9-9-9 for dummies “A real tax analysis…. that failed”

There has been so much garbage written in past weeks regarding the 9-9-9 tax plan proposal of republican presidential candidate Herman Cain, that I thought someone who actually "gets it", should take a crack at working through the B.S, and give a real and thoughtful explanation of the plan, how it works, and its possible effects.

If you have read any previous articles on the plan, or even if you have listened to Herman Cain try to explain it, I want you to erase all that crud from your memory, and try to follow along.

There is widespread consensus that the current tax system is a complicated failure that hinders the nation’s growth while allowing the politically well-connected to manipulate the system to get special breaks that are not available to average workers and businesses. This is stimulating a great deal of interest in shifting to the simple, flat and fair taxes proposed in the 9-9-9 plan. The current income tax system punishes the economy, imposes heavy compliance costs on both businesses and taxpayers, rewards special interests, and makes America less competitive. Turns out, the proposed 9-9-9 tax plan would dramatically reduce these ill effects.

The 9-9-9 plan would get rid of nearly all current federal taxes and replace them with a 9% income tax, a 9% corporate tax and a 9% national sales tax. Sounds simple, but some have not thought it through far enough to get even a basic understanding of what that would actually mean. While scraping the tax code and implementing these taxes would be fairly simple, the transformation that would ensue is extremely complex, and as mind-blowing as the chicken or the egg causality dilemma.

The Business tax and the Sales tax

Not much discussion has taken place about the reduction of the business tax that would result from 9-9-9. Nobody really cares about business, they want to know how it affects them personally. Truth is, the business tax cuts outlined in 9-9-9 does effect each and every one of us on a personal level, because it will help to pay some, if not all, if not more than all, of the sales tax portion of 9-9-9. You really can’t talk about one, without the other, and get a real understanding of the proposal. Partisan tax analysts and political foes have taken advantage of this complexity to put the plan in a negative light.

With the 9-9-9 business tax cuts, the cost of products and services will be reduced, in most cases by more than the 9% sales tax that will be added on.

Prices of products and services will go down with the reduced business costs, and the forces of free-market competition. The business half of payroll taxes are eliminated, business tax rates are reduced, the costs of tax compliance and tax avoidance is reduced, if not completely eliminated. Costs of support businesses, from the wholesale suppliers, shippers, packaging, just about every line of the current business spreadsheet is reduced. This will allow businesses to streamline. Accounting will be simplified, tax compliance will be easier, and the time and money spent attempting tax avoidance will be pretty much eliminated. Possibly the most transforming aspect is that money spent on the, government corrupting, tax lobbyists, would be pointless. There is no tax loopholes, deductions, or subsidies allowed, unless the business is located in an empowerment zone. All these increased business efficiencies and reduced business costs, will reduce the costs that, up to now, were simply passed on to you in inflated product and service prices.

Unlike a state sales tax, which is an add-on tax that increases the price of goods and services, this is a replacement tax. It replaces taxes that are already added into selling prices. By replacing higher marginal rates in the production process with lower marginal rates, marginal production costs actually decline, which will either lead to prices being the same or lower. (O.K., I borrowed that paragraph from Herman)

The current "hidden taxes", priced into the products and services we purchase, is estimated at somewhere around 25%(+ or – 10%), depending on the particular product or service. So that means, with these business costs removed, and a 9% business tax imposed, a $100 product should be reduced to $81.75 on average. You will then have to pay a 9% sales tax on that product($81.75×1.09=$89.11), but that’s still a 10.9% savings on average, after taxes. If you follow the "+ or -" math, your new final cost could be between 1% more & 22.77% less.

The reason for the 20 point swing in possible savings has to do with what the particular product is, the amount of supporting businesses in production, and the number of middle-men between the production and the eventual final sale. The cost of services is mainly a payroll and overhead calculation, and therefore will not have as many cost reductions as products would. Also, products built outside the U.S., or with parts not made in the U.S., will not benefit as much from the reduced cost structure. Their cost saving will only occur in the distribution and sales of the product. But, that’s actually a positive aspect, not a negative one. Because American made parts and products benefit more, American products will become less costly as compared to their overseas competitors. American products sold overseas are not sales taxed and, along with the business cost reductions, will be considerably less expensive for our foreign customers. Making the American companies more competitive means more sales, more jobs, and more economic growth.

Now, this does assume that businesses actually do pass on all their reduced business costs into the cost-cutting of their products and services. They may choose to use some of that savings to raise wages, or grow their business, both of which would benefit to the economic health of the country. They could decide to pocket the money. But even then, if they spend it, save it, or invest it outside of their business, it’s still a plus for the economic health of the country. Spending is increased economic activity and government revenue. Savings allows banks to loan more. Investments allow businesses to grow. All of which promote economic growth. Even in the worst case scenario, even if you found a business charging the 9% tax over the old price($109), you probably wouldn’t have to look too far to find one of his competitors has chosen to pass on some share of their reduced business costs to undercut him. It is this price war competition that will eventually work prices down to the lowest possible margins the free market will support. Bottom line, prices will be anywhere from 9% more, to 23% less on various items at the department store. Overall, I see it as a 25% decrease, followed by an 18% increase, for a net savings of 7%.

