The 9-9-9 tax plan of Herman Cain, the former CEO of the Godfather’s Pizza chain who is now running for president, has a $29,000 problem. That’s roughly the difference between how much more the average American family would pay and how much less the richest 1% would pay Uncle Sam each year under the tax overhaul proposed by Cain last week.
The catchy 9-9-9 title has in part helped Cain surge in the Republican primary polls. Cain says the plan would simplify the tax code, and lower all Americans’ income taxes. What’s more, Cain says his plan will generate the same amount of revenue for the government as our current tax system, which has income tax rates as high as 35%.
The catch: Economists and tax policy experts were quick to point out that under Cain’s plan, most Americans will actually pay more in overall taxes, even if they pay less in income taxes. The tax bill for the rich however is likely to drop – overall and on income. Just how much more most of us will pay and how much less the rich will pay is still unclear. The closely watched Tax Policy Institute, which is a joint effort of the Urban Institute and Brookings Institution, center-left policy-research centers, says it will be out with its analysis of the plan early this week. But here’s what I can tell you so far, the 9-9-9 seems about the most unfair tax plan proposed since I have began covering the economy. Here’s why:
To see why the Cain 9-9-9 plan is so unfair, consider what it would do to the tax bill of a family making $50,000 and one making just over $500,000. Edward Kleinbard, a tax expert at the University of Southern California, who amazingly has already written a 13-page detailed paper on the Cain 9-9-9 plan, says the average family of 4 making $50,000 under our current system pays $8,416 a year, after deductions, in both income and payroll taxes. That equals an effective tax rate of about 17%. Now take the top 1%. To meet that mark that family would have to earn $530,000. Under current tax law, taking into affect deductions like charitable giving and mortgage write-off, the top 1% pay an average of 29% of their income to Uncle Sam in payroll and income taxes. So, under current law the family making $530,000 will pay $153,700 a year in taxes.
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Now to 9-9-9. The Cain plain lowers the income tax rate to 9%, and does away with the payroll tax. Nice. How does Cain pay for that? Well, he adds on the other two 9s – a 9% sales tax, and replaces corporate income taxes with a 9% business transaction tax, meaning instead of paying taxes on just earnings, businesses will now have to pay a 9% fee to the government for their net purchases every year. A company’s biggest purchase or expense is its workers, so corporate tax basically works out as a 9% payroll tax.
What would the $50,000 family and the top 1% have to pay? Well, under Cain’s plan, the family earning $50,000 would see their income tax bill fall to $4,500. But they would also have to pay a 9% tax on everything they buy each year. Since most families of 4 on a $50,000 income spend nearly all of their income, that works out to another $4,500 in taxes. What’s more, Kleinbrad figures that most companies have a fixed budget to pay for wages. So if the government adds on a 9% payroll tax, companies will simply pay 9% less in salaries to their workers. So for the family making $50,000, they pay another $4,500 in lower wages. Total 9-9-9 tax bill: $13,500, or $5,084 more than what they pay under the current tax system.
Apply the same math (the supposed bonus of the Cain plan is that we all pay the same simplified rate) and the family making $530,000 would have a tax bill of $132,500. But that’s only if they spend every dollar they make, which is probably not the case. Most wealthy individuals save or invest a good portion of their income. That will go untaxed in the Cain plan. Assume the top 1% only spend half their income each year, and their tax bill drops to $119,250, or $34,450 less than they pay under the current tax system. What’s more, the richer you are the larger you would see your tax bill drop.
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So why would Cain want a plan that shifted the tax burden from the rich to the poor if it is not going to generate any more income for the government? One answer is that Cain says sales taxes are easier to enforce. It is certainly true that our current system is a confusing mess with plenty of ways to dodge paying. But what about a black market. Having spent his entire life in the restaurant business, surely he’s heard a story or two of restaurants that don’t report their sales to the government. Has he ever hired a contractor?
Cain says his plan may not result in lower wages, because companies will have more money to pay employees because they no longer have to pay income taxes. That’s possible, but economists say that’s not what has happened what has happened in the past. Generally corporate transactions taxes, which are popular in Europe, result in lower wages or higher prices, or both.