Businessman Herman Cain, who is seeking the Republican presidential nomination, has introduced a simplified tax system based on a 9% income tax, 9% corporate tax and a 9% sales tax, coined “9-9-9.”
We received several questions from clients asking if this is a workable plan, and how would it affect them. Under this plan, working taxpayers would not be paying Social Security taxes, and likewise, employers will not be paying Social Security taxes on the employees. In theory, the elimination of the payroll tax and the reduction in the corporate tax rate would lead to a decrease in the price of goods. Furthermore, businesses would also be able to pass along the tax savings either by increasing wages or hiring new employees. The plan could also help repatriate dollars outside of the United States, allowing companies to bring the money back without a 35% tax.
The 9-9-9 plan should eliminate the inheritance tax, providing an easier route to passing along businesses to employees or heirs. It is also thought that the 9-9-9 plan would capture money made in the underground economy—income derived from illegal activities—because of the sales tax component of the plan.
We looked at a sample client who was retired with an income of $80,000. Last year, this client’s tax liability was about $8,000, around 10%. Cain’s 9-9-9 plan simplifies the tax code by wiping out many of the itemized deductions, and imposes a 9% income tax on gross income less charitable contributions. For retired taxpayers, the 9-9-9 plan may hurt a because these individuals do not reap the savings from the elimination of the payroll tax.
One issue with the 9-9-9 tax plan is the regressive nature. Low income families currently pay little to no income tax, and spend most everything they earn on the necessities. These people would be hit much harder than the rich. Cain has begun to address this issue, saying he would exempt people who are at or below the federal poverty line (about $22,000 for a family of four) from the tax on income. Other provisions—albeit vague—included businesses in areas with high unemployment or poverty.
The 9-9-9 plan is certainly an interesting concept, promising to capture the money exchanged in the underground economy, possibly driving down prices on goods. If nothing else, Cain’s plan has people talking about needed tax reform. Most agree, the current tax code is far too complicated. The nature for the reform needed should continue to be a topic for debate.