Republican presidential candidate Herman Cain has proposed completely scrapping our tax code and simplifying it with a 9-9-9 tax policy. He would tax all personal income at 9%, all corporate income at 9% and he would impose a 9% federal sales tax. The plan would eliminate the payroll tax (for Social Security and Medicare) that is separate from the income tax. In other words, there would just be one big pool of tax money (rather than separate pools which are ultimately combined and spent).
He asserts that this will be “revenue neutral” – meaning that it will bring in as much tax revenue as we currently do. Some commentators have argued that this is not true (and that we will need a higher, “less catchy number” than 9-9-9). I’m going to assume that this plan will be revenue neutral. (It doesn’t change my view.)
Background That You Need to Know
To participate in this debate, you need to understand where our tax revenue comes from. Here are 2011 estimates:
- Individual Income Taxes — $956 billion
- Payroll Taxes — $807 billion
- Corporate Income Taxes — $198 billion
- Excise Taxes — $74 billion
- Other Taxes — $138 billion
The Joint Committee on Taxation recently said that 51% of Americans pay payroll taxes but not income taxes (based on the 2009 tax year). This angers many people. (Some of that 51% even receive money back from the government.)
What’s Great About Cain’s Proposal
- It’s simple. Our tax code is too complex and this complexity works to the advantage of the politicians. We have no idea what they’re doing.
- It eliminates virtually all deductions, credits, tax expenditures, etc. In other words, it eliminates the power of the lobbyists. It also simplifies tax reporting.
- By having one tax on personal income (rather than an income tax plus a payroll tax), we are all simply paying the same tax. You no longer have the issue that some people don’t pay income tax.
- There are plenty of other things that people like, such as eliminating taxes on capital gains and dividends (and hopefully further encouraging investment).
What’s Terrible About the Proposal
If the plan is revenue neutral, this simply means that we’re changing who is paying. This plan is a huge tax increase on the poor. Think about this using simple intuition. You all know (as described above) that many American workers only pay payroll taxes (they don’t pay income taxes). So, that means that they pay a tax equal to 7.65% of their income (the payroll tax). Now, they’ll be paying a flat 9%. Right away, we know that those people are paying more.
Then, add on 9% sales tax on almost everything we buy. Most people who aren’t paying income tax (because of a lower salary) spend the majority of what they earn. As a result, they will be paying an additional 9% tax on what they earn. So in aggregate, you can think of this as paying 18% tax on income.
Use some common sense here. If the lower-income people are paying more (paying close to 18% when they are currently paying 7.65%) and we’re taking in the same amount of money (“revenue neutral”), I’m pretty sure that this means that someone is paying less. Oh, I figured it out … it’s the higher-income people.
Another way you know that we’re shifting tax from the high-income to the low-income is that we’re eliminating capital gains tax and dividend tax. Hopefully we can all agree that the wealthier parts of society are the ones that own stocks and bonds. So if they’re not paying taxes and we’re revenue neutral, who must be paying more?
We can also agree that the elderly own more stocks and bonds than the young. So, we’re shifting the tax burden from the older generation to the younger. That’s great because it will prepare the young people for what we’re going to do to them with Social Security.
So here’s the tax plan that Americans are getting so excited about: Tax the poor more and tax the wealthy less. To me, that doesn’t sound good. But, 9-9-9 is catchy. Of course, “Cain is Insane” is also catchy.
A Few More Thoughts
- Our tax code is a disaster. But Americans have long had a belief in progressive taxation. The problem is all of the deductions, credits and exclusions. It’s not the fact that I’m in a higher tax bracket if I earn more money.
- I might not have a problem with this plan if we adjusted it in some way. For example, if the plan was for a 15% flat tax on all income above $50,000 (and I’m just making these numbers up), that would work better for me. (I’m not going to go for the sales tax proposal.) But, if we did this, we’d still need a payroll tax — otherwise, lower income people would be paying zero (rather than their current 7.65%).
- This proposal would never pass. The lobbyists are too strong. Do you think that the homebuilder industry will let the mortgage interest deduction go away? Do you think the health insurers will allow us to start including the employer portion of our health insurance premium as income? The lobbyists own the government. As an aside, if we did the flat tax, it would eliminate tax advantages like the one that Cain garnered for the pizza industry (when he was President of their association).
- In addition to the frustration that we all have with politicians and the tax code, the popularity of 9-9-9 is telling us something more. It’s telling us that Republicans just aren’t happy with Mitt Romney (who will probably be their nominee). They’re searching for someone to love. Herman Cain has a great life story that really represents the American dream. It’s a story we can all love. But, I don’t think 9-9-9 is something that we should love. I don’t even think it’s consistent with our American ideals.