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Herman Cain’s 9-9-9 Tax Plan

This article was written by in Taxes. 38 comments.


In the latest CNN poll, Republican Party hopeful Herman Cain is statistically tied with Mitt Romney with support of 25% to 26% of Republicans asked, but two thirds of the respondents haven’t made up their minds. Likely a big contributor to Cain’s surge from from 9% to 25% is his 9-9-9 tax reform plan.

This plan is a significant simplification of how the federal government levies taxes on the public. The three nines refer to a starting point that includes a 9 percent federal income tax, a 9 percent corporate transaction tax, and a 9 percent federal sales tax. Despite the appearance of a tax cut due to the fact that many people pay more that an effective 9% on federal income taxes, this would likely result in a significantly higher tax bill for most people. The 9 percent national sales tax would be in addition to any state sales taxes. For the middle class and families lower than middle class on the socioeconomic scale, who need to devote a larger percentage of their income on buying the necessities of living like food, an increased sales tax makes it much more difficult to make ends meet.

Even if the new national sales tax is added only to items that are purchased new, there are some significant necessities that cannot be purchased used, such as food.

Herman CainThose who support a value-added tax or a flat income tax have often recognized that “equal” doesn’t always mean “fair,” and have adjusted blanket proposals with credits that benefit those who would be harmed by a tax like this.

Defense of Cain’s 9-9-9 tax plan also relies on the idea that the costs of consumer goods will go down when embedded taxes disappear. For example, if corporations can better control their tax expenses, they won’t need to increase a product’s price to cover a potentially higher tax bill. The underlying assumption is that businesses will lower prices (or not raise prices) to compensate for lower expenses, but that doesn’t happen. When a product is sold at a certain price point, a reduction of expenses for the product just result in higher profit for the company. Companies with shareholders won’t turn away the “easy” profits earned by reducing expenses and keeping revenues the same.

We’ve seen that as recently as the airline tax fiasco. During a short period of time earlier this year, airlines had the opportunity to pay less tax. During this period of time, several airlines raised fares so customers did not see any difference in the total expense.

The 9-9-9 tax plan is not an immediate change. The plan calls for first phase that includes a reduction of the top tax brackets to 25%. The second step would be the plan that includes a 9% rate on each of the three categories. The final phase would be a flat national sales tax, eliminating income tax entirely.

This is from the Washington Post’s fact-checking analysis of the plan:

Right now, nearly half of taxpayers don’t pay income taxes, but they do pay their share of payroll taxes, which amounts to 7.65 percent of wage income (though much of it is capped at $107,000). Cain would also eliminate the earned-income tax credit, which is intended to lift working Americans out of poverty. Many of these workers currently receive tax refunds.

On top of that, Cain would introduce the new sales tax, which would affect lower and moderate-income people who spend most of their income on purchases, not savings and investments. Depending on how you do the math, people now paying zero or negative taxes might be faced with a 27 percent tax on income.

In other words, while on paper Cain is promising a tax cut, in reality tens of millions of lower-income Americans would face tax increases. People in high tax brackets — 28 percent and higher — would likely see big tax cuts.

Do you support the 9-9-9 tax plan?

Photo: johntrainor
CNN, Washington POst

Published or updated October 17, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 38 comments… read them below or add one }

avatar tom

No… it’s an overly simple solution to a very complex problem.

I think SNL actually summarized Herman Cainbest:

http://www.hulu.com/watch/289402/saturday-night-live-gop-debate-ii#s-p2-sr-i1

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avatar lynn ♦155 (Cent)

I saw this and I agree. ( I laughed too)

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avatar Krantcents

No! Anytime someone tries to simplify the tax code, it has a negative effect.

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avatar Armand Medina

This is not a simplification of the tax code, it is a replacement for the tax code. It is more of a great unknown. It might be great or it might suck. There is no real precedent.

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avatar Andy

Personally, I think it has some good ideas, along with the ridiculous, but at least it gets people talking about much needed tax reform. A topic that has been too hard and droll for past campaigns and current incumbents.

