COMMENTARY | Herman Cain has proposed a radical change to the American tax code in the form of his 9-9-9 plan. Under his proposal all income would be subject to a flat 9% tax. Corporations would pay a 9% tax on income. A national 9% sales tax would be put in force. Cain contends that this would create a revenue-neutral situation. Critics say it would be a tax blessing for the rich while burdening the poor. What’s the real story? Let’s examine each aspect of the 9-9-9 plan to find out.
9% Flat Income Tax
Present-day income taxes are applied against individuals’ entire gross (pre-tax) income. The IRS shows the tax brackets for individuals and couples in a document called Publication 505. The lowest bracket shown is 10% and the highest is 35%. Since Cain’s plan calls for a 9% flat tax rate it sounds, on the surface, like a savings for everyone. Looking deeper, however, shows Cain’s plan is flawed and drastically favors the rich.
The current income tax regulations follow what is called a progressive tax schedule. That means that people with low incomes pay low taxes, and people with high incomes bear a higher tax burden. Using Cain’s plan would save the lowest wage-earners 1% while saving the highest wage earners 26%.
The situation is even worse for low income earners. Another aspect of Cain’s plan is the elimination of all income tax deductions other than charitable giving. Most taxpayers have some deductions, other than charitable giving, that lower their overall tax rate. Those would be gone. Low income earners could end up paying more in total income tax under Cain’s plan than under the current regulations.
It would be very different for the wealthy. One of the richest private citizens on earth, Warren Buffett, recently wrote that his overall income tax rate was 17.4%. He achieved that low rate despite his billionaire’s income by having accountants and tax lawyers find every way possible to reduce his tax burden. Under Cain’s plan he would pay 9%, saving about half of what he currently pays.
Cain’s plan also calls for a total elimination of the capital gains tax, which includes most investment income. Capital gains make up a large part of revenue received by the rich and would have zero tax burden. On the other hand, the poorest Americans rarely own any assets that generate capital gains revenue.
Result: Cain’s plan favors the rich on income tax.
9% Corporate Tax
Corporate income is taxed differently than personal income. When a human being earns wages, taxes are due on the full amount, and the wage-earner gets to spend whatever is left over. Corporations are taxed differently. They earn money, spend what they want, and are only taxed on whatever is left over. In other words, a corporation can effectively avoid all income tax by simply spending everything it earns. Cain’s new plan does very little to change this.
Additionally, corporate tax rates start at 15% and go as high as 39%. Whatever money a corporation earns that actually gets taxed would, under Cain’s plan, be taxed at 9%. That saves at least 6%, and as much as 30%, for the corporations.
Keep in mind that one item Cain specifically includes as a way corporations can spend down their money to reduce taxes is the payment of dividends to shareholders. That means corporations can reduce their taxable income by giving bigger dividends to the wealthy individuals and institutional investors that own their stock.
Result: Cain’s plan is very beneficial to corporations, and the bigger the corporation, the bigger the benefit. It also benefits the rich by making dividend payment very attractive to corporations.
9% National Sales Tax
Currently no national sales tax exists. A 9% tax would be higher than the general sales tax presently in force in any state in the U.S. This tax would be levied above and beyond state sales taxes.
Sales taxes are touted in Cain’s plan as a “fair tax,” meaning that they would be fair to everyone regardless of wealth. That’s an incorrect assessment. The less money someone has, the greater the percentage of their income must go toward supporting them. A wealthy person can buy the exact same things while spending a much smaller fraction of their income on them.
A new sales tax could also reduce consumer spending. The less of a person’s income is available for discretionary purchases, the less they can buy.
Result: Cain’s plan hurts poor people more than wealthy people.
Other Reasons Cain’s Plan Favors the Rich
Cain’s plan calls for an end to the inheritance tax. Inheritance taxes are one of the defenses against small numbers of individuals hoarding the wealth of a nation till there is virtually nothing that is not owned by the rich. It taxes the estates of the wealthy, transferring some of the value to the government, where it can serve the public good. This would disappear under Cain’s plan, allowing the wealthy to amass greater and greater riches.
It also calls for the end of the capital gains tax. Capital gains are the primary source of wealth for the rich, and would no longer be taxed.
In the extension of his plan all corporate and personal income taxes would be abolished. With no tax on income or capital gains, and no tax on the estates of the rich when they die, wealth would become entirely concentrated in the hands of the super-rich.
Why Cain’s Plan Won’t Work
If overall taxes are reduced it will mean a loss of revenue for the government. The government’s expenses, however, will not be changed. They will simply be underfunded. This will result in tremendous reduction in government services, increased federal debt, or both. When considering reduction in services keep in mind that what one person regards as unnecessary, another regards as vital.
Since the one situation in which Cain’s plan increases total taxation is when calculating taxes for the poor, they will have to shoulder an even larger burden of supporting the nation.
Also written by Andrew
Why working-class people should not vote for Ron Paul
Rick Santorum’s little web identity crisis
Sources
Herman Cain’s 999 Plan, HermanCain.com
Publication 505, IRS.gov
Warren E. Buffett, Stop Coddling The Super-Rich, NYTimes.com
Instructions for Form 1120, IRS.gov
Sales Taxes in the United States By Jurisdiction, Wikipedia.org
Kevin Drum, The Great Capital Gains Charade, MotherJones.com