Republican presidential contender Herman Cain has a provocative plan for reforming the US tax code: No federal tax higher than 9 percent for anyone.
His “9-9-9” tax plan has resonated with many Republican voters for its simplicity and boldness. It’s one factor that has propelled Mr. Cain upward in recent weeks as other presidential hopefuls have been faltering.
But now, with many people looking closer at Cain as a top rival to former Massachusetts Gov. Mitt Romney for the Republican nomination, the 9-9-9 tax plan is also drawing closer scrutiny. Perhaps the most politically sensitive question concerns fairness.
Some independent tax experts say the plan would amount to a big tax cut for the wealthiest Americans, and a tax hike for millions at the lower end of the income scale. In fact, many poorer Americans could pay a higher effective tax rate than the rich, they say.
Cain’s plan is for a flat 9 percent income tax, a 9 percent sales tax, and a 9 percent tax on business income. The Cain premise is to treat all Americans with flat-rate simplicity, but his plan could have an impact that varies widely among different groups.
Central to the debate is that middle- and lower-income Americans spend almost all of their income, meaning the sales tax would constitute a higher percentage of their income than it would for wealthier Americans whose income exceeds their living expenses. The richest Americans, meanwhile, would see a big decline in their income-tax rate.
The heightened attention given Cain’s 9-9-9 plan (it played a central role in a televised Republican debate Tuesday) comes at a time when a majority of Americans, in opinion polls, support the notion that income taxes on the rich should go up from their current levels, which are already higher than what most Americans pay.
Cain has not offered a detailed response to questions about whether his plan makes for a “regressive” tax code, distributing income from the poor to the rich. He says the key virtue of his plan is that it will buoy economic growth and job creation.
The economy and jobs are the top priority for US voters, so the Cain plan will not necessarily sink or swim on the fairness issue alone. But it’s an important piece of the public debate over his plan.
Here’s a closer look at the issue. First, it appears that Cain’s plan would offer an income-tax cut to millions of Americans, not just the rich, once you factor in that his plan does away with the payroll taxes now paid by workers to help cover Social Security and Medicare. (Under Cain’s proposal, those programs would be funded through the government’s general revenue stream.) But for some working Americans, who now owe very little income tax, the new 9 percent flat tax would represent a tax hike that outweighs their savings from the payroll-tax cut. (Currently, employees pay 6.2 percent of their income in payroll taxes to fund Social Security, and 1.45 percent to fund Medicare.) And many Americans don’t work, including those who are elderly, disabled, or unemployed. Roberton Williams of the Tax Policy Center, a nonpartisan research group in Washington, says 23 percent of households appear certain to see their income taxes go up under the Cain plan. “And they are the poorer end of the population,” Mr. Williams says. One group facing an effective income-tax hike would be seniors who don’t currently owe payroll taxes. Another would be workers who currently owe payroll taxes but no income tax. (Cain has not outlined income-tax exemptions for Social Security beneficiaries or low-income workers, for example, Williams says.)
Then comes the sales tax. How low- and middle-income households fare under Cain’s plan depends a lot on how much they spend as well as how much they earn. The candidate’s plan calls for the sales tax to apply only to new goods, so someone buying a previously owned home or car wouldn’t face the tax. One challenge, economists say, is that the plan could push consumers toward used goods, resulting in price hikes that partially offset the tax break. In TV interviews, Cain has referred to a family earning $50,000 a year, and said its total taxes would fall under his plan, even when the sales taxes are factored in. At the other end of the income spectrum, the Tax Policy Center estimates that people in the highest tax brackets now effectively pay about 18 percent of their total income in federal income taxes. That rises to an effective rate of about 21 percent when payroll taxes are added in, and taking into account that much of their income is not covered by the payroll tax.
The Cain plan would cut all of that to 9 percent. Cain also calls for eliminating the capital-gains tax, a levy now paid almost entirely by high-income Americans. The current tax rate on long-term investment gains is 15 percent. Cain’s espoused goal is to propel economic growth, but a side effect would be that hedge fund managers – who classify much of their earnings as capital gains – would see “a big tax break,” Williams says. The Cain tax rate on business income, at 9 percent, would be much lower than today’s official rate of 35 percent, and lower than the actual rates businesses pay after various deductions. But Williams notes one caveat: It appears the Cain plan allows no exemption for wages paid to employees. (Cain’s website describes the business flat tax as 9 percent of “gross income less all investments, all purchases from other businesses and all dividends paid to shareholders.”) So, even though the payroll tax would disappear, employers would in effect pay a new tax on their cost of labor. Under the Cain plan, new Empowerment Zones would provide special tax deductions for those living or working in them. That would help some lower-income workers, but the scale of this Cain program remains unclear. Cain says that, overall, this plan will get the economy moving again, in part because it “provides certainty” about the direction of tax policy. (He sees the 9-9-9 plan as a step toward adopting a FairTax system, in which a consumption tax would replace income taxes.
FairTax proponents typically call for rebates to cushion the burden on lower-income Americans.) Other Republican candidates, including Mr. Romney and former Utah Gov. Jon Huntsman Jr., have offered their own plans to simplify the tax code and goose economic growth.