Herman Cain’s 999 Tax Plan (Part 1: Taxing individuals)

Please scroll down for an UPDATE

Candidate Herman Cain has proposed a plan for revolutionary tax reform.  In this article we analyze the effects of this plan on individual taxes.

When comparing various tax plans one must remember that every possible form of tax is disagreeable in some way.  So rather than holding out for something that feels good, one must look for a tax regime that is least harmful.  The best tax system:

  • Has no purpose other than funding the government.   It should not include levers to reward or punish businesses or individuals for compliance or non-compliance with the desires of the politically powerful;
  • Is simple enough for everyone to understand so politicians can’t use it to deceive us;
  • Makes virtually every adult a taxpayer, even if the poorest pay only a token amount.  When the cost of government goes up every taxpayer should have to contribute to the increase and when the cost goes down every taxpayer should receive some benefit.

The table compares the status quo with tax increases President Obama indicates we can expect if he is reelected, and with Mr. Cain’s 999 plan.

What hasn’t been widely reported is that Cain presents 999 as a transition step from the current system to the final destination, which is “The Fair Tax,” a consumption or sales tax that would replace all other federal taxes.  The Fair Tax goal is to tax consumption rather than taxing income, investment, risk-taking and success.

The 999 plan is designed to lower rates, broaden the base of taxpayers and remove elements in the current code that politicians use to divide Americans into opposing groups.

The 999 plan would completely eliminate the existing payroll tax a scheme that afflicts politicians with a malady commonly called “talking out of both sides of his mouth.”  One side tells us the payroll tax is the virtuous mechanism by which workers pay for and earn their Social Security and Medicare retirement benefits.

But, to support the notion that it’s “fair” to tax the rich even more, while 47% of households pay zero income tax, the other side of the politician’s mouth characterizes the payroll tax as an ordinary tax obligation, like the income tax, and a millstone around the necks of “working families.”

The 999 plan would eliminate the double-speak and put “workers” and “the rich” on the same side by eliminating the payroll tax and funding retirement benefits from general revenues collected from the broadest possible base of taxpayers.  Everyone with income from work would pay the same flat 9% income tax with no deductions except for charitable contributions.

The existing income tax scheme starts with high tax rates and then gives deductions and credits that effectively reduce the rates to those of us who order our lives in ways the political elite believe we should.  For example, we pay less tax if we borrow to buy a home than if we pay cash for the home or rent.  The 999 plan eliminates all credits and all deductions except for charitable contributions in return for the low, flat, 9% rate.

Perhaps the most controversial element of the Cain plan is the 9% national sales tax. Cain’s campaign website does not mention any non-taxable products or services.  He has said in TV appearances that the poor would get a break because the tax would not apply to used merchandise, used cars or used homes.  He has not said that groceries or drugs or services would be exempt as they typically are in state sales tax regimes.  Questions about whether the tax would apply to rent or utilities or insurance premiums or health care have not been answered.

Critics from the left complain that ending the payroll tax would not offset the combined burden of a 9% income tax and a 9% sales tax and the plan would amount to a substantial tax increase on low to middle income workers.  We did some analysis and found that they are partly right.  Because the current tax code is so complex two taxpayers with the same income can have very different tax bills.  If nothing is exempt from the sales tax, and no income is exempt from the 9% income tax then a lot – maybe as many as half – of low to middle income people would see a substantial increase in their federal tax obligation.  For the rest the change from the current payroll tax plus income tax to 999 would not significantly change their federal tax obligation.

According to the Cain campaign additional 999 provisions that will provide relief to low income taxpayers will be published soon.

UPDATE:

Economist Art Laffer, purporting to represent Herman Cain, said in an October 19 Wall Street Journal editorial that:

…the [999] plan exempts from any tax people below the poverty line.

Mr. Laffer did not explain how below-poverty-line people would be identified or how it would be possible to exempt someone from a sales tax, collected by private businesses.

Conservatives are wary of granting sales tax authority to Congress.  Those who support the Fair Tax insist that it’s appeal and success depends on completely eliminating the income tax, not adding “an additional tax stream.”  They have a point.  Introducing a sales tax before eliminating the income tax would empower a corrupt Congress to continuously increase both rates.

But, Cain also has a point.  The Fair Tax proposal to replace all federal taxes with one simple national sales tax has been around for 20 years without ever gaining enough traction to win popular acceptance or a serious hearing in Congress because it’s a radical change from the status quo.  A Constitutional Amendment nullifying the 16th Amendment that created the income tax would have to be enacted.

Cain’s 999 transition stage would be a chance for The People to experience the national sales tax and feel some of the benefit Fair Tax supporters promise.  At that point, resistance to dropping all income taxes in favor of one sales/consumption tax would be far lower.  Cain’s claim that 999 would have the effect of uniting now disparate factions around the Fair Tax is valid.  Critics say, correctly, that one major tax policy change would be more efficient and less disruptive than Cain’s two step process.  But lowering resistance probably requires giving people a chance to partially experience the new regime before they commit to it.

The critics are right that a future, corrupt Congress could increase the rates.  But there is no tax scheme that’s immune to political threat.  The current Obama Vs Republicans tax debate, which is typical of every tax debate of the past century demonstrates that tax increases to expand the power of government are politically salable only when most voters are led to believe – usually falsely – that only a small minority, “the rich” will feel any pain.  An increase in the sales tax that would directly affect everyone would be much harder to sell.

The combination of a low flat income tax plus the business and investment related tax changes Cain has proposed would ignite a new era of strong economic growth, high employment and prosperity.  Just as no politician is today calling for a direct tax hike on the middle class, few would want to go on record calling for change to a proven success formula.  And raising one or all of the legs of 999 which is easy to understand and thus, easy to for The People to monitor would be a particularly unappealing idea.

Next: The 999 plan for business and investors.

3 Comments so far

  1. Dan Pangburn on October 14th, 2011

    By reducing U.S. manufacturing labor cost by 15.3% and increasing the price of goods manufactured outside the U.S. by 9%, 999 is a jobs plan.

  2. Political-Bill on October 16th, 2011

    Cain’s plan is nothing more than than a massive shift of the tax burden from the rich to the middle class and poor. If you think reducing aggregate demand with massive tax increases on the middle class will be good for “jobs” go ahead and elect him.

  3. Cainiac on October 17th, 2011

    Hey Political-Bill…isn’t it about time the “Freebaggers” start paying their own way anyway?