Politics

Cain's Revised '9-0-9' Tax Plan Raises New Doubts

By: Kenric Ward | Posted: October 25, 2011 3:55 AM
Herman Cain

Herman Cain | Credit: Christopher Halloran - Shutterstock

One of the chief complaints about Herman Cain's "9-9-9" tax plan is that money-hungry politicians could ratchet it up to 15-15-15, or worse.

So the GOP presidential candidate is going the other way, promising low-income Americans that their income tax rate would go to zero.

"Your plan isn’t 9-9-9, it’s 9-0-9. Say amen, y’all," Cain told a crowd in Detroit. "In other words, if you are at or below the poverty level … then you don’t pay that middle 9 on your income."

That tweak is significant, politically and fiscally. Cain has been taking heat from progressives, and even mainstream Republicans, for proposing a tax plan
they claim would be more "regressive" than the current system.

By relieving low-income earners of any income tax obligation, Cain is more closely aligning his plan with the current exemption-laden "progressive" tax code, which he calls "stupid." He and other Republicans have frequently criticized the current setup that enables some 47 percent of Americans to avoid paying any income tax.

Michele Bachmann, for one, argued at last week's presidential debate that everyone "ought to pay something."

By compromising on his signature plan, Cain may have unraveled it, along with his candidacy.

Until just days ago, the Georgia businessman adamantly defended the 9 percent rate, saying "A flat tax is not -- by definition -- a regressive tax. Everyone pays the same rate."

Now that Cain says he'll give a pass to a large, and growing, segment of the population, will 9-0-9 bring in the revenue projected by 9-9-9? Economists say the numbers won't pencil out.

And while Cain's bow to low-income earners might soften knee-jerk criticism from the left -- where he's unlikely to gain any votes anyway -- some conservatives remain unconvinced about the advisability of his proposed national sales tax.

"The biggest issue I have with the plan is that it would introduce a new national sales tax, and it is easy to envision the tax rate starting at 9 percent, and doubling or more," said Randall Holcombe, an economics professor at Florida State University.

"Cain’s longer-term plan is to phase out the business and personal income taxes and replace it with a larger national sales tax. But one could easily imagine the larger sales tax along with rising rates on incomes when spending continues to be so much larger than revenues," said Holcombe, a fellow at the James Madison Institute, a free-market-based think tank in Tallahassee.

Even before Cain punched his large loophole in the 9 percent income tax rate, Holcombe said it was "unlikely" that working families would have paid more under the plan.

"Those people would pay, at most, 9 percent of their incomes in income tax, and 9 percent of their incomes in sales tax if they spent all of their incomes on sales-taxable items, for a total of 18 percent in personal taxes," Holcombe explained.

"But the employee and employer shares of the current Social Security payroll tax is more than 15 percent, which is pretty close to the 18 percent in the [original] 9-9-9 plan. 

"If people don’t consume their entire incomes, and don’t pay the whole 9 percent income tax [Cain deducts charitable contributions from taxable incomes, and would have additional deductions for those in 'empowerment zones'] they would pay less than 18 percent. And, today, anybody who pays federal taxes beyond the Social Security tax already pays more than 15 percent."

Holcombe concluded that the claim of "higher taxes" under the Cain plan "only appears to hold water for people who are consuming more than they are earning."

Art Laffer, who authored the Reagan-era "Laffer Curve," which projected that lower tax rates generate more tax revenue through economic expansion, called Cain's original 9-9-9 "a wonderful plan." Rep. Paul Ryan, R-Wis., also praised it.

The Club for Growth predicted the original plan -- 9 percent tax on income, a 9 percent business tax and a 9 percent national sales tax -- could spur an “unparalleled economic boom.”

But the National Retail Federation said that last "9" would dampen consumer spending.

“This will hurt demand and slow the economic recovery,” the federation’s tax policy expert, Rachelle Bernstein, said. “You definitely do not want to do this.”

Ultimately, the perception that Cain caved to left-wing criticism of an across-the-board flat tax may be most damaging to his political fortunes among tea party conservatives, one of his core constituencies.

A Tax Policy Center model that showed 84 percent of Americans would pay more taxes under his plan appeared to be the impetus for his revised 0 percent rate for low-income households.

Just days earlier, Cain offered a stirring defense for the political and fiscal viability of 9-9-9.

"Politicians propose things that can pass. Problem-solvers propose things that can work. One of the worst instincts of Washington types is to judge an idea not on its substantive merits, but on their perception of its political viability," he said.

"I do not underestimate the challenge of getting any good idea through Congress, but I have said all along that if you propose a good idea, and the people understand the idea, they will pressure Congress to pass it."

By walking back the 9 percent income-tax rate for selected segments of society, Cain opened himself to charges that he is just another pandering politician.
Indeed, he issued his own indictment of such behavior at his website last week. Standing by his 9 percent across-the-board rate, before he abandoned it, Cain declared:

"By taking away the politicians’ gateway drug of loopholes and deductions, we make it much more difficult for them to mess with the tax code. The plan as I’m proposing is a huge improvement over the status quo."

 

Contact Kenric Ward at kward@sunshinestatenews.com or (772) 801-5341.


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