Can Herman Cain's 999 Plan Work?

Axel Whiteman ^ | 10/5/11 | Axel Whiteman

[justsaynomore]

UPDATE: 9/27/2011 We were contacted directly by the Cain Campaign's chief economic advisors last week, and were advised that base numbers in our analysis significantly understate the initial revenue generated in the first year of the 999 plan. The Cain Campaign had indicated a willingness to share their raw data so that we might adjust our projections. We anticipate that this information will be made available shortly, and we'll review their data, and will modify our analysis if warranted.

While the nation awaits Barack Obama's "Jobs Plan," which will be countered by the Romney "Jobs Plan"and the Wall Street Journal swoons over Jon Huntsman's economic plan; we thought we'd take a moment to review the economic plan proposed by Herman Cain.

About two weeks ago, Presidential hopeful, Herman Cain announced his "Vision for Economic Growth" which he calls 999. The previous link is to the official campaign brochure describing the plan. The brochure appears to be rather poorly constructed, stringing together often unrelated talking points, policy initiatives, and goals. (For anyone interested, we've done a point by point critique on the shortcomings of the brochure here, and cut and pasted our own suggestions here.)However, on closer inspection, one can see what is likely to be the unedited stream of conscience thought of a singularly brilliant individual. Despite the explanatory shortcomings of the brochure, the "Vision for Economic Growth" is quite simple in nature

Cain's "Enhanced Phase I".

Cains vision is;

Limit all personal income taxes (including SS / Medicare) to 9%

Reduce Corporate Taxes to 9%

Introduce an national sales tax of 9%

Phase II would be to eliminate the personal income tax and the Corporate Income Tax and replace them both with the "Fair Tax"

Cain's brochure claims that the plan is revenue neutral, which would mean that it would generate a similar amount to the current Federal Revenues of about $2.162 Trillion. At first glance it seems difficult to fathom. It fortunately it isn't difficult to test this contention. We'll simply assume zero deductions and multiply the aggregate totals of each sector by 9%.

Our best, or perhaps most optimistic, estimate of aggregate U.S. personal income comes from University of New Mexico's Bureau of Business and Economic Research. According to UNM's BBE - total personal income in 2011 will be $12.590 Trillion.

Corporate Taxable income is a bit more difficult to ascertain due to the ability of Corporations to make business decisions and accounting allocations based on prevailing tax law. Data is readily available for total Corporate taxes paid, but this includes a large number of deductions and accounting allocations to define depreciation, capital gains, etc. Again in the interest of erring on the high side, we'll use our own extrapolation of data. Last year, Corporations reported after tax profits of about $1.5 Trillion. Based on a current corporate tax rate of 35% and corporate propensities to shift "profits" into capital gains or other lesser taxed classifications, one could make a reasonable case that the core gross profit to which tax would be applied could conservatively be estimated to be twice that amount. That is $3Trillion.

Total Consumer spending is quite a bit easier to identify. According to the latest annual report from the U.S. Census Bureau (calendar year 2009), the total amount of sales for the U.S. Retail Industry (including food service and automotive) was $4.13 Trillion.

A quick acid test of the numbers would be to total them and see how they compare to total GDP. The total of our factor is about 19 Trillion. Recognizing that to a large extent "retail sales" are largely previously counted in Personal Income, and that the total GDP is estimated to be around 15 Trillion, our estimates of "Taxable Base" against which to apply the Cain 9% tax rates appears to be reasonable. Now applying the 999 tax rate yields the following.

	Total Aggregate	Tax Rate	Gov. Revenue
Personal Income	$12,530,101,184		0.09	$1,127,709,107
Corporate before Tax Income	$3,000,000,000	0.09	$270,000,000
Gross Consumer Purchases		$4,200,000,000	0.09	$378,000,000
			$1,775,709,1

As we can see from the above referenced table, the 999 plan, when applied to current economic levels of activity; falls significantly short of the current Government revenue of 2.162 Trillion. In this blunt and rather static analysis, the 999 plan would result in a $387 Billion revenue shortfall when compared to current tax revenue estimates.

