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Peter Schiff - Herman Cain's Hidden Nine

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October 18, 2011 – Comments (9)

Herman Cain has been gaining much traction with his 9-9-9 Plan, a bold proposal to replace our dysfunctional tax code with what could be a simpler, less invasive, and more economically stimulative alternative. While I don't agree with the full spectrum of Mr. Cain's policy choices, I applaud his courage on the tax front. Judging by his rising poll numbers, this appreciation is widely shared. However, the plan has deep flaws, the most glaring of which is its creation of a hidden payroll tax which represents a fourth "nine." This serious pitfall has been unmentioned by Mr. Cain and overlooked by those who have analyzed his plan. 

Cain would replace the current system of income and payroll taxes with a 9% flat-rate personal income tax, a 9% corporate tax, and a 9% national sales tax. Great idea. Such a system would unburden businesses, provide a tax cut for most Americans, and shift taxation to consumption and away from income generation. This is exactly what our economy needs. But unlike our current corporate tax system, the plan eliminates the deductibility of wages and salaries from corporate income. The net effect can be the creation of a brand new 9% tax on wages by corporations as corporations attempt to recoup that lost tax deduction. When this fourth 9 falls from Cain's sleeve, many of his opponents will likely accuse him of cheating.

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9 Comments – Post Your Own

#1) On October 18, 2011 at 5:51 PM, leohaas (93.60) wrote:

"Cain would replace the current system of income and payroll taxes with a 9% flat-rate personal income tax, a 9% corporate tax, and a 9% national sales tax. Great idea. Such a system would unburden businesses, provide a tax cut for most Americans, ..."

The hidden fourth nine is not the only problem of Cain's proposal, and definitely not the largest.

The real travesty of Cain's proposal is that this is a huge tax increase on the poor and the vast majority of the middle class. Someone making $70k/year, married with a couple of kids, standard deduction, no tax credits, pays about $7,700 in federal income tax under the current law. Under Cain's proposal, this tax payer pays about $6,300 in income tax, plus $5,700 in federal sales tax, for a total of $12,000 due the Feds!

People who are not able to save (and thus spend all their money--that is the poor and most of the middle class) pay a total of 17.19% of their income to the Federal Government under Cain's proposal. Under current law, only filers with an AGI more than $99k (that is, the top 10%) pay a higher percentage as their average tax rate.

In other words: Cain's proposal shifts the tax burden from the top 10% to the bottom 90%. IN WHAT WORLD IS THAT FAIR?

Oh, and this also proves Schiff is full of cr@p. In what world is the top 10% equal to "most Americans"?

Disclosure: I am not in the bottom 90%.

PS. Sorry for yelling.I just cannot stand any more of these so-called "fair" tax proposals.

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#2) On October 18, 2011 at 6:22 PM, aptosjoe (< 20) wrote:

You got that right! But really, when has a Republican ever been concerned about the bottom 90%?  Maybe Lincoln, but they shot him.

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#3) On October 18, 2011 at 6:27 PM, Varchild2008 (84.41) wrote:

I can name a few things I personally disagree with Herman Cain on...That's to be expected as I can name things I disagree with Ronald Reagon.

No Politician is ever going to be the PERFECT politician.
As those of us that will be voting in the GOP primary, it is our duty to stay as educated on these candidates and weigh their ideas against each-other and determine who deserves our vote.

It is about:

1) Character
2) Arena of Ideas and the strength/weaknesses of those ideas
3) Background history....what did they do and why did they do it?

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#4) On October 18, 2011 at 7:13 PM, Varchild2008 (84.41) wrote:

"The real travesty of Cain's proposal is that this is a huge tax increase on the poor and the vast majority of the middle class. Someone making $70k/year, married with a couple of kids, standard deduction, no tax credits, pays about $7,700 in federal income tax under the current law. Under Cain's proposal, this tax payer pays about $6,300 in income tax, plus $5,700 in federal sales tax, for a total of $12,000 due the Feds! "

None of that is true.  And I do not understand what the hidden 9% is...I don't get it???

A tax a wages?   uhm ??huh?

anyhow.....

You are forgetting that the 15% Payroll tax under this plan goes to 9 and that Corporations will most likely lower prices of goods under this plan lessening the impact of the 9% federal sales tax.

And you are forgetting that Herman Cain's plan includes empowerment zones where 9/9/9 will be lowered in those zones that have a significant amount of Poor people.... Like Detroit Michigan for example.

Herman Cain ultimately will tweak 9/9/9 when he becomes President so that it works and does not result in what some people choose to think it will.

I've done a calculation on a $42K Taurus..assuming prices aren't lowered...which they will be when Corporations save tons of money on the lower tax they will drop prices to compete against eachother.....they will...

