Wednesday, October 12, 2011

Herman Cain's 9-9-9 Plan Example

Let's try to look at it simply, here.

Presidential candidate Herman Cain has found a recent groundswell of support with the idea of scrapping the current tax code and replacing it with a 9% income tax on individuals like you and me, 9% on corporations like your grocery store, and 9% on sales.

Let's say that your family makes $50,000 and spends $45,000 in a year. To keep it simple, let's pretend that you spend all $45,000 at the grocery store.

Today

Your income puts you in the 15% tax bracket. Let's call that a personal income tax bill of $7,500. Again, that simplifies things - in reality the first few thousand dollars of income are taxed at just 10% so your tax is a little less. Oh, and you get some deductions and exemptions, but let's ignore that.

Meanwhile, your grocery store is taxed at a corporate rate of 35%. Their tax is passed along to you in price at the counter. Let's pretend that the $45,000 spent at the store includes you paying its $1,000  corporate income tax. For those checking my math, that's much lower than 35% of $45,000, because the store gets to take all kinds of deductions for business expenses and such.

Finally, there is no national sales tax today.

Your total tax: $7,500 + $1,000 = $8,500.

Tomorrow

Your rate is 9%, not 15%, so your personal income tax is $4,500, or 9/15 of the old tax of $7,500.

The grocery store drops to 9% from 35%, so you pay $257 of corporate income tax rather than $1,000.

However, the store now has to pass another cost on to you - the 9% national sales tax on the goods it purchased. Plus, you also have to pay a 9% national sales tax yourself when you buy the goods from the store. So let's call that 18% in total, on about $45,000 worth of goods, or $8,100 of national sales tax.

Your total tax: $4,500 + $257 + $8,100 = $12,857.


Way-Too-Simple Summary

Your personal rate dropped from 15% to 9%, while your sales tax rose from 0% to 18%. Therefore, your total tax rose. The corporate income tax you pay was affected, but to relatively minor effect.

2 comments:

Mike said...

Do stores pay retail sales tax on the goods they purchase for resale to us? Or are these items purchased wholesale? I thought one important point of 9-9-9 was that nothing was taxed twice? But you are taxing it twice. With your logic 9 could become 18 or 27 or 36...and on an on depending upon how many times a product got past on before arriving at the store where it is eventually purchased at retail.

Joe McDonald said...

You could be right Mike... I know that when Illinois contemplated a sales tax on corporations a few years back, the heart of the opposition was this multiplicative effect. I hope you're right because I am in favor of a simplified Code and transparency in general. Looking forward to more details to answer questions like yours and mine. Thanks...