Should conservatives back the 9-9-9 plan?

Herman Cain got what he wanted from this week’s debate — he drew attention to his 9-9-9 plan for tax reform, and he proved that he could handle attacks from the field and maintain his aggressiveness.  But now that Cain has drawn attention to the plan he says will jump start the economy, he will find more questions and challenges as well as supporters.  In the latter camp, Art Laffer has given his supply-side stamp of approval:

Famed supply-side economist Art Laffer told HUMAN EVENTS that Cain’s “9-9-9” plan was a pro-growth plan that would create the proper conditions for America’s economy to grow and thrive again.

“Herman Cain’s 9-9-9 plan would be a vast improvement over the current tax system and a boon to the U.S. economy,” Laffer told HUMAN EVENTS in a statement. “The goal of supply-side tax reform is always a broadening of the tax base and lowering of marginal tax rates.”

Added Laffer: “Mr. Cain’s plan is simple, transparent, neutral with respect to capital and labor, and savings and consumption, and also greatly decreases the hidden costs of tax compliance. There is no doubt that economic growth would surge upon implementation of 9-9-9.”

Laffer also said that “such a system provides the least avenues to avoid paying taxes, yet also maintains the strongest incentives for work effort, production, and investment.”

On the other hand, ABC News walked through the implications for a household of four earning the average national wage of “just under $50,000,” and finds that these middle-class voters will get squeezed, and squeezed hard.  That’s largely due to the third “nine,” the new federal sales tax that Cain’s proposal would create in tandem with flat taxes on personal and corporate income (also see update below):

If you have a family of four with an income of just under $50,000, they would pay more under the Cain plan. Currently, they are taxed at just less than 7 percent and pay $3,400 in income tax. Under Cain’s plan, they would be taxed at 9 percent or pay $4,500.

That’s $1,100 more.

Although the family would save almost $4,000 in Social Security taxes, it would have to give up the child tax credit of $4,000. Furthermore, it would pay an additional national sales tax of 9 percent on everything purchased, including groceries and clothes, which totals about $2,000.

That means under the Cain plan that family would be almost doubling its taxes, going from $3,400 to $6,500.

Most of the damage in this case comes not from the flattening of the tax code and the elimination of deductions — which would be almost entirely offset by the elimination of other tax streams, as Cain promises — but from the national sales tax.  In my column for The Fiscal Times today, I question whether conservatives want to champion a new tax that almost by definition will have a regressive impact on voters — and could open a constitutional Pandora’s Box that will undermine arguments against creeping federal encroachment.  But first, let’s be clear as to what exactly 9-9-9 is — and isn’t:

It is not a comprehensive economic plan. It’s actually not even a budget plan. That’s why Cain’s challenge to Romney in the debate was somewhat unfair; Romney’s 160-page proposal is a broad economic plan with specifics on deficit reduction and entitlement reform, trade and energy policy. 9-9-9 is more properly categorized as tax reform.

9-9-9 is also transitional tax reform, not the end goal. On Cain’s website, he describes 9-9-9 as merely Phase 1 of tax reform. The final stage of Cain’s tax vision is the Fair Tax proposal pushed by Mike Huckabee in the 2008 election cycle, which is a consumption tax modeled on the European value-added tax (VAT). Cain developed the 9-9-9 plan to “unite the ‘Flat Taxers’ with the ‘Fair Taxers.’”

That’s a laudable goal, but instead of uniting the two camps by using a flat tax as an intermediate step, Cain adds the federal sales tax while the income taxes are still in place.  That creates a new federal income stream rather than replacing the existing income-tax stream.  We’d have to hope that Congress could repeal the 16th Amendment shortly after implementing 9-9-9, but that’s a time-consuming process.  Cain is going to have a hard time finding two-thirds of the politicians in Congress willing to give up their ability to use the income tax as a spoils system, either now or in the future.  In the meantime, the federal government will be inserting itself into every retail transaction in the country.

And just how do conservatives feel about that?

Finally, without a specific constitutional amendment authorizing it, a federal sales tax on general purchases would get challenged by small-government federalists on principle. Unless the sale crosses state lines, it is difficult to see federal jurisdiction at the cash register for most transactions. Accepting that Congress can impose a sales tax on transactions at the local grocery store without a Constitutional amendment granting such authority would require conservatives to embrace a Wickard v Filburn philosophy of interstate commerce. Since a rejection of that philosophy is at the heart of conservative opposition to ObamaCare and its mandate, don’t expect conservatives to leap for joy at the thought of a new definition of interstate commerce that fits the final “nine” in Cain’s plan.

