Wednesday, November 2, 2011

Cain’s 9-9-9 and the Drive to Buy Used Goods

One of the components of Herman Cain’s 9-9-9 tax plan is a 9% national sales tax. This sales tax would be on top of any sales tax imposed by a state. Now, as I understand it, this tax would apply to the sale of all new goods and services. I’ve heard Cain say, on several occasions, that one way that people could avoid the sales tax would be to adjust their behavior and purchase used goods instead. And that is what I want to look at.

First, let’s consider the impact of 9-9-9 on the housing market. Just consider the disparate impact upon the purchase price of a new house as compared to the purchase price of an existing (used) house when the 9% sales tax on the new house is factored into the price. By way of simple example, a new $200,000 house would suddenly cost $18,000 more while an existing house would not be subject to that increase. Hmm. Seems to me that residential home builders, already struggling in this economy, would very likely be virtually driven from business. This is especially true in the low-end production home market. The people paying builders to build million dollar mansions can probably afford to absorb and pay that tax; but the family on a tight budget looking to buy an inexpensive production home may have just been priced out of the American dream of home ownership. And the builders who rely on building subdivisions full of cookie cutter but affordable houses will have had their businesses ripped out from under them. How many more construction workers will be out of a job? But I guess that there will be incentive for people to buy and rehab older existing homes…

Or what about the auto industry? We already pay sales tax on cars (and did you know that you pay sales tax even if you lease your car?). But let’s just think about what an additional 9% sales tax would mean. Right now, in Indiana, the sales tax is 7%. So a car with a sticker price of $30,000 actually costs $32,100. If we add on an additional 9% to that $30,000, suddenly that new car will cost $34,800 (or an additional $2,700 over the current post-tax cost). How many fewer cars will be sold with that sort of built in price increase? And as fewer cars are sold, how many car salesmen will be out of a job? More importantly (perhaps), what will happen to the automotive manufacturing industry? If the demand for new cars goes down, won’t that have an adverse impact on the manufacturing sector? Won’t the new sales tax create an incentive for people to buy older cars? Now a new industry may develop to help keep older cars, long since out of warranty, in good condition, but is that a good trade off? Do we really want our roads to look like Cuba’s with mostly old, semi-functional cars? And remember, it is Herman Cain himself who has suggested that consumers adjust their habits by buying used merchandise.

What about other forms of retail sales? I suppose that consignment stores would see a substantial uptick in sales, but at what cost to clothing stores selling new clothes?

And consider one other important element to all of this: There are some goods where buying used simply isn’t practical. It’s hard to buy used milk. Used tires probably aren’t very safe. And I’m pretty sure that Godfather’s Pizza doesn’t sell used pizzas. Joking aside, where this really becomes a problem is on its impact upon those who are least able to absorb these additional costs. It should be obvious, but the poor pay a much larger percent of their income on food and other essentials. But under Cain’s plan, not only would the poor be forced to pay income tax that they probably don’t pay now (though, to be fair, apparently they would no longer pay payroll taxes), but they would also be forced to pay more for food and other essentials. Go tell a poor family … or an elderly woman who already can’t afford her medicine … that the cost of those essentials is going to go up by 9% and see how that will impact their lives.

Cain has suggested that the sales tax wouldn’t seem like a big deal because prices would come down because of decreased taxes imposed upon those who manufacture and sell goods. Do you really believe that? Bank of America made $6 billion last quarter; did they drop their fees to lower costs? Of course not. Do you think that the drug companies would decide to lower the cost of drugs? I certainly doubt it. A lowering in the cost of production will be passed on, primarily, to shareholders. Most likely, the only decrease in price would be to compete with a competitor who chooses to lower prices, but if none of the businesses in a particular market decide to pass any savings along, then prices would not drop appreciably.

Oh, and just to game the system a bit. Cain’s plan also provides that businesses don’t pay the sales tax on things that they purchase. Hmm. Then it seems to me that businesses could purchase all sorts of things for their employees and I’m sure that smart people can find a way to avoid those purchases being classified as income (especially if, under Cain’s 9-9-9 plan, we’re not filling out complicated tax returns anymore).

Finally, as I understand the plan, the 9% sales tax would also apply to services. Think what that would mean for the cost to see a doctor, the cost of insurance, the cost of a lawyer, or even the cost of the kid down the street who mows your lawn. All of those services would now incur a 9% tax. It seems that healthcare (and remember, Cain has pledged to repeal the Affordable Care Act) would be hit really hard. Insurance, whether from an employer or privately purchased would be 9% more expensive and so would the cost to see the doctor and purchase a medicine. Given how expensive both health insurance and medical treatment are already, this seems like it would really cause a severe and negative impact. And given that an enormous percentage of healthcare costs are paid by the elderly who are no longer paying payroll taxes, then this 9% increase in costs could prove devastating.

Perhaps used medicine will become popular.

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