The Income tax

When you are paid, a payroll tax of 7.6% has been deducted from your pay along with your current income tax withholding. With 9-9-9, you get all your income taxes returned to you, but you will have to pay another 1.4% of your total income. This, along with, what used to be payroll tax money, will be your 9% flat income tax. For most people, this is a huge cost saver. The people who do not benefit from this change are those who pay no income taxes, and those who not only don’t pay income taxes, but actually are reimbursed for their payroll taxes, with various income tax credits. Most of these people will be helped by the provision that does not tax "below poverty level" income. Some working poor will still be asked to pay somewhat more, and they will have to look to their state welfare department for help. They have welfare programs for a reason, you should not expect the federal tax system to be in the business of economic assistance, beyond the obvious poverty level tax exemption. This is because, in a country that champions all kinds of equal rights, we have been slow to treat everyone equally under the tax code. So, in that spirit of equality, what we do for the least of us, we would have to do for everyone. Low income people need to have "skin in the game", same as every other American worker. Being of need should not remove the mantle of shared responsibility. Sure, they may be paying in at one end and taking out at another, but at least they are first doing what is expected of them….. what is expected of us all.

With our current tax system, some of the rich don’t pay taxes, they have the means to pay a tax accountant instead. Well, those days are over! There is only one income tax deduction allowed(charity), and one exemption(sub-poverty line income). According to a new report from the Congressional Research Service, one-quarter of all households making $1 million, paid a smaller share of their income in taxes than 10 million middle class families. In addition to the 94,500 millionaires paying a lower tax rate than much of the middle class, they’ve also shown that about 7,000 of them likely paid no federal income tax at all. With 9-9-9, everyone pays an equal share of their income. No exceptions!

Effects on our economy

Yeah… well… there are many schools of thought on this. The great majority think it will add a turbo charger to economic growth and job creation. According to former Reagan Treasury official Gary Robbins, of Fiscal Associates, the 9-9-9 Plan will expand GDP by $2 trillion, create 6 million new jobs, increase business investment by one-third, and increase wages by 10%. While I agree on the positives, he did not state over what period of time this would occur. I think it would probably take a year or two for the system to adjust, prices to stabilize, and start performing at maximum benefit. But I also see growth continuing to build exponentially from that point on, like a snowball down a mountain side.

According to the Tax Policy Center, Herman Cain’s 9-9-9 tax plan would raise taxes on 84 percent of U.S. households. If that were true(and it’s not), it would cause some harm to the economy in the minds of many, but economic growth and job creation would still occur, although likely at a reduced rate. Fact is, TPC did not do a proper analysis of the plan. They simply subtracted payroll taxes, the current income tax rates, and added 25.3%(income tax) to project your new tax liability. They either did not know what to do with the business tax change, or chose to blur the issue. They rule the 9% business tax, along with the sales tax, as a new 18% business tax. They then, went on to remove that 18% from your taxable income and broke out the adding machines. Did they account for lowered costs of goods and services? No! As far as I can tell, they just used their concocted 18% business tax to calculate government revenue, and figure how much of your income, is subject to an income tax. Did they tell you that the business tax cut will, in many cases pay the sales tax for you? No!

Now, all the tax calculations in the world can’t even correctly figure the after-effects of the business tax cut on business, let alone any particular income group. Behavior modifications brought about by taxation changes are incalculable, and with the sales tax being largely a tax that can be controlled, through the amount of purchases you make, we don’t even know where to begin an educated guess.(if Tax Policy Center knows anything, they should know this) They are showing themselves as political hacks, not to have some sort of qualification on this point! If they were honest, they would have stated that there are ever-expanding parameters of possibility, not unlike forecasting the projected path of a hurriCane.

In a completely new economic environment, how can you possibly calculate what percentage of people will choose to spend more, save more, or invest more.(or less) And, even if you took an educated guess, how could you possible determine how much more?(or less) Every American family budget is as unique as the individuals themselves. I have spent a considerable amount of time researching the business tax changes of this plan, and I can’t even begin to narrow the price changes of products and services to less than a 20 point parameter.(the imported products are driving me nuts) So, I’m not going to blow smoke up your a–, and tell you that this group saves and this group doesn’t. I’m going to conclude by stating the obvious answer. I DON’T KNOW! It’s largely up to you, how you spend, save, and invest. If you save and invest, you avoid the sales taxes of spending. If you purchase used products, you also avoid sales taxes. If you buy American products, that are made -w- mostly American components, you should be saving money… maybe(it’s complicated). If I’ve learned anything by foolishly taking on this impossible project, it is; For every answer, there are two more impossible questions to this endless equation.

What I can tell you is; It taxes everything once and nothing twice. It taxes the broadest possible base at the lowest possible rates. It is neutral with respect to savings and consumption, capital and labor, imports and exports and whether companies pay dividends or retains earnings. (O.K., I borrowed that paragraph from Herman too)

What is certain, is that 9-9-9 has enormously positive potential effects on economic growth, while at the same time, it imposes restrictions on the government’s ability to pick winners and losers through legislative tax code manipulation.

Now, how could that be wrong for America?