Tuesday, October 11, 2011


Have you heard about the tax plan proposed by Republican Presidential candidate Herman Cain (aka “The Black Walnut”)?  He calls it the “9-9-9 Plan”.

According to Cain his 9-9-9 system would raise as much revenue as the existing federal income, corporate, and payroll taxes and could bring in additional revenue by boosting economic growth.

Here, from Cain’s campaign website, are the basics of the plan -

  • Business Flat Tax – 9%
1. Gross income less all investments, all purchases from other businesses and all dividends paid to shareholders.
2. Empowerment Zones will offer additional deductions for payroll employed in the zone.

·         Individual Flat Tax – 9%.

1. Gross income less charitable deductions.
2. Empowerment Zones will offer additional deductions for those living and/or working in the zone.

  • National Sales Tax – 9%.
Under 9-9-9The “Fair Tax” would ultimately replace the 9% individual and corporate income taxes.  I assume he means the FairTax proposal for a national sales tax that has been around for a while.  According to its website -   

“The FairTax plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue neutrality, and, through companion legislation, the repeal of the 16th Amendment.”
Cain summarizes the results of his plan -

  • It ends the Payroll Tax completely – a permanent holiday!
  • Zero capital gains tax
  • Ends the Death Tax.
  • Eliminates double taxation of dividends
  • Ends nearly all deductions and special interest favors
Let me begin by stating that I would not vote for Herman Cain for President.  I will never vote for anyone who openly supports the “Tea Party” movement.

While the 9-9-9 Plan is obviously a gimmick, it does deserve careful consideration.

I doubt the flat 9% tax rates for federal income, corporate, and sales tax would actually work, especially if it must also replace the current Social Security and Medicare payroll taxes, although I, as Cain is fond of saying, “don’t have facts to back this up”.  But “The 9-9-9 Plan” sounds better than “The 10-15-6 Plan”.  At least he didn’t call it “The 6-6-6 Plan”.

I do like the “flat tax” aspect of the plan.  And I like the fact that he does away with all loopholes and “tax expenditures”.  However, he does not mention whether some of these expenditures currently affecting the 1040, such as the tax benefits for college, the energy credits, and perhaps even a form of the Earned Income Credit, would continue as direct grant programs.
On the corporate level I also support a “dividends paid deduction”.  However I would apply any flat corporate tax to net book income (without a deduction for depreciation of real property).  I do not support a “gross income” tax for corporations.  Currently a NJ corporation, with high gross income but no actual taxable income, can pay as much as $2,000 in state corporate tax (again on actual income of “0”) – and this is not fair. 

I do not know what he means by “gross proceeds less all investment”.  Does he mean investment in equipment, such as a 100% Section 179 deduction?  I am not sure if I support this aspect.

On the individual level, if you do away with all tax expenditures why keep the deduction for charity?  The charitable deduction is most effective at higher levels of tax.  I do not think that taking away the deduction for charitable giving under a low flat rate would substantially reduce contributions.

It is assumed from the plan outline that there would be a “0” tax rate on capital gains (I assume long term).  While I do favor a lower tax on capital gains (or “more better”, in my opinion, a return to the capital gains deduction, at one time 50%) I do not support a “0” tax on capital gains.  Warren Buffet would pay practically no federal income tax!

I would want to consider keeping the deduction for contributions to retirement plans, or some kind of “universal savings plan” that would cover medical costs, education, and retirement, but would be willing to do away with all other deductions under a 10% or similarly low flat tax.  And I would do away with the deduction for depreciation of real property on Schedules C, E, and F.    

I especially like the fact that under a flat tax we would no longer have a situation where nearly 50% of Americans pay absolutely no federal income tax.

A national sales tax, as long as it is low enough, is not a bad thing.  One of its major benefits is that it would collect tax from the current “underground economy”.  A drug dealer who does not pay income tax on his earnings, or a self-employed businessperson who under reports his income, would still be required to pay sales tax when he buys an expensive car.  And, as most states already collect state sales tax, it would be easy to administer.  A side benefit of a national sales tax could be standardized national rules for what is subject to state, and federal, sales tax.

If there was something similar to the 9-9-9 plan in place I definitely would not eventually replace it with the Fair Tax as currently proposed.

So – what do you think?


1 comment:

Anonymous said...

If a 9% income tax was inacted, why wouldnt everyone with any sizable I R A account convert all of his I R A to a Roth I R A and pay no further income tax on future withdrawals? Paying a one time 9% tax would be an immediate source of tremendous revinue for the federal government.