Friday, October 14, 2011

9-9-9? Nein, Nein, Nein

On August 8, well before Rick Perry’s campaign disintegrated in the debates, I warned that it would be a critical mistake to make him our nominee because he would be ridiculed once some of his views became well-known.

I feel the same way about Herman Cain. I love Mr. Cain and his conservative views, but his 9-9-9 tax plan is complete nonsense, and will also become a subject of ridicule. God knows we need a simplified tax code, but a flat tax that rewards millionaires and punishes low income earners is unacceptable, and a sales tax added to an income tax will give future Congresses a weapon similar to handing a match and gasoline to a firebug. Mr. Cain may appeal to some conservatives, but Obama will win 48 states if Cain is our nominee. I wonder how many conservatives recognize that Cain's 9-9-9 tax plan turns Social Security and Medicare into welfare programs entirely financed by Congressional authorizations.

Although the following analysis was published in the NY Times, the author, Bruce Bartlett, is someone to be trusted:

Inside the Cain Tax Plan

By BRUCE BARTLETT October 11, 2011 NY Times

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of the forthcoming book “The Benefit and the Burden.”

With recent polls showing increased support for Herman Cain as the G.O.P. presidential nominee, attention is being drawn to his platform, especially what he calls the 9-9-9 tax plan. News reports describe it as a 9 percent tax rate on business and personal income, combined with a 9 percent national sales tax.

Little detail has been released by the Cain campaign, so it’s impossible to do a thorough analysis. But using what is available on Mr. Cain’s Web site, I’m taking a stab at estimating its effects.

First, the 9-9-9 plan is actually an intermediate step in Mr. Cain’s plan to overhaul the tax system and jump-start growth. Phase 1 would reduce individual and business taxes to a maximum of 25 percent, which I assume means reducing the top statutory tax rate to 25 percent from 35 percent.

No mention is made on the site of a tax cut for those now in the 10 percent, 15 percent or 25 percent brackets. This means that the only people who would get a tax rate cut are those now in the 28 percent, 33 percent or 35 percent brackets. According to the Joint Committee on Taxation, only 4 percent of taxpayers pay any taxes at those rates.

As for corporations, Mr. Cain’s proposal is primarily going to benefit those with revenues of more than $1 million a year, because they account for 98.7 percent of all receipts by C corporations. (A C corporation is a legal entity separate and distinct from its owners that is taxed as a corporation; its shareholders pay taxes individually on their gains.) Those companies with receipts over $50 million account for 88.8 percent of total receipts.

Other business entities — sole proprietorships, S corporations (which have between 1 and 100 shareholders and pass through net income or losses to shareholders) and partnerships — would not benefit because they are not taxed on the corporate schedule. But they represent 92 percent of all businesses.

Second, Mr. Cain would eliminate all taxes on profits earned by multinational corporations outside the United States. It’s hard to know the impact of this provision, but according to Martin Sullivan, an economist with Tax Analysts, the 50 largest corporations in the United States generated half of their profits in other countries.

The actual benefit of Mr. Cain’s proposal would be much greater to many of them, because, according to Mr. Sullivan, while some of these 50 companies have no foreign operations, others derive 100 percent of their gross profits in foreign countries.

In 2010 these included Philip Morris, Pfizer and Abbott Laboratories.

Third, Mr. Cain would abolish all taxes on capital gains. Such taxes typically generate more than $100 billion in federal revenue annually, according to the Tax Policy Center. According to the Joint Committee on Taxation, two-thirds of all capital gains are reported by those with incomes over $1 million.

Mr. Cain says these three proposals, which he would put into effect immediately without offsetting the lost revenue, will jump-start economic growth. He offers no evidence for this assertion; it is simply put forward as self-evident. But the experience of the George W. Bush administration was that cuts in tax rates on the wealthy and on capital gains had no effect whatsoever on growth, according to the Congressional Research Service.

And this is only Phase 1 of the Cain plan. In Phase 2, the payroll tax would be eliminated, causing more than $800 billion in revenue to evaporate. The estate and gift tax would be abolished, further reducing taxes on the wealthy. And the 9-9-9 plan would be implemented.

It’s important to understand that the 9 percent rates on personal and business income would apply to very different tax bases than now exist. For individuals, the tax would apply to gross income less only the deduction for charitable contributions. No mention is made of a personal exemption.

This means that the 47 percent of tax filers who now pay no federal income taxes will pay 9 percent on their total income. And elimination of the payroll tax won’t even help half of them because the earned income tax credit, which Mr. Cain would abolish, offsets both their income tax liability and their payroll tax payment as well.

Additionally, everyone would now pay a 9 percent sales tax on all purchases. No mention is made of any exemptions from this tax, so we may assume that it will apply to food, medical care, rent, home and auto purchases and a wide variety of other expenditures now exempt from state sales taxes. This would increase their cost of living by 9 percent while, at the same time, the poor would pay income taxes.

The business tax in the Cain plan bears no resemblance to the present corporate income tax. The tax would apply to gross sales less dividends paid and all purchases from other companies, including investment goods. Thus, there would be no deduction for wages.

How benefits would be treated is unclear, because purchases of things like health insurance might constitute a purchase from another company and remain deductible. If so, what is to stop a company from paying its employees by leasing their cars and homes for them and even buying their food and clothing? That would reduce their taxable revenue.

