The Tax Policy Center, another highly respected tax analysis group, has now released its analysis of the distributional effects of "a fully phased in version of Herman Cain's 9-9-9 tax plan," along with the assumptions it has made in reaching its conclusions, based on the information available at Cain's campaign website and from Fiscal Associates, a firm that analysed one form of the proposal for the Cain campaign. See TPC, Herman Cain's 9-9-9 Tax Plan (Oct. 18, 2011).
"We conclude that all three taxes are versions of well-known forms of consumption taxes, although collected in different ways and with a few modifications."
The bases of all three taxes are essentially the same as the base of a national sales tax. The basic structures of the three taxes are:
1. National Sales Tax: This is a retail sales tax, collected on sales to final consumers. It is imposed on all sales to households, non-profit institutions and governments, as well as sales by the business activities of government and non-profits (for example, revenues of non-profit hospitals.) The tax is modeled on the Fair Tax proposal that has been proposed by Americans for Fair Taxation and was first introduced in Congress by Representative John Linder (R-GA) in 1999. The tax rate is 9 percent of the total price (including tax) charged by businesses to consumers.2
[Footnote confirms that this 'tax inclusive' rate of 9% equates to a tax-exclusive rate of about 9.9%. Most sales taxes in the US are reported in tax-exclusive terms--using tax-exclusive rate of 9%, a sales price of $100 will result in an additional $9 in tax, while using tax inclusive rate of 9%, a sales price of $100 will result in an additional $9.90 of tax.].
2. Business Tax: This is a subtraction method value-added tax, sometimes called a business transfer tax (BTT). All businesses would pay a 9 percent tax on all sales minus purchases from other businesses (including purchases of investment goods). This is essentially the same as a retail sales tax, except that it is collected in pieces on the value added at each stage of production. In the aggregate, those pieces add up to retail sales.
[Discussion adds that this tax is modified from the usual business transfer tax, in that it permits a deduction for dividends paid, with the result that the tax base is limited to wages and the tax functions as a payroll tax.]
3. Individual Flat Tax: As described by Fiscal Associates, this is a version of the Flat Tax originally developed by Professors Robert Hall and Alvin Rabushka and endorsed in the past by former House Majority Leader Dick Armey, Senator Richard Shelby of Alabama, and former Presidential candidate Steve Forbes. The flat tax is a subtraction method value-added tax, similar to the BTT, with the exception that businesses may deduct wages paid and workers must report and pay taxes on their wages. With a single rate, however, it makes no difference whether the worker or the business remits the tax. (The original flat tax proposal would have allowed workers to claim exemptions for themselves and dependents, but the Cain proposal has no such adjustment.)
TPC assumes that the sales tax and business tax amount to an 18% sales tax on consumption, while the individual income tax would be applied to wages already reduced by the sales tax, thus reducing it to a 7.38 percent effective rate and resulting in a 25.38 percent national sales tax (except for the dividends paid deduction to the business tax and the charitable contribution deduction to the income tax). TPC notes that Cain has suggested some exemptions for lower income folks in "empowerment zones", but there are no details on how that would work (or not). It concludes the plan would raise about $300 billion less than the law that would otherwise be in effect for 2013, which would repeal the Bush tax cuts.
The TPC study provides various tables, including a table showing fully phased in distribution of the tax by cash income level. (Like many economic studies, TPC assumes that the corporate tax is paid by shareholders.) The vast majority of ordinary Americans would have substantial federal tax increases: for those with incomes below $100,000 there would be federal tax increases ranging from $1,231 per year (for those making less than $10,000 a year) to $5,170 a year (for those making between $75,000 and $100,000 a year). George W. Bush's and the GOP's powerful base of have-mores, however, would make off exceedingly well, enjoying the LOWEST tax rate of all income distributions: 96.7% of millionaires would have a federal tax CUT of $611,979 a year!
The idea of moving from a progressive income tax reflecting the long-held values of the vast majority of the American people to a radically regressive national sales tax system where the highest income Americans pay the lowest rate of tax is anathema to most Americans. If such a plan is adopted, it will be because of the ability of corporate and individual wealth to buy the policies that suit them.
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