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avatar Ceecee ♦53 (Newbie)

Unless you have a ton of income from capital gains, it’s a bad deal. The working poor will really suffer under this plan.

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avatar David M

Do your care to explain further regarding why its a bad idea? Do you mean personally?

If so I totally disagree – I do not have a lot of capital gains taxes but this would be a big tax saver for me personally.

Do I think its good for America? – Hell NO!!!!

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avatar Jack

We are in the middle of the worst economic downturn in 70 years, and the solution is to add a regressive 9% tax on all sales? (With no exceptions for food, services or medical care.) I can’t think of a worse idea.

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avatar UH2L

Another scheme to fool poor people into getting screwed over even more just because the plan looks nice and simple.

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avatar anonymous

I love the flat tax, but the sales tax on top of it makes low income people’s tax rates greater than high income people’s tax rates.

Someone who makes big money can choose to save/invest a significant portion of their income rather than spend all their income, thereby sheltering that income from sales tax. Saving that income will build weath for themselves.

However, someone with low income will be forced to spend virually all their income on necessities such as food, clothing and etc. That’s virtually a full 9% sales tax off of what’s left over from the 9% income tax. Low income people will go from one extreme to the other, paying no income tax to paying the greatest percentage of their income to taxes.

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avatar wylerassociate ♦162 (Cent)

this 9-9-9 plan is going nowhere as is herman cain’s presidential candidacy.

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avatar Apex ♦478 (Nickel)

Herman Cain could get elected President and hold sizable majorities in both houses of Congress and 9-9-9 will still have zero chance of passing. Moderate Republicans such as Olympia Snow and Susan Collins from Maine would not even support it.

Discussing the merits of this plan is like discussing the merits of unicorns. Both might have merit but neither one exists or ever will so what’s the point?

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avatar crashdamage1957 ♦113 (Cent)

I saw an article on Yahoo today that said in part “Under Cain’s 999 plan… ” Warren Buffett would very likely have paid no income taxes”. It went on to say “Cain, a Georgia businessman, has risen to the top of several polls for the 2012 presidential campaign. A centerpiece of his platform is his 9-9-9 tax plan. Devised by Rich Lowrie, an Ohio wealth manager for Wells Fargo”… and i had to stop reading at that point.. Wait…did i just read that correctly? This plan was devised by a guy who works as a Wealth Manager for Wells Fargo? Seriously? Like getting the fox to devise your Hen-house Protection Plan. I agree that simplifying the tax code is a good goal, but this plan isn’t the right answer to that problem.

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avatar Armand Medina

Not sure how Warren Buffet could pay no taxes under a plan that has a flat tax on individual income, corporate income, and consumption (with supposedly no loopholes) and yet some claim that a poor person under this same plan will somehow pay 27% tax. That makes no sense. If nothing else the man does eat and consume some consumer products.

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avatar crashdamage1957 ♦113 (Cent)

here is a link to the article http://www.huffingtonpost.com/2011/10/17/warren-buffett-no-income-tax-999_n_1016141.html

“According to an analysis prepared for Yahoo’s Lookout by the American Institute of Certified Public accountants, the 999 plan would leave Buffett paying around $440,000 in income tax, or 1.1 percent of his approximate $40 million in currently taxable income.”

So there you have it.

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avatar Simple is not Smarter

Because only paid income would be taxed, not dividends or other investment income. If you work and earn $100,000 you will pay 9k in income taxes. If you instead you collected 100,000 in dividends there would be no tax. Right or wrong this is a huge windfall for the wealthiest Americans because the bulk of their income would become tax free.
Following along this path the plan is supposedly revenue neutral, which means if one group is experiencing a huge windfall than another group is really getting the shaft.

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avatar Evan

Doesn’t matter – Literally will never get through Congress, but wow it makes some fantastic news.

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avatar Luke Landes ♦127,535 (Platinum)

No, something like this will probably never make its way through Congress, but here we have someone who for the moment is the leader among GOP hopefuls, so I would say it’s important to look at what he’s saying.

