9-9-9 and the Other Shoe

I've been waiting for that metaphorical shoe to drop on Herman Cain, whose 9-9-9 tax plan gives a new meaning to "retail politics." I'm not able to analyze what the effect of such a plan would be on tax payers or the deficit, but I know there are many wonks out there who can, and I've been hoping to hear from some of them.

An AP story in the Star Tribune quotes a Bush (the first) Treasury official as saying "The poor would pay more while the rich would have their taxes cut, with no guarantee that economic growth will increase and a good reason to believe the budget deficit will increase."

The biggest surprise in the story was that the 9 percent corporate income tax would apply to payroll costs -- in effect, the cost of employees is not considered to be a part of the cost of doing business. For many types of companies -- especially professional services -- payroll is 80 percent or more of expenses. How does that make any sense?

Cain's 9 percent sales tax would apply to everything, including food -- with an exception for purchases of used goods. I kind of like that exception, since I think Americans would be well-served to reuse more of what we already have instead of buying new. But applying the tax to food means middle- to low-income people will be paying taxes on every cent they make, since they're pretty likely to spend ever cent they make. For those readers who don't know it, we here in Minnesota still exempt clothing from our state sales tax, which is also a boon to those with lower incomes, so we feel pretty strongly about exempting necessities from sales tax. (Although I would consider adding a state luxury sales tax for clothing over a certain price.)

Another thing I didn't realize about Cain's plan is that (according to the AP article) it would eliminate the payroll taxes that fund Social Security and Medicare. That makes sense in terms of trying to enact a sweeping reform, but it clearly would leave both programs even more underfunded than they already are.

Today's Strib included a story called 7 Things to Know About Cain's 9-9-9 Tax Plan. Item 4 is "How would it affect the wealthy?"

"People at the top end pay 20 or 21 percent in income and payroll taxes now," [Roberton] Williams [of the nonpartisan Tax Policy Center] said. "This plan zeroes out their payroll tax and suddenly their tax is down to 9 percent. Then, like everyone else, they pay 9 percent on what they spend. But the rich don't spend everything they earn."

Plus there are no capital gain or inheritance taxes, so imagine what Warren Buffett would say -- he'd be paying even less than he is now. And nonprofits who benefit from extra largesse from rich donors, who are trying to avoid taxation, would clearly suffer.

We all know the tax code is a mess, and changes have to start somewhere, but can't we do better than Cain's over-simplified 9-9-9 plan? Simplicity is sexy, but life is complicated, and adults should be able to deal with that.