The EFM Feature
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Today, Rick Perry tries to start his Presidential campaign anew by proposing a flat tax.  But the most attention-getting plan so far has been Herman Cain’s — let’s say it together — 9-9-9 plan.

One of our readers, Michael Dean, is a CPA in Draper, Utah.  He took Cain’s plan and applied it to five of his real life clients to see how the plan would play out in actual people’s lives… not just the debate stage.  Here are his fascinating results:

Cain has talked a lot about how his 9-9-9 plan is revenue neutral and wouldn’t shift the tax burden to lower and middle income taxpayers.  Recent macro studies suggest otherwise but just for fun I took four of my clients, one in an upper income bracket, two middle income clients, and one in the lower income bracket and compared them using the current tax law in affect for 2010 against Cain’s 9-9-9 plan.  (See attached file).  These are real life taxpayers.  I made some assumptions for purposes of the analysis, namely that the charitable deduction would still be allowed under 9-9-9 and that the remaining income after tax would be subject to the 9% national sales tax.  The results were not surprising but none the less, very disturbing.  I highlighted the greater amount of tax being paid under each plan.

The upper income client would have paid less income tax under Cain’s plan than he did pay under the current code and I mean considerably less, like $41,210 less.  Even if you assume that he would have spent 100% of his remaining income on items subject to Cain’s 9% National sales tax (which obviously he would never do) he still comes out paying less than under the current code.  Even if you removed his considerable charitable contribution as an itemized deduction, he still would have paid less.  Conversely, the middle income and lower income clients wound up paying more under Cain’s plan.   Interestingly, the lower the adjusted gross income, the higher percentage of tax those clients paid under 9-9-9.

Cain tries to partially address the issue of the poor paying more tax by establishing what he calls “Opportunity Zones” which would eliminate the national sales tax for certain individuals living in inner cities.  It still doesn’t address the inequity that poor people would face who don’t live in the inner cities and it still doesn’t address the disparity of income tax that they would still have to pay anyway under 9-9-9.  While Cain’s plan is well intentioned, it doesn’t appear to be well thought out.   Per Herman Cain’s website, he is proposing to eventually eliminate the income tax and repeal the 16th amendment.  It doesn’t take an accountant, an economist, or even someone very intelligent to realize that these far-reaching proposals will never pass muster with Congress or the electorate at large.  If Cain becomes the Republican nominee based on these proposals, Obama will have a lock on the next 4 years in my opinion.

As usual, Governor Romney has it right by proposing simple, doable changes to the existing code instead of trying to eat the elephant all at once.


Comments and Discussion

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5 Responses to 9-9-9 in the Real World

  1. Terry says:

    As much as I like Herman Cain, this article proves why likableness won’t necessarily translate to “good U.S. president’. Cain has good intentions, but I can tell you right now that his 9-9-9 plan will never make it into law, even if he is the president at the time.

    Romney is still the best candidate.

  2. Todd says:

    Thank you for this article. I appreciate the thoughtful evaluation on the part of Mr. Dean and EFM for sharing the results. I’ll stand with Mitt on this one, “The rich are doing okay, it is the middle that are hurt the most by the economy.” I like the simplicity of a flat tax and would like to see it implemented slowly. But, I have to agree with Bachmann that the 9-9-9 plan is a tax plan not an economy stimulus or jobs plan. (She hasn’t had a chance to say it yet, but, Perry’s economic plan is also only a tax plan).

    Mitt’s economic plan is a bit long winded to fit into a three syllable catch phrase. But, it is a real business plan for solving a real business problem. Once again this is evidence that Mitt is the alternative to current failed system.

  3. Chris says:

    This is fascinating, seeing the actual numbers. Very interesting. But there are two fiscal goals to consider, right?

    I mean relieving the tax burden on the households is only one element to ponder as it goes to electability (i.e., winning votes), a sense of economic stability for individuals and demographics, and thereby a hoped for economic stimulation. But the other question is: would Cain’s plan increase or decrease the tax revenue taken in by the government? If it would, then there might be something to it as a means of getting the nation back on budget, except of course the bicameral system and special interest lobbyists ever ensure that increased revenue would NOT ultimately go toward paying down the debt but be spent on constituents. Curbing spending must go hand in hand with tax reform.

    • David Walser says:

      “…But the other question is: would Cain’s plan increase or decrease the tax revenue taken in by the government? …”

      Cain claims that his plan is revenue neutral, that is, his proposal is supposed to generate the same amount of revenue as does the current system. This claim is additional evidence that Cain’s 9-9-9 plan is more sales craft than statecraft. How likely is it that three new taxes, each with a 9% rate, will produce the same amount of revenue as the current system? Isn’t it far more likely that the tax rates might need to be 9.5%, 7.75%, and 13.4% (or some other set of unequal and non-round percentages) if the goal is revenue neutrality? 9-9-9 is marketing. It’s not a serious policy proposal.

  4. Rex McBride says:

    Nancy -

    The thing I liked about the CPA study of his 4 tax clients at different income/expense levels is that it put Cain’s macro 9-9-9 plan (as currently formulated) to the micro test of how it would look to 4 families on April 15th, when it was time for each of the families to pony up the IRS’s share of their wealth.

    Lofty rhetoric aside about “this plan will save you taxes,” there are so many economists who fall in love with one unrealistic macro theory or another, but those abstract plans are usually not given the acid test of showing exactly what the impact of the plans would be on the micro level.

    The macro vs micro reality is important to this election, because Romney hands down is the only candidate who is skilled enough to navigate between macro concepts and micro realities. In a complex economy, an effective leader needs to understand and navigate between both levels and realize the importance of each.

    Since America is getting bushwhacked at both the micro and macro levels under the Obama tax/borrow/spend economy, I hope that the Romney campaign features more “what is the bottom line impact” studies similar to the CPA’s study of those 4 clients at different income/levels. Because the CPA selective representative clients, most of us will fall close to one or another of those 4 clients.

    The bad news is that Cain’s lofty promises of lower taxes from his macro 9-9-9 plan is not only wrong — it’s dangerous. Maybe Cain only has economists on his staff, economists who’ve never met a CPA.

    Rex

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