Deficit and Tax Policy

October 20, 2011 By David Morris

Cain’s 9-9-9 Tax Plan – A Tax Plan That’s Not Fully Cooked

Before delving into Herman Cain’s 9-9-9 tax plan, I want to give the presidential candidate some credit. It’s not easy for a politician to come out and propose a radical overhaul of the tax code, especially not in this political climate.

The main reason it’s received a lot of attention is due to its simplicity and easily digestible numbers. Every time someone says we should implement 9-9-9, it’s hard not to feel like it‘s as easy as ordering a pizza. However, what sounds simple turns out to have many complicated details that need to be better understood.  And while it seems like lower taxes for everyone, early analysis declares the plan will mean higher taxes for many in the middle and lower classes.

The features of the 9-9-9 plan (taken straight from Herman Cain’s presidential website)

• Business Flat Tax – 9%
  • Gross income less all purchases from other U.S. located businesses, all capital investment, and net exports.
• Individual Flat Tax – 9%.
  • Gross income less charitable deductions.
• National Sales Tax – 9%.
  • This gets the Fair Tax off the sidelines and into the game.
• Eliminate the payroll, estate, and capital gains tax

You may notice two big differences between Cain’s plan and the current tax system. First, is that the business and individual tax rates are a lot lower than the current rates. This feature has many people concerned that the 9-9-9 system will not generate enough revenue for the government to function at current spending levels. Second, is the addition of a new revenue stream for the government in the form of a retail sales tax (a type of consumption tax).

With the basics out of the way, let’s look at the concerns of implementing the 9-9-9 plan:

• According to the non-partisan Tax Policy Center the plan would raise taxes on 84% of American households 
  • Low-income Americans will have their tax rate increased by 14% while the middle class sees a 4.4% increase in their tax rate
  • This is presumably how the system generates enough revenue to match the current tax system.
• The wealthy will receive a large tax cut.
• A lot of people are uncomfortable with the government adding an additional revenue stream.
• It is only one phase of a long-term tax reform plan (ultimately leading to a national sales tax) which begs the question: If it’s been hard enough for the current administration to reform the tax code just once, will it really be possible for one president to overhaul the tax code multiple times while they are in office? I think not.

Besides these alarming issues there is the feeling that this type of tax reform is too radical for politicians to get behind. It would make more sense to simplify the system that is already in place, an idea that many politicians have advocated for.

If you are interested in learning more about Cain’s 9-9-9 plan check out Bruce Bartlett’s piece in the New York Times where he expands on several of these points. And for those of you who are into the nitty-gritty of tax policy, Edward Kleinbard of the University of Southern California has written an academic paper analyzing Cain’s 9-9-9 plan.

As for me, I think the 9-9-9 plan is ambitiously designed but the wrong way to overhaul the tax system at such a fragile economic time. One thing for sure, it will be interesting to see how people react to the plan now that there is more information available. What about you? How do you feel about this plan?

• Taxes

• Tax Reform

• Herman Cain

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