While We’re On Cain, Let’s Take a Look at 9-9-9

While We’re On Cain, Let’s Take a Look at 9-9-9

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Looking at recent polls, Herman Cain is the man. So, as with any front runner, it’s time to take a closer look at his campaign trail stump line known, affectionately, as “Nine, nine, nine.”  At first it rattles off like classic Grand Slammer Boris Becker on court after hitting a poor shot.  There’s also an angry scene in Quentin Tarantino’s bloody cult hit Inglorious Basterds that quickly flashes across the mind, but let’s pretend we didn’t see that. Ultimately, it’s the heart of Herman Cain’s big sell.  So far, not only is it easy to remember, but it probably has a chance of being equally effective in application.

Under Mr. Cain’s plan, there would be a nine percent tax on corporate income; a nine percent tax on personal income; and a nine percent national sales tax.  Fairly simple.

To better understand the effect of the proposal, let’s look at a hypothetical single-parent taxpayer  under two scenarios: 1. where she is a wage earner, and 2. where she is self-employed.  Let’s also assume under both scenarios that the taxpayer has gross earnings of $21,570 and we are applying the tax code for the year 2010.

As a wage earner under the current tax code, our single parent has gross income and adjusted gross income of $21,570.  After subtracting a standard deduction of $8,400 and taking two exemptions of $3,650 each, her taxable income is $5,870.  The tax on this income is $588, leaving an effective tax rate of 2.7%

Under Mr. Cain’s 9-9-9 plan, the wage earner’s federal tax liability would be $1,941.30.  Outside of rent and food, our wage earner doesn’t get out much, so her national sales tax would be an additional $100, bringing her total tax bill to $2,041.30.  His effective tax rate under the 9-9-9 plan would be 9.46%.

At this point, the progressives would be ready to pounce and scream at the perceived regressive nature of the tax under Cain’s plan. But, let’s hold that thought for the moment and proceed to the self-employed scenario.

Under the current code, our self-employed single parent – having given up on finding a nine-to-five job – has earned  $21,570 during the first year of his start-up.  After deducting expenses for advertising, use of the home, etc., his net profit is $20,018.  He subtracts an additional $1,415 for self-employment taxes, which brings his adjusted gross income to $18,603.  He is also entitled to standard deductions of $8,400 plus $7,300 in exemptions leaving his taxable income at $2,903.  According to the tax tables, his tax is $291, an effective tax rate of 1.45%.

Under the 9-9-9 plan, the self-employed single parent, earning $21,570 in gross revenues, subtracts $1,652 in business expenses or investments, bringing his net profit or income to $20,018.  At a rate of 9%, total taxes amount to $1,802, an effective tax rate of 8.35%.

Now, it’s time to pounce.

Under Mr. Cain’s plan, whether you are a wage earner or entrepreneur, your effective tax rate, defined as taxes divided by total income, will increase.  This downside could be offset, however, by increasing investment in productive, income generating activities.

For example, under the 9-9-9 plan, a business owner could increase the level of its business investments, increase purchases from other businesses, or increase the payouts of dividends, which in turn can also be deducted from taxable income.

Individual tax payers under the 9-9-9 plan can live and/or work in empowerment zones, increase charitable donations, or invest in entrepreneurial activities.  This, presumably, offsets the national sales tax which is consumption based.

The impact on the entire economy from the 9-9-9 plan is the broadening of the tax base.  Whether as a result of income or sales taxes, everyone would contribute to the national coffers.

Criticisms of the 9-9-9 plan have been mounting in the social media space.  Among the criticisms are some taxpayers unwillingness to pay both a national sales and a national income tax.

Another criticism is, given the need for additional consumer spending to get the economy going, do we really need a national sales tax dampening the impact of consumer spending?

One thing appears certain.  Mr. Cain is the only GOP candidate so far that has offered a tax plan that has gained some traction and resonance in the public discourse.  How long the traction will hold is as uncertain as whether the pizza deliveryman will accept a coupon beyond the expiration date.

10 COMMENTS

  1. Your calculations are incorrect.

    The self employment tax rate is 15.3% – the payroll tax for the self employed person in your example should be $3,063.

    You forgot to take into account that under the Cain plan the payroll tax is eliminated. The $3,063 in payroll taxes plus the $291 in income taxes ($3,354 — a 16.75% tax rate) is what you should compare Cain’s 9% rate to.

    The payroll tax amount for the employed person is also 15.3% (she pays half directly out of her paycheck, and her employer pays half on her behalf–that parts a hidden tax, but she is stil part of her salary). Her total payroll tax is $3,300 + $588 on income brings her total incomem tax to $3,888, or 15.7%.

    When you factor payroll taxes (social security taxes, etc…) in the equation, then Cain’s 999 plan comes in pretty close to the current tax system.

    • You're correct, John, in terms of the amount of revenues the '9-9-9' plan is projected to generate *if* such a plan were to pass through Congress. In this aspect, Cain can claim his plan is essentially neutral.

      Alton has erred in explaining personal exemptions would be allowed under Cain's plan. The first '9' in the plan is a flat income tax; the exemptions we now take for granted and that Alton cited would be eliminated. The result would be an increased shift of the tax burden onto lower-income individuals and families, while the burdens of wealthier individuals and families are reduced. Putting aside arguments over whether the '9-9-9' plan is "fair", it doesn't make economic sense presuming the goal is a vibrant economy.

      Alton also included business exemptions in his example that would not be allowed under Cain's corporate income tax — the third '9'. Either Alton has never read Cain's plan to know any better, or he knows and is simply misrepresenting the facts.

      The bottom line to all this is Cain's '9-9-9' employs some really bad math… if it employs math at all.

  2. Cains plan is one I do not agree with until:

    1) we get rid of federal mandates which increase our local taxes to pay for federal policies (which Cain plan seems to ignore, along with current tax system) IE: my property tax for "school" board tacks on even more taxes to pay for federal "funded" schools – which I do not use nor believe in nor are found in Constitution.

    2) a "national" sales tax is dangerous unless the 16th amendment is repealed. It will allow future Congress' to increase income AND sales taxes – as future Congress' are not bound by past ones.

    • I am sure that #1 will be addressed just as soon as they stop taking social security from my check. You know a System….
      "which I do not use nor believe in nor are (is) found in Constitution. "

  3. Interesting. Mr. Cain's focus, as well as the focus of this analysis, is on federal income taxation. In addition, up until last evening in an interview with Lawrence O'Donnell of MSNBC, Mr. Cain said that his 999 plan eliminates the tax code. From that point, it's straight arithmetic. Sooner or later, Mr. Cain will have to address the payroll and tax and social security. __Also interesting is none of these comments address the impact on individual taxpayers, especially low income and minority taxpayers. Individual taxpayers don't care about revenue neutrality.__The fact is that in the beginning, this tax plan is regressive. Is that a bad thing? No, because it will force low income taxpayers to pursue engrepreneurial and productive activities, expenses for which may be deducted from income. In the long run, we get off the plantation. In the short run we start incentivizing a production-based economy, and move away from a consumer-based economy …

  4. I love it. If I incorporate, I can take a small salary, and then take the rest in dividends each quarter, and under Cain's plan, that would be tax free, and pass the 9% corporate tax off to my customers. I love it.

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