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avatar jim

It works in SimCity.

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avatar Paul

I think it is a good idea to simplify the tax code–getting rid of the IRS and the tax preparation industry would boost the economy by simplifying business. I also think it’s good to push more of the tax burden on the less successful so they will have more of an impetus to move up. I know that last is controversial, but I think economic production and innovation comes from the wealthy, not the wage-earners.

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avatar lynn ♦155 (Cent)

Paul, The one glitch in this way of thinking is there has to always be something at the bottom of a food chain. So the incentive will not be there for everyone. Some people just don’t have the skill set to move up. I feel it’s our responsibility to care for these individuals. And this thought is also controversial.

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avatar Armand Medina

While I would prefer only a basic flat tax, even at an elevated 15 or 20% rather than 9%, I understand the idea of a consumption tax. Supposedly slightly more than 50% of Americans pay no income tax. A consumption tax would generate income from that sector. It would also generate income from people who pay no income tax on illegal activities as they would still be buying groceries, game boys etc. with their illegal income. So I get that.
I am not sure why people keep saying that the effective rate for “the poor” will be a 27% tax. First off poor people don’t usually pay corporate taxes. So if they are adding the 9′s there is an error in their math. If I recall their is supposed to be a cut off point for the very poor. In addition the effective rate would be 18% assuming you had income above the cut off level and spent all of your income on goods and services. Still a moderately low rate compared to present income tax levels. Understandably this would vary according to your state tax on items too. The 9% income tax rate would be attenuated, however, by the elimination of the payroll tax which, if I recall correctly, is like 5 or 6%. So your effective income tax rate would be 4 or 5%. Even if you spent all of your income on goods and services this would give you an effective tax rate of about 13 or 14%. I have worked three part time jobs to support myself before and at one time had to live in my car lived at the poverty level and I don’t recall my tax rate being as low as this.
The odd thing is even when I discuss a flat tax (there is nothing fairer than a flat tax with no allowed deductions) with some people, they view it as unfair and claim that the rich should still pay more. I think this attitude can cloud good judgement. Logic and reason should be our guide when determining the future of America. I prefer Gary Johnson as a candidate and am not some big Cain supporter.

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avatar anonymous

@Armand Medina

I don’t get the 27% rate either. Maybe it’s a combination of local taxes as well.

The payroll tax would be eliminated for all income levels, so just throw that out alltogether from a comparison between low and high income earners.

Throw out local taxes as that varies between location, and these are federal level candidates, not local.

Now, I agree with your estimate of a possible 18% tax on the working poor, and higher earning individuals (not corporations) would be faced with the same flat 9%. I also agree that even the great Warren Buffet could not finagle out of that one.

However, the high earner will not have to be faced with a full 9% sales tax on all of his/her income, because he/she has the much easier option of SAVING instead. Therefore, the high income earner would pay 9% plus some other percentage lower that 9% due to savings.

Hence, my observation of a possible outcome of a reverse progressive tax, where the working poor pay a higher percentage that the higher income earners. That’s not any fairer than the current progressive income tax system (deductions and credits aside) and is quite possibly even worse.

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avatar Simple is not Smarter

When you talk about Warren Buffet not getting out of the 9% keep in mind that it is only ordinary income that would have the 9%. In his case last year ‘ordinary’ income was just about 10% of is total income, so his effective tax rate would only be ~1%. Now maybe we can make similar assumptions to the rest of the tax plan that the savings from corporate taxes will be passed on to customers, and that the 7.65% that companies would not pay into social security will imediately be passed into raises for its employees (both are necessasary for the plan to work as promised without cutting the purchasing power of the middle class) and assume that Warren Buffet will give the difference to everyone in the form of charitable donations. Of course that would completely eliminate any tax he would owe because charitable giving is the one deduction that will still be around in the 9-9-9 plan.
My other question is if companies are immediately passing all of the savings they are seeing to customers and employees why is it a good plan for companies? It isn’t any cheaper to hire workers because I just increased their pay and I am not making any more profit because I just cut my prices.

