Herman Cain’s 9-9-9 tax plan sounds simple enough: Eliminate the existing tax code and replace it with a 9% tax on personal income, a 9% business tax and a 9% national sales tax.
But could it work?
That question has been posed to a number of tax policy experts since Cain unveiled the plan last month. And it was a topic that dominated Tuesday’s Washington Post-Bloomberg debate.
Cain insists that the plan would immediately jump-start the economy by putting more money into people’s pockets.
But Bruce Bartlett, a former Treasury official under President George H.W. Bush who studied Cain’s plan and wrote an analysis Tuesday for the New York Times, said Cain “offers no evidence for this assertion; it is simply put forward as self-evident.”
Bartlett called the plan “a distributional monstrosity.”
“The poor would pay more while the rich would have their taxes cut, with no guarantee that economic growth will increase and a good reason to believe that the budget deficit will increase,” Bartlett wrote.
That’s because two of Cain’s three 9s – the income tax and the national sales tax -- would disproportionately impact the 47% of tax filers who don’t pay any federal income tax under the current system – many of whom are elderly or poor.
The extra money paid by these people would in effect subsidize the huge tax break for wealthier Americans who currently pay as much as 35% in federal income tax.
And for the middle class – that shrinking group of consumers whose spending on goods and services is key to keeping the economy rolling – the 9% sales tax might discourage purchases on non-essential items. Or, as Cain himself has suggested, it might encourage them to buy used goods instead, which he says would be exempt from the tax.
There is no such exemption for necessities like groceries. So, poor people who can only afford to spend on basic needs would see their cost of living increase 9%.
Cain has argued that wage earners would save considerably because his plan abolishes the payroll taxes that pay for Social Security and Medicare.
“You have to start with the biggest tax cut a lot of Americans pay, which is the payroll tax, 15.3%,” Cain said, defending his plan at the Tuesday debate. “That goes to 9%. That is a 6 percentage point difference. And the prices will not go up. So they have got a 6 percentage point difference to apply to the national sales tax piece of that.”
But what Cain failed to mention is that employers today pick up half the cost of the payroll tax. Under the Cain plan, employers would save their half of payroll taxes while employees would pay a higher percentage in the form of income tax.
The plan could also discourage hiring and wage increases. Companies would be allowed to deduct purchases they make from other businesses before calculating how much of the company’s revenue would be subject to the tax. But Cain provides no such deduction for wages.
“If you’re the shareholder, you’re going to get a huge increase in your dividends,” Bartlett said in an interview on Wednesday. “But if you’re a worker, sounds to me like he’s saying I get a deduction for buying a machine to replace a worker, but I get no deduction for hiring a worker.”
Plus, he said, it would encourage employers to find new, tax-free ways to pay employees.
“What’s to stop a company from paying its employees by leasing their cars and homes for them and even buying their food and clothing?” Bartlett wrote. “That would reduce [the employer’s] taxable revenue.”
The plan also faces political challenges. At a time when the Republican Party is especially allergic to any proposal that expands the government’s reach, Cain’s proposal creates a whole new category of federal tax.
That problem was illustrated Tuesday night when former Pennsylvania Sen. Rick Santorum asked the audience to raise their hands if they would support the new national sales tax idea.
“There you go, Herman. That’s how many votes you’ll get in New Hampshire,” Santorum said. “We’re not going to give the federal government, [House Minority Leader] Nancy Pelosi, a new pipeline, a 9% sales tax for consumers to get hammered by the federal government.”
Santorum then applied the same logic to the income tax: “How many people believe that we’ll keep the income tax at 9%? Anybody?”
Also politically problematic: Cain touts the plan’s simplicity but fails to mention that the three 9s are just one step in his broader aim to transition the U.S. to a Fair Tax system – a more, so-to-speak, mainstream idea to replace all income taxes with a single consumption tax.
(Another element of that three-step plan – a promise to immediately reduce the top tax rate for individuals and businesses, from 35% to 25% -- was recently scrubbed from an updated version of the 9-9-9 plan posted to Cain’s website. The campaign did not respond to requests for comment.)
Efforts to pass a Fair Tax in Congress have failed repeatedly for more than a decade.
The plan, as Cain presents it on his website, is also light on details, making it impossible to determine independently if it would be revenue-neutral, as Cain has claimed.
The U.S. Treasury took in about $2.2 trillion last year, most of it from four main categories of federal taxes: income taxes paid by individuals and corporations, taxes on wages, taxes on inheritance, and excise taxes on goods like alcohol and tobacco.
An analysis by Bloomberg News estimated that Cain’s plan would have been about $200 billion short if it was in place in 2010. The plan would have raised $922.1 billion from the national sales tax, $912.7 billion from the individual income tax and $127.7 billion from the business tax, according to the Bloomberg analysis.
Cain’s campaign on Wednesday provided Bloomberg’s Steven Sloan with an analysis by Fiscal Associates Inc. suggesting the plan would collect as much as is raised under the current system.