Should the U.S. Federal Tax System Be Replaced By Herman Cain's 9-9-9 Plan?

Overview/Background

1. It would substantially increase the take-home pay for American workers from not only the lowering of the income tax brackets but the elimination of both the business side and employee side of payroll taxes. U.S. federal tax rates go as high as 35% in 2011, and additional surtaxes are scheduled to hit when Obamacare kicks in. On top of that, employers and employees both pay 6.2%, for a total of 12.4% per employee. All these taxes would be replaced with the 9% individual rate. So if your taxable income is $50,000 and your average tax rate is 40% counting payroll taxes, under Cain's plan, instead of $20,000 in taxes, you would only have to pay $4,500, for an extra $15,500 in take home pay! Regardless of your income level, those people that pay income tax will receive a cut.
   
   
2. Millions of words of complexity in the U.S. Income Tax code would be eliminated, saving money in tax preparation as well as providing a method of cutting a large part of government spending (i.e. most of the IRS and the overhead of processing returns, payments, refunds, audits, compliance checks, etc.). The cost to individuals, businesses, and the government of processing such a gigantic mess of a tax code costs the country hundreds of billions every year. All of this would be freed up with the implementation of Cain's 9-9-9 plan. Only a skeleton portion of the IRS would need to remain since returns would shrink to one page in size.
   
   
3. Corporations and businesses would have a massive inflow of investment cash, leading to business expansion and new hiring. Since capital gains and dividends are no longer taxed, banks and investors who have kept trillions of dollars on the side would be pouring money into capital investment. Businesses that have been limited in growth due to lack of funds would then be able to start expanding, hiring workers as part of the process. All that new hiring would have a chain reaction, as previously unemployed Americans spend their paychecks, providing a jolt to the demand side of the economy.
   
   
4. Personal savings accounts would increase quickly, meaning banks would have more money to lend to potential homebuyers and other consumers. Taxpayers would see a large, immediate jump in their take home pay. A portion of that will end up in bank savings deposits, giving banks more money to lend. Much of the real estate market problems stem from a lack of available credit. The 9-9-9 plan is likely to help alleviate this problem.
   
   
5. Many intelligent accounting personnel which are currently tied up in tax preparation would be freed up to shift their services to other sorely-needed areas--such as cost cutting, efficiency improvement, new business organization, and Sarbones-Oxley compliance. Accountants typically have to study for years to even begin to understand the U.S. tax code, and they must supplement their training every year since tax laws regularly change as Congress tinkers with the code. Many accountants work 60+ hours per week during tax season and a large number of hours the rest of the year to assemble documentation and ensure compliance. All of that wasted talent would be freed up to work on areas that make sense, areas that can actually improve the efficiency and profitability of business. Also, there's a major shortage of accounting personnel that are needed for compliance with the mountain of financial regulation that has been created recently from Sarbones-Oxley and Dodd-Frank laws.
   
   
6. Corporations that have shifted resources oversees would have incentives to move operations back to the U.S., shifting associated hiring back to Americans. American businesses have shifted business units and labor to areas such as India and China, which is much easier nowadays with advanced technology. Lower employment costs and lower corporate tax rates will reverse that trend, leading to more employment of Americans.
   
   
7. Foreign companies would have much greater incentive to move their operations to the U.S., hiring more Americans in the process. Foreign companies that up to now haven't even considered basing operations in the U.S. due to the high cost would suddenly give the country another look. Thus, new jobs might actually be taken from India, China, etc. rather than the trend that's currently occurring.
   
   
8. Starting or investing in a new business is much less risky since you get to keep a much greater percentage of the earnings. New business startups would explode since the take-home profit potential would be so much greater. Investors and capitalists who have money to spare always have the option of putting their money in relatively safe investments such as CD's, treasuries, or gold. Only a high-enough profit potential will prompt them to take on the risk of losing money by investment in new business ventures. A lowering of the corporate tax rate to 9% will change all that.
   
   
9. Having more American businesses along with a lower unemployment rate means the tax base vastly increases, with entitlements such as unemployment falling, leading to a much-needed drop in the annual deficit. It's logical to wonder why tax revenues often actually increase by dropping rates, especially for the economic illiterates that dominate the media. However, the 9-9-9 tax plan will lead to more people working and greater taxable income to those already working; in other words, a greater tax base. On top of that, fewer people unemployed means less money will have to be paid out for unemployment and other government entitlements. The combination of the two means a much needed drop in the annual federal deficit.
   
   
10. Americans wouldn't have to spend so much of their leisure or work time tracking expenses for tax returns & filling out complicated forms. Individuals must track all their receipts for any deductions they have during the tax year. Logging gas mileage, organizing receipts, filling out schedules, and so on costs Americans billions in productive time every year. Almost all Americans would be able to use a one-page form with Herman Cain's plan.
    
