Herman Cain’s 9-9-9: Why Tech Should Pay Attention

on October 20, 2011

Herman Cain photoThis site doesn’t usually cover politics  and I promise we won’t make a habit of it. But in a previous life, I used to write about tax policy and I still follow the topic closely. I’ve been intrigued by Republican presidential candidate Herman Cain’s 9-9-9 tax program. And in trying to make sense of the very skeletal proposal, I have realized it could pose huge problems for the tech industry with what is effectively a 9% tariff on imported goods.

The key element is the “9% flat business tax.” Cain’s protests notwithstanding, this is a value added tax, with an important and disturbing twist. Economists define a business’ value added as gross revenues less the cost of goods purchased or, equivalently, as the cost of labor plus profit.

Here’s the one-sentence description from Cain’s web site of just what will be taxed at 9%: “Gross income less all purchases from other U.S. located businesses, all capital investment, and net exports.” The devil is in the phrase “other U.S. located businesses.” In the unlikely even this ever became law, hundreds of pages of the Internal Revenue Code would be taken up defining a “U.S. located business.” Are Intel chips from a fab in Israel the product of a U.S. located business? What about a Boeing aircraft with components from all over the world?

If we assume Cain intends to limit the deduction to goods produced in the U.S., this is big trouble. Effectively, it increases the cost of foreign goods by 9% relative to U.S.-produced competition, the same as a tariff (and as such it would almost certainly be found illegal by the World Trade Organization.) Most countries that impose value added taxes allow them to be rebated on exported goods (that would be the effect of Cain’s net exports exclusion) but do not discriminate based on the source of goods purchased.

If Cain wants to argue that structuring a tax this way is necessary to revive U.S. manufacturing, it’s an interesting issue. But he should recognize that it is a major change both in tax and trade policy. And tech should realize that it is a serious threat to the system of global manufacturing that is at the heart of the industry.