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.
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.
ReplyDeleteYou 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...
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