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.

Those 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

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The IRS has finalized the 2012 federal income tax brackets, but most people aren’t concerned with these numbers until next year. In April 2012, you’ll need to be concerned with the 2011 tax brackets to file your 2011 income tax returns. Most taxpayers won’t need to deal with the 2012 rates until early 2013.

While tax laws are always in flux, and things could change before 2012 tax returns are due in April 2012, the new tax brackets are official. They increase each year due to inflation. I’ll update these tax tables if the IRS announces any changes. For those who like to get a head start on their tax planning, these tables will at least provide a starting point.

Here are the tax tables for 2012, applicable for taxpayers filing by April 2013, still in the distant future. Keep in mind that the “taxable income” used in these tables is not your gross income. Taxable income already has certain deductions removed, like 401(k) contributions.

To lower your tax burden this year by up to $5,000, consider opening an IRA (Individual Retirement Account). Mint.com has an IRA wizard that can show you what kind of IRA to open and where to open it.

Married individuals filing joint returns and surviving spouses

Heads of households

Get your refund in as little as 8 days. E-file with TurboTax today. It’s Easy

Unmarried individuals (other than surviving spouses and heads of households)

Married individuals filing separate returns

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Warren Buffett has frequently claimed that he pays less tax as a percentage of his income that his secretary. President Obama has jumped on this as a basis for the Buffett Rule, a new proposed tax code that ensures that millionaires pay their fair share of income tax.

According to Buffett, his effective tax rate is 17.7 percent while the effective tax rate for his secretary, who earns $60,000, is 30 percent. There are two primary reasons that Buffett’s tax rate is so low. First, only the first $100,000 or so is subject to the payroll tax. For the secretary’s income, all is subject to this tax, while only a small portion of Buffett’s income is subject. Also, most of Buffett’s income is taxed at the lower long-term capital gains rate of 15 percent rather than the tiered ordinary income rates that are in effect for his secretary’s income.

It is also fair to consider why the secretary’s tax rate is so high. I may have to run some calculations again to check, but before I owned my own business, my effective tax rate tended to be 15 to 18 percent considering federal and state income taxes as well as payroll taxes.

Someone with a $60,000 income will also spend a larger percentage of this income on expenses subject to sales tax, increasing their total tax burden more dramatically than someone whose income is high enough so that it can mainly remain in investments or savings.

The Tax Policy Center has offered data that show that while Buffett may pay a smaller tax rate than his secretary, this is not the case on average. The research group estimates that this year, millionaires, or households earning $1 million in income or more, will pay an average of 29.1 percent of their income in federal taxes while households earning between $50,000 and $75,000 will pay an average of 15 percent. Buffett and his team do not seem to follow the norm; in fact, their tax roles are reversed.

Historically, tax situations that favor the wealthy are friendlier than they have ever been. In 1986, the top marginal federal income tax rate was 50 percent. Throughout the 1970s it was 70 percent.
In 1964, it was 77 percent. Throughout the 1950s, it was 91 or 92 percent. In the mid-1940s, the highest bracket was 93 percent. The income required to fall into the top box varied each year, but not by so much that someone earning $1 million per year in today’s dollars would have found him or herself anywhere other than in the top bracket. These highest tax brackets applies to households earning over at least $1 million in today’s dollars. Individuals today need to earn only $380,000 to be placed into today’s highest tax bracket.

Beyond the rates, the poorest and the wealthiest all have ways to reduce their tax bill, though depending on your point of view, the other group seems to have more opportunities to do so. Over the long term, tax policy in the United States has shifted greatly in favor of wealthy households and corporations, while assistance plans for the poor have been facing more scrutiny.

“People who are doing quite well and worry about low-income people not paying any taxes bemoan the fact that they get so many tax breaks that they are zeroed out,” said Roberton Williams, a senior fellow at the Tax Policy Center. “People at the bottom of the distribution say, ‘But all of those rich guys are getting bigger tax breaks than we’re getting,’ which is also the case.”

The Buffett Rule, intended to ensure that wealthiest households pay their “fair share” to avoid situations like the one between Buffett and his secretary, could be designed to have no effect on the “average” household earning more than $1 million, those households that conform to the averages predicted by the Tax Policy Center.

Associated Press

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