Check his Math.
Former professional mathematician Herman Cain thinks he has the solution, and he calls it “The 9-9-9 Plan“ In Mr. Cain’s favor, it probably is true that if ever we needed a President competent in math, that time is right now. Before he went into the business world, Cain worked as a mathematician professionally, doing rocket ballistics for the Defense Department, and he earned his graduate degree from Purdue University in Mathematics.
—But we need to check his math. As Ronald Reagan said, “Trust, but verify.”
Some questions we need to ask are: “Does it bring in at least as much revenue as our current scheme of taxation,” and “Does it place undue burdens on a significant portion of the population?” In addition, there are numerous “hidden benefits” to the economy from the plan which are not always immediately obvious. Finally, there are a ton of urban legends creeping up about 999, in some supposedly “reputable” publications. We will discuss those at the end.
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To outline briefly Herman Cain’s 999 Plan, it calls for…
- Completely abolishing the current Federal taxation system, including the payroll tax.
- A 9% across-the-board individual income tax.
- A 9% corporate tax rate.
- A 9% Federal sales tax on all new products, but not on services.
Question #1: Is 9-9-9 “revenue neutral”?
Does it bring it bring in approximately the same amount of revenue as our current system? It seems to be at least close to the ball park, if not in the ball park. Here’s the back-of the-envelope math, using static analysis*:
+ Total revenues to the US Treasury last year were $2.1 trillion.
+ Per capita personal income is $45,000/year: Multiply $45,000 x .09 x 310 million people = $1.255 trillion in revenue.
+ Corporate profits last year were depressed at $1,225 trillion: $1,225 trillion x .09 =$110 billion in revenue.
+ Sales tax-eligible transactions* last year were $4.3 trillion: $4.3 trillion x .09 = $387 billion in revenue.
+ In addition, there are non-tax revenues (for example oil-drilling leases on Federal land, entrance fees to Yellowstone Park, etc., etc.) that will continue as before and bring in, as they did last year, $146 billion in revenue.
So the 999 plan, if newly in effect last year, would have brought in $1.868 trillion, a shortfall of about 11%……. HOWEVER,……….this is using static analysis, which assumes that when businesses no longer have to pay that 7.65% payroll tax or a 35% tax rate or double taxation on dividends, that money will be taken off the table and disappear, as if that extra money accruing to them will be taken out back and burned in a bonfire. But we all know (well maybe not some Democrats) that they are NOT going to use that money to light cigars. They are going to do something with it: invest in expanding their current business, invest in new ventures, or pay down their own debt (stabilizing their company and the employment of those who work there), or even bump up pay or bonuses to employees. Or maybe all of the above.
Looking at a dynamic analysis, we can expect more revenue than the $1.868 trillion supplied by static analysis, but how much more? We’re still $232 billion short. Remember that the terms “tax cut” and “tax rate cut” are not synonymous. There is a great deal of confusion over this and people (especially politicians!) often say the one when they mean the other. A tax rate cut can result in an increase in tax revenue, whereas a rate increase can sometimes reduce the government’s total revenue. This is because the economy is dynamic: People and especially business people don’t just sit there when they get a higher or lower rate, they change their behaviors. This is where the weeds get thick, and I am not prepared to go further with precision except to say that the Reagan tax rate reduction resulted in an extra $500 billion to the Treasury per year, while US Treasury receipts after the Bush tax rate reductions went from $1.782 trillion in 2003 to $2.406 trillion in 2006. We got big deficits because the politicians set their Spending Dials to “Spend-O-Matic.” In the reinvestment-strong 9-9-9 plan, receipts would likely increase well beyond the static analysis-produced $232 billion gap.
So, following dynamic analysis, the question “will it be at least revenue neutral” has to be answered with a clear “yes.”
Question #2: “Does 9-9-9 place undue burdens on a significant portion of the population?”
Okay, who gets hurt? As currently constructed, most people people get a big plus, but some are impacted negatively, mostly low to middle income seniors. Also there is some significant negativity for the non-working poor, which will have to be addressed.
