The current Republican front-runner, Herman Cain, has proposed a new tax plan to replace our current messy tax structure. His 9-9-9 plan, which sounds like a pizza promotion, would put a 9 percent tax on certain corporate earnings, a 9 percent tax on individual earnings, and a 9 percent national sales tax. It would end payroll taxes. It would end most tax deductions. It sounds simple; it is simple. Unfortunately, the devil’s in the details. Here’s why you’ll pay higher taxes.
On the surface, this looks like lower taxes for most everybody. The lowest tax bracket currently is 10 percent while Cain’s plan puts all income taxes at 9 percent. Obviously 9 percent is smaller than 10 percent, right? No. Dig deeper and you’ll find it isn’t true.
Our federal tax code currently has lots of tax exemptions (income that isn’t taxed) and tax credits (money that directly offsets taxes and can provide refunds), all done to drive certain behaviors. We get tax exemptions for the following: charitable donations, each person in our household, education expenses, paid mortgage interest and more. We get tax credits for each dependent child and qualified education costs.
According to the US Census, median household income in 2009 was $49,777. If you had a family of four with that income, and only counted tax exemptions and credits for household size and having children, you would have paid $2,450 in federal income taxes in 2010. By comparison, the only exemption allowed by the Cain plan is for charitable donations. Your federal income tax under the Cain plan would be some $4,480, or nearly double what you actually paid.
The lower your income, the worse it gets.
By comparison, if your family were in the ‘1 percent’ and earned $250,000 under 2009 tax rates, you’d have paid $55,500 in federal income tax. Under Cain’s 9-9-9? $22,500. The higher your income, the more you save; and charitable donations, mostly given by the wealthy, are the only tax exemption left.
The plan gets worse.
Ask any economist. Broad sales taxes of any sort hit people at the bottom worse because they spend a larger share of their income on taxable goods and services. The 9 percent sales tax would go on top of any state sales tax, and doesn’t include any exemptions we have in Massachusetts for necessities like food and clothing. This means 9 percent more for your textbooks, your groceries, and your cafeteria food. As students, this tax code hits us very hard.
In short, his plan will discourage companies from paying good salaries, and will reduce the spending power of people earning under roughly $120,000 a year, meaning most people at UMB. This will weaken both consumer power and market demand, not to mention wreck many household budgets.
Mr. Cain eliminates the following taxes in his 9-9-9 plan: inheritance taxes on estates worth $4 million and up, which he mislabels “the death tax”; taxes on unearned income such as dividends, which are primarily earned by the wealthy; taxes on money earned overseas by corporations; and payroll taxes covering Social Security and Medicare, which are paid jointly by employers and employees.
He claims that this would provide a $2 trillion dollar surplus. While I am not an economist, I doubt that would be the case unless his sales tax also applies to purchase and sale of stocks and bonds.
This plan would result in smaller household budgets. More families would have to decide between food and rent.
Corporations are not hiring much right now. They have plenty of cash, and they aren’t uncertain about the tax code. The reason they aren’t hiring because there’s weak demand from consumers like us, who can’t buy new iPhones or TiVos or Priuses without either good salaries or easy credit to afford them. If you want the current depression to last until 2020 at a minimum (and we are in a depression), then vote for Herman Cain for president.
Our current tax code is elaborate and hard to understand, yes, but it’s more humane than his.