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avatar CommonCent$

Anytime you take the pressure off of small business you create jobs. The reason why this country is losing jobs to other countries is because we have created an environment of too many taxes and too big a government causing our price to manufacture a product too expensive. We can continue the current tax plan and continue to lose our competitiveness in the world until we eventually all work for another country OR we become bold and try to CHANGE. Everyone shouted they wanted CHANGE in 2008 but nothing changed. Cain is the 1st candidate that has a bold plan to get America back on track.

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avatar jim

The reason we’re losing jobs to other countries is not our tax rate. We’re losing jobs because people in China work for $1 an hour. If people in China got paid $8 an hour then we would not be losing jobs to China.

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avatar Money Beagle

The middle and lower classes will suffer higher taxes while the rich will get richer. The middle class has already had stagnant wages for the last 20-30 years. There is no need to propogate this further.

I personally think Obama would love it if Cain got the nomination, because once the working public sees this picked apart, there’s no way Cain would be elected. It’s probably Obama’s best chance, actually!

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avatar Josh

“The underlying assumption is that businesses will lower prices (or not raise prices) to compensate for lower expenses, but that doesn’t happen.”

When corporate taxes are reduced, the gain from that reduction is divided between lower prices, higher wages paid to their workers, and higher profits. Some companies may choose to just let their profits increase, but others may decide to lower prices in order to increase demand for their products, which also has the potential to increase profits for them. Others may decide to increase wages a bit in order to attract better workers. No matter where that money goes, it’s good for the economy. Even if a company just takes the higher profits without modifying prices or wages, the stock price of that company goes up, which benefits shareholders (also known as taxpayers or consumers).

“We’ve seen that as recently as the airline tax fiasco. During a short period of time earlier this year, airlines had the opportunity to pay less tax. During this period of time, several airlines raised fares so customers did not see any difference in the total expense.”

Flexo offers this as his defense of the first statement I quoted. The problem with this defense is that he’s using a short term example to defend a long term argument. Things that happen in the short term do not change the way consumers or companies behave. Milton Friedman won a Nobel Prize for studying what he called permanent or life cycle income in 1976, so this isn’t news.

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avatar Apex ♦478 (Nickel)

You are correct that the distinction is between short and long term.

In the short term many companies will do everything they can to hold on to every extra dollar of profit they can. However in contradiction to Flexo’s statement that we know companies won’t lower prices, what we actually know is that in the long term no company can hold on to excessive profit margins that exceed normal business profit margins in that industry.

And why is this? Well if competitors use the profit to pay their workers more than companies who do not follow suit will lose their best qualified workers to competitors and become uncompetitive. If competitors use the profit to lower their prices then companies who do not follow suit will lose their customers and go out of business. If no competitors make any changes then eventually new competitors will enter the market and compete against them to get a piece of that easy profit and the only way they can compete is to offer better prices and this will force the entire industry to lower profits back to the standard profit margin level.

The thing that makes people think this doesn’t work is that the first year it won’t work out quite like this in most cases. It might take a full year, or 3 years or 5 to be fully reflected. It’s unclear how long it will take. In fact it could happen by just having stagnant prices for 5 years until inflation caught up and took away the profit. People would point to this and say they didn’t lower prices but failure to raise prices in the face of inflation is in fact lowering prices.

Anyone who follows this logic and doesn’t agree simply doesn’t believe that markets work. And if that is the case then I would ask why are prices not already higher. When a new industry starts prices are typically high due to high start up costs. Then as the industry grows sales increase and the profits rise. This brings in competition and that starts to squeeze prices down and by the time the industry is mature the prices have been squeezed down until the profit margin is at a point that no more competitors are interested in trying to enter that market. Price declines after that come only from lower costs of production.

