Cain's 9-9-9 tax plan

I watched a couple episodes of the show Mad Men a while back.  I like the bits about coming up with advertising ideas, and the "newness" of advertising with images that drove the business in the '60s, but didn't like the interpersonal dramas.

The results of modern marketing is in display in politics in a big way, and it is clear that the pitch/soundbite is perceived as more important than the content.  Herman Cain's "9-9-9" tax plan is exactly that.

It's no surprise.  The guy is the former CEO of Godfathers Pizza, so he knows a thing or two about marketing. "9-9-9" just rolls off the tongue, and it sounds really appealing because nine seems like a really low number compared to the top rates in our progressive income tax code.

The reality, is that this tax plan would be a big benefit to the wealthy, and would screw the bottom, say, 95% of earners in the US.

Let's say you are a typical family of four, with pre-tax household income of about $60,000.  Under Herman Cain's tax plan, your payroll taxes would be 9%, but you would lose deductions for mortgage interest, child tax credits, standard deductions, etc.  Chances are your effective income tax level then would be the same or higher than it is today.

Secondly his plan eliminates the tax deduction for health insurance premiums, including the part your employer pays.  So your employer is likely to pass more health insurance costs onto you.  You can say goodbye to the inappropriately named "Flexible Spending Account" that you may use today to use pre-tax dollars on out-of-pocket medical expenses.

Then Herman Cain adds a 9% sales tax.  So now you take the money you earned and already paid 9% on, and you pay another 9% on everything you buy.  So now that family of 4 takes their $54,600 of income and likely spends all of it in a given year.  (Maybe in some lower cost areas of the country you can manage to save some proportion of that).  This would be on top of any local sales taxes, which in my area are at 9%, excluding groceries and professional services.  So the two 9% federal taxes are essentially combined for a 18% federal tax plus your local tax rates.

For someone who makes $1,000,000 a year, this is great, because they only get the 9% payroll tax.  And if they derive any considerable portion of their income from capital gains on stock, then the effective income tax rate is even less, because Herman Cain wants to eliminate that.  Then, this millionaire could choose to only spend 10% or less of that total yearly income, thus only paying maybe $9,000 in the national sales tax.  This person with $1,000,000 income per year could only pay 3.5% of their total income towards federal taxes under the first two "9's" in this plan.

The third bit of the plan, the last 9, is a 9% business tax, and this is where it gets even better.  The 9% is not a corporate income tax, I believe it is a tax on total sales.  If a business has earnings before taxes of 15%, that today are taxed at ~35%, your tax burden is 5.25% of sales (.15 X .35).  Now business have a 9% tax (a considerable increase) that will be passed onto consumers in terms of higher prices.

Ezra Klein sums it up nicely:

Which gets to perhaps the main way in which there is no 9-9-9 plan: This plan wouldn’t work. Not as policy and, as I expect Cain will soon find out, not as politics. Moving to an 18 percent consumption tax is, among other things, very bad for older voters, who make up a substantial portion of the Tea Party base. Jacking up taxes on the poor and the middle class even as you sharply reduce them on the rich and completely eliminate them on overseas income for corporations isn’t popular among anyone in the political system who isn’t specifically paid by the Club for Growth. The 9-9-9 plan is a great slogan. But the more seriously Cain gets taken, the more seriously the plan is going to get taken. And as that happens, it will soon become clear that it’s very poor policy.