The 9-9-9 Plan Would Mean 9-1-1 For The Poor

“Stupid people are ruining America.” -Herman Cain

Herman Cain
Republican Presidential contender Herman Cain has outlined his 9-9-9 plan to simplify the tax code. The plan proposes a 9% flat tax on personal and corporate income and a 9% national sales tax. It would eliminate taxes on capital gains and other forms of income, as well as all tax deductions and loopholes. It seems simple. As it turns out, its simplicity is its only advantage.

Cain claims the 9-9-9 proposal is revenue neutral, meaning it would raise as much money for the federal government as is collected under the current tax plan. However, the Center For American Progress estimates that this plan would have collected 9.2% of GDP in taxes in 2007 whereas the government actually collected 18.5% of GDP.  Based on 2010 numbers, Moody’s Chief Economist, Mark Zandi, estimates the plan would collect 15% of GDP in taxes in 2010, which is approximately what the federal government collected in the same year. However, government spending totaled 23% of GDP. So even if we give Cain the benefit of the doubt on the revenue neutrality of the plan, he would still have to impose some significant spending cuts in order to balance the budget.

Additionally, employers are currently required to deduct payroll taxes from your paycheck, including taxes for Social Security and Medicare. Cain would eliminate that. Under his plan, Social Security and Medicare would have to be paid for out of the general fund. Further, there would be no income tax withholding. Instead of filing your taxes at the end of the year and getting a return or paying (typically) a small amount, you would be writing the IRS a large check once a year. Automatic withholding forces employers to report your income to the IRS and forces you to prepay your tax bill. Eliminating payroll taxes creates an opportunity for employers and employees to under-report income, in addition to putting the responsibility for saving for their tax bill on the shoulders of Americans who, it’s well documented, already don’t save enough.

Currently, there is no national sales tax (except on gasoline.) Sales taxes are imposed and collected by state and local governments and used to support their activities. Further, state and local governments collect income and property taxes, as well. It’s unclear if Cain’s plan would replace state and local taxes or be implemented on top of those taxes. If his plan replaces those taxes, he offers no solution as to how state and local governments will fund their police and fire departments.

Finally, Cain claims his plan isn’t regressive on the poor, but it is. First, it eliminates capital gains taxes. Paris Hilton doesn’t make her money by working, like the rest of us schmucks. She lives off interest. Under this plan, she doesn’t pay taxes. On average, capital gains account for 40% of income for those earning a million dollars a year or more but only account for 4% of income for those earning $200,000 per year or less. Next, sales taxes really hurt the poor. The extra $9 on a $100 grocery bill is a more significant amount of the budget of a person earning $20,000 per year than it is of the person earning $200,000 per year. Moreover, poor people spend a larger percent of their earnings than the rich. Poor families spend about 98% of their income, while the rich spend about 90%. Now the poor have to pay 9% more on all of their spending.

So, in summation, Cain’s plan collects less revenue, provides more opportunities for people to cheat, possibly bankrupts state and local governments, and increases the tax burden on the poor while benefiting the wealthy. Of course it’s being proposed by a millionaire who supports small government.

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