More Problems with Cain’s 999 Plan

October 17th, 2011 at 9:09 am | 26 Comments |

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There is so much to like about Herman Cain.

And there is also his 999 plan. Mr. Cain’s website states that “Amidst a backdrop of the economic renewal created by the 999 Plan, I will begin the process of educating the American people on the benefits of continuing the next step to the Fair Tax.” While there is no legislation to study with respect to his 999, there are some clear economic and political problems with 999.

Like the FairTax proponents, Mr. Cain infers a reduction in prices partially or totally offsetting the increased tax rate. He looks to the decrease in the corporate tax rate and the elimination of social security taxes on payroll for employees to cause this price reduction.

One need only look to the annual report of Safeway to understand the impact of 999 on grocery prices. Because the grocery business is incredibly efficient and there is significant competition, there are very, very low margins in the industry. The pretax profit in good years for Safeway is only about 2% of sales and the Federal income taxes therefore are less than 1/2% of sales. After making a reasonable guess based on other information in the Safeway annual report, the total Federal income tax plus Safeway’s portion of their employees’ payroll taxes is less than 2% of sales. Assuming that would all be passed through to the customer in the way of price reductions, the price of food must increase by about 7%.

An immediate increase of 7% in food prices or the mere thought of this could destroy any chance Herman Cain has with retired and low income voters. As this voting block does not pay income taxes, the resultant reduction in their spending power would surely result in these voters looking elsewhere.

In addition, assuming that the 999 parallels the FairTax, there are questions to be posed. It appears that many of the problems that we noted in The FairTax Fantasy, An Honest Look at a Very, Very Bad Idea would or could accompany the 999 plan. Because Mr. Cain wants to educate voters on the FairTax, the following questions need to be asked of Mr. Cain immediately:

1. The FairTax proposal, if calculated as a traditional sales tax, is 30%, but is described as a 23% tax because it is calculated on a “tax-inclusive basis”. (Note, the FairTax rate of 23% results in a tax of $30 if the seller gets $100 in sales proceeds. There is no controversy with respect to this calculation.)– Question 1: Is the 9% sales tax calculated in the same manner as the FairTax? If so, if stated like a sales tax, the rate is actually 9.89%.

2. What is not taxed under the 999 plan? The FairTax taxes new houses, food, and all services, including rent. Does the 999 plan follow the FairTax and tax each of these items?

These and other questions regarding the 999 plan need to be addressed.

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26 Comments so far ↓

  • Steve D

    The Fair Tax is mathematically illiterate. You never calculate percentage changes on an inclusive basis. If your tax is cut from $100 to $80, would you be okay with the Government saying it’s a 25% cut, since 20 is 25% of 80?

    But the central issue is that no amount of tinkering with the tax laws will help unless one fundamental reform is made – exceptions to tax laws need to be banned. Without that, the Fair Tax will be as riddled with loopholes as the present system in no time flat.

    • armstp

      From Krugman:

      “From comments I see that some readers believe that Cain’s second “9″ is a profits tax, which I’ve argued in the past probably falls on capital owners. But it isn’t: it’s a tax on all business income, defined as sales minus purchased inputs and dividends — but with no deduction for wages. So the new element here is, in effect, a 9 percent tax on wages paid.

      And the almost universal belief of economists is that taxes on wages, whether paid directly by the worker or by the employer, basically fall on the worker. For those who know their Econ 101, it’s standard incidence analysis: since the overall supply of labor seems to be pretty wage-inelastic, the supply side bears the burden.

      And again, his plan therefore involves 9 percent income taxes with few deductions, a de facto 9 percent levy on wages, and a 9 percent sales tax. That’s a huge tax hike for lower- and middle-income families, without, of course, the kind of benefits that European countries pay for with their VATs.”

  • armstp

    “There is so much to like about Herman Cain.”

    And what would that be? His foreign policy expertise and thoughts? His border security solution? His social conservatism?

    I don’t see it. I don’t see anything.

    • PracticalGirl

      Exactly. Hank, if a candidate’s major platform policy is a loser, what difference does it make what his LQ (likability quotient) is?

      So far, Cain has put forth a broad stroke that most economists laugh at. His “political strategy” is to “take it to the people and they will demand implementation”. Another laugh. Somehow, I just can’t see us a nation standing up saying “PLEASE, oh PLEASE. Increase my cost of living by 9% across the board”. Cain is a political dwarf who apparently hasn’t actually listened to the message of the Tea Party that he purports to love. What were all those rallies about, Mr. Cain?

      He has yet to answer any serious questions about how he would navigate large special interest groups that are naturally opposed to his goals. Nobody has even question him on what he proposes for 1.7 million accountants that will be out of work. Obviously, 9/9/9 renders accountants useless. But regardless of their profession becoming valueless, they will still flood the unemployment market, along with many of their tax attorney and estate planning friends. What’s President Cain plan for several million highly paid, specifically educated workers who will be out of a job? And does he really think that their entrenched lobbying institutions will just simply fold because he’s great at the 15 minute radio segment?

