Herman Cain's 9-9-9 Plan

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At last night's Republican debate, Herman Cain issued his "9-9-9 Plan". You can read the highlights of the debate here.

To summarize his plan, it basically sets personal income tax on everyone at 9%, with no exemptions allowed, 9% for businesses, and a 9% federal sales tax. As for how that compares to what we currently have, it's a mixed bag. The 9% personal income tax ranges anywhere from considerably more to considerably less than what you currently pay, depending on your income. Basically, the wealthier you are, the further above the 9% you're paying. However, the lower income earners pay very little tax. If you make less than say, $50K per year and have a family, deductions and exemptions are likely to result in your effective tax rate being much lower than 9% - virtually none at all in some cases. So for them, it's more.

The 9% on businesses is similar, but in most cases it's less than what they currently pay.

Finally there's a 9% federal sales tax. This is definitely more as there currently is no federal sales tax.

I don't know nearly enough about economics to say what I think about this. At first blush, it seems to hurt more the less money you make. The 9% income tax is more than you currently pay, and you're obviously paying more with the 9% sales tax. If you are one of the wealthier Americans, you obviously will buy more stuff, and will pay more in sales tax, but you might make most of that back with a lower federal income tax.

What are the thoughts on this? Good sound bite or good plan?

 

Only 9% tax... sounds like heaven

I don't think it will work in practice in the US, since the bottom something %, with the least amount of money to spend, seem to have it worse than the bottom something % around here in The Netherlands. Raising their taxes so they have even less money to spend seems... well... like adding water to an extinguished fire. It will probably cause more problems than it will solve, unless they plan on giving it back to the poorest as some kind of benefits. But I like the idea that everybody pays the same share from an ideological viewpoint.

 

I think his plan certainly the way to go if you want to go for a society with strong class distinctions, income inequality and generally enjoy sipping tea while watching the police shooting the rioting, uneducated masses.

The federal sales tax hurts the lower classes, the flat income tax hurts the lower classes. Technically this is "spreading the wealth around" in the opposite direction. That is giving more to those who already have plenty. No thanks.

In the economic sense I imagine the 9% federal sales tax is added to a sales tax on the state level? I doubt Cain has actually bothered to calculate the deficit effect but Imagine a 9% rise in sales taxes would gain quite a lot of income to the government. If you consider Finland the central government nets 11,4% of its income from capital, income and corporate taxes while over 15% comes from sales taxes. Of course you need to take into consideration that municipalities take their own tax on income and a half of the corporate taxes but a nine point rise in sales taxes would certainly be a huge boost in income.

 

Yeah, but the 9% federal sales tax doesn't. And like BTA pointed out, that federal sales tax would be on top of what you already pay in state sales tax, which for most states, is in the range of 5%-8%.

 

9% income tax =/= 9% tax you pay, remember . When you figure in social security contributions, taxes levied on businesses (we usually work somewhere), on purchases, local taxes etc. the total amount of taxes paid can be several times that amount. I think the total taxes percentage in Bulgaria is in the high 20s-low 30s, and the income tax here is a flat 10%.

It definitely has the right ring to it for a popular soundbite, but I'm not so sure it would work well in practice. How much revenue does Mr. Cain's team estimate they could raise that way, compared to what the US is currently getting?

 

Yeah, I'm sure there is still the 6.2% SS tax, the 1.45% Medicare, and any other state, county, and/or local taxes, as applicable, depending on where you live. Cain's plan wouldn't mean you'd walk home with $0.91 from every dollar you earn.

To use myself as an example, in Maryland the state tax is 4.75%. (To be precise that's the percentage if you earn anywhere between $10,000 and $150,000 - so it's nearly everyone paying 4.75%. People earning less than $10,000 are exempt, and people earning in excess of $150,000 pay 6.25% on everything over $150,000.) And I also have a county tax of 3%. So anyway, in the Herman Cain tax plan, I'd pay 9% + 6.2% + 1.45% + 4.75% +3% for a total of 24.4%.