The abolition of any deduction for wages is likely to raise the cost of employing workers, even with abolition of the employers’ share of the payroll tax. And since the dividend deduction doesn’t appear to be related to profitability, companies could borrow to pay dividends and still get the deduction. Even a novice tax lawyer could easily make a tax shelter out of that.

And here’s the kicker in the Cain plan. Phase 2 is merely a transition to yet another fundamental tax reform. In Phase 3, the United States would adopt the so-called Fair Tax, which would replace all federal taxes with a 30 percent sales tax on all goods and services. In a previous post, I explained why the Fair Tax is a bad idea. I went into more detail in testimony before the House Ways and Means Committee on July 26.

Whatever one thinks of the Fair Tax, it makes not the slightest bit of sense to have a plan that requires fundamental changes to the federal tax system twice to achieve its objective.

Veterans of tax reform attempts in the United States know reform is very difficult and time-consuming even once. If the Fair Tax is a good idea, Mr. Cain ought to just do it, without confusing the issue with his unnecessary and highly complicated 9-9-9 plan. After all, one of the prime selling points of the Fair Tax is its simplicity, and the 9-9-9 plan is far from that.

Because so little detail exists, it’s hard to do either a proper revenue estimate or distributional analysis of the Cain plan. It’s obvious, however, that Phase 1 would represent a huge tax cut for the wealthy at a time when federal revenues are at a historical low as a share of the gross domestic product and the economy’s fundamental problem is a lack of aggregate demand.

Thus the Cain plan would increase the budget deficit without doing anything to stimulate demand, because rich people can already spend as much as they want and are unlikely to spend more even if their taxes are abolished.

The poor and the middle class might increase their spending if they could keep more of their earnings, but they will unquestionably pay more under Phase 2 of the Cain plan. With no tax on capital gains, the rich would pay almost nothing, while elimination of all deductions and credits, as well as imposition of a national sales tax, must necessarily raise taxes on everyone else, especially those not now paying income taxes.

At a minimum, the Cain plan is 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 good reason to believe that the budget deficit will increase.

Even allowing for the poorly thought through promises routinely made on the campaign trail, Mr. Cain’s tax plan stands out as exceptionally ill conceived.


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At 4:35 PM, Anonymous Anonymous said...

I would want to know more about the specifics before dumping on Cain's plan. But leaving the present plan in place with all the deductions, exclusions, depreciations,and other loop holes requiring most people to employ someone to file their taxes, is not exceptable. And with 47% of Americans not paying ANY income federal taxes, that has to change. We all enjoy benefits as citizens of this great country. Everyone, and I mean everyone, should pay something in federal taxes.

But, I am of the mind set ABO- Anyone But Obama. I will even vote for Romney, but will have to hold my nose. He is close to being a RINO. He pushed Romneycare long before we knew about Obamacare. He flip flopped on abortion. (how the hell can anyone be pro life and then be for killing babies?) That's immoral and disgusting. Let's hope a conservative candidate will get the nod. Hopefully, that will be Herman Cain.

At 4:46 PM, Blogger RussWilcox said...

Anonymous, I agree that every income earner should pay some income tax, but if you want to defeat Obama, it would be a mistake to support Cain.

At 6:26 PM, Anonymous SharonW said...

Having a national sales tax of 9% which would be added to state sales taxes of 7% would make it 16% on every purchase. This would kill retail businesses. This plan is not well thought out. Within a few years it would be 12-12-12, then 14-14-14.

Herman Cain could never beat Obama and all his money and all his street fighters in the general. Romney has had previous experience with the nasty political landscape and is more acceptable to the independents. Sharon

At 4:21 AM, Anonymous Mason said...

At least Hermain Cain is offering a new idea on taxation no one else is doing that. Our tax code nears reform and one might as well start over. I personally don't lke the 9% sales tax but as it stands the system is revennue neutral. Hermain must realize that he will have to be flexible because of congress, he has to reflect that in his message. I certainly like him much more than Romney who is nothing more than a RHINO and Perry doesn't have a chance. The only presidential contenders that can do the job right now is Cain and Gingwich. Quite frankly I'll take Ron Paul over either Romney or Perry

At 9:24 AM, Anonymous Anonymous said...

I think Romney will make it clear shortly that if elected he will work to repeal obamacare. That will be enough reassurance to bring on board most nose-holders.

Cain is likely flavor of the week only and should fall by the wayside shortly just as Perry did leaving Romney to win the primary.

Romney, like it or not is the only current candidate with the wherewithal to beat Obama.


At 6:20 AM, Anonymous Anonymous said...

This I know about Herman Cain. He is an honest man. He was business executive and from personal observation, I know he is a good people manager. He is not a dictator nor uses authoritarian methods.
He does not run around trying to in the spot light but rather works thru delegation and develops consensus in achieving results.
He understands money. That is he values money and its sources as resource not to be squander in achieving desired results. He understands capital development in economic terms.
One reason that he appears weak in media is because the Obama regime fears him and media distorts and misstates his words.
When looking at his proposed plan, look at fact that he offered plan based on numbers. It is for discussion, which it has succeeded doing. It is not a plan etched in gold, rather a basis of discussion of economic issues.


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