Does Cain's 9-9-9 tax plan add up?
GOP presidential candidate Herman Cain -- the frontrunner, according to some polls -- has proposed a major overhaul of the U.S. tax system. What would it mean to taxpayers and the economy?
This post comes from Alison Fitzgerald at partner site BloombergBusinessweek.
Republican presidential candidate Herman Cain's plan to create a national sales tax would hurt retailers, threaten economic growth and shift the tax burden onto the middle class and poor, tax experts and business groups said.
Cain’s so-called 9-9-9 plan, which would replace the current tax code with a system of three separate taxes of 9% each, has boosted his popularity among voters. The former chief executive officer of Godfather's Pizza has surged in polls in recent weeks, and a Wall Street Journal/NBC News poll released this week put him in the lead.
Tax experts and business groups interviewed don’t like his tax plan as much as voters. They said it would shift the burden to middle-income and poor families and would hurt sales across the economy, at least in the short term. Article continues after video.
"There will be a noticeable decline in consumer spending for some years," said Rachelle Bernstein, vice president of the National Retail Federation, based in Washington, in an interview. "We know that that has an impact on consumer spending and GDP."
Consumer spending accounts for about 70% of the U.S. gross domestic product.
Cain has proposed a 9% sales tax on all goods and services, another 9% on personal income and the third on corporate gross income. During the debate in New Hampshire sponsored by Bloomberg News and the Washington Post on Oct. 11, Cain said the proposal is his top policy goal.
Expanding tax base
"It expands the base," he said during the debate. "When you expand the base, we can arrive at the lowest possible rate, which is 9-9-9."
That expansion means that long-standing tax breaks, such as the mortgage interest deduction and the exclusion from income of employer-sponsored health insurance, probably would vanish.
Although Cain hasn’t released extensive details of his plan, it also would probably add a sales tax on many products and services, such as new homes, financial transactions and even doctor visits. Several business and trade groups contacted by Bloomberg News declined to comment on the plan because they didn’t want to take a position on the presidential race.
Impact on states
Michael Bird, federal affairs counsel for the National Conference of State Legislatures in Washington, said the sales tax, on top of what state and local governments already levy, could make it difficult for them to adjust their tax rates.
"Would the 9 cents create a ceiling, or would states say, now we have to lower our costs because the cost of goods and services are higher than a lot of people are comfortable with?" Bird asked. "It's hard to say."
Robert Dietz, an economist at the National Association of Home Builders, said new homes sales would see a double tax increase. The house itself would be subject to the 9% retail sales tax, and then buyers would have to pay tax on the interest on their mortgage, as opposed to now when they can deduct that interest from their income. (Find today's best home equity rates here.)
"Layering a new tax on top of the sale of a newly constructed home would certainly be bad for the housing market," he said. Each new home creates the equivalent of three full-time jobs for a year, he said.
Trucking hit hard
Small trucking firms and drivers may be hit hard by a sales tax on fuel piled upon already-high excise taxes, such as the 24.4 cent-per-gallon levy on diesel fuel and a surcharge already applied to new heavy-duty vehicles, said Todd Spencer, executive vice president of the Owner-Operator Independent Drivers Association, which represents truckers under contract with larger U.S. companies such as Landstar Systems Inc.
Further taxing fuel "may be a hard sell for Mr. Cain at a time when diesel is headed back towards a $4 per gallon average," Spencer said. "Adding a 9% sales tax and a 9% VAT (value-added tax) onto the 12% federal excise tax truckers already pay on new trucks and trailers would certainly cause them to think twice about buying new equipment."
"There's a lot in this plan that’s just kookie," said Steve Wamhoff, legislative director at Citizens for Tax Justice, pointing out that it doesn't tax dividends or inheritance at all, but does tax wages. "It makes the tax system much, much, much more regressive than it is today."
The proposal would hit middle- and low-income people with a larger tax burden because they spend more of their money on food, clothing and household goods and have less left over to save and invest, which wouldn’t be taxed.
Ed Kleinbard, a professor of tax law at the University of Southern California in Los Angeles, said Cain's plan would increase the federal tax burden of a family of four making $50,000 a year by $5,100 to $13,500.
