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

{ 38 comments }