Paul L. Caron

Monday, October 10, 2011

Kleinbard: Herman Cain's 9-9-9 Tax Plan

Cain Edward D. Kleinbard (USC), Herman Cain's 9-9-9 Tax Plan:

Presidential candidate Herman Cain has proposed replacing current law’s income, payroll and estate taxes with his 9-9-9 Plan– a 9% “individual flat tax,” a 9% “business flat tax,” and a 9% sales tax. This essay analyzes the components of the 9-9-9 Plan. Contrary to casual impressions, the Plan could be expected to raise substantial amounts of revenue, but does so largely by skewing downwards the distribution of tax burdens when compared to current law.

The 9-9-9 Plan functions as an effective 27% payroll tax on wage income. By imposing an effective 27% flat tax on wage income, the 9-9-9 Plan would materially raise the tax burden on many low- and middle-income taxpayers, who today face little or no tax under the income tax, and a 15.3% effective payroll tax burden. The Plan apparently offers lower tax rates (17.2%) for labor income attributable to owner-employees of firms, because they can extract their labor earnings as returns to capital.

The Plan operates as an ersatz variant on standard consumption taxes with respect to capital income, exempting normal returns on equity from tax and imposing tax at an effective 17.2 percent rate on economic rents. Finally, the Plan’s sales tax acts as a one-time tax on existing wealth. The relative undesirability of that consequence depends on what one chooses as the current-law comparable.

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Woody is obviously not familiar with the history of the income tax which has long provided exemptions for low earners. According to Woody, he should have to pay income tax on income from his lemonade stand beginning with dollar one.

The problem with "net worth" is defining it, including the date of measurement and valuation methods. This can be complex. I recall many years ago the IRS tried a "net worth" theory to establish that a taxpayer's return was not reflective of his true income, based upon his "net worth," requiring the taxpayer to explain that he may have acquired his "net worth" in a non-taxable manner. It seems the IRS has abandoned this method. Also, the IRS once considered an annual "net worth" tax aimed at unrealized gains that would at death give rise to date of death valuation (often, until perhaps recent years, stepped-up) tax basis that would avoid capital gain taxes (but in some cases subject to the federal estate tax). As I recall, Sen. Ted Kennedy had proposed such a tax, which failed.

Posted by: Shag from Brookline | Oct 13, 2011 2:22:11 AM

>Add a 9% tax on net worth.

Raising the sales tax from 0% to 9% is intended to achieve and does achieve exactly the same effect. Think about it.

Posted by: AMTbuff | Oct 12, 2011 8:24:07 AM

Shag, a progressive tax covers all taxpayers and begins with the first dollar earned -- not after exempting the lower 51% in a vote-buying effort with the money of the other 49%.

Posted by: Woody | Oct 11, 2011 7:05:04 PM

1. A VAT style sales tax, if it exempted exports from the tax, would (along with the lower corporate tax rates), be a powerful incentive to bring manufacturing to the US.

2. The low flat rates would provide a powerful incentive to savings and investment. It would also reduce the cost of enforcement

3. The elimination of tax expenditures would disproportionately hit the rich

Cain is more than Able!

Posted by: DLN | Oct 11, 2011 10:47:32 AM

Add a 9% tax on net worth. Otherwise Cain is not Able to be President.

Posted by: Nick Paleveda MBA J.D. LL.M | Oct 11, 2011 9:46:50 AM

I guess Woody is no fan of progressive taxation that existed long before Obama came into office (as well as having been previously watered down over several decades, including the two (2) Bush/Cheney tax cuts primarily for the wealthy beginning early in 2001).

Posted by: Shag from Brookline | Oct 11, 2011 2:44:33 AM

"...the 9-9-9 Plan would materially raise the tax burden on many low- and middle-income taxpayers, who today face little or no tax under the income tax...."

Doesn't the professor believe that every taxpayer should pay his "fair share?" Paying "little or no income tax" to support the operations of government is not exactly a fair share. His point is not an argument to oppose the tax plan but just plays along with Obama's class warfare.

Posted by: Woody | Oct 10, 2011 7:24:33 PM