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.