Cain's 9-9-9 tax plan is simple: Most will simply pay more

Cain's 9-9-9 tax plan is simple: Most will simply pay more

Cain's 9-9-9 tax plan is simple: Most will simply pay more

By John W. Schoen, Senior Producer

When it comes to Republican presidential candidate Herman Cain's proposed 9-9-9 tax plan, there’s one thing all sides agree on: it’s very simple.
If you're a corporation, own a small business or count yourself among the richest Americans, you'll simply love it. If not, you'd simply pay a lot more in taxes.
Everyone hates the current tax code. A Congressional supercommittee is attacking the mess as part of a broad proposal to balance the federal budget. President Barack Obama wants to pay for his jobs stimulus package by raising taxes on the wealthiest households. Corporations are agitating for a “tax holiday” to bring home over a $1 trillion in profits stashed overseas to avoid the IRS back home.
Now Cain, who has recently surged to the front of the pack of GOP presidential contenders, is drawing attention to a radical idea. Rather than slog through the political morass of overhauling the existing system, just scrap it entirely. No more deductions, exemptions, incentives and tax loss carry forwards
In its place, Cain wants the government to pay its bills with three sources of revenues held to single-digit rates: a 9 percent tax on all consumer purchases, a 9 percent “business” tax and a 9 percent income tax.
Cain claims the plan is already generating popular support among voters, which will make it much easier to implement in the political quagmire that has numerous tax reform proposals.

“I can be walking through the airport going through security and a TSA agent will say, ‘Hello Mr. Cain: 9-9-9,” Cain recently told CNBC. “If the public understands it, they will support it and demand it. That is going to be the difference. It is not a complicated piece of legislation.”
But the odds are much higher that, when the public understands it, the vast majority of taxpayers will be horrified to realize they face a huge tax increase. That assessment comes from Bruce Bartlett, a senior official in the Reagan and George H.W. Bush administrations, who described the plan as a “distributional monstrosity.”
“The poor would pay more while the rich would have their taxes cut, with no guarantee that economic growth will increase and good reason to believe that the budget deficit will increase” Bartlett recently wrote in the New York Times. “Even allowing for the poorly thought through promises routinely made on the campaign trail, Mr. Cain’s tax plan stands out as exceptionally ill conceived.
The reason the plan would hit poor people much harder that the wealthy is also simple. The current tax code provides a series of deductions, credits and exemptions that ease the tax burden on all households, but they have a greater positive impact those at the bottom of the income ladder. As a result, some 38 percent of U.S. households pay little or no taxes. They would now suddenly be hit with what amounts to a tax bill that represents 27 percent of their income, according to USC law professor Edward Kleinbard, who published a paper this week calling the 9-9-9 plan “a terrific example of fiscal hocus pocus.”

“It is presented as a low-tax panacea, but it actually would raise the tax bills of many Americans very substantially,” he said.
Though he's gained political momentum by hammering away at the plan's simplicity, Cain has had a harder time explaining how the plan would benefit the average household. In a recent appearance on MSNBC’s The Daily Rundown with Chuck Todd, Cain explained that a family with annual income of $50,000 would come out ahead under the 9-9-9 scheme. But as my NBC News colleague Domenico Montanaro found upon closer examination, the numbers Cain offered just don't add up.
The plan would certainly benefit some households. Owners of small businesses would be among the biggest winners, said Kleinbard, because they could pay themselves with dividends (which would no longer be taxed) instead of wages. That would effectively reduce their tax rate to about 18 percent.
Kleinbard also found that the plan would have some significant unintended consequences, including what amounts to a phantom tax on existing savings. For example, if you bought a new car with money you’d stashed in a savings account, accumulated from earnings, investment gains or interest or dividends that you’ve already paid taxes on, you’d now have to pay yet another 9 percent on the new car.
That phantom tax, which would apply to any purchase made with existing wealth, “may come as a big surprise to Mr. Cain and his followers.”
Cain and advisors who have reviewed the plan insist that it would collect enough money to replace the current tax code and not add to the federal budget deficit. But until Cain presents a more detailed proposal, those estimates are all but impossible to verify.
That uncertainty has drawn fire from the political right. Many support the idea of a flatter, more regressive tax than the current system. But they worry that Cain‘s plan could make it easier for the government to raise revenues.
“The challenge is creating a (business tax) and a sales tax and keeping the income tax having three taxes all of which can grow,” Grover Norquist, head of Americans for Tax Reform, told MSNBC. “It’s like having three needles in your arm taking blood out. It’s much more dangerous than just one.”
Critics of Cain’s plan argue that he’s hoping that widespread dissatisfaction with the current system will prompt voters to overlook the plan’s numerous pitfalls.
NYU law professor Daniel Shaviro thinks part of the popular appeal of Cain’s plan is that it appears to hold tax rates to single digits – even though the cumulative tax paid by most households would amount to 27 percent. Borrowing from Cain, Shaviro offers and even simpler solution to make existing tax code much more palatable
“Replace the 35 percent annual income tax with a 3-3-3-3-3-3-3-3-3-3-3-3 monthly tax on annual income,” he recently wrote on his blog. “After all, who's counting if the 12 monthly taxes actually add up to 36 percent annually?”