So is the plan unworkable?

Not so fast....

One of the difficulties in estimating tax revenue is that both people and corporations change their behavior in order to take advantage of tax policy. Obviously, this plan is proposed encourage economic activity, and create an environment where economic growth can occur. It would not be unreasonable for the 999 plan to result in a 10% growth rate. Ok, that's a bit aggressive, but not unreasonable. Remember, the Federal Budget Baseline assumes an 8% annual growth in Government outlays, and that after 4 years of no growth - there may be significant "pent up demand" making this possible. And honestly, if we don't get some economic growth out of a dramatic policy change, why bother anyway. So, lets scale back a bit, and for the sake of rhetorical simplicity, assume 9% growth....

9% Growth Projection
Personal Income	$14,887,013,217	0.09	$1,339,831,190
Corporate before Tax Income	3564300000	0.09		$320,787,000
Gross Consumer Purchases	4990020000	0.09	$449,101,800
				$2,109,719,990

Now we're getting somewhere. If one assumes that we can achieve significant growth after instituting such pro-growth policies; we are now within $50 Billion of being Revenue neutral. In fact if the growth continues for another year, we would surpass the revenue neutral point and then become "Revenue Positive."

Based on the assumed growth projections, the 999 plan becomes revenue "Positive" quite quickly. The underlying philosophy of the plan is sound, if not brilliant - both from the perspective of functional economics and political positioning. The broad and indiscriminate capture of ALL income at a low rate removes government from picking "winners and losers". For the above projections to maintain any degree of accuracy, ALL deductions are eliminated. That's right, no charity, no mortgage, no green energy etc. Just straight .09 from everyone. This removes market distortions from economic decision making. It also removes a great deal of power from the legislature to create private sector billionaire's with the passage of legislation. (Oh the humanity!)

It is, in short "Economic Liberty"

The diametric opposite of what has been in practice since the Obama administration took office.

Politically, it is of equal brilliance. The mainstay of Barack Obama's political rhetoric is class warfare. To be fair, it is at times the a common tool for the right wing media as well. Limabaugh frequently bemoans the fact that almost half the nations population pay "no income tax." While that's technically true, it is only so by a matter of semantics, not economics. About 20% of every wage earners productive income is confiscated by the Federal Government and labeled "Social Security, and Medicare" contributions. Once confiscated it is thrown into the exact same General Fund that higher wage earners "Social Security, Medicare, and Federal Income Taxes" are placed. Other than the label - there is no difference in these funds.

Consequently, we have Obama on one side chiding "millionaires and billionaires" for not paying their "fair share." - When they already cough up 50% of their income. And on the other side we have Limbaugh, Levin, and Boortz lamenting the fact that half of the country are "freeloaders" paying nothing in Federal Taxes - "When the freeloaders" are busting their butts for $10 bucks an hour, and taking home $8 an hour.

This Tax structure creates the fertile ground on which the seeds of class envy are planted and harvested by antagonists on both sides.

The 999 plan puts all Americans on equal footing and eradicates the root of class warfare.. When Legislative issues arise that will call for more spending and imply the need for higher taxes, it would be a great change of pace to see every productive American evaluate the issue from the standpoint of a taxpayer/stakeholder. (Even illegals would object to higher taxes!)

The 999 plan is an outstanding concept, unfortunately; it only addresses one side of our current Federal Fiscal Crisis. Even if 999 initiates a period of extended 9% growth, it still leaves an annual deficit of more than a $Trillion annually. Even if revenues grow at 9% per annum, the current budget baseline of 8% annual growth, when added to the required interest payments to fund the increasing deficits - yield a budget that NEVER balances.

As bold and dramatic as the 999 plan is, it addresses only the revenue side of the Federal Financial issue. As Cain often says, "First you've got to identify the problem." The revenue "problem" is how to most equitably, and efficiently extract about 20% of GDP from the nations producers? 999 is an elegant and effective answer to that question.

The more pressing question remains, "How do we run the Federal Government on less than 20% of GDP?" This will require actual budget "cuts" - not the faux "cuts against the baseