Since presidential GOP candidate Herman Cain has risen in the polls, his 999 plan for tax reform has come under increasing scrutiny. Now considered a Republican front-runner, he faces the difficult task of proving that his plan — touted as his vision to a return to prosperity — can actually work. It seems unlikely that such a simple formula can cut taxes, reduce spending, increase productivity, slash the deficit, and finance our massive federal government.
The simplicity of 999 is its most attractive feature. It would eliminate the current federal tax system, codified in the Internal Revenue Code of over 4000 pages, and replace it with three flat taxes: a nine percent business tax; a nine percent individual tax; and a nine percent national sales tax. Bluntly calculated, Jane Doe, an individual consumer and wage earner with a small business, would pay no more than 27% in total taxes. A global comprehensive tax of 27% certainly compares favorably to a federal income tax of 25% on taxable income alone.
However, a deeper examination of Cain’s plan shows its clear and undeniable flaws. It is not fair. It is not equitable. As all flat taxes do, it imposes a greater tax burden on the poor than on the rich. A national sales tax, in particular, would hit lower income people harder. Lower income people spend a greater percentage of their income on necessities (food, clothing, basic comfort) than higher income people. Whereas taxpayer A earning $30,000 must spend most of it on necessities, taxpayer B earning $500,000 and having greater disposable income does not have to do so. Taxpayer A’s sales tax burden is, in reality, close to 100% of income; taxpayer B’s burden is less depending on spending habits. Moreover, taxpayer B who spends less on necessities can invest the remainder of the earnings tax free since, under 999, investment income goes untaxed.
As Cain’s plan would impose the nine percent flat tax on gross income (less charitable deductions), all current tax breaks would be eliminated. For tax year 2011, married filing joint taxpayers with two dependent children enjoy $14,800 in exemptions and a standard deduction of $11,600. Both breaks reduce taxable income. Both breaks would be eliminated under 999, thereby increasing taxable income and the amount of tax due on it. Consider the married couple earning $52,000 with two dependent children and making no charitable deductions who would pay $4,680 in taxes under 999. Compare our current system in which the same couple would pay $2,990 in taxes ($52,000 less $26,400 in exemptions and standard deduction = $25,600 in taxable income at about 12%). Thus, instead of cutting taxes, 999 actually imposes in a tax increase. It results in an added tax burden of $1,690 ($4,680 less $2,990) in pre credit dollars. If the current child tax credit (a tax break of $1,000 per dependent child under age 17) is factored in, then the tax increase under 999 jumps to $3,690.
And, that is a hefty burden in these tough economic times when people are struggling to hold on to their homes and use the treasured mortgage interest deduction to help. But, this deduction — an aid to the American dream of homeownership — would also be eliminated under Cain’s 999 plan. So if Cain intended 999 as a vision to a return to prosperity, then his vision is skewed to one of prosperity for the wealthy solely.