 

Ah, I should've guessed there was already another tax on goods.

I don't want to hijack this thread, but income tax here in the lowest scale is 33.5 and in the highest 52% (actually a little bit less over the total amount, but the system here is kinda complicated). That includes social security contributions and I guess taxes levied on businesses. On purchases it's 19%, except for food and drinks, which is 6%. Alcohol, cigarettes, gasoline, motor vehicles and a lot of other stuff is taxed even higher than 19%. After that, you still have to pay your local taxes (to the municipality and the province you have a house in) and road taxes (if you have a motor vehicle). And if you saved all your life and payed up the mortgage on your house, you have to pay wealth taxes. And there might be something I forgot...

I didn't do the math, but the 9-9-9 system doesn't seem that bad for over here. But I imagine it would be down hill for a lot of Americans.

(And I'm not *****in' about that we have it bad over here. Life is good... we just pay a lot of taxes )

 

I would go on a long rant about this subject, but Morgoroth essentially put my thoughts in a nutshell.

 

Wealthy people buy more stuff in $ terms obviously but much less in % terms. They put a lot of money into savings and investments while the poor spend any money they get. This plan is really hammering the poor in favour of the rich.

 

Make the poor pay up! Great plan, Mr. Cain.

 

Too many politicians do not understand the difference between simplicity and simplistic.

 

Oh, well in that case it doesn't work at all. SS and Medicare alone mean everyone pays 7.65% of their income up to ~$110K, so the only way this plan even begins to work is if he plans on defunding both of those programs.

Well now that I know it would replace ALL other federal payroll taxes, it would save me a bundle too. I took out last year's tax return, and saw that my effective income tax rate was right around 9% (it was 8.9% to be exact). But that was just income tax, and didn't count what I spent in other payroll taxes like SS and Medicare.

So what Cain's plan basically means is I wouldn't be paying Medicare and SS tax. I seriously doubt that even with the 9% federal sales tax that I would make up the difference through purchases.

The other question I'd have is if there is anything that would be exempt from that 9% sales tax? Like groceries and clothing? If you have to pay a 9% tax on the food you buy, that really sucks for the poor. While you do chose what food you buy at the grocery store, it's not like the purchase of food is discretionary spending. Regardless of what you decide to buy, you have to buy something to eat. Same goes with clothing.

Most state sales taxes do have exemptions for food. But I didn't hear that mentioned in Cain's plan. The only food items taxable at a grocery store are the truly discretionary items - things like soda, chips, candy - junk food items. Clothing is more of a mixed bag in terms of whether or not it's subject to tax, and varies by state. Some states do, some states don't, and some states tax clothing at a lower rate than their typical sales tax. Maryland does tax clothing, and when I lived in Pennsylvania they didn't for most items (only truly discretionary items like suits and leather jackets were taxed).

 

In that case, I'd really like to see what his projections for revenues and growth are. If they involve the tooth fairy magicking unemployment to 2 % and GDP growth per year to 5+ % from next year on, I would not be impressed.

 

I found this analysis of Cain's tax plan, and chances are, unless you are in a high income tax bracket, you'll pay more.

In fact, you may end up paying a lot more: Here's an example of what a family of four with a $50K income would pay. If you don't like math, the short of it is this:

Using a standard deduction, their income tax bill last year was $776. Under Cain's plan it would be $4,500 and that's before we even get to the 9% federal sales tax.

Big winner would be small businesses, as they could pay themselves with dividends instead of a salary, as capital gains taxes no longer exist. Another winner is Wall Street investors, again because no capital gains tax.

There is some other strange consequences of this plan. Say you save up money and buy a car in cash - suddenly the price of your car just increased by 9%. With this system if you got a fairly low interest rate, you'd actually pay less by taking out the loan than paying for a car up front.

There is also currently no exemption for home buyers. Imagine adding an extra 9% onto the cost of a house. That's potentially tens of thousands of dollars.