9-9-9 tax plan: Does it make Herman Cain a Robin Hood for the rich?
9-9-9 tax plan is helping Herman Cain soar in GOP presidential polls. But does a 9 percent national sales tax and a flat 9 percent income tax take from the poor and give it to the rich?
(Page 2 of 2)
Here's a closer look at the issue.
First, it appears that Cain's plan would offer an income-tax cut to millions of Americans, not just the rich, once you factor in that his plan does away with the payroll taxes now paid by workers to help cover Social Security and Medicare. (Under Cain's proposal, those programs would be funded through the government's general revenue stream.)
But for some working Americans, who now owe very little income tax, the new 9 percent flat tax would represent a tax hike that outweighs their savings from the payroll-tax cut. (Currently, employees pay 6.2 percent of their income in payroll taxes to fund Social Security, and 1.45 percent to fund Medicare.)
And many Americans don't work, including those who are elderly, disabled, or unemployed.
Roberton Williams of the Tax Policy Center, a nonpartisan research group in Washington, says 23 percent of households appear certain to see their income taxes go up under the Cain plan.
"And they are the poorer end of the population," Mr. Williams says.
One group facing an effective income-tax hike would be seniors who don't currently owe payroll taxes. Another would be workers who currently owe payroll taxes but no income tax. (Cain has not outlined income-tax exemptions for Social Security beneficiaries or low-income workers, for example, Williams says.)
Then comes the sales tax. How low- and middle-income households fare under Cain's plan depends a lot on how much they spend as well as how much they earn. The candidate’s plan calls for the sales tax to apply only to new goods, so someone buying a previously owned home or car wouldn’t face the tax.
One challenge, economists say, is that the plan could push consumers toward used goods, resulting in price hikes that partially offset the tax break.
In TV interviews, Cain has referred to a family earning $50,000 a year, and said its total taxes would fall under his plan, even when the sales taxes are factored in.
At the other end of the income spectrum, the Tax Policy Center estimates that people in the highest tax brackets now effectively pay about 18 percent of their total income in federal income taxes. That rises to an effective rate of about 21 percent when payroll taxes are added in, and taking into account that much of their income is not covered by the payroll tax. The Cain plan would cut all of that to 9 percent.
Cain also calls for eliminating the capital-gains tax, a levy now paid almost entirely by high-income Americans. The current tax rate on long-term investment gains is 15 percent. Cain's espoused goal is to propel economic growth, but a side effect would be that hedge fund managers – who classify much of their earnings as capital gains – would see “a big tax break,” Williams says.
The Cain tax rate on business income, at 9 percent, would be much lower than today's official rate of 35 percent, and lower than the actual rates businesses pay after various deductions.
But Williams notes one caveat: It appears the Cain plan allows no exemption for wages paid to employees. (Cain's website describes the business flat tax as 9 percent of “gross income less all investments, all purchases from other businesses and all dividends paid to shareholders.”) So, even though the payroll tax would disappear, employers would in effect pay a new tax on their cost of labor.
Subscribe Today to the Monitor
Under the Cain plan, new Empowerment Zones would provide special tax deductions for those living or working in them. That would help some lower-income workers, but the scale of this Cain program remains unclear.
SOUND OFF on Facebook: What chance would Herman Cain's 9-9-9 tax plan have of getting passed by Congress?
Cain says that, overall, this plan will get the economy moving again, in part because it “provides certainty” about the direction of tax policy. (He sees the 9-9-9 plan as a step toward adopting a FairTax system, in which a consumption tax would replace income taxes. FairTax proponents typically call for rebates to cushion the burden on lower-income Americans.)
Other Republican candidates, including Mr. Romney and former Utah Gov. Jon Huntsman Jr., have offered their own plans to simplify the tax code and goose economic growth.
RECOMMENDED: Election 101: Herman Cain