The University of Southern California's Edward Kleinbard performs the thankless task of trying to figure out the actual impact of Herman Cain's 9/9/9 campaign slogan cum tax plan, and he comes up with the following. Warning: It gets a little complicated:
Bottom line: If you make, say, $50,000 a year, your current total federal tax burden is about $7,000. Under Herman Cain's plan, it would be about $13,000. Even if you tweak the numbers a bit to make up for different measurement methodologies, that's a big difference.
So here's Herman Cain's new slogan: If you want to double your federal taxes, vote for me! I know I'm not a conservative and can't really pretend to understand what conservatives want, but I'm pretty sure this is not a tea party winner.
Via Ezra Klein, who adds the obvious point that Cain's 9/9/9 plan isn't a real plan anyway; it's just a brief set of bullet points. Which is just another way of saying that it's a joke.
Let’s get something straight: There is no 9-9-9 plan. Not, at least, in the sense that most people think there is.
Herman Cain has not proposed three entirely separate taxes -- one a 9 percent corporate income tax, another a 9 percent consumption tax, and then a final 9 percent personal income tax. Rather, he has proposed an 18-9 plan: an 18 percent consumption tax and a 9 percent personal income tax. Or maybe he has proposed a 27 plan: a straight 27 percent payroll tax on wage income. Depends on which tax professor you ask and how deep into the details you want to go.
Republican presidential candidate Herman Cain (Jim Cole - AP) As Daniel Shaviro, a tax professor at New York University, notes, “a key part of 9-9-9’s intuitive appeal is the idea that, not only is 9 a low number, but the plan’s three 9’s appear to be spread out.” The only problem? The business tax and the sales tax are “effectively the same tax.”
The business tax is not a corporate income tax. It’s essentially a value-added tax. And a value-added tax is simply a form of a consumption tax. To tax wonks, this is comedy gold. Here they have spent years arguing whether a sales tax or a VAT tax is the better way to tax consumption, and Cain just went ahead and put both taxes in his plan. “So two of the 9’s in the Cain plan are simply redundant versions of almost the same thing,” writes Shaviro. That’s how you get to an 18 percent consumption tax.
But if you go deeper with the tax wonks, they’ll tell you that in the long run, all income is spent. This is the really long run we’re talking about here, to be fair. This is a long run that can last multiple lifetimes, as a father passes on savings to his more spendthrift kids, who hand it over to their more spendthrift kids. But in that world, Shaviro says, “a wage and a consumption tax are ultimately the same. Wages are ultimately spent. I guess you could burn your wages. but otherwise, you’ll spend them.”
That’s how USC tax professor Edward Kleinbard, in an extremely thorough analysis, can conclude that “the 9-9-9 thus replaces current law’s payroll tax and income tax with a new system that is the economic equivalent of a 27 percent payroll tax on employees.”
Yikes. It’s fairly well understood that in our current tax system, the income tax is progressive, in that the rich pay more and the poor pay less, and the payroll tax is regressive. Cain’s system is that system on steroids: There’s no longer a progressive income tax; all there is is a regressive payroll tax. A huge regressive payroll tax. “The 9-9-9 Plan would mean a huge tax hike for the working poor and middle class,” writes Kleinbard. Bruce Bartlett makes it even more straightforward: “The 47 percent of tax filers who now pay no federal income taxes will pay 9 percent on their total income,” not to mention another 18 percent on the goods they purchase.
So what does Cain say about this? Well, usually he deflects the question. But my colleague Jennifer Rubin got his economic adviser Rich Lowrie to confront it directly. And Lowrie says that this just wasn’t something he or Cain was interested in when developing the 9-9-9 plan. He called it “Washington thinking” to worry about who would pay how much under the new system, and he “repeatedly refused to say how much more of the tax burden would be borne by the poor and middle class.”
There are other problems and oddities in the plan. For instance: Cain says it’s just a step on the way to implementing “the FairTax” proposal. But as Bartlett writes, “whatever one thinks of the Fair Tax, it makes not the slightest bit of sense to have a plan that requires fundamental changes to the federal tax system twice to achieve its objective.”
Moreover, the plan has all sorts of inconsistencies, obvious oversights and simple mistakes: Cain’s plan doesn’t allow employers to deduct the cost of their wages; he does allow them to make a tax shelter out of borrowing money to pay dividends; and he uses a sales tax, which is notoriously easy to game. Indeed, the plan’s holes loom so large that Kleinbard, in a dryly humorous section, explains that he’ll pass on assessing portions of the plan, such as its treatment of interest income, because he assumes they are an “inadvertent error.” The opportunities for tax evasion would be dramatic.
Which gets to perhaps the main way in which there is no 9-9-9 plan: This plan wouldn’t work. Not as policy and, as I expect Cain will soon find out, not as politics. Moving to an 18 percent consumption tax is, among other things, very bad for older voters, who make up a substantial portion of the Tea Party base. Jacking up taxes on the poor and the middle class even as you sharply reduce them on the rich and completely eliminate them on overseas income for corporations isn’t popular among anyone in the political system who isn’t specifically paid by the Club for Growth. The 9-9-9 plan is a great slogan. But the more seriously Cain gets taken, the more seriously the plan is going to get taken. And as that happens, it will soon become clear that it’s very poor policy.