"It’s less money in most people's pockets after tax and more money in the pockets of the wealthy," said Kleinbard, a former staff director at Congress's Joint Committee on Taxation.
The Cain campaign’s own analysis of the plan doesn't address how it would change the distribution of the federal tax burden, other than including a provision for some sort of "poverty grant," which Cain has described as a lower rate in targeted "empowerment zones."
Will McBride, economist for the Tax Foundation in Washington, said Cain's tax plan would spur economic growth in the long run. While the 9% federal sales tax would depress consumption now, if consumers know they will have more money in their pockets in the future because of lower taxes, they will spend more.
"This is not a Keynesian plan; this is a long-term growth plan," McBride said.
Even some conservatives that advocate for a simplified tax system disagree with Cain's approach.
Ryan Ellis, tax policy director at Americans for Tax Reform, which advocates for lower tax rates and smaller government, said the plan introduced entirely new taxes that are expected to rise with time.
The business tax functions like a value-added tax, he said, where the inputs to a product are taxed along the way. "When you raise the VAT, it's embedded in the price of the good so it's a politically easy tax to raise," he said. "The people who know tax policy in the conservative movement are not responding well to this."
Not all bad
Still, Ellis said the plan is better than the current system though not as good as some alternatives.
"It would radically simplify the tax system," he said. "It would move the tax system toward a consumption base and it would do so at very much lower marginal tax rates."
Most groups said they aren't lobbying for or against 9-9-9 yet because it’s unclear whether it will become a viable proposal.
"In general, we are supportive of efforts to simplify the tax code," said Jason Brewer, spokesman for the Retail Industry Leaders Association, based in Arlington, Va. "We are not in favor of a national sales tax. If in the primary season this becomes a hot topic, we will certainly weigh in more publicly."
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It really does not matter how many tax dollars are collected. The way our government is operated the more money collected, the more money is pissed off. The idiots in DC do not understand the term "budget". All these liars, whores, and thieves care about is padding their pockets, helping out their families and relatives, and repaying their overly-generous campaign contributors. Their pensions and retirement programs are completely out of control and exorbitant.
Washington DC truly is America's cesspool for liars, whores, and thieves !!!!
TAKE THIS POLL WOULD YOU BE WILLING TO PAY MORE IN TAXES IF THE BOTTOM 47% OF PEOPLE PAID SOMETHING IN TAXES ANYTHING 1.00 ,100.00 INSTEAD OF PAYING NO TAXES AT ALL OR GET MORE BACK THAN THEY PAID IN ?
I'M RIGHT IN THE MIDDLE CLASS AND MY ANSWER IS A BIG YES IF IT WOULD HELP THE COUNTRY. EVERYBODY NEEDS TO PAY SOMETHING BE PART OF THE SOLUTION NOT PART OF THE PROBLEM.
That 9,9,9 will turn into
We need to be more efficeint and use technology instead of detering it.
Does it really matter what Cain proposes?
With a new congress that would be similar to what we have...it won't even get read.
This is campaigning, not what will happen.
We need to vote out incumbents in congress, not worry too much about the puppet in cheif
I'm all for people paying their fair share, but I still can't believe what I just heard. Let's play a little game here with the Cain plan (only let's make it a 10/10/10 plan so the math is easier)
My employer pays me $1. Oh the government gets $.10 of it.
I buy a $.90 hot dog. Government gets $.09.
Hot dog vendor made $.81. Government gets $.08.
Hot dog vendor pays $.73 for his franchise license. Government gets $.07 and another $.06 for the profit the big chain made.
This is all acceptable, but big chain owner then pays himself through dividends the remaining $.60 and owes 0 in taxes, because investments aren't taxed. He sells 10 million hotdogs through his businesses and makes $6 million tax free. How does that work? Seems like the rich just got richer and the poor just got A LOT poorer.
If you're going to have a flat tax through the system, then it needs to be a tax through the system. This plan is nothing but a con to extract more blood from the masses. (Did I say that before?)
