It may be time to take Herman Cain's 9-9-9 tax scheme seriously, and that's a scary thought for U.S. small business.
2012 Republican presidential candidate Herman Cain signs "9-9-9" hands, a reference to Cain's proposed tax overhaul, during a book signing in The Villages, Florida, Wednesday, October 5, 2011.
When Herman Cain announced this spring his intention to run for president, few considered him anything more than a political long shot. As the former CEO of the Godfather pizza chain and an Atlanta radio show host, Cain has never even held public office.
So in September, when Cain unveiled his 9-9-9 tax plan as the panacea for America's economic ills, both sides of the political aisle were quick to scoff at its simplicity. The plan wipes clean the current tax system, and institutes a flat 9 percent sales tax, 9 percent business tax, and 9 percent income tax.
Former Utah governor John Huntsman joked that he thought the plan was "the price of a pizza."
But in America, it seems, simplicity sells. In the last week, Cain's popularity has soared, with polls pitting Cain neck and neck with frontrunner Republican candidate Mitt Romney, and even two points ahead of President Obama in a national approval rating.
If Cain's bid for the Republican nod is becoming a reality, it's worth entertaining a "what if" scenario: Namely, what if the 9-9-9 plan becomes a reality? Would it help small businesses?
The answer, according to almost every small business expert I talked to, is a resounding no.
"It might sound good on paper, but it just doesn't work," says Charles Green, executive director of the Atlanta-based Small Business Finance Institute. "And for small business owners, it's probably not good at all."
Perhaps the biggest red flag for businesses is the 9 percent national sales tax Cain is proposing. Because the new sales tax would be added to existing state and local sales taxes, some cities would see sales taxes skyrocket.
Small businesses in Chicago, for instance, already deal with a sales tax of 9.75 percent. With Cain's plan, the tax at the cash register would rise to nearly 20 percent. Business groups have been quick to point out the potentially destructive effects an increased sales tax would have on the country's (already limp) consumer spending.
Marc Caputa, writing for the Miami Herald, notes that the plan "is getting tepid-to-awful reviews from some of the nation's most influential business groups," adding that the National Federation of Independent Businesses "had little good to say about the few available details."
The National Retail Federation was more blunt in its assessment. "This will hurt demand and slow the economic recovery," the federation's tax policy expert, Rachelle Bernstein, notes. "You definitely do not want to do this."
Doug Mataconis, a political blogger, writes that Cain is "either blind or idiotic to ignore the impact that a combined federal and state sales tax would have in jurisdictions that already do have a sales tax, and the impact that a combined levy approaching 20 percent on the sale of goods would have on the middle class, and on small businesses."
The 9 percent business tax also presents problems for business owners because it eliminates deductions many owners rely on. Under Cain's tax scheme, the only deduction businesses would be allowed to make would be purchases from other businesses. Other ordinary costs of business, including wages, would be disallowed.
Lastly, the 9 percent business tax would cut into the profits of small companies—especially businesses like grocery stores that maintain slim margins to survive. ("Small businesses that have a very tight profit margin could be totally wiped out by this," one blogger noted.)
The irony of 9-9-9 is that despite its theoretical simplicity, it will actually become enormously convoluted in practice. As Charles Green puts it, "It's naïve to think that you can erase 22,000 pages of regulations and put in a 9 percent tax across the board."
There is one thing to say for Cain's plan. It has been able to accomplish something no politician has been able to pull off for at least a decade. It has united liberals and conservatives in opposition. Says Green: "They all hate the plan."