Should the U.S. Federal Tax System Be Replaced By Herman Cain's 9-9-9 Plan?
Overview/BackgroundPresidential candidate Herman Cain vaulted to the top of election polls largely on the strength of his proposed 9-9-9 tax plan . Former Godfather's Pizza CEO Herman Cain , a mathematics and computer science graduate, who has managed and turned around a number of failing businesses, has used his vast private sector experience and a team of economists to construct a revolutionary plan to change the tax structure of country. His plan would throw out the 10-million word federal income tax code, eliminate all social security and other payroll taxes, and drop all federal inheritance, dividend, and capital gain taxes. Almost all deductions would be removed as part of the process. In it's place, a 9 corporate income tax, a 9 percent individual income tax, and a 9 percent sales tax would be instituted. The 9 percent income tax rate wouldn't kick in until a person hits a certain income level. Other details are still being ironed out, such as the specifics of what items would be exempted from the sales tax (e.g. food & wholesale items?). A number of estimates have been made on the impact of the new tax structure on income, prices, government revenues, etc., but the truth is that the effect is almost impossible to predict with any level of precision. There are far too many variables that will change. For example, it's impossible to say a $100 item will cost $109 after the tax plan goes into effect, since it ignores the changes in the cost structure of the item and the change in purchasing power of consumers. Thus, the best way to analyze the tax plan is to look at the economic logic and the likely changes in business & individual behavior, both positive and negative.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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!
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
Congress cannot be trusted to keep future rates at 9-9-9, and it will be much easier to raise a
sales tax or turn it into a value-added tax than it would have been if
it never had been started.
It will likely take a little time to see all the positive effects of the plan, and the burgeoning deficit will lead liberals
to start pushing for a raising of rates. Who knows, income tax rates may slowly be pushed back to their original rates, and
the country will be back to where they started, paying a sales tax on top of all the other taxes they currently pay.
Congress is likely to create separate rates for various "sin" items such as alcohol, tobacco, and
fatty foods in addition to those items deemed "rich person items" such as luxury cars,
slowing taking away more of our money and freedom.
Although the sales tax will start at 9%, initial budget shortfalls will lead certain Congressmen to push for hikes for items they
want to discourage and which won't hurt much politically, such as alcohol, Big Mac's, cigarettes, donuts, soda, etc. The
same applies to items that low-middle income citizens normally cannot afford, such as boats, luxury vacations,
Whatever justification is given for raising rates, a hodgepodge of sales tax rates will slowly eat away all the extra income
and benefits of the tax system change.
Poor and middle class Americans will pay more than the rich on a percentage of income basis.
Lower income individuals typically must spend all or most of their disposable income every paycheck, so the 9% sales tax will
mean a much greater percentage tax hit than rich individuals, who
only spend small fractions of their disposable income. For example,
assume a person has $10,000 of disposable income and spends it all. The $900 in sales tax would mean a 9% rate. Assume a person would earns a million spends $100,000. The $9000 in sales tax would mean a 0.9% rate as a percentage of income.
It's a potentially risky system since it's impossible to really know if it will generate enough revenue to
cover enough of the $3.7 trillion the federal government spends annually for defense, social security, Medicare, national debt
Federal tax revenues are currently around $2.2 trillion per year. With a $1.5 trillion deficit already, it would be disastrous to
potentially drop revenues even further. Corporate rates would drop from around 35% to 9%. Income rates would drop from about 35%
to 9%. Combined social security rates of 12.4% would drop to 0%. Capital gains & dividend rates would drop to 0%. The death tax would
be eliminated. Can we really expect expansion of the tax base and the addition of the sales tax revenue to equal the before-tax
amount of tax revenues?
Transition costs would likely be very expensive since so much of the tax & business transaction recording system would be changed.
Businesses will have to transition all their accounting systems centered around the current payroll routines and institute new systems centered
around sales tax. Computer programs such as QuickBooks and Peachtree will have to be revamped. New rates and tax routines will have
be phased in over years. A number of "final" tax returns from the old system will have to be prepared. In short, it will take
a gargantuan effort to get transitioned over to the new system.
Many accountants and lawyers, especially those who specialize in taxation, would lose their jobs and be forced to
train in new career skills.
Tens of thousands of accountants and lawyers have devoted their careers to taxation. All that training and experience will essentially become
worthless, causing firms to likely terminate the employment of the majority of them.
