Some economists worry the plan would result in national tax cheating since retailers might offer items for sale at two different prices: one with tax and one without tax for people paying with cash. “The incentive to cheat is huge,” says Nigel Gault, chief US economist for IHS Global Insight in Lexington, Mass.
Mr. Gault says this is the reason why most countries have enacted a Value Added Tax (VAT) that gets tacked on during the different phases of producing a product. As each tax gets added on, there is an incentive to pass it on.
Since Cain would eliminate the business deduction for labor but not investment, the plan would most likely cause distortions that might add to the unemployment rate, says Mr. Silvia. “This would favor heavy industries that use lots of capital and penalize companies where labor is significant and capital is small,” says Silvia. The entire service sector would be disadvantaged, he adds.
Mr. Lowrie says one of the goals is to make labor more productive. “Capital and labor – you can’t separate them,” he says. “It makes no sense to takes sides, one over the other.”
But probably the largest economic impact would be shifting the tax burden. “It's a huge tax reduction on the very top and a huge tax increase for moderate and low income people," says Michael Graetz, a professor at Columbia University who has testified before Congress on taxes.
For example, economists have a measure called marginal propensity to consume. Low income people tend to spend about 98 percent of their income, middle income people spend 97 percent and high income people spend 90 percent.