I stated in my previous post on Herman Cain’s 999 Plan analysis that one of the main arguments against the 999 plan was that it was not revenue neutral. That premise states that the tax collected from the 999 Plan would not be equivalent to the current tax collected with the convoluted tax code. I have done more research and have performed a calculation that will show this argument is not valid.
Remember that the 999 Plan will levy a 9% tax rate on each of the following: personal income (minus savings and charitable contributions), corporate profits and consumer purchases (through a national sales tax). For the rebuttal to the revenue neutral argument let me provide the supporting data to my analysis. The total tax revenues in 2010 were $2.163 trillion according to this link so that is the amount the 999 Plan must meet to be characterized as revenue neutral. The total personal income estimate came from here and is equivalent to $12.375 trillion. I estimated total annual corporate profits by taking the 3rd quarter of 2010 corporate profits ($1.659 trillion) and multiplying that by 4 to get an estimate of yearly profits by business ($6.636 trillion) (SEE UPDATE AT END OF POST FOR CLARIFICATION OF THIS ESTIMATE). Note: This corporate profit estimate should be conservative since corporate profits should increase as the economy recovers in 2013 (as Obama leaves and Federal regulations diminish which will allow the Free Market to flourish). The total consumer purchases come from the 2009 Census data on Annual Retail Trade Survey and amounts to $4.091 trillion.
The high level analysis is shown in the table below. Using these conservative numbers, the 999 Plan misses the 2010 tax revenue totals by only 3.95%. This analysis is a static analysis and neglects economic improvements from consumers having more disposable income (consumer purchases increase) and corporations paying lower taxes (corporate profits increase). Once you take these net positive economic impacts into consideration, overcoming this delta should be trivial. Of course spending must be reduced since $2.163 trillion in tax revenue doesn’t cover the $3.456 trillion in Federal spending but having a Fiscally Conservative in the White House and a Fiscally Conservative leadership in both the House of Representatives and Senate will take care of that.
UPDATE – Herman Cain posted 9 rebuttals to common argumenst against the 999 Plan and you can find it here.
UPDATE – Arthur Laffer, famed economist, has also provided his supportive analysis of the 999 Plan here.
UPDATE 28-OCT-11 – Based on an error that was pointed out by a commenter (which I replied to here) I underestimated corporate profits. The real estimate for corporate profits should have been $1.659 trillion and not the higher $6.636 trillion I originally used. But I am going to keep my original value for corporate profits because, as I stated in the comments, Mr. Laffer used $9.5 trillion for corporate profit estimates from Cain’s team. I think the discrepancy comes in the fact that Cain’s plan would change the formula for calculating corporate profits that are taxed. Currently Cost of Goods Sold is subtracted from gross income and that includes labor and operating costs. In the brief description on Cain’s website corporations will only deduct purchases and capital equipment and that sounds like it excludes operating costs and labor. It could be that this will be taxed and therefore the higher figure is probably what we should use. It is my opinion that Cain’s staff needs to release the details on the Revenue Neutral analysis to clear up some of this confusion.