Can't say that I totally agree with 9-9-9. Sales tax @ 9% might be a bit stiff especially coupled with the 9% National sales tax. On the other hand the 9% flat income tax proposal is not far off. 10%
across the board would be good; no deductions except dependants and insurance. Do your homework boys and girls; I lived under British taxation for 9 years while in Hong Kong. They had more money in the coffers than they could count. When Great BritaIn was in financial dire straights in the late 1960's, Hong Kong bailed them out and didn't even make it a loan. Get a life fellow Americans. This system works and guess what, the wealthy have no breaks; they pay the same rate with NO LOOP HOLES OR WRITE OFFS.
Max. I won't go that far. I generally lean republican because overall I believe in the philosophy of lower taxes and less government allows people more freedom to create and be innovative and reap the benefits of their own labor, but I've got to admit to being bitterly disappointed with the current crop of politicians out there.
I should add, that means we should be looking to expand the opportunities for people at all levels of income, not finance the opportunities of one class of people on the backs of another.
Cain is getting his 20 minutes of fame but there is nothing to worry about, he isn't going nowhere with this 9-9-9 plan. I much preferred his 3 medium pies for 9 bucks each plan he had while at Godfathers.
It's painfully obvious Cain isn't a politician (normally a good thing), but he's screwed himself over by making his plan so simple that most of the populace can actually understand how it will F them over with with higher taxes. The vast majority of lower income folks will pay MUCH more than they are now (effectively 18%). And the rich making their money off dividends will go from 15% (already absurdly low) to 0%.
We can still come up with a very simple tax that is fair for all and doesn't require any lawyers or CPAs to assist in calculating. Here it is folks:
A progressive tax rate on income and all dividends with no deductions or credits for anything. Lower income brackets would have very low rates but ask them to contribute a very small % starting at 10K. Marginal Tax Rates would be much lower than current rates to make up for the the loss of all the deductions and credits but the goal is for it to be revenue neutral compared to what we have now and make it very simple to calculate. Yes, some would pay more than currently (normally those getting excessive deductions / credits now) but others might pay less (those not getting many deductions / credits now). Overall though most would pay close to what they pay now. Here is my plan:
Income Marginal Tax Rate
> 1M 35%
Based on the above, the EFFECTIVE tax amount rate at various example incomes would be:
Just imagine, your one page income tax form would take a whole 5 minutes to complete. You could cut out the $$$ you pay for a lawyer, CPA or tax preparer, and the associated angst of doing taxes. Meanwhile the the IRS could cut 90% of its budget and staff since policing such a plan is easy as pie. And best of all, everyone knows everyone else is contributing their fair share and that some people aren't getting rich or fleecing the rest of us via excessive deductions, credits and tax loopholes.
Okay so some of you surely won't like my plan. If so, tell me, WHAT'S YOUR PLAN?
9-9-9 is a simplistic hare-brained scheme. The tax code desperately needs to be changed but this plan will not do what he says.
Nat, you're problem is you seem to think Federal taxes are the only taxes that our governments collect. This is patently false. All those people you want to stick it to do pay consumption based taxes.
Furthermore you seem to think that poor people have extra money lying around to just hand over to the government. There is a reason they're called poor. If you start taking away more money from them by taxing those on the brink you're going to end up having to create more (or expand existing) social programs to compensate. All that does is provide less incentive for them to ever improve their circumstances.
Consumption or sales taxes are ALWAYS regressive and punish the poorest and most vulnerable in society much more than they make things equitable. This is because poor people are forced to spend a much higher percentage of their incomes on consumption of goods necessary to maintain life. This makes their marginal tax rate much higher than someone who is able to save and invest their money, especially when you remove all taxes on investments, which you're effectively doing by eliminating things such as the Capital Gains Tax, The Estate Tax, etc.
I have thought it through and I hate, even though once my children are grown, which they nearly are, it would probably end up costing me less money.
You're right there are a large number of people in this country that don't pay federal income taxes. That doesn't mean they pay no tax. It means in the past the federal government has chosen to use the IRS to administer a large percentage of its social program, by not ever collecting or returning money to those who would end up being part of some other (and probably more expensive) social program. Furthermore a huge percentage of the people you're talking about not paying taxes are seniors on little income other than their Social Security. If you add a new tax to them, you're essentially taxing them twice on the same earnings and breaking the Social Security "contract". I don't think that's going to fly.
It's a poorly thought out and poorly explained plan.
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