23 October 2011

9-9-9

A serious critique of Cain’s tax proposal comes to light:

Under Herman Cain's 9-9-9 tax reform plan, 84% of U.S. households would pay more than they do under current tax policies, according to a report released Tuesday by a nonpartisan research group.

First off, there’s a word missing here.  It would be more accurate to say that more households would pay more direct taxes under Cain’s plan.  People already pay plenty of indirect taxes now; Cain’s plan would simply make people face their costs head-on.  Also, this plan appears to eliminate one-time taxes like the estate tax, which is a good thing.

Second, it’s a good idea for more people to foot more of the tax bill.  One way to increase government accountability is to make sure everyone has skin in the game.  Fiscal prudence will become more of a national concern if most citizens’ tax bills go up.
Under the current system, most of the lowest income households end up owing no federal income tax. That's because their incomes are so low that they're exempt, or because their tax liability is canceled out by the standard deduction and tax breaks, such as the Earned Income Tax Credit.
The Cain plan doesn't exempt very low incomes from taxation. And while it would eliminate the payroll tax, which is the heaviest tax for low-income families, that tax relief would be offset for many by the elimination of the EITC and other tax breaks they qualify for now.

From what I gather, the lowest earners wouldn’t pay that much more.  Employee-side payroll contributions are already 7.6% of income; bumping it up to 9% is not going to be that huge a difference.  Actually, factoring in employer-side matching for Medicare withholdings, employee withholdings are already effectively at a 9% income tax.  Thus, the only poor see their tax burden increase is by the elimination of tax credits.  I don’t have enough information at this time to determine how much of an increase the lowest quartile of income-earners would see their tax burden rise by.  However, since the lowest quartile of earners take a decent amount of government benefits, I don’t really have a problem with the government charging for them.

But the majority of the highest income households would get a tax cut. For instance, 95% of those with more than $1 million in income would receive an average tax cut of $487,300.

These people would then spend their newfound riches more efficiently than the government, which is a plus in my book.  At any rate, I don’t get caught up in this class warfare because I just don’t care.  I don’t think the wealthy are inherently more or less deserving of their wealth than others.
Under Cain, capital gains -- a notable source of income for the wealthiest Americans -- would be tax-free. He would also preserve the charitable deduction. And taxing all non-capital gains income at 9% would amount to a considerable break from today's top rate of 35%.

At the very least, the tax code should not disincentivize investing, since investing is a key to wealth and economic growth.  Better yet, the tax code should encourage people to invest and save (if I recall correctly, the capital gains tax applies to savings where the interest earned exceeds $50).

Cain’s plan has been criticized by those on the left, who say it would hurt the poor, and those on the right, who worry a new national sales tax is an invitation for the government to raise taxes over time.

I’m not a fan of wealth redistribution, so I view taxes as payment for services.  If poor people want the government to do something for them, they should pay for it.  And since the government does many things for poor people, poor people should rightly expect to either a) actually pay something or b) pay a closer approximation to the cost of the benefits they receive.

As for conservatives, I share their concerns about new taxes.  If you give the government an inch, it will take that as a sign to increase taxes.  I would suggest that the introduction of a new type of tax (e.g. consumption tax) be accompanied by the elimination of a tax of similar scope and coverage (in terms of revenue).  While simplification is good, I don’t think Cain’s proposal simplifies things enough.  Also, I don’t think that his proposal is going to survive once the class warfare aspects of politicking start up in earnest during the upcoming election cycle.

UPDATE: I made a mistake in saying that interest earned was subject to the capital gains tax.  As such, disregard my commentary related to that. (HT: Matt)

3 comments:

  1. For what it's worth, the capital gains tax does _not_ cover interest (or dividends, for that matter). Those are taxed as ordinary income. Capital gains only covers "income" due to an increase in the nominal-dollar price of an asset between the time when it is acquired and the time when it's sold.

    Of course, this means that in large part it's more of a tax on inflation than on real income.

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  2. Although the rich would get a tax cut in theory, in practice they would pay as much or more due to the elimination of loopholes, subsidies and the like. Warren Buffet has proclaimed that he pays very little tax, Cain's plan would tax him more.
    Of course, Cain's plan would put thousands of CPA's out of work, not to mention tax lawyers. Bonus!

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  3. @matt- my bad. I've got to stop writing when I'm sleep deprived because I'm prone to making dumb mistakes like that.

    @tweell- It's hard to gauge the effects of simpler tax code. Some firms (like GE, e.g.) would definitely pay more, others would certainly pay less. I'm not so sure about rich people. My gut tells me that the bulk would pay less, though I do think some might end up paying more.

    At any rate, seeing fewer tax lawyers would certainly be a bonus.

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