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Sunday, October 16, 2011

RAISING CAIN

Once again there is a new "front runner", sort of, in some polls,  for the Republican presidential nomination.  In the last couple of months the fortunes of the Republican candidates and potential candidates have mimicked the stock market’s boom and bust cycles.  In a contest with too many candidates, the "leaders" usually have had approval ratings in the high twenties so it is difficult to assess what one's genuine support will be as the fringe candidates drop out.  The "maybe I'll run", non-candidate Donald Trump had 28% support in April but just 8% in May.  Then there was the Bachmann boomlet in early August when she won the Iowa Straw Poll and seemed destined to win the first in the nation and over important Iowa Caucuses in January.  But later on in that same month Texas Governor and new conservative hope Rick Perry entered the race and immediately jumped to 27% approval, stealing most of his support from Bachmann, now at 5%, and edging out front runner Mitt Romney in one poll  (Rasmussen) by 12 points.  But in the televised debates Perry has appeared clueless and unprepared and has gotten himself in trouble with conservative purists over illegal immigration and his failed attempt to require pre-teen school girls to be inoculated against a sexually transmitted disease.  So the conservative leadership banner has been handed off to Herman Cain who now leads Romney 27% to 23% in one poll (NBC/WSJ) and ties him at 29% in another (Rasmussen).  Almost all of Cain's new support comes at the expense of Perry who has dropped into the 9-14% range. 

This poses significant questions as the far right runs out of credible candidates (Gingrich, Paul and Santorum all remain in single digits).   Is this just the latest in an "anybody but Romney" dynamic in a more conservative than usual Republican electorate?  If not, then the presumption will be that Cain and/or his "9-9-9" economic program have genuine appeal. 

Certainly Herman Cain has significant personal appeal.  His background as a successful business executive and President of the St. Louis Federal Reserve Bank is impressive but in a electoral world dominated by interviews and debates his straight talk and confident style probably represent his major appeal. Now however, as happened to the other "frontrunners", much attention will be paid to "what" he is saying as well as  how he is saying it.

What Herman Cain is saying, over and over, is that he has a "bold plan" to restart the economy and cut unemployment.  Unlike the rest of the field who talk in general terms about cutting taxes and spending, Cain's plan not only has a name, "9-9-9" but contains specific details.  The basics include tossing out the existing federal tax code and  establishing a single bracket of 9% on personal income and business income.  This would represent a dramatic reduction across the board from the current brackets which start at 10% and climb through six brackets to 35% .  Capital gains taxes, inheritance taxes and taxes on dividends would also be eliminated. Cain would make up some of the loss in federal revenue by eliminating all tax deductions. He would make up the rest by establishing a national sales tax, also at 9%.  Payroll taxes which fund Social Security and Medicare currently at 15% would also be reduced to 9%.

Political candidates tend to shy away from specifics because they invite criticism from competing political candidates and groups most directly affected, and this proposal will be no different. Removing such things as the mortgage interest deduction, the oil depletion allowance (depreciation for oil wells) and deductions for charitable giving will generate much opposition. Ideologically based criticism is also certain and indeed has already started since Cain has surged in the polls.

Naturally, the first question about 9-9-9 is "Is it a good idea?"  The first and second "9s" are a flat tax with no deductions for individuals and businesses.  This is not a new idea but has definite appeal. It would simplify the ridiculously complex tax code and ensure that most of the 47-49% of tax filers who currently pay no federal income tax pay at least something  As a significant  cut for those who do pay taxes and businesses, it would put large sums of money into the economy instead of the government and thus stimulate economic growth and job creation.

The third "9" will continue to generate the most opposition.  Cain realizes that the federal debt and deficit numbers are so huge that stimulating expansion and spending cuts alone, can never achieve meaningful reductions. Thus he has proposed a broad based national sales tax.  Other conservatives believe all taxes represent a transfer of wealth to the government and depress economic growth.  They also fear that future Congresses seeking ever more revenue would raise the sales tax rate as has been done in the European Union.

Liberals who generally like high taxes prefer both a progressive personal income tax with the "wealthy" paying a higher percentage of their income and a high corporate tax.  They view sales taxes as "regressive" because when applied to basic needs like food, medicine, rent and transportation, the tax takes a larger share of total income from low income families.

So overall, is it a good plan?  Cain's economic adviser claims that the plan would:  1.  add two trillion to the Gross Domestic Product  2. create 6 million jobs  3. increase business investment by 33%  4. raise wages by 10%  5.  raise  federal revenues by 10%.  These are lofty claims and it is fair to assume that they are overly optimistic.  Still, the plan has some support among conservative leaning economists like Art Laffer of "supply side" economics fame, and Republican Congressman Paul Ryan.  A true analysis will require more time and probably more details but the political debate won't wait.

There is also another political consideration.  The plan could only be approved by a Republican majority in the House and a filibuster proof 60 vote Republican majority in the Senate which is highly unlikely in 2012.  That being the case what does it say about Cain's candidacy.  If his economic plan can't be passed, what other appeal does he have?  He is undeniably very intelligent but he has no experience in elected office and has no background in social or foreign policy.  Future debates on these subjects could broaden his appeal or see him join the crowd of "also rans" who experienced short periods of enthusiasm before falling into the single digit approval wasteland.

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