But assuming no price drop....The end result is the 9% sales tax doesn't break the bank at all....  And even if this results in raising taxes on the Poor... I am in favor of that big time anyhow.

The Poor do not pay ANY INCOME TAXES at all right now.

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#5) On October 18, 2011 at 9:39 PM, stockdatamaster (98.99) wrote:

The real travesty of Cain's proposal is that this is a huge tax increase on the poor and the vast majority of the middle class. Someone making $70k/year, married with a couple of kids, standard deduction, no tax credits, pays about $7,700 in federal income tax under the current law. Under Cain's proposal, this tax payer pays about $6,300 in income tax, plus $5,700 in federal sales tax, for a total of $12,000 due the Feds!

Wait a minute... that $5,700 number is totally bogus.  Why in the world would a $70k/year household be spending $63,333 annually on retail goods? ($63,333 * 9% = $5,700).

Obviously, the bulk of a person's major non-discretionary expenses (such as mortgage/rent/utilities) would NOT be subject to the national sales tax, so the actual number here should be much smaller...perhaps $500 to $1,500 at the most.

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#6) On October 19, 2011 at 1:15 PM, rfaramir (30.52) wrote:

Peter gets to the heart of the problem here: "The only way to combine tax reform with tax reductions for most taxpayers is to shrink government to a more manageable scale."

Any tax reform changes so many things that it is unclear what the net result is, so there is litle urgency to cut government spending until the dust settles. Spending has to be cut now. They are spending us into oblivion as it is now, and waiting for a new tax scheme to fix things will only dig us deeper into debt in the meanwhile.

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#7) On October 19, 2011 at 5:17 PM, leohaas (93.60) wrote:

#5:

"Wait a minute... that $5,700 number is totally bogus.  Why in the world would a $70k/year household be spending $63,333 annually on retail goods? ($63,333 * 9% = $5,700)."

No, it is not. Read here about an example Herman Cain gave himself:

"For this fact-check, we'll only be talking about the personal income tax and the sales tax since the business tax directly affects only business owners and corporations.

Cain set the parameters for the $50,000 experiment during our interview.

For calculating the tax burden under 9-9-9, Cain assumed that the hypothetical tax filer made no charitable deductions and was not eligible for a tax credit by living in an inner city. So Cain's taxpayer paid the full 9 percent income tax on $50,000 -- or $4,500.

Cain then assumed every other dollar was spent on something subject to his 9 percent sales tax, meaning his hypothetical taxpayer contributed an additional $4,095 to the federal government. (Cain's 9-9-9 includes no sales tax on used goods.)

That's a total tax paid of $8,595 or a tax rate of 17.19 percent.

That's the maximum someone would have to contribute under 9-9-9, unless they spent more than they took in on items subject to the sales tax. Presumably they'd pay less if they saved money or spent money on housing, which we assume wouldn't be subject to a sales tax. But again, we're using Cain's figures."

17.19 percent is Herman Cain's number. I did not make that up. I calculated it, and Cain's own example confirms that it is correct. From Cain's response we can deduce that ALL spending will be subject to the national sales tax, except used goods, not just whatever you think is "discretionary". Of course, the middle class can always start shopping at the Salvation Army to avoid paying the federal sales tax!

The main difference between Cain's example and mine is that he assumes a single filer making $50k/year, and I assumed  a married filer with 2 kids making $70k/year. Single filers fare a lot better under Cain's plan than married filers. It looks like we are reintroducing a gigantic marriage penalty. That won't fly with Family Values folks, who are a large part of the Republican constituency.

I also did not understand the payroll tax elimination correctly. As a result, I incorrectly estimated that 90% of Americans get the short end of the deal. But according to Cain's rivals in yesterday's debate, 84% of Americans will end up paying more taxes under Cain's plan. So I wasn't that far off...

#4: you just confirmed that sticking it to the poor is your goal. Thanks. We are done talking.

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#8) On October 25, 2011 at 12:38 PM, dereksas (< 20) wrote:

Are they trying to say that Cain's 9-9-9 plan changes GAAP by not allowing labor cost to be a cost of goods (or services) sold? I seriously doubt this and suspect that Schiff, as smart a fellow as he is, is confusing the deduction for payroll taxes paid with labor cost which figures into net income according to GAAP and is not a statutory tax deduction that can be lost in legislation. I mean lets get real. The services sector dominates the US economy and in a services company the vast majority of the cost of doing business is labor. If they must add this back to net income for tax purposes then this is a GIGANTIC tax increase even at 9%. You would have many companies paying huge taxes when they made very little or even negative profit...

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#9) On October 25, 2011 at 12:48 PM, rfaramir (30.52) wrote:

"a GIGANTIC tax increase" is exactly what it is, as intended, but you're not supposed to notice that.

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