There have been three main arguments against Herman Cain’s 999 Plan – 1) The national sales tax gives the Government another tool to use for higher tax collection, 2) the plan is not revenue neutral and 3) the plan penalizes lower income groups.
The first argument shouldn’t be too hard to debunk. Currently, there is nothing preventing Congress from raising current income taxes or initiating new income taxes right now so adding a different tax (national sales tax) won’t increase the odds of Congress raising rates on the that new tax collection vehicle. That is why elections are important and we must elect those who would rather focus on reducing our Spending than raising our Taxes. Raising the National Sales Tax would require legislation and Congress would be on the record (and the hook) for voting in favor of tax increases. So this first 999 Plan argument is dumb and shows people aren’t thinking logically.
The second argument is more complicated and I’ll address this in a future post when I have better data. There is one link here, where someone has taken a look at the revenue neutral argument from a high level. If we perform a static analysis (meaning the economy won’t change after the 999 Plan), then the plan is not revenue neutral and we’ll fall short by about $400 billion in the first year. But even modest economic models will show economic growth from the 999 Plan. When you give people more disposable income they’ll buy products which will stimulate the economy, grow business and add jobs (which inturn generates more revenue from Corporate and Income taxes). Dropping the Corporate tax rate will give companies more money to hire workers, build new facilities and develop new markets/products which will also grow the economy. The economy is holding back due to excessive regulation and the 999 Plan should open the gates and allow our economy to experience annual growth rates that will rival the best in our history. When taking 9% growth rates into account, the 999 Plan is revenue neutral. Again, I’d like to get more data and perform this analysis on my own to verify.
Now on to the third argument and I believe this one has some validity. I developed a spreadsheet that allows me to perform a simple calculation and comparison of the current tax system and the 999 Plan for various Income demographic groups. For this analysis, I used the latest IRS data from 2009to get the average tax rate on taxable income for each group. I also assume each group saves 10% of their annual income and donates 2.5% of their annual income to charity. The current plan includes the average effective income tax rates (from teh 2009 IRS data), Social Security Tax (4.2%) and Medicare Tax (1.4%) and those taxes are levied against the net income after deducting savings and charitable contributions. The 999 Plan has a 9% tax on the net Income and also a 9% sales tax on the net income (I assume that you are spending the rest of your money after savings and charitable contributions). You can see from the graph below that the lower incomes will see their effective income tax rates increase while the middle and upper income groups will see their effective tax rates drastically decrease. The difference is less than $1,000 per year but that is a lot of money for those making less than $50,000 per year. This increased tax burden on the lower income demographics needs to be addressed and maybe the plan clarified that those making less that $50,000 per year will be exempt from teh 9% Income tax (they’ll still pay their fair share through the 9% National Sales Tax).
Footnotes – You’ll also see that assuming the same savings and charitable contributions across all groups, the effective tax rates in the 999 Plan are the same (makes sense because we’ll all be taxed at the same 9% for income and 9% for purchases). In case you are interested, there is a tax simulator that allows you to see the comparisons between the current tax system and the 999 Plan. The actual Excel Spreadsheet I used for this analysis can be found here -> 999 clacs.
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.