Now let's put the three taxes together. Starting with $100 of pretax firm-level gross income available to pay salaries, the employee receives $91 in wages, and the firm pays $9 in "business flat tax." The employee then pays $8.19 in "individual flat tax" (9 percent of $91.00). Finally, the employee incurs a $7.45 further tax (the sales tax, measured as 9 percent of $82.81 in post-flat tax cash available for consumption), leaving her with $75.36 after all federal taxes to invest or spend. That represents a 24.6 percent all-in tax on the firm's gross income attributable to the employee's added value. Converting the $24.64 in total tax to a payroll tax equivalent, by comparing that tax to the $91 in salary the employee receives, yields a payroll tax equivalent rate of 27 percent ($24.64/$91).In other words, when you take a look at the actual effect of the three different parts of Cain's plan, they all act similarly to a flat payroll tax. And the three parts add up to 27 percent. This means that if you're an average worker who spends most of your paycheck each month (in other words, virtually all of us), you'll be paying 27 percent of your income in federal taxes under Cain's plan. This compares to a current federal tax burden of about 14 percent for an average family.
Bottom line: If you make, say, $50,000 a year, your current total federal tax burden is about $7,000. Under Herman Cain's plan, it would be about $13,000. Even if you tweak the numbers a bit to make up for different measurement methodologies, that's a big difference.
So here's Herman Cain's new slogan: If you want to double your federal taxes, vote for me! I know I'm not a conservative and can't really pretend to understand what conservatives want, but I'm pretty sure this is not a tea party winner.
Via Ezra Klein, who adds the obvious point that Cain's 9/9/9 plan isn't a real plan anyway; it's just a brief set of bullet points. Which is just another way of saying that it's a joke.
There is no such thing as the 9-9-9 tax
Ezra Klein of the Washington PostHerman Cain has not proposed three entirely separate taxes -- one a 9 percent corporate income tax, another a 9 percent consumption tax, and then a final 9 percent personal income tax. Rather, he has proposed an 18-9 plan: an 18 percent consumption tax and a 9 percent personal income tax. Or maybe he has proposed a 27 plan: a straight 27 percent payroll tax on wage income. Depends on which tax professor you ask and how deep into the details you want to go.
Republican presidential candidate Herman Cain (Jim Cole - AP) As Daniel Shaviro, a tax professor at New York University, notes, “a key part of 9-9-9’s intuitive appeal is the idea that, not only is 9 a low number, but the plan’s three 9’s appear to be spread out.” The only problem? The business tax and the sales tax are “effectively the same tax.”
The business tax is not a corporate income tax. It’s essentially a value-added tax. And a value-added tax is simply a form of a consumption tax. To tax wonks, this is comedy gold. Here they have spent years arguing whether a sales tax or a VAT tax is the better way to tax consumption, and Cain just went ahead and put both taxes in his plan. “So two of the 9’s in the Cain plan are simply redundant versions of almost the same thing,” writes Shaviro. That’s how you get to an 18 percent consumption tax.
But if you go deeper with the tax wonks, they’ll tell you that in the long run, all income is spent. This is the really long run we’re talking about here, to be fair. This is a long run that can last multiple lifetimes, as a father passes on savings to his more spendthrift kids, who hand it over to their more spendthrift kids. But in that world, Shaviro says, “a wage and a consumption tax are ultimately the same. Wages are ultimately spent. I guess you could burn your wages. but otherwise, you’ll spend them.”
That’s how USC tax professor Edward Kleinbard, in an extremely thorough analysis, can conclude that “the 9-9-9 thus replaces current law’s payroll tax and income tax with a new system that is the economic equivalent of a 27 percent payroll tax on employees.”
Yikes. It’s fairly well understood that in our current tax system, the income tax is progressive, in that the rich pay more and the poor pay less, and the payroll tax is regressive. Cain’s system is that system on steroids: There’s no longer a progressive income tax; all there is is a regressive payroll tax. A huge regressive payroll tax. “The 9-9-9 Plan would mean a huge tax hike for the working poor and middle class,” writes Kleinbard. Bruce Bartlett makes it even more straightforward: “The 47 percent of tax filers who now pay no federal income taxes will pay 9 percent on their total income,” not to mention another 18 percent on the goods they purchase.
So what does Cain say about this? Well, usually he deflects the question. But my colleague Jennifer Rubin got his economic adviser Rich Lowrie to confront it directly. And Lowrie says that this just wasn’t something he or Cain was interested in when developing the 9-9-9 plan. He called it “Washington thinking” to worry about who would pay how much under the new system, and he “repeatedly refused to say how much more of the tax burden would be borne by the poor and middle class.”
There are other problems and oddities in the plan. For instance: Cain says it’s just a step on the way to implementing “the FairTax” proposal. But as Bartlett writes, “whatever one thinks of the Fair Tax, it makes not the slightest bit of sense to have a plan that requires fundamental changes to the federal tax system twice to achieve its objective.”
Moreover, the plan has all sorts of inconsistencies, obvious oversights and simple mistakes: Cain’s plan doesn’t allow employers to deduct the cost of their wages; he does allow them to make a tax shelter out of borrowing money to pay dividends; and he uses a sales tax, which is notoriously easy to game. Indeed, the plan’s holes loom so large that Kleinbard, in a dryly humorous section, explains that he’ll pass on assessing portions of the plan, such as its treatment of interest income, because he assumes they are an “inadvertent error.” The opportunities for tax evasion would be dramatic.
Which gets to perhaps the main way in which there is no 9-9-9 plan: This plan wouldn’t work. Not as policy and, as I expect Cain will soon find out, not as politics. Moving to an 18 percent consumption tax is, among other things, very bad for older voters, who make up a substantial portion of the Tea Party base. Jacking up taxes on the poor and the middle class even as you sharply reduce them on the rich and completely eliminate them on overseas income for corporations isn’t popular among anyone in the political system who isn’t specifically paid by the Club for Growth. The 9-9-9 plan is a great slogan. But the more seriously Cain gets taken, the more seriously the plan is going to get taken. And as that happens, it will soon become clear that it’s very poor policy.
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