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A Project of The Annenberg Public Policy Center

Cain’s ‘Fiscal Hocus Pocus’

A former chief of staff of the nonpartisan Joint Committee on Taxation calls Herman Cain’s 9-9-9 plan “a terrific example of fiscal hocus pocus” that would have the effect of “drastically increasing taxes on the working poor and middle class.” Edward Kleinbard, now a professor of law at the University of Southern California’s Gould School of Law, published a research paper through the university on Oct. 12. It is so far the most detailed look at the 9-9-9 plan by any independent tax expert, and it will provide ammunition for both liberal and conservative critics.

Cain claims that his plan is “simple, transparent, efficient, fair, and neutral.” We noted after the most recent GOP debate that, in fact, his plan is “murky” rather than transparent, and that Cain’s consultant on the plan hadn’t produced any study of how it would impact different income groups.

Some analysts have estimated that Cain’s plan wouldn’t produce as much income as the taxes it would replace, and one liberal analyst has even said it would cut revenues in half. Kleinbard disagrees. “I cannot promise that the Plan is wholly revenue neutral compared to current law, but in fact it should raise a great deal of revenue,” he writes. That will bolster Cain’s conservative critics who argue that creating both a 9 percent national sales tax and a 9 percent flat tax on personal income would lead to higher taxes. “You know, you can drain out more blood with two needles than with one,” says Grover Norquist, president of Americans for Tax Reform.

Furthermore, Kleinbard concludes that Cain’s proposed sales tax would amount to “a disguised one-time 9 percent tax on existing wealth — no doubt much to the surprise of Mr. Cain and his followers.” That’s because an asset worth $100 on the day before the tax becomes effective would return only $91 to the owner the day after (the $100 sales price minus the $9 tax). Kleinbard calls this “a one-time 9 percent haircut on existing wealth,” and it may give conservatives fresh reason to object to Cain’s plan. The tax would apply to real estate (including personal residences), stocks, bonds, gold or any other asset that is bought and sold, with the sole exception of “used goods” which Cain now says he would exempt. (Cain adviser Gary Robbins told us that existing homes would be exempted as “used goods,” a point Cain also made in a CNBC interview a day after the debate.)

On the other hand, Kleinbard’s analysis also supports liberal critics who argue that any sales tax or flat tax tends to reduce taxes for upper-income persons while raising them for lower-income persons.

Kleinbard: The 9-9-9 Plan functions as an effective 27 percent payroll tax on wage income. By imposing an effective 27 percent flat tax on wage income, the 9-9-9 Plan would materially raise the tax burden on many low- and middle-income taxpayers, who today face little or no tax under the income tax, and a 15.3 percent effective payroll tax burden.

How would the plan amount to a 27 percent tax on wages? Kleinbard explains:

  • Cain’s proposed 9 percent tax on business transactions — which does not exempt wages paid by businesses — would cause businesses to pay 9 percent lower wages, and thus effectively become an invisible tax on wage earners.
  • The 9 percent tax on personal income would take another bite of the same wage income after it is received.
  • The 9 percent national sales tax that Cain proposes would eventually take a third bite of that income at the time it is spent to buy goods or services.

Kleinbard’s arithmetic is a bit more complex and sophisticated than this rough summary, but he arrives at a 27 percent figure for wage and salary income, and a 17.2 percent rate on self-employed business owners (who could pay themselves in tax-free dividends rather than wages, avoiding the effects of the 9 percent personal income flat tax.)

Kleinbard figures that a family of four earning $120,000 would pay (directly or indirectly) $800 more in federal taxes under Cain’s plan than under current law. At lower income levels the increase in percentage terms would be even higher, and at low wage levels it would be “dramatic.”

One note of caution: Kleinbard has recently testified before the Senate Finance Committee that the U.S. has “no practical choice” but to raise taxes back to levels of the 1990s, at least until entitlement spending can be reined in. He said he favors allowing the Bush tax cuts on individuals to expire next year and imposing a new top rate in the range of 42 to 44 percent on incomes over $2 million. He also contributed $5,250 to Democratic candidates and party committees between 1989 and 2006 (and none to Republicans) when he was a partner in the New York law firm of Cleary, Gottlieb, Steen & Hamilton prior to joining the JCT staff in 2007. Whether any of that colors his analysis of Cain’s plan, we will leave to our readers’ judgment.

The JCT is a House-Senate committee upon which Congress relies for professional analysis of the effects of proposed changes to the tax system. Its staff is not divided into Republican and Democratic factions, and (like that of the Congressional Budget Office) is nonpartisan.