us,) 9-9-9 would still be a rather low compared to many of our trading partner. For example, Canada has a 7% (unless it was reduced lately) national sales tax on top of Provincail tax which is at least as high in most provinces. Further, while Canada has a progressive tax system, unlike America, most Canadians regardless of income level, pay some income tax and if you count provincial tax, you can bet it is a lot more than 9%, try 50% in most cases because there are not as many tax deductions availaible. Yes, many Canadians (even those living abroad) get a sales tax rebate, but again, less than 47% of them receive this rebate. If we look a little further, most European (both Eastern and Western) regularly pay over 20% in sales tax. At many of them also pay even more than Canadians in terms of income tax. Nevertheless, in certain sectors (product lines) let''s just say manufacturing is far from dead in Europe.

"Retailers and manufacturers are in business for one thing, to make as much money as they can and pass those profits on to their stock and bond holders, not the consumer." That is true, but they are also in competition.

With regards to American turning to used goods, this already is the case in terms of the auto industry.

Anonymous said...

Another opinion regarding 999 is that it will jump start manufacturing and jobs by lowering the corporate rate to even the playing field with countries like Mexico and China. But that doesn't guarantee that the jobs will be scaled to today's salaries. As a matter of fact, I think the new job's pay scale will be lower so that the corporations would be competitive with China and Mexico.

I hope that we never see 999 because I do not want to see an additional mechanism in place to collect money for the wasteful government.

To me if they want a national sales tax then abolish the income tax and if they don't abolish the income tax then you should never impose a national sales tax. You should never ever allow the Federal government to have both.That would be a disaster, if we have another obama like administration with a Pelosi Congress.-Just my opinion.

Ohio JOE said...

"As a matter of fact, I think the new job's pay scale will be lower so that the corporations would be competitive with China and Mexico." Regardless of 9-9-9 or no 9-9-9, we need to have some kind of compeitiveness.

John said...

DanL, you're wrong about price cuts not being passed on. Don't worry, I'll write a post about it and explain it in more detail.

Used goods are great - that's efficiency at its core, when a good is used for longer time than it normally would. It helps consumers too as if you can sell your old TV, you get more money, so more money to spend - which is good for the economy.

I wrote a post just a couple of weeks ago criticizing the 9-9-9 plan, but your post is so unfair I can't let you stand unchallenged.


Anonymous said...

John, I eagerly await your college essay on taxation. I am sure that your naivete will leave me breathless.

Anonymous said...

John, used goods are wonderful. I buy lots of them. Among the used goods I have bought are 3/4 houses, 6/9 cars, 2/4 grand pianos, quite a bit of camera equipment, clothes, tools, toys for my kids... I made no criticisms of used goods. Stay on target John.

Anonymous said...

Ohio John,

I agree with you,U.S. business's need to be able to be competitive with the rest of the world.That should be one of the primary goals of the president

What I was getting at is that the worker will then have to pay a 9%national sales tax in addition to an income tax and their salaries may be lower if America is competitive businesses are competitive again. Can you tell I hate the idea of a national sales tax plus an income tax. ha ha.

Anonymous said...

An effective national sales tax is never going to pass. The politicians are not interested in having all Americans reminded of the cost of big government every time they buy groceries. If everyone had to think about government spending every time he or she bought something, fewer people would clamor for government spending. Liberal politicians are never going to let that kind of tax pass. If the tax were written in a way that exempted people from the everyday things that liberal constituents buy, conservatives would not support giving the government another revenue stream. The simple 9-9-9 that Herman Cain is touting has no chance of passing the Senate. Even if the GOP held 60 seats, the Democrats would find a few liberal Republican senators who would join them in a filibuster.

On the other hand, asking the 47% who pay nothing to begin paying something is not "onerous and draconian." That kind of overstatement reduces the credibility of this entire commentary. With the end of FICA, the effective income tax increase on those who currently pay no income taxes would be less than 3%. The reduction in business taxes would give companies more cash. Many would find that the best use of that cash would be letting go of bad employees and hiring better employees. Many good employees would receive more pay either at their current jobs or with competitors. Bad employees would struggle, but the rest of us are tired of bearing the burden for subsidizing bad employees. I'm not saying that the plan would break even for all of the 47% who are not currently paying taxes. Many of them would find themselves having to make some sacrifices. The alternative is that the rest of us would have to make even bigger sacrifices to fix our country's problems. Many of those problems have come from politicians elected by that 47%, so I don't mind asking them to share the burden of their mess.

The idea that this plan would "kill" manufacturing is likewise silly. Manufacturers will be getting a huge benefit from the reduction in their taxes. Companies don't die because the government reduces their taxes. Those who have been paying tax rates higher than 20% will suddenly find themselves with more money. They will buy all kinds of new stuff that manufacturers produce. Because they have more money and can upgrade their stuff more often, their old stuff will filter into the used market more quickly. Stuff in the used market will cost a bit more. That higher cost will hurt those who buy used goods to avoid the 9% sales tax, but that higher cost will also put more money into the pockets of anyone selling used items. More money in people's pockets will continue to drive the economy and keep manufacturers operating.

I agree with Mitt Romney's statement in the last debate that solving our economic problems is more complicated just implementing a new and gimmicky tax structure. We need systemic fixes at all levels. However, the notion that Mr. Cain's plan would necessarily kill manufacturing is nonsense.

Anonymous said...

Anonymous at 9, why don't you sign your name? Is it because you are embarrassed to be associated with these ideas you've written here? Is it because you know that you are dishonestly spinning this issue to further your political agenda?

I am for expanding the tax base and making most of those 47% non tax payers to pay some taxes. I would suggest starting them at 2% federal income tax that cannot be waived by deductions or credits. Then, over 5 years raise that 2% up to 4%. But going from 0% to 9%, plus a 9% sales tax is most certainly draconian.

9-9-9 is a giant tax break to the very wealthy, and a huge tax hike to low income and middle income. The wealthy who are now much wealthier aren't going to rush out and buy products from places like Sears, JCPenny, WalMart, etc. They aren't going to be buying Fords and Chevy's. In other words, they aren't going to be purchasing durable goods that the middle and lower classes purchase. They will buy BMW's, shop from Nordstroms and buy luxury goods. That will not keep manufacturers afloat that make goods bought by middle and low income consumers.

What is most telling is that you want the lower middle class to be the ones who sacrifice, they are the people who can least afford to sacrifice.