      Cain may have personal qualities that make him likable. He obviously blew the lid off of fast food leadership. But the largest, most complex political organization on Earth needs a professional who has come up within the ranks of the industry-government-just as his position as Godfather’s Pizza required years and years of progressive success within the food services industry. His- and, apparently, large portions of the GOP base-refusal to acknowledge the need for expertise is terrifying and makes him not just unlikable but dangerously arrogant as well.

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  • rbottoms

    Gaawd, you people are in a bind.

    Hoist. Petard.

    Har. And double har.

  • Frumplestiltskin

    please, please, please nominate Cain.

    In a sense though it is a pity that Cain didn’t have prior experience or a rational plan, having 2 black men running for President would have been one for the history books.

  • roubaix

    Plan 9 from Outer Space, amirite

  • reasonableviews

    Frankly, there aren’t enough details out there to evaluate the 9-9-9 plan fairly, which means that the plan is whatever the reader wants it to be. In a way, that’s part of the genius of it: simple, easy to repeat, fits on a bumper sticker, and vague enough to include whatever you think it should.

  • think4yourself

    Sounds good – but.

    As all the posters above mentioned, plus:

    - zero tax on capital gains. Now those who get paid that way pay only 9/9. The plan lost me on this one. If Capital Gains was taxed at the same rate as wages, we could talk more.

    - Can you really get rid of all the loopholes? How do you get rid of all the loopholes for business deductions? If I purchase healthcare for my employees is that an expense or a loophole? How about deductions I take for capital expenditures (either Sec. 179 or Depreciate it out over the life of the capital purchase)?. How about personal deductions? Can we really eliminate the home mortgage deduction (good luck facing that entrenchment), how about deductions for medical expenses, state income taxes, job training?

    - 9% sales taxes. Conservatives have rightly questioned what are the long term implications of adding another tax catagory. What does that mean for states with high state sales tax? What items are taxed and what are excluded? Who doesn’t believe that at some point in the future congress won’t say “let’s make 9.9% for the next two years just cause we need a little money (for example to that – show me how many states have lowered their sales taxes in the last 30 years).

    Of than that plan, there’s alot to like about Mr. Cain – okay wait. Maybe not anything more than the rest of the GOP field.

    • Steve D

      “Can you get rid of all the loopholes?”

      There are a million sound reasons for having exceptions to tax laws. We want to encourage people to give to charity, get a better education, make their homes more energy efficient, and invest. It’s fair to give people a break from having to pay taxes and try to raise children at the same time. If your house burns down, you have enough problems without being taxed, too.

      The problem is that Congress has abused that discretionary authority to death. And I for one don’t see any cure except to take that authority away from them, or at least severely limit it. But I’m open to suggestions.

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  • Oldskool

    We get it, the man is crazy and shouldn’t be allowed anywhere near the White House. But if push comes to shove, Rs will vote for him anyhow. Even the deep-thinkeratti will pause long and hard inside the polling booth.

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  • baw1064

    I have to give credit to Michele Bachmann, of all people, for the best remark about Cain’s plan: “999 is 666 upside down.”

    Actually, a Republican candidate proposing a 666 plan would be hilarious.

  • toenail

    I agree with a lot of the comments about 999 raising the tax on many low and middle income people. One thing I haven’t seen mentioned is that Herman Cain cannot do the 999 plan without the help of many, many other people. He cannot repeal the 16th amendment by himself. The change must be ratified by 3/4ths of the states. It takes many other politicions agreeing with him and pushing it along. An amendment change that takes less than 5 years would be amazing. Herman Cain knows this. This means his plan is really pure BS.

    • baw1064

      Technically (although unlikely in practice) you would get rid of the income tax without repealing the 16th Amendment. The 16th Amendment allows the Federal Government to impose an income tax (repealing a clause in the original Constitution which expressly forbade one). But it doesn’t require that one be collected.

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  • Dutchman3

    9-9-9 isn’t revenue neutral as Cain claims. Here’s why:

    (1) 9% sales tax: With a $14.5 trillion GDP, economists estimate that a reasonable tax base could be 81% of GDP provided you tax all government spending. So, 14.5T x .81 x .09 = $1057 billion.

    (2) 9% Corporate tax: Corporate profits currently run about 12% of GDP. So, 14.5T x .12 x .09 = $157 billion. That is half of current Corporate tax revenue.

    (3) 9% individual income tax: Wages and Salaries for both government and private sector employees was $6408 billion in 2010 according to the BEA. A 9% tax would raise $577 billion.

    Add them up and total revenue would be $1791, very short of the $2163 revenue in 2010. And the individual and corporate empowerment zones would only widen the gap.

    9-9-9 doesn’t work, but 11-11-11 might?

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