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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If the wealthy aren't paying their fair share, what is the fair share for the 50% that aren't paying any Federal Income Tax, plus they're getting a substantial lump sum payment for earned income tax credit.
Think that if all the government "freebies" were totaled, the poor wouldn't be classified as poor.
Brent, (and i am a homeowner also) why do we deserve a tax write off for owning a home. It isnt really fair to the people who choose to live in a rental.
But once you start digging and get beyond the slogan, you realize this is not good economics. Period. It doesn't matter what side of the aisle this is coming from, it doesn't help the middle class.
Regarding Cain's 9-9-9........ I want to see an article written with
experts and their party affiliation
too bad in today's world - we can't have reporting that is factual - with no biases
Show me that than can be done and I might believe the author writing the article
Absolutely Not, this is a horrible plan. To eliminate deductions for the middle class is going to have us pay more in taxes, so ultimately your raising taxes on the middle class, plus making us pay more through taxing. I'm using 100K as the benchmark of someone who as a mortgage and family. average home price being 200K. You'll loose ~4K for family, an average `12K for mortgage and ~5K for property tax deductions. Under this plan you will pay more in taxes.
"There are sooo many people who don't pay any tax; almost 50% of this country".
Typical Republican fabrication.
Sure, there are a lot of people who pay little or no Federal income tax -- those who earn meager amounts to begin with -- but those same people pay sales tax, gas tax, payroll taxes (if they're lucky enough to have a job), taxes tacked on to their car license (if they have a car) tobacco tax (if they smoke), liquor tax (if they drink), property tax (either theirs, or their landlords through their rent)...they pay tolls for bridges, tunnels, expressways...in other words, income tax is not the only kind of tax!!!
Use your head. Don't just take everything Fox News says as gospel. Don't assume that those deductions millionaires use to lower their taxes to nil apply to everyone, because most Americans don't have accountants to weasel deductions for them, and don't have offshore bank accounts to hide their money. Look out your window at those Wall Street protests: they're getting bigger, and more people with a conscience are joining in. Unless you are a millionaire, or are owned by one, you need to think for yourself. Oh...and it's no coincidence that this article is accompanied by an ad for Bank of America!
Don't liken the plan at all. A 9 percent national sales tax on top of almost a 10 percent state sales tax (which exists in many states) would be a real killer to the lower classes in the United States. Go to Canada where you have a 5 percent national GST (a type of national sales tax) on top of provincial taxes which are 8 to 9 percent, and that really kills the poor economically. The only salvation in Canada is that they provide a tax rebate check to lower class families which does help somewhat.
I would much prefer a simplified graduated income tax rate with no deductions, exemptions, or exclusions possibly at a three tier or four tier level, and lower overall corporate tax rates (in the range of 15 to 20 percent) to allow for repatriation of money held overseas by foreign subsidiaries of American corporations. That is the real solution....
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
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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 !!!!
I feel the premise is a good one, a flat tax rate , but it needs modifications. 9% income taxes with net incomes of $250,000 and over, having deductions for dependants only, 9% income tax rate for net incomes $35,000 to $249,999 with deductions for dependants and home mortgage interest. Below $35,000 no tax at all.
Corporate tax rate at 9% of net for profit made in the United States, but an additional 9% for profits on goods manufactured outside the United States, this is to encourage corporations to bring jobs back home.
A 9% Federal excise tax on selected items and goods, not a sales tax on all goods and services.
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