The 9/9/9 Plan - An Analysis

As many of our readers already know, the 9/9/9 tax plan proposed by Republican presidential candidate Herman Cain has generated a fair amount of interest, some positive and some negative.  In fact, on a radio talk show last evening where Andy and I were guests, a number of the callers brought up the plan and wanted to know more.


So, let's start with some basics:


The plan would replace the current, extremely complex tax structure of varying marginal tax rates and a host of deductions (not all of which are available to all taxpayers) in the personal income tax code. The plan would, among other things, end the estate tax, the payroll tax (used to fund Social Security and Medicare), and the capital gains tax. 


Instead, individual taxpayers would pay a flat tax rate of 9 percent, irrespective of their income level, homeownership, number of children or otherwise; the only deduction would be for charitable giving. 


Businesses would pay corporate taxes at 9 percent, and, as something very new for Americans, there would be a new federal sales tax (in addition to any state or local sales taxes), also set at 9 percent.


Mr. Cain claims that the new tax structure would be revenue neutral - that is, it would collect for the federal government the same amount as the current structure provides.  


There's some debate as to that claim (a difficult debate to resolve, since the issue centers around how a new tax structure might change American's economic behavior, something that's perhaps unknowable at this point), but for purposes of this analysis, let's assume that it's correct.


One of the questions that arose on the radio show was: What the effect of this proposal would be on typical taxpayers?


To answer that, I went to the internet and the most cogent analysis of the proposal seemed to be that of Ezra Klein, of the Washington Post, of which I've reproduced highlights below.  (The full posting is at www.washingtonpost.com/blogs/ezra-klein/post/the-9-9-9-plan-for-an-average-household-and-for-a-wealthy-one/2011/08/25/gIQAGKYzhL_blog.html#excerpt.)


"I asked Edward Kleinbard, a tax law professor at the University of Southern California, to walk me through the tax burden for a typical family of four with an income of $50,000 in the current system and under Herman Cain’s plan. Before we get to the details, here’s the bottom line: Cain’s plan would increase the family’s tax bill by thousands of dollars.

Let’s start with the calculations for the current system. If you take the employer and employee side of the payroll tax, payroll taxes come to 15.3 percent of our hypothetical family’s $50,000 income.  Final bill? $7,650 in payroll taxes. But that’s almost all they’re going to pay in federal taxes.

When it comes time to fill out their federal income taxes, they take the standard deduction ($11,400), plus four personal exemptions ($3,650 each), plus two child-tax credits ($1,000 each), which leaves them paying $766 in federal-income taxes.

Total tax bill? $8,416.

Cain’s plan, by contrast, acts like a 27 percent payroll tax with basically no exemptions. To understand why that is, read my earlier post, or, if you really want the details, see Kleinbard’s full analysis. So here, too, the calculation is fairly straightforward: $50,000 x 27% = $13,500.

And that leaves us with simple subtraction. $13,500 - $8,416 = $5,084. That’s how much more a family of four with $50,000 in income and a very simple tax return would pay under Cain’s 9-9-9 plan.

. . .  let’s look at the other side of this, too. Take a family of four with $1,000,000 in income. I wanted to stop bothering Kleinbard at this point, so I just ran these numbers myself. Assume again that the family files a very simple tax return: standard deduction, four exemptions. According to Turbotax, they would owe $311,208 under the current system.

Cain’s plan is a bit tougher to apply to them. Many of his taxes are consumption-based, and it’s likely that this family would hold on to much of their income in any given year. But as the tax professors will tell you, all income is eventually spent, so all the income they make this year will eventually be taxed under the 9-9-9 plan.

If you grant that premise, then the calculation is no harder than it is for the family of more modest means: $1,000,000 x 27% = $270,000.  That means that the 9/9/9 plan is, for a household making $1,000,000, a tax cut of $41,208 ($41,208) . . . "

Assuming this analysis is correct, the 9/9/9 plan generates significant tax increases on the middle class, and significant tax cuts for the upper class.


Putting to one side any philosophic debate on tax "fairness," any tax plan like 9/9/9 is going to be a very tough sell for any presidential candidate, especially in a time of economic stress.


David Holmes