Herman Cain's '999 plan': long overdue tax reform or job killer?
Herman Cain's political star is lately on the rise, thanks in no small part to the persistent marketing of his '9-9-9 plan' to reform the tax code. Independent economists say the plan takes us into uncharted territory.
(Page 2 of 3)
If you cut down on consumption, retailers fret it would cost them sales and the nation jobs.Skip to next paragraph
In Pictures The Hermanator Experience
Subscribe Today to the Monitor
“Every CEO says the reason they’re not hiring is because they’re not seeing demand,” says Rachelle Bernstein, a vice president and tax counsel at the National Retail Federation, a lobbying group, in Washington. "An additional tax on consumer spending will negatively impact that already weak demand."
Some economists worry the plan would result in national tax cheating since retailers might offer items for sale at two different prices: one with tax and one without tax for people paying with cash. “The incentive to cheat is huge,” says Nigel Gault, chief US economist for IHS Global Insight in Lexington, Mass.
Mr. Gault says this is the reason why most countries have enacted a Value Added Tax (VAT) that gets tacked on during the different phases of producing a product. As each tax gets added on, there is an incentive to pass it on.
Since Cain would eliminate the business deduction for labor but not investment, the plan would most likely cause distortions that might add to the unemployment rate, says Mr. Silvia. “This would favor heavy industries that use lots of capital and penalize companies where labor is significant and capital is small,” says Silvia. The entire service sector would be disadvantaged, he adds.
Mr. Lowrie says one of the goals is to make labor more productive. “Capital and labor – you can’t separate them,” he says. “It makes no sense to takes sides, one over the other.”
But probably the largest economic impact would be shifting the tax burden. “It's a huge tax reduction on the very top and a huge tax increase for moderate and low income people," says Michael Graetz, a professor at Columbia University who has testified before Congress on taxes.
For example, economists have a measure called marginal propensity to consume. Low income people tend to spend about 98 percent of their income, middle income people spend 97 percent and high income people spend 90 percent.
Thus, Cain’s proposal would result in an individual who makes $20,000 per year, paying $1,800 in income taxes, plus another $1,605 in sales taxes, assuming they spend 98 percent of their income. The combined income and sales taxes would amount to 17 percent of income.
By way of comparison, using today’s tax rates, that individual – married filing separately – would pay $2,575 in combined taxes or 12.8 percent of their income, according to the website moneychimp.com.
A middle income taxpayer that makes $55,000 per year would pay $9,319 in combined taxes, coming to 16.9 percent of their income. Today, that individual would pay $9,875 and would pay 17.95 percent of their income in taxes.