The 9-9-9 Plan: Its Distressing Message About Ourselves

On October 12, both CBS and ABC carried a segment assessing GOP presidential candidate Marvin Cain’s 9-9-9 tax plan. By the time the segment was aired, the fatally flawed nature of the Cain plan was already becoming apparent. Yet the only flaw in the plan exposed by the two channels was that it might raise the taxes of the middle class and the poor — ABC did show how a hypothetical middle class family could pay an additional $2,400 plus in taxes. There was no focus on how difficult it might be to get the plan enacted nor how much it would benefit the wealthy. The impact of the elimination of the FICA (payroll) tax was ignored.

Both CBS and ABC featured proponents of the 9-9-9 plan explaining how it would simplify tax filing. Of course, eliminating the federal income tax would simplify tax filing even more by eliminating all paperwork.

The Herman Cain 9-9-9 plan is designed to be implemented in three stages: 1) the present top rate of 35 percent would be reduced to 25 percent; 2) corporations would be taxed at 9 percent, as would individuals/households, and there would be a 9 percent national sales tax; and 3) all federal income taxes would be eliminated ad replaced with a greatly increased national sales tax — Bruce Bartlett, senior policy adviser to both Ronald Reagan and George H.W. Bush, believes that this tax could be as high as 30 percent.

It is very difficult to enact any major change in the nation’s tax structure: enacting a three-stage structure might be akin to performing Hercules’ 12 labors, or , as one scientist said of President Reagan’s Star Wars fantasy, solving the technical and scientific problems involved was like 10 Manhattan projects rolled into one.

The wealthy, whether they be in the form of individuals, households or corporations, would realize a bonanza under the 9-9-9 stage of the plan:

1) The tax on capital gains would be eliminated. As economist Joseph Stiglitz points out, the wealthy get much of their income in the form of capital gains. Hedge fund managers usually report their income as capital gains: in 2010, some hedge fund managers earned over a billion dollars and others earned in the hundreds of millions. All of these capital gains earnings would be tax-free under the Cain plan.

2) Estate taxes would be eliminated. This would be a boon to the super-rich with large estates. Not only would the national government suffer a large loss in revenue but those states that tie their estate taxes to that of the national government would need to change their tax laws.

3) The 9 percent tax would be a 26 percent reduction from the current top marginal tax rate. Roberton Williams of the Tax Policy Center says that those in the highest tax bracket pay about 18 percent of their total income in federal income tax — 21 percent if they pay FICA tax — after all of their tax breaks are factored in. Cutting their effective tax rate in half is a nice break; also, this 9 percent could be reduced by making charitable contributions.

4) The FICA tax would be eliminated. This provision would break the connection between paying into a trust fund and being paid benefits from the trust fund. This provision would put the payment of Social Security benefits into the general revenue stream, where payment of benefits would compete with all other programs for funding. This is a prescription for the dismantlement of Social Security.

The elimination of the FICA tax would be a further boon to those high earners who now pay a FICA tax on their first $106,800 in earnings.

Eliminating the FICA tax will greatly advance the year when Social Security benefits cannot be fully paid. Cain has no answer as to how Social Security shortfalls can be made up. His only answer would seem to be more borrowing.

5) Corporations would not be taxed on their offshore earnings. Corporation tax experts say that U.S.-chartered corporations get about half of their revenue from offshore earnings. Given that the CBO calculates that about two-thirds of U.S. corporations do not pay any federal income tax, the one-third that do would reap a rich reward in having their offshore earnings excluded from taxation.

While the rich would realize a financial bonanza from the enactment of the Cain plan, those at the lower end of the economic scale would see their taxes go up. An analysis done by the previously-cited Roberton Williams finds that 23 percent of households, mostly at the poorer end of the population, would see their income taxes go up. Included would be those who don’t pay a FICA tax and those who currently don’t pay federal income tax.

A sales tax is regressive in nature, as the poorer you are the higher the percentage of your  income goes to the purchase of the necessities of life. A 9 percent national sales tax would be added to the state and local sales taxes now in place. Californians pay a 9 percent sales tax, so they would pay an 18 percent sales tax under the 9-9-9 plan. Alabama has a comparatively low 4 percent state sales tax, but municipalities and counties add to it. In two Alabama counties, the total sales tax is 9 percent.

A total sales tax approaching a fifth part of a purchase price would be almost certain to trigger a consumer revolt.

Another possible serious flaw in the 9-9-9 plan is that it will not raise as much revenue as the current tax system. A media analyst at Bloomberg News says that the 9-9-9 plan would cut revenues by $200 billion. The Center for American Progress finds that the plan would produce revenues at 14 percent of GDP, lower than the current percentage.

A serious omission in Cain’s plan, identified by both Williams and Bartlett, is that it provides no exemption for wages paid to employees. That alone would more than cancel out the gain employers would get for not needing to pay any FICA tax.

There is now a controversy brewing about whether or not the 9-9-9 plan would exempt U.S.-manufactured products from the national sales tax. If it does, it would almost surely trigger a retaliatory response from those nations hit with a high sales tax on products exported to the United States.

This analysis of Herman Cain’s tax plan was entitled: The 9-9-9 Plan: Its Distressing Message About Ourselves. The mainstream media’s lack of due diligence has been explored; however, Herman Cain’s climb in the polls to number one among the GOP presidential candidates is a distressing take on how easily a significant chunk of the nation’s people can be swayed by a sloganistic, simplistic approach to a major policy issue, an approach that falls apart on even a cursory examination by a non-expert. These policy clueless people are usually labeled low-information voters but perhaps we need a more appropriately derogatory term for them.

This blog is designed to make the case for why Barack Obama should not be nominated for a second term and it doesn’t seem too far-fetched to me to see President Obama as greasing the skids for some of what Herman Cain has proposed..

Herman Cain would initially drop the top marginal tax rate to 25 percent. When President Obama endorsed the “Gang of Six” — three Republican and three Democratic U.S. senators — plan, he also endorsed a top marginal tax rate of 23 to 29 percent.

When Herman Cain proposes to eliminate the FICA tax this may be seen as a logical progression from Obama’s first cutting the FICA tax by one-third and now proposing to cut it by half for another year at least.

President Obama has proposed or endorsed so many tax proposals, including his recent statement saying he is “comfortable” with a 5.6 tax surcharge on those earning a million dollars or more, that virtually everything seems to be up for grabs in the taxation area.

Herman Cain’s tax plan seems to be less extreme due to President Obama’s seeming willingness to endorse virtually every tax plan that comes down the pike.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s