Herman Cain and 9-9-9

[RecycleMichael]

http://economix.blogs.nytimes.com/2011/10/11/inside-the-cain-tax-plan/?hp

Inside the Cain Tax Plan

By BRUCE BARTLETT
Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul.

With recent polls showing increased support for Herman Cain as the G.O.P. presidential nominee, attention is being drawn to his platform, especially what he calls the 9-9-9 tax plan. News reports describe it as a 9 percent tax rate on business and personal income, combined with a 9 percent national sales tax. Little detail has been released by the Cain campaign, so it's impossible to do a thorough analysis. But using what is available on Mr. Cain's Web site, I'm taking a stab at estimating its effects.

First, the 9-9-9 plan is actually an intermediate step in Mr. Cain's plan to overhaul the tax system and jump-start growth. Phase 1 would reduce individual and business taxes to a maximum of 25 percent, which I assume means reducing the top statutory tax rate to 25 percent from 35 percent. No mention is made on the site of a tax cut for those now in the 10 percent, 15 percent or 25 percent brackets. This means that the only people who would get a tax rate cut are those now in the 28 percent, 33 percent or 35 percent brackets. According to the Joint Committee on Taxation, only 4 percent of taxpayers pay any taxes at those rates.

As for corporations, Mr. Cain's proposal is primarily going to benefit those with revenues of more than $1 million a year, because they account for 98.7 percent of all receipts by C corporations. (A C corporation is a legal entity separate and distinct from its owners that is taxed as a corporation; its shareholders pay taxes individually on their gains.) Those companies with receipts over $50 million account for 88.8 percent of total receipts.

Other business entities — sole proprietorships, S corporations (which have between 1 and 100 shareholders and pass through net income or losses to shareholders) and partnerships — would not benefit because they are not taxed on the corporate schedule. But they represent 92 percent of all businesses.

Second, Mr. Cain would eliminate all taxes on profits earned by multinational corporations outside the United States. It's hard to know the impact of this provision, but according to Martin Sullivan, an economist with Tax Analysts, the 50 largest corporations in the United States generated half of their profits in other countries. The actual benefit of Mr. Cain's proposal would be much greater to many of them, because, according to Mr. Sullivan, while some of these 50 companies have no foreign operations, others derive 100 percent of their gross profits in foreign countries. In 2010 these included Philip Morris, Pfizer and Abbott Laboratories.

Third, Mr. Cain would abolish all taxes on capital gains. Such taxes typically generate more than $100 billion in federal revenue annually, according to the Tax Policy Center. According to the Joint Committee on Taxation, two-thirds of all capital gains are reported by those with incomes over $1 million.

Mr. Cain says these three proposals, which he would put into effect immediately without offsetting the lost revenue, will jump-start economic growth. He offers no evidence for this assertion; it is simply put forward as self-evident. But the experience of the George W. Bush administration was that cuts in tax rates on the wealthy and on capital gains had no effect whatsoever on growth, according to the Congressional Research Service.

And this is only Phase 1 of the Cain plan. In Phase 2, the payroll tax would be eliminated, causing more than $800 billion in revenue to evaporate. The estate and gift tax would be abolished, further reducing taxes on the wealthy. And the 9-9-9 plan would be implemented. It's important to understand that the 9 percent rates on personal and business income would apply to very different tax bases than now exist. For individuals, the tax would apply to gross income less only the deduction for charitable contributions. No mention is made of a personal exemption.

This means that the 47 percent of tax filers who now pay no federal income taxes will pay 9 percent on their total income. And elimination of the payroll tax won't even help half of them because the earned income tax credit, which Mr. Cain would abolish, offsets both their income tax liability and their payroll tax payment as well. Additionally, everyone would now pay a 9 percent sales tax on all purchases. No mention is made of any exemptions from this tax, so we may assume that it will apply to food, medical care, rent, home and auto purchases and a wide variety of other expenditures now exempt from state sales taxes. This would increase their cost of living by 9 percent while, at the same time, the poor would pay income taxes.

The business tax in the Cain plan bears no resemblance to the present corporate income tax. The tax would apply to gross sales less dividends paid and all purchases from other companies, including investment goods. Thus, there would be no deduction for wages. How benefits would be treated is unclear, because purchases of things like health insurance might constitute a purchase from another company and remain deductible. If so, what is to stop a company from paying its employees by leasing their cars and homes for them and even buying their food and clothing? That would reduce their taxable revenue.

The abolition of any deduction for wages is likely to raise the cost of employing workers, even with abolition of the employers' share of the payroll tax. And since the dividend deduction doesn't appear to be related to profitability, companies could borrow to pay dividends and still get the deduction. Even a novice tax lawyer could easily make a tax shelter out of that.

And here's the kicker in the Cain plan. Phase 2 is merely a transition to yet another fundamental tax reform. In Phase 3, the United States would adopt the so-called Fair Tax, which would replace all federal taxes with a 30 percent sales tax on all goods and services. In a previous post, I explained why the Fair Tax is a bad idea. I went into more detail in testimony before the House Ways and Means Committee on July 26.

