Monday, October 17, 2011

Poor people will prosper under 999 - and so will the rest of the country.

Herman Cain’s 9-9-9 tax plan is imperfect, but it’s by far the best plan on the table. As such, criticism of 9-9-9 comes from all quarters.

The left is unhappy that its egalitarian nature is the opposite of the progressive tax structure we’ve had for a century. I suspect however that it is not simple tax policy that drives their antipathy, it’s revenge. You don’t have to listen very long to one of President Obama’s “fair share” speeches to recognize it. Or watch much of the “Occupy your city here” demonstrations going on around the country to see the envy. The notion of those fat cat Wall Street bankers paying the same tax rate as a single mother of three who works two jobs to support her children is simply unacceptable.

The other main criticism from the left is that poor will pay more taxes than they do now while that rich will pay less. That is simply not true. Let’s imagine the most difficult of possible situations, where a family of four has an income of $25,000 a year, all in the form of untaxed government benefits. Let’s assume they spend every dollar they have every year. As it stands today, they would ostensibly pay no taxes.

In reality however if they spend their entire $25,000 income they are actually paying $5,750 in embedded taxes. According to the people over at, 23% of every dollar a consumer spends in the United States is due to federal taxes levied on employees, on corporate profits, in the form of excise taxes, etc. If that is the case, then when that family spends its $25,000, in reality, $5,750 of that is for federal taxes.

Under Herman Cain’s 9-9-9 plan that 23% would go away. Here’s an example: Let’s assume this family goes to the store and buys $100 worth of groceries. Under the current system, $23 of that total represents embedded taxes. If you remove that $23 from the total, then the cost of those groceries without taxes is $77. That 23% of embedded taxes would now become 9% as both profits and employees have a 9% tax rate. Therefore, the price on the shelf of the goods will now reflect the 9% embedded taxes and would cost $84. At the register the 9% sales tax would be added and the final price becomes $91.50. That’s 8.5% less than they would have spent under the current system.

If you expand the $100 to the family’s entire $25,000 income, they would actually end up spending $22,962 rather than their entire $25,000. In this case they actually end the year $2,037 richer than they do under the current system. While prices would not come down the day after 9-9-9 went into effect, competition would bring them down rapidly.

As for a family with an income that actually pays taxes, in almost all circumstances they come out ahead via the 9-9-9 plan. Read Ed Morrissey’s piece over at to compare the numbers with a family of 4 earning $50,000. In the few cases where the family does not come out ahead, they too will pay less in taxes as a result of the lower embedded taxes.

From the right criticism comes in the form of suggesting that it has no chance of ever getting enacted. This is a red herring. If conservatives take the White House and the Senate, it will pass easily. And they won’t need 60 votes to get it done as Harry Reid has decided that the nuclear option is no longer particularly toxic.

A more substantive complaint from the right is the very understandable notion that they don’t want the kleptocrats in Washington to have another tool with which to beat the American taxpayer about the head, i.e. a sales tax that starts out as 9-9-9 could easily become 10-10-10 or 25-25-25. I can certainly appreciate that as our current system started out with a top rate of 7% in 1913 but reached 77% by 1918.

That rate creep danger does exist, but the truth of the matter is that it already does. If the passage of the wholly unconstitutional ObamaCare demonstrates one thing, it’s that Washington thinks there are no limits to its power already. It’s only the Tea Party and a few Republicans who are keeping a sales tax from happening today. Remember Nancy Pelosi proposing the VAT not so long ago? Besides, Cain is proposing that a balanced budget constitutional amendment be passed, and I would recommend that he adds language that requires a 2/3 majority in both houses to increase taxes. As a cherry on top, the 9-9-9 plan would eliminate the ability of politicians to skew the tax code to help their friends or harm their enemies.

At the end of the day, the thing that is most compelling about the 9-9-9 plan is the economic growth it will stimulate. This growth comes from two directions. The first is the $350 billion Americans spend each year simply complying with federal tax regulations.(here and here) That is the equivalent of a boost of 2% to the economy, or a $1,000 per person that Americans would have to spend. The second part of that is the investment and jobs that would be created. Today the United States corporate income tax rate is 35%. If the corporate income tax rate went from 35% to the 9% included in the 9-9-9 plan, you would see trillions of dollars in investment flood into the United States as companies repatriated profits held overseas and sought stronger financial results.

To put that change in perspective, under the current tax structure a company that earns $1 billion in the United States pays $350 million in corporate taxes, leaving the shareholders with a net profit of $650 million. If the 9-9-9 plan were in place those same shareholders would instead enjoy a net income of $910 million, fully $260 million more, or 40% more money in their pockets. The resulting rate would be amongst the lowest in the world and would make the United States an investment magnet for investors and companies from around the world.

Then of course there are jobs. I began this post talking about how the poor would not be negatively impacted by 9-9-9. Actually they will be positively impacted. What is the single most powerful way to turn poor people into middle class taxpayers? More and better paying jobs, of course. With a 9.1% unemployment rate there is little incentive for companies to increase the wages of their employees. There are simply too many people willing to step in and fill the shoes of any disgruntled employee. At an unemployment rate of 4% the dynamic is turned on its head where employees are far better positioned to demand and get wage increases. As economic growth creates millions of jobs and as demand for workers begins to outstrip supply, the value of those employees increases and their compensation follows suit.

At the end of the day 9-9-9 is by far the best plan on the table. It’s easy to understand, it saves Americans money via lower prices, it means more investment, a growing economy, more jobs and higher wages. If Americans really want to return to prosperity, 9-9-9 will get them there. The question is, do they have the courage to finally walk away from incremental change and do something bold?

No comments:

Post a Comment