If there is an event that raises profit margins new competitors will come in and drive them down if the companies don’t take them down by themselves. Either by entering and competing directly or by offering a substitute at a much better price. I know that markets are not perfect and there can be dislocations and barriers to entry that make this a lumpy process but eventually competition finds a way to compete. A lot of companies say they like competition because it makes everyone stronger. That is a blatant lie. Companies hate competition. Why? Because it drives down prices and profits. Every company would like to hold on to as much profit as they can. In a market economy they have no power to do so. The market will set their profit margin and they cannot exceed it for any extended period of time.

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avatar Tony Lovasco

The mistake many people have made about the 9-9-9 plan, and the FairTax (which is Cain’s final tax plan, with the 9-9-9 being step 2 as mentioned above) REPLACE the current tax system, not suppliment it.

So no more payroll taxes (7.5% from the employee’s side if the temporary cuts aren’t renewed) — which all poor people that have a job pay. You don’t get a rebate for your Social Security & Medicare contributions. The 9-9-9 plan might increase the price of goods, but having an instant 7.5% increase in pay should compensate for that.

Also of note — if the 9-9-9 is indeed intended to transition us to the FairTax, then along with the FairTax will come the prebate — a monthly check for each household covering the approximate amount of sales tax they would be spending each month, based on poverty-level spending for a household of that size. that means not only will the poor have a 7.5% boost in their take-home pay, but they’ll also get a monthly check as well — so theoretically, poor people should continue to pay basically no taxes, just like the current system.

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avatar Apex ♦478 (Nickel)

It will not transitions us to the fair tax. You think adding a new kind of tax is going to get rid of the income tax eventually? No what is going to happen is after Democrats take control again progressive brackets will be added back into the income tax, the corporate tax will be raised and if more money is needed the sales tax might be raised as well.

People have already commented that the 9-9-9 will become the 14-14-14 and maybe the 21-21-21.

It’s all moot because it could never pass but if by some strange phenomenon it could, it would definitely not stay 9-9-9 and the changes would make it tax more not less.

All these magically tax proposals are a game. The government currently spends 1.5 Trillion more than it takes in. And improving economy can help that a little but eventually we have to cut spending or raise taxes. There is no magically tax plan that can change that reality.

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avatar shellye ♦107 (Cent)

It’s unfortunate that this crop of candidates apparently sees taxation (or lack of it) as the only way to get this crappy economy going again. Not a single one of them has any kind of economic vision other than to mess with the tax code. Not that it doesn’t need messing with – it absolutely does – but it would sure be nice to hear some FRESH ideas on how to get people back to work and grow this economy instead of the “good tax, bad tax” debate.

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avatar Daniel

Has there been any mention of what sales tax would mean to online companies. The state sales tax issue is one thing, but if this became a national tax, online stores would lose out on one of it’s big disadvantages, that they don’t have to account for sales tax unless they have a presence in the state. Under the new rule, amazon, for example, wouldn’t be able to avoid it.

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avatar David M

Which is good news IMHO.

Do I shop at Amazon to not have to pay sales tax – you betcha!

Does it make any sense that if I shopped in state I would pay 6.25% sales tax on an item but by shopping on the internet there is not tax – absolutely not!

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avatar Tim E.

Maybe I am wrong here. I have seen many comments about how 9% on the income tax rate would hurt the lower income individuals. Would it make things easier for those people if the minimum wage was increased proportionatly to offset the 9% tax rate? Just a thought. I do think that this plan could also lead to wage increases, better benefits, and probably more individuals starting new businesses; therefore creating new jobs for this Nation.

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avatar Cejay ♦1,521 (Half-Dollar)

Bad idea. But you made it totally understandable.

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avatar qixx ♦1,895 (Half-Dollar)

There is only one thing i care about this plan. It would increase my effective tax rate. I care less about the rest of you on this one. And conversely you should care about number 1 here as well.

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avatar Cedarcrest Tax

It seems that the plan would raise taxes on lower and middle income at a time when they are being hit the hardest by inflation and the economic slowdown. It would be difficult politically to get something like this done. The more likely outcome would be some change to the current system with the focus on higher-income taxpayers bearing more of the burden.

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