Whatever one thinks of the Fair Tax, it makes not the slightest bit of sense to have a plan that requires fundamental changes to the federal tax system twice to achieve its objective. Veterans of tax reform attempts in the United States know reform is very difficult and time-consuming even once. If the Fair Tax is a good idea, Mr. Cain ought to just do it, without confusing the issue with his unnecessary and highly complicated 9-9-9 plan. After all, one of the prime selling points of the Fair Tax is its simplicity, and the 9-9-9 plan is far from that.

Because so little detail exists, it's hard to do either a proper revenue estimate or distributional analysis of the Cain plan. It's obvious, however, that Phase 1 would represent a huge tax cut for the wealthy at a time when federal revenues are at a historical low as a share of the gross domestic product and the economy's fundamental problem is a lack of aggregate demand.

Thus the Cain plan would increase the budget deficit without doing anything to stimulate demand, because rich people can already spend as much as they want and are unlikely to spend more even if their taxes are abolished. The poor and the middle class might increase their spending if they could keep more of their earnings, but they will unquestionably pay more under Phase 2 of the Cain plan. With no tax on capital gains, the rich would pay almost nothing, while elimination of all deductions and credits, as well as imposition of a national sales tax, must necessarily raise taxes on everyone else, especially those not now paying income taxes.

At a minimum, the Cain plan is a distributional monstrosity. The poor would pay more while the rich would have their taxes cut, with no guarantee that economic growth will increase and good reason to believe that the budget deficit will increase. Even allowing for the poorly thought through promises routinely made on the campaign trail, Mr. Cain's tax plan stands out as exceptionally ill conceived.

[Gaspar]

Good article and it does bring up some valid concerns.  I believe his proposal does not include any personal exemptions to my knoledge.  I do however believe that there is a "prefund" for basic necessities like food, clothing, housing and utilities.  It is true that this is an intermediate step to a Fair Tax, Cain has been very forthright about that.

This brings up some troubling questions that will certainly need to be addressed.

[Conan71]

At least he's proposing something entirely new rather than continuing on with our failed taxation system which is far too complex to comply with and enforce.  As well, the tax code has been used as a personal payback account by politicians of both parties for far too long as a reward to their campaign backers.

I've pretty much ruled out voting for anyone who promises lowering taxes under our current system lower than they are now as some sort of responsible fiscal policy.

[Gaspar]

Conservative groups are actually promoting this video making fun of Herman Cain's strange campaign video.
http://www.mrctv.org/videos/video-makes-fun-herman-cains-odd-campaign-video-funny-0

It is pretty funny!

Cain was on the networks this morning talking about it.  He said, "I want the people who work for me to be who they are, not packaged for TV.  Mark smokes. I'd like for him to quit, but that's who he is, and I'm not here to change people!"

[nathanm]

At least he's proposing something entirely new rather than continuing on with our failed taxation system which is far too complex to comply with and enforce.

The present system isn't too difficult. The problem is all the effing loopholes and exceptions and the like. If the basic system remained as-is, but we eliminated most of the special treatment it would be easily understandable. Yet another example of what happens when money and politics mix.

[Gaspar]

The present system isn't too difficult. The problem is all the effing loopholes and exceptions and the like. If the basic system remained as-is, but we eliminated most of the special treatment it would be easily understandable. Yet another example of what happens when money and politics mix.

So, if we eliminate 5,999 pages of teh 6,000 page code?

[nathanm]

So, if we eliminate 5,999 pages of teh 6,000 page code?

It would probably need to be 25-50 pages (or 100, given the way the Federal Government wastes paper by triple spacing and has headers/footers that take up half the page), since it has to cover things like nonprofits making a profit on non-tax-exempt activities and other corner cases. I would rather the tax code be both clear and precise, otherwise we'll end up wasting money on endless court cases.

[Gaspar]

It would probably need to be 25-50 pages (or 100, given the way the Federal Government wastes paper by triple spacing and has headers/footers that take up half the page), since it has to cover things like nonprofits making a profit on non-tax-exempt activities and other corner cases. I would rather the tax code be both clear and precise, otherwise we'll end up wasting money on endless court cases.

Would you suggest a rate structure with progressive increments?  Would investment income be taxed in the same way that it is today?

[Red Arrow]

So, if we eliminate 5,999 pages of teh 6,000 page code?

New form 1040:

How much did you make?

Send it in.

[nathanm]

Would you suggest a rate structure with progressive increments?  Would investment income be taxed in the same way that it is today?

I don't really have a problem with the general outlines of the tax system as it exists. I think that long term investment holdings should continue to be taxed at a lower rate than short term holdings, which should continue to be taxed as regular income, so yeah, I think the general system is ok. The thing I find most annoying on that front is the necessity of keeping track of documentation of cost basis, such that you only get taxed on gains, but I don't really see a way around that as long as investment income is taxed at all, and quite honestly, I think that would be utterly ridiculous.