    
11. Americans would have much greater incentive to work, invest, and save. It's a fundamental principle of psychology that actions that are rewarded tend to be repeated, while actions that are punished tend to decrease in frequency. Therefore, our tax system seems totally backwards. The government discourages work by taxing every bit of income you earn from the work. The government punishes you with capital gain and dividend taxes, in addition to the corporate taxes, for taking the risk of investing your money to help businesses grow and expand. Cain's plan eliminates these disincentives. You would get to keep every cent of the money you make from investing. And you can keep all but 9 percent of your work income. Since taxes are shifted to the consumption side of things, Americans have far greater incentive to save money.
    
    
12. The massive inflow of new investment cash from the elimination of dividend & investment tax, along with the greater after-tax profit potential would make it much easier to start new businesses; more businesses means more competition, leading to lower prices and better quality products and services. One of the great benefits of market competition is the awesome products and services that result. Competition has driven American companies to create the iPod, the laptop computer, electricity-powered cars, online cart shopping, and so many other great things. There's a ton of untapped ideas that are unable to turn into mass market inventions due to lack of funds. Ideas mean nothing without the financing to turn them into reality. Who knows what may come out of this explosion of investment capital--new lifesaving drugs, revolutionary computer technology, cheap sources of power, and so on. In addition, existing products and services improve with competition. A company won't stay in business very long if it charges substantially more for the same product as a competitor. Consequently, all services & products in America become better off.
    
    
13. Many of the rich individuals who can hire the best lawyers & accountants to find all the tax loopholes would be forced to pay at least 9% on all their earned income. Billionaire Warren Buffett and other wealthy individuals brag about the low tax rates they pay. Although upper income individuals pay the vast majority of taxes, on a percentage basis, they often pay only a small fraction of their income to taxes. The best lawyers and accountants can be called upon to sift through the 10-million word tax code and find the best tax loopholes. Corporations can use their political influence to build in waivers & business tax loopholes. Cain's plan ensures all companies and individuals above a certain income level pay 9 percent, with less opportunity for crony capitalism.
    
    
14. Given the fact we have an unsustainable national debt and annual deficit with limited ability to cut entitlements such as social security, drastic action is needed to restructure the economy and tax revenue base. The federal government is currently spending $3.7 trillion dollars annually while only taking in $2.2 trillion in revenue, which is only adding to a $14 trillion dollar debt. An aging population is bringing Medicare & Social Security to the brink of disaster while the Obamacare behemoth hangs in the near future. We're heading for the same problems as Greece and Italy, yet Democrats and Republicans are having trouble agreeing on how to trim only a few hundred billion per year! Things have to change. Needed spending cuts are one matter, but it would help to also bring in more revenue. Unfortunately, raising income taxes may end up decreasing revenue due to its suppressing effect on economic growth, and even if the government takes 100 percent of millionaires income, it won't be enough to pay off the deficit. A radical, but sensible, restructure is necessary.
    
    
15. The entire pricing structure of goods and services will change for the better, as lower employment costs, more competition, and higher after-tax profit rates will lead to lower prices, possibly enough to offset any sales tax addition. When companies set the price for a good or service, they usually use some form of cost + a certain markup percentage that will give the company an acceptable profit margin for its risk and investment. Anything that lowers the cost will therefore lead to a lower price charged to consumers, and if the company doesn't lower its price, then competition will eventually set a better price and take market share from the company. For example, consider a $1000 laptop. The lowering of employment & tax costs may take the price down to around $917; the 9% sales tax would then take it up to the $1000, so the net cost to consumers is roughly the same. The effects will vary by product, but the net effect of all products & service will likely lead to relatively unchanged prices.
    
    
16. There is less incentive to cheat on tax returns since only 9 percent is taken, as opposed to the 40+ percent that may be taken between income tax and payroll taxes. Many people will fudge numbers a bit for certain deductions, especially when supporting documentation doesn't have to be mailed in. Others may hire lawyers or accountants to find questionable deductions. In both cases, the taxpayer is risking an audit, cash penalties, or even jail time. With a large amount of money, it may be more worth the risk to them. However, as the percentage drops, people are less willing to take the risk. Consider that a person with a risky $10,000 deduction may save the taxpayer $3500 or more; however, if the top rate drops to 9 percent, the deduction (assuming it still can be taken under Cain's plan) would only save $900, so it may no longer be worth the risk. Consequently, the cash flow to the government actually increases by $900.
    
    
17. The elimination of the death tax allows small and family businesses to remain intact upon the founder's death, whereas now they often must be sold or broken up to pay estate taxes. Most businesses start out as sole proprietorships or partnerships. As they grow, some choose to incorporate, while others, especially family businesses, do not. When a primary owner dies, the government takes a huge junk of the estate value, which currently is around 35%. So for example, a business worth $10 million must pay $3.5 million in cash to the government. Often the business is worth far more than the sum of it's individual parts, especially if it's made up of equipment and other high-cost capital assets. A business worth $10 million will almost never have that much of it in cash or short-term investments. Consequently, the survivor family must sell all or a significant portion of the business to pay the taxes. A $10 million business may employ 50 people, all or many of whom must now lose their jobs. Not only that, but a lifetime of hard work and achievement is wiped out, with society no longer benefiting from the goods or services provided by that company.
    
