Monday, October 17, 2011
Why 9-9-9 is headed for the deep six
So we're on the same page, here are the main points from Cain's website. The 9-9-9 plan would eject the current tax code and replace it with a 9% tax on personal income, a 9% tax on corporate income, and a 9% federal sales tax. The only deduction for personal income tax returns would be charitable donations. Deductions from gross income for businesses would be purchases from other U.S. located businesses, capital investments, and net exports. The federal sales tax would be on new goods, but I haven't been able to determine if services would be taxed. In fact, other than the vague bullet points on Cain's election website, I haven't been able to locate the actual 9-9-9 plan. Although a tax code that can be printed on a note card seems appealing, it's doubtful that one that short could actually be implemented.
Here's why 9-9-9 is destined for failure:
1) It scraps the long accepted graduated tax system for one that favors people with discretionary income. A person making $50,000 in wages and who has no charitable deductions would pay $4,500 (9%) in federal income tax. An additional 9% in federal sales tax would be assessed on expenditures. Because there's no actual 9-9-9 plan to read yet, I'm not sure if spending on car and house payments would be taxed or if services would be taxed. Are utilities considered new goods or services? Let's assume that this person spends $25,000 on federally taxable stuff. That would amount to an additional $2,250 for a total of $6,750, or 13.5% of the $50,000 wage.
Now let's consider someone who makes $1,000,000 in salary and spends $250,000 of it to support a nice lifestyle. Assume again that half of the $250,000 is spent on federally taxable items. Federal income tax would be $90,000; sales tax would be $11,250. That totals to $101,250, or 10.125% of the $1 million salary.
How does that compare to the current tax code? A single person earning $50,000 with no itemized deductions pays $6,350. A married couple earning $50,000, again with no itemized deductions, pays $3,061. A single person earning $1 million would certainly be able to itemize deductions, so it's not realistic to assume a standard deduction for such a person, but for laughs, let's do just that. A single person earning $1 million would pay $324,371. A married couple would pay $313,763.
Therein lies the political challenge for 9-9-9. Lower paid folks would pay a higher percentage of their earnings in taxes than people who earn more than they spend. Secondly, compared with the current system, 9-9-9 provides a significant reduction in actual dollars paid in federal income taxes for high earners, while the opposite is true for lower earners. Some people may like this idea, but it won't fly at the ballot box.
2) The introduction of a federal sales tax is just too tempting as a new revenue source for Congress. The Fair Tax Act, as formulated by Neal Boortz and John Linder, calls for a national sales tax but marries the idea with the repeal of the 16th Amendment, which would abolish the federal income tax.
Herman Cain's 9-9-9 plan, according to his campaign website, is step one of a two-step process, with step two being adoption of the Fair Tax Act. The problem I see is that, in the unlikely event that Cain is elected and 9-9-9 becomes law, Congress would start dreaming about how great a 12-12-12 plan would be, or a 20-20-20 plan. Income taxes would remain on the table and the easy way to avoid spending cuts would be to crank up the national sales tax. More tools in the tax hike toolbox is a recipe for disaster.
Tax reform is needed, but I believe we will have to whittle away at the tax code we've got. Eliminating loopholes and tax preferences will result in a fairer tax system without cutting the safety net we have in place for our less fortunate citizens. Anyone who thinks they'll win the presidency on a tax policy that goes after lower wage earners to benefit high wage earners is just not tuning into the national debate.