Seniors get burned by the fact that they are being hit with a 9 percent Sales Tax, while NOT getting the more-than-off-setting elimination of the Payroll Tax. They already paid their Payroll Tax. Low-to-middle income seniors also tend to spend a greater portion of their income on Sales-Tax-eligible transactions, including food. So it’s like having their SS check cut by as much as 6-7% in some cases.
The non-working poor are in much the same category as the seniors, getting the sales tax but no offset from the Payroll Tax elimination.
And then there are a few unanswered questions for Mr. Cain and the 9-9-9:
Is Social Security taxable income? Seniors generally do not pay taxes on Social Security. So do they now get 9% withheld from their checks?
And the Roth IRA/401k situation: For years, wise folk have not taken the IRA/401k exemption when they put money into their retirement plan, willing to accept a smaller fund in exchange for not having to pay taxes at the time of withdrawal, using the Roth plan. Do they now have to pay 9%? And do they get a “claw-back” of some kind to compensate for what amounted to a prepayment of income taxes?
Believe me, I want 9-9-9 to work, the whole idea of making the proposal is gutsy and creative, and Mr. Cain seems to me like a wonderful candidate. But these things need to be answered.
Question #3: What are the “Hidden Benefits” to the economy from a 9-9-9 Plan?
Increased exports. Because the Income Tax burden to business is reduced, those products become more price-competitive in the world markets, and we sell more goods overseas, which means more jobs and more money coming into the US economy from outside.
It makes it harder to raise taxes in the Future. A lot of people have this confused, and state the opposite, but taxes become harder to to raise when taxpayers have “skin in the game,” that is, something to lose if the tax is increased. Every voter would be paying the Sales Tax and thus inclined to vote against raising it. As for the Income Tax, the 9% Income Tax will apply to the great majority of taxpayers. With the current system, almost 50% of the population pays zero income tax, and are thus inclined to favor raising taxes since they will not have to pay them, “just the rich.”
Reduction of compliance and regulation burden. This saves companies and upwards of $350 billion/year ,which then gets plowed into the economy creating additional profits which are in turn taxed at 9% yeilding still more income to the Treasury. Also, companies that pay nothing now on large profits, as in Obama’s favorite crony capitalism pet, General Electric), will actually have to pay. In 2010, General Electric posted $14.2 billion in profits and paid zero in Income Tax. No more special deals for special Wheels.
Stops punishing job creation. Companies have their reinvestment dollars slashed by 35% when they want to expand or enter new fields. That hurts employment (which hurts revenue to the Treasury). In addition, companies have to shell out for the payroll tax matching, further punishing job-creation even more.
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Notes:
* “static analysis” is simply doing the basic math without asking “how might humans respond to any changes?” It is in contrast to “dynamic analysis,” which tries to take human behavioral adjustments into account.
— FOR EXAMPLE:
Let’s say Herman has a pizza store. He sells a 100 pizzas a day and he charges $10 a pizza. He’s struggling and he’d like to make a lot more money, so he decides to raise the price to $100 a pizza. Under static analysis he does the math: 100 pizzas per day x $100 per pizza = wow, he’ll take in $10,000 per day!! That’s way better than the $1,000/day he was getting before!
In contrast, dynamic analysis includes thinking about how the customers will respond when they see the menu reading “14 Inch PIZZA: $100.00.” People respond to a changing marketplace in definite patterns that are largely if not precisely predictable. This is sometimes difficult to measure, but it does explain why lower tax rates often result in MORE rather than less revenue to the US Treasury. Lower taxes give more $$ to businesses who as a rule do NOT put the $$ into pillow cases, but rather invest in expansion and new products or services, generating jobs and more business activity (which in turn generates more tax revenue) . This is why previous tax cuts (Democrat John Kennedy in 1961, Reagan in 1982-1983, Bush in 2002) saw revenues jump up in the years following the new rates. Unfortunately politicians under Reagan and Bush said “hey, more money to spend gives us more borrowing power! Let’s spend the new dough on new favors to our voters and borrow even more, so we can buy off the taxpayers and get re-elected! We’ll be retired before they catch on!”
* “Sales-Tax Eligible Transactions” are transactions that are consumer purchases of new (not used) products and does not include housing. However, it does include food.