    
18. The elimination of capital gain and dividend taxes means it's much easier for the poor and middle class to move into the ranks of the rich since it's much easier to build a fortune when the government isn't picking away from it every year and every transaction. Any financial planner will tell you that a person of moderate salary can become a millionaire by disciplined saving and stock market investing, using the magic of interest rate compounding. In other words, the savings and the earnings on the stock investing combine over time to make people rich. Indeed, people in the poor and middle class often have no chance to move into the ranks of the rich without a thriving economy & stock market. Corporations will have much greater after-tax earnings under Cain's plan, meaning more growth & capital gains potential. Elimination of the dividend and capital gains tax means it's much easier to become rich. For example, if you contribute $100 monthly from age 25 to 65 to investments that earn 6% after tax, you would accumulate $200,000. If you eliminate the 35% average corporate tax rate and the individual capital & dividend taxes, the after-tax rate may increase to about 12%. Contributing the same savings for the same length of time would instead yield $1.176 million! And remember, with more people getting richer, you have more consumers spending money in the economy, meaning the effect is multiplied.
    
    
19. American exports would leave our shores without the embedded corporate taxes and higher employment costs, meaning goods would be much more competitively priced internationally. Every year we without question have a trade deficit. In other words, we buy far more from other countries than we sell to them. A big part of the reason is that we must factor high employment costs and taxes into the price of each product. If that is eliminated, the U.S. can be far more competitive internationally.
    
    
20. Americans would have a lot more take home pay to spend on consumer goods, offsetting any negative change in the pricing caused by the sales tax. Some assume that the Cain team and many economists are wrong, that the total cost of goods and services will rise with the added 9% sales tax. Even if you believe that, it's undisputed that Americans will have far more money to spend in their paychecks. A person making $50,000 is likely to see over $4000 more in his or her take home pay. If that person spends $10,000 on the taxable consumer goods, the total sales tax would be $900. In other words, the greater pay will more than cover any potential price increase.
    
    
21. Consumers and free-market capitalism would again be the central focus of the economy, meaning money would get better allocated to the worthwhile, in-demand areas of our economy, rather than where corrupt, inefficient government organizations would like to direct the money. Too much of the U.S. economy is currently driven by government spending, meaning a few hundred are deciding where to best spend money. As we've seen with the Soviet Union, Cuba, and so many other centralized economies, this only leads to disaster. Cain's plan shifts the economy to a consumer-driven one in which millions of individual decisions allocate funds to be most valuable and in-demand goods and services.
    
    
22. The stock market would likely skyrocket since untaxed capital gains and dividends would be so much better investments. Stock market prices are fundamentally the result of various models based on expected earnings, cash flow, growth prospects, and interest rate. The elimination of capital gain & dividends, along with the huge drop in corporate tax rates, will all be fed into those pricing models, which any Finance or Economics major will tell you, will lead to a skyrocketing of prices. This means more money in our 401k's and a much bigger opportunity for everyone to accumulate wealth.
    
    
23. A sales tax is much easier to see and track since an increase appears on every purchase receipt, whereas with an income tax, increases are usually spread over 24+ pay periods and intermingled with deductions & exemptions. A person making $50,000 that gets his taxed raised by 1% will see only about a $19 difference in a bi-weekly paycheck. If you consider exemptions, deductions, allocated credits, pay raises, etc., along with the fact that people are often accustomed to getting a tax refund of varying amounts, you will see that it's vary easy to miss an income tax increase. Government is often sneaky about it, meaning they may raise it 1% per year over 5+ years at the same time citizens are seeing an increase in their salary that comes with job experience. In other words, it's easy to miss tax increases. However, with a national sales tax, increases are nearly impossible to miss. Never mind the fact that even the debate of an increase will make national news. You will be able to see it printed on the receipt of every purchase!
    
    
24. People who criticize the 9-9-9 plan and emphasize its riskiness ignore the vast number of problems & riskiness of our current job-killing, de-motivating, freedom-sapping tax system. Of course it's risky and scary to go to a new tax system! Even Herman Cain himself would admit that there are some drawbacks of the plan; however, the benefits far outweigh the costs and risks. And consider our current tax system. What would you do if some politician was pitching that system as his plan?!! What if a politician said, "I propose a 10 million word tax code with separate income level brackets, thousands of deductions & credits, thousands of exceptions/phase-outs/carryovers of these deductions and credits, and multiple levels of taxation at the business, wage, and investment earning level. Small businesses will have several volumes to wade through in complying with this new system, with the income flowing through to the owner level. And after plowing through this endless puzzle of a tax code, if for some reason you don't pay enough, then you must use the Alternative Minimum Tax calculation." How many votes do you think that politician would get? I'm sure you could come up with a boatload of "cons" to that system, but could you come up with any "pros"? A change has to be made, and Herman Cain's 9-9-9 plan, if not the best answer, is a solid step in the right direction.