Saturday, October 25th, 2014

The facts about Herman Cain's 9-9-9 tax plan

Republican presidential candidate Herman Cain touts a "9-9-9" tax reform plan.
Republican presidential candidate Herman Cain touts a "9-9-9" tax reform plan.

Herman Cain stunned the Republican political establishment on Sept. 24, 2011, easily winning Florida's Presidency 5 straw poll by trumpeting a platform of specific tax reforms he calls the "9-9-9 Plan." The plan would eliminate the current tax system all together, replacing it with a 9 percent personal income tax, a 9 percent corporate income tax and a 9 percent national sales tax.

"Our tax code is the 21st Century version of slavery. The IRS has become the overseer of the American people," says Cain, 65, who made his name in the business world by turning around the Godfather's Pizza chain as chief executive officer. He now serves as a motivational speaker and has authored books on leadership.

Cain has yet to detail hyper-specific points about the 9-9-9 Plan, but we have a good idea of how it would generally function.

The 9 percent income tax

The centerpiece of the 9-9-9 Plan is to eliminate the current, complicated income tax system -- with its series of tax credits and deductions and its variety of tax rates based on income -- and to replace it with a flat income tax. Cain's flat 9 percent income tax also would replace payroll taxes, which all workers pay and that fund Medicare and Social Security, and would end the estate tax, which is a tax on inheritances. Currently, about 49.5 percent of all tax filers pay no income tax at all, according to the Joint Committee on Taxation, a respected bipartisan committee of Congress. Cain's income tax would be collected equally for workers with two exceptions -- taxpayers could claim a deduction for charitable contributions (we haven't heard him discuss a limit) and taxpayers could earn a type of tax credit for living in an "empowerment zone," which Cain has described as inner cities needing revitalization. While the result of this part of Cain's plan would affect taxpayers differently, the flat income tax and the elimination of payroll taxes would result in shifting some of America's tax burden, making some poorer Americans pay more into the system while many middle- and upper-class Americans would pay less.

The 9 percent national sales tax

Cain's national sales tax, in effect, would attempt to make up for the reduction of federal revenue by creating the 9 percent income tax. The national sales tax, which would help fund the federal government, would be on top of state and local sales taxes, which fund state and local government. In Florida, that would create a hypothetical tax rate of 15 percent in most parts of the state. In the Wall Street Journal, Cain said the national sales tax would be levied "on all new goods." (A good question to ask would be whether services are exempted.) Most economists agree that a national sales tax would raise the relative tax burden on low- and middle-income earning taxpayers. "The main reason is that low- and middle-income households consume more of their income than high-income households do," said William Gale, senior fellow for economic studies at the Brookings Institution. "Another way of saying that is high-income households save more of their income than low-income households do."

The 9 percent corporate income tax

The nation's corporate income tax now stands close to 40 percent, so on the surface Cain's plan would be a huge reduction. But that's only part of the story. The current tax structure includes credits and deductions that often reduce the rate at which businesses pay income taxes. According to the World Bank, businesses on average pay an effective tax rate of 27.6 percent. (Of course, some businesses pay at a far lower rate and some pay more.) Like Cain's changes to the personal income tax structure, his plan for businesses would include eliminating many -- though not all -- of the credits and deductions businesses now enjoy.

How much tax revenue would the 9-9-9 plan generate?

The big question, after how much would you pay, is how much money would the plan generate for the federal government? It's hard to say. For instance, Cain's corporate income tax is based on gross income of businesses less investments, purchases from other businesses and all dividends paid to shareholders. But gross income figures are not always available, nor would be the value of the credits in Cain's system. We also don't know how spending habits might change if a national sales tax was enacted. Still, some people have at least attempted to quantify the impact. The Washington Times published an opinion piece Sept. 25, 2011, that attempts to put a number to the plan. The story used total personal income figures generated from University of New Mexico's Bureau of Business and Economic Research to estimate that the 9 percent personal income tax would generate around $1.1 trillion a year (the figure appears to not include charitable deductions). It used U.S. Census figures to determine spending in the retail industry -- and calculated that a 9 percent national sales tax would generate around $380 billion. And, using a method that we don't completely understand, they estimated that a 9 percent corporate income tax rate would generate $270 billion. In total, that's about $1.8 trillion, though a rough, rough estimate. That number is about $360 billion less than what the government currently takes in -- about $2.16 trillion.

Cain, in his Wall Street Journal opinion piece, said the plan was designed to be revenue-neutral initially but that revenues would increase as the economy grows. "These measures would free up capital, spur production, and incentivize risk-taking, thereby fueling the economy and creating jobs," he wrote.

Little has been written about the 9-9-9 Plan. Really, until now little has been written about Cain.

The result of Florida's straw poll figures -- at least temporarily -- to change both.