The federal sales tax, at least without a Constitutional amendment, makes the limitation of federal authority to interstate commerce absolutely dead.  If they have tax jurisdiction on any retail sales transaction in America, then Congress has the explicit power to regulate all commerce, not just the encroachments we’ve seen through Wickard.

Cain’s a smart man who knows how to adapt when a business plan doesn’t work out.  I’d prefer to see his 9-9-9 plan modified to a 15-15 plan, or a plan to just transfer to a constitutionally-based (and constitutionally-limited) Fair Tax without the intermediate steps at all, rather than a hybrid that ends up with Americans paying taxes in two streams, and Congress still able to manipulate both for their own political purposes.  Cain has proven that he thinks out of the box, and he’s absolutely right that we can’t pivot to long-term growth and economic stability by tweaking the systems we currently have — but a new federal sales tax on top of an income tax would be a Pandora’s Box conservatives should not want to see opened.

Update: HA reader Bill C says ABC’s computation is in error:

The first step is fine … $3400 vs $4500.  However, the $4000 from Soc Sec. taxes is direct return, but the $4000 tax credit is an adjustment to the amount to be taxed, to the amount they pay MORE would be 9% of that or $360.  $4500 – $4000 + $360 = $860.  If you then add the $2000, you end up with $3400 vs $2860.

So it is not almost doubling the tax, but reducing it by a little more than $500.

I’ll drop ABC a note to ask them to review this, but I believe Bill is correct.

Update II: However, the Tax Policy Center says the Cain calculation is also overstating current tax liability for a family of four at $50,000 (via Jen Rubin):

In fact, a family making $50,000 a year with two children would only pay about $776 in income taxes when standard deductions are factored in, based on 2010 Internal Revenue Service levels. (In fact, not factoring in deductions, a married couple filing jointly making $50,000 a year would pay $6,666 in income tax, not $10,000. But what’s important for tax purposes is “taxable” income.)

Here’s the math:

– Gross Income: $50,000
– Subtract the 2010 standard deduction: $11,400 (2011 is $11,600)
– Subtract the personal exemption (essentially the number of people in the house): $14,600 ($3,650 x 4)
– That brings us to a taxable income of $24,000
– The tax on a married couple filing jointly at $24,000: $2,766
– Then, deduct an additional $2,000 ($1,000 child tax credit x 2)

That comes out to just $766. And that doesn’t include other potential exemptions, like educator credits, moving costs, student-loan interest, health-savings accounts, etc.

ABC also got the child tax credits wrong; it’s correct in this analysis.

Update III: More analysis from reader David P, using three scenarios for baseline assumptions:

Summarizing the end results (the math is later), there are 3 scenarios about what would happen to this family under the 999 compared to 2010 rates (which is what everyone has used in their calcs): 1. the family is self-employed, 2. the employer gives the SS tax to the employee, and 3. the employer keeps the SS tax.

1.  A self-employed family paid $8400 in federal taxes in 2010 and had $41600 left, compared to $6500 under 999 with $43500.  That’s $2000 less in taxes and $2000 more in their pockets.

2. The family paid $4575 in total federal taxes in 2010 and had $45425 left, compared to paying $6850 under 999 with $46975 left.  That’s $2000 more in taxes, BUT its $1500 more in their pockets.

3. The family paid $4575 in total federal taxes in 2010 and had $45425 left, compared to paying $6500 under 999 with $43500 left.  That’s $2000 more in taxes, and $2000 less in their pockets.

Under the current 999 plan, only scenario 3 is worse for the family.  999 isn’t perfect, but it won’t take too much tweaking to get it nice.  For example, the new code says all taxes that were paid by the employer are now given to the employee, forcing scenario 2 and eliminating scenario 3, with no net negative effect on the employer. …

Here’s the math, roughly typed.

Family of 4 @ $50k gets 2 deds @ 5700 and [email protected], giving a taxable income of 24000, and they pay an SS/Medi rate of 7.65%
Their taxes are then 16750*10% + 7250*15% = about 2750, and SS/Medi is $50k*7.65% = 3825
Their total federal tax is 2750 income + 3825 SS – 2000 child = 4575

If they are self-employed, their SS/Medi rate is 15.3% (7.65*2)
Their taxes are then 2750 income + 7650 SS – 2000 child = 8400

Under 999, they pay $50000*9% plus roughly 2000 in sales tax, for $6500 in total federal tax.

If the employer gives them the 3825 that the employer no longer pays to the Fed, then their new income is 53825, and they pay 4850 in income and 6850 total.  This isn’t much more than they paid if the employer kept it, but its significantly more in their pocket.

This does make Cain’s “simplicity” argument more supportable, considering all of the gyrations it takes now to get to the math.  My objection is less about this and more about adding a federal sales tax while still taxing income, though.

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David Strom 9:21 PM on February 02, 2023