The 999 Tax Plan – How Hermain Cain’s Tax Reform Plan Would Affect Your Income Taxes

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There has been a lot of news lately on Republican presidential candidate Hermain Cain’s 999 plan. As the new darling and front runner for the parties presidential nomination, Cain’s tax plan has gone from a joke (e.g. the price of a pizza) to getting some serious, albeit critical, reviews. Here’s what some of the mainstream media are saying about this plan and how average American individual and business may be impacted.

The “9-9-9” label is actually a bit of misnomer. Cain would toss out much of the current federal tax code and replace it, eventually and only temporarily, with three taxes — a 9 percent income tax, a 9 percent business transactions tax and a 9 percent federal sales tax. On paper, the first two look like cuts, because payroll taxes for Social Security and Medicare (now nearly 15 percent, including corporate contributions) would be repealed. The sales tax would be new, on top of existing state sales taxes.

Right now, nearly half of taxpayers don’t pay income taxes, but they do pay their share of payroll taxes, which amounts to 7.65 percent of wage income (though much of it is capped at $107,000). Cain would also eliminate the earned-income tax credit, which is intended to lift working Americans out of poverty. Many of these workers currently receive tax refunds. On top of that, Cain would introduce the new sales tax, which would affect lower and moderate-income people who spend most of their income on purchases, not savings and investments. Depending on how you do the math, people now paying zero or negative taxes might be faced with a 27 percent tax on income.

An example of how the plan would work was described by Cain, “….under the current system, a family of four earning $50,000 will pay over $10,000 in taxes assuming standard deductions and standard exemptions. I’ve gone through the math, $10,000. Now, with 9-9-9, they’re going to pay that 9 percent personal — that 9 percent tax on their income. So that’s only $4,500. They still have $5,500 left over to apply to this sales tax piece. …They are still going to have money left over.”

But the reliable Tax Foundation calculator comes up with a much more reasonable figure: a total tax bill of $3,515 — $690 in federal income taxes and $2,825 in payroll taxes. (The family gets a big income-tax savings from the child tax credit, which Cain would eliminate.) So, in other words, under Cain’s plan, this family would instantly pay $1,000 more in income taxes. They would also pay additional sales taxes, probably more than $3,000, on their purchases. It’s unclear how the business tax would affect the family’s tax bill but it appears this theoretical family would get no tax cut but instead a 100 percent tax increase.

In other words, while on paper Cain is promising a tax cut, in reality tens of millions of lower-income Americans would face tax increases. People in high tax brackets — 28 percent and higher — would likely see big tax cuts. As part of his plan, Cain would also eliminate estate taxes and capital gains taxes, which, again, mostly affect higher-income people with stock and real estate investments. (Source: Washington Post – Fact Checker)

Herman Cain’s 999 tax plan: Break for the rich? Ultimately, Cain wants the country to adopt a Fair Tax, which is what his 9-9-9 plan is the basis for. A fair tax in essence, it’s a national sales tax that would replace the current tax code entirely and all the credits, deductions and exemptions that go along with it. With a national sales tax you would pay federal tax on what you spend rather than on what you earn, save or invest. The idea is to make the tax system less of a hindrance to economic growth. “Income taxes, by their nature, double tax savings and investment, which imposes a large deadweight or efficiency cost on the economy,” former Treasury Department official Bruce Bartlett said at a House Ways and Means Committee hearing this summer.

How the fair tax would work: You would pay what amounts to a 30% tax on top of the price of anything you purchase. So for something that costs $1 you would pay $1.30. The extra 30 cents represents 23% of the final purchase price ($1.30). That’s why you will hear Fair Tax supporters say that the tax rate under the Fair Tax is just 23%. A Fair Tax, like any tax that applies across the board to everyone regardless of income, would hit the poor harder than others. To correct for that, all taxpayers would receive a monthly rebate check equal to what someone at the poverty line would pay under the Fair Tax. That would mean poor people would get back the tax they paid in.

Many business groups and tax experts have also expressed serious concern about both the administrative complexity of a 999/fair tax plan and potential for tax evasion in terms of how the Fair Tax would interact with state and local taxes. They say a national sales tax would hurt retailers, threaten economic growth and shift the tax burden onto the middle class and poor. (Source : CNN Money)

The Huffington post has an interesting comedic reference on the basis for the 999 plan – SimCity. Long before Cain was running for president and getting attention for his 999 plan, the residents of SimCity 4 – which was released in 2003 – were living under a system where the default tax rate was 9 percent for commercial taxes, 9 percent for industrial taxes and 9 percent for residential taxes.

Simplify and spur growth: Will McBride, economist for the conservative Tax Foundation in Washington, said Cain’s tax plan would spur economic growth in the long run. While the 9 percent 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.

However, 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.” Though Ellis added, “It would radically simplify the tax system….and would move the tax system toward a consumption base and it would do so at very much lower marginal tax rates. (Source: Bloomberg)

Final thoughts

The plan is tailored for a presidential campaign – the name is catch and easy to remember. But it is unlikely to ever pass Congress without some serious revisions and concessions. Personally, I think it has some good ideas, along with the ridiculous, but at least it gets people talking about much needed tax reform. A topic that has been too hard and droll for past campaigns and current incumbents.

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{ 1 comment… read it below or add one }

Keith Elcock October 20, 2011 at 6:36 pm

Obviously you did not go to Herman Cain’s website and read the details of his proposal….and you need to buy a new calculator…because your payroll tax figure should be $3825 not $2875 (7.65% of 50K).

The plan allows everyone a poverty level deduction, in this case $17,378.00, so income tax is $2936 not $4500.

Making these corrections this family of four saves $1679.00 on their income taxes. (Assuming that your calculator was functioning correctly when you figured only $690 in taxes on $50K in gross income…1.38%???… yeah you really do need a new calculator…lol)

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