Many of the incentives in the income tax system, such as for education, home ownership, and energy efficiency, would
The mortgage deduction, earned income credit, retirement savings credit, Hope education credit, and so many other positive incentives in the tax
system would be eliminated in Cain's plan. Tax incentives are one of the few positive ways that government can influence society for good,
without restricting freedom or fundamental rights.
Retirees and others who are living off saved income will be paying higher prices, despite the fact they paid
much higher income taxes when they earned the money.
Social security recipients and other retirees paid taxes their whole lives using our present tax system. It's unfair to make them
pay a sales tax using their already taxed saved income. Herman Cain has talked about paying out a refund to such individuals to
compensate them for this unfairness, but it's doubtful it will be enough to cover those that spend more than a standard small amount.
Black market purchases to avoid sales tax would likely increase a substantial amount.
With federal, state, and potentially local sales tax all on the same item, consumers may be paying 17-20% tax on items they
buy in high-tax states. Consequently,
if you sell to someone without telling the government, you can sell for much cheaper. Put in perspective, a $10,000 item may cost
up to $12,000 with tax. A party may agree to buy an item from the seller for $11,000 if that person doesn't report the sales
tax. Thus, the seller makes an extra $1000 and the buyer pays $1000 less, with this black market purchase yielding $0 in government
revenue. Imagine thousands or even millions of such transactions!
There would be less incentive to contribute to retirement accounts since most of the tax advantages would vanish, and given
the dire straits of the social security system, this is definitely not a good thing.
This is a small disadvantage, but important nonetheless. Many people lack the discipline to save for retirement, especially when it may be 30, 40,
or 50 years away, but given the fact these people may live 20+ years after they retire, it's vital to start saving early. With the
current 401k and IRA tax setup, taxpayers save a tremendous amount of money over time if they contribute to a retirement account. These
accounts also provide discipline since you normally cannot withdraw from them without a substantial penalty. With the elimination of capital
gain & dividend taxes, along with the reduction of the income tax, there is little incentive to continue to contribute, especially when you
can't access the money without a penalty. Consequently, retirement account contributions drop by a lot. Also, those that have contributed
no longer receive the same benefits they expected when they made their contributions.
The higher sales tax will provide a disincentive to consumer purchases, and consumer spending is one of the things
that drives our economy; this is especially true for high sales tax states such as New
York and California.
With all the uncertainty and instability in the world, along with a long period of tough economic times, people are likely to save a large percentage of their
new cash flow from the tax hike, especially when they can invest & grow their money rather quickly without being taxed at all. Consequently, consumer
spending drops significantly, which ironically is one of the great drivers of economic growth and is central to the Cain plan's success.
Refundable tax credits such as the Earned Income Credit, which function effectively as a free payout to lower income working individuals, would be eliminated;
thus, the poor wouldn't receive the same large tax return many are used to receiving.
People that work but earn a low salary, especially if they also have kids, will tell you they annually expect a large tax return every year. In fact, they often
depend on it for paying their minimum annual bills. With the elimination of almost all tax credits and deductions, the poor may have these refunds reduced or eliminated.
This is on top of spending all their money on consumer goods that are now 9% taxed. In all, this makes the plan incredibly
difficult on the poor.
With a divided Congress, it will likely be almost impossible to pass, and even if it does, Congress will hack it up
into a non-sensical mess as it does with most tax changes.
Not since the Civil War have we had such a politically-divided country. Politicians almost always vote along their party lines. Cain's 9-9-9 plan will be
almost universally opposed by the Democrats, and several Republicans have expressed reservations on the sales tax part of the plan. Various politicians will
be arguing the necessity of certain credits and deductions such as the Earned Income Credit and the mortgage deductions. Others will want tax-advantageous
items put in to help their voting districts. With 535 politicians in Congress involved, the 9-9-9 plan will likely be turned into a 9-9-9 + 10,000 exceptions
plan; in other words, a disheveled mess that kicks out most of benefits of the legislation in the first place. And that assumes, it passes at all.
The likely implementation & phase-in of the tax plan will take several years, and our economy needs a jolt immediately.
Too much is already built into our current tax system to simply flip a switch and be on the new plan. Businesses and
individuals have multi-year deductions,
carryovers, unearned revenue & expenses that haven't been allocated to tax returns, other deferred tax assets & liabilities, and so on. In addition,
businesses must be given time to update tax software, payroll systems, and other computer programs. Thus, the bill will have to be phased in over several
years, which would come at a time of high unemployment and skyrocketing deficits that must be addressed immediately.
Related LinksExplaining the 9-9-9 Plan
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Written by: Joe Messerli
Page Last Updated: 01/07/2012