And yes, I do think progressive taxation is the way to go. There's just not much money at the bottom, and a much greater proportion of the income of those at the bottom of the income distribution goes to necessities, so their tax rate should naturally be somewhat lower. I wouldn't even be terribly opposed to keeping current rates if we can add a couple of brackets higher up the income scale, perhaps peaking at 40-50% for the very top earners. That should get them paying about what the rest of us do. (remember, in a progressive system, a 50% top rate doesn't mean that you only get to keep 500,000 out of your first million in income, more like $750,000, depending on exactly how the brackets are structured and what rates apply)

I don't think any reform to the tax code is doable without getting money out of politics first. No serious reform is possible without doing that. Given that Congress' approval ratings are running right around 9% now, I dare say most everyone would be interested in that goal. We can argue about the rest later, IMO.

[Conan71]

The present system isn't too difficult. The problem is all the effing loopholes and exceptions and the like. If the basic system remained as-is, but we eliminated most of the special treatment it would be easily understandable. Yet another example of what happens when money and politics mix.

In your haste to disagree with me, you end up looking like a walking contradiction. 

[Conan71]

I don't really have a problem with the general outlines of the tax system as it exists. I think that long term investment holdings should continue to be taxed at a lower rate than short term holdings, which should continue to be taxed as regular income, so yeah, I think the general system is ok. The thing I find most annoying on that front is the necessity of keeping track of documentation of cost basis, such that you only get taxed on gains, but I don't really see a way around that as long as investment income is taxed at all, and quite honestly, I think that would be utterly ridiculous.

And yes, I do think progressive taxation is the way to go. There's just not much money at the bottom, and a much greater proportion of the income of those at the bottom of the income distribution goes to necessities, so their tax rate should naturally be somewhat lower. I wouldn't even be terribly opposed to keeping current rates if we can add a couple of brackets higher up the income scale, perhaps peaking at 40-50% for the very top earners. That should get them paying about what the rest of us do. (remember, in a progressive system, a 50% top rate doesn't mean that you only get to keep 500,000 out of your first million in income, more like $750,000, depending on exactly how the brackets are structured and what rates apply)

I don't think any reform to the tax code is doable without getting money out of politics first. No serious reform is possible without doing that. Given that Congress' approval ratings are running right around 9% now, I dare say most everyone would be interested in that goal. We can argue about the rest later, IMO.

Actually, I think rather than there being a distinction between long-term gains and short term gains, have different rates for passive or active investment and have a few safe havens like cap gains on a primary homestead taxed at a lower rate or still allow the reinvestment of that capital with no tax penalty.  I'm defining passive investors as people who do nothing but push paper, betting on paper gains or losses to make their money, and not directly putting capital into a business operation.  Buying 10,000 shares of GE simply isn't the same as providing capital for a local business which could add 10 or 20 jobs to the local economy.

I think you could also take a lot of gyrations out of the financial, real estate, and commodity markets going about it that way.  People making a living flipping stocks and trading commodities can literally let their greed dictate what happens to other's retirement accounts and what people wind up paying for gasoline or food.  Make the stakes higher for home flipping and that would help curb the rapid escalation of home prices that result in the massive calamity we saw the last few years.  In other words, look at the specific activity, not the time-frame so much in considering the rates.

I realize the current code with short and long term gains is supposed to help delineate such activities, but apparently the tax code hasn't been much of a deterrent to preventing certain practices that affect the overall financial picture for everyone else.  I've never been much for taxation as being a deterrent to behavior, but considering what the home flipping binge ultimately contributed to the housing bubble and nearly brought down the financial markets, I think there's a reasonable argument to make for it in certain cases.  Or as another example: what speculators did to oil prices in 2008 and continue to do today.

Don't penalize those creating jobs for others and who make a great profit creating something.  Tax the smile out of those who do nothing but push money from place to place and fleece others in the process.

Yeah I know it doesn't sound all that conservative, but I think there are a lot of wealthy people under the gun right now who make an honest living and will continue to create jobs so long as they've got the capital to do it.  Don't hammer the people who provide jobs, hammer those who exploit the system to the detriment of others.

[nathanm]

When I said system, I meant the basic underpinnings. The underlying concepts are sound. The basic rates aren't even too terribly far off from where they need to be to get the deficit under control, since we'll be paying for a lot less blowing stuff (or at least doing it more cost effectively) up pretty shortly. Get the economy out of slowsville and the problem will pretty much fix itself, especially if the Bush cuts are allowed to expire.

It would be nice if we can manage to get the whiners to let us run a budget surplus for a while when the economy picks up, so as to pay down the debt to something closer to 50% of GDP and forestall the need for the Fed to raise interest rates significantly should that expansion grow too vigorous.

[Gaspar]

New form 1040:

How much did you make?

Send it in.

That's a lot like President Obama's new 90-90-90 plan.

[nathanm]

That's a lot like President Obama's new 90-90-90 plan.

It's no wonder you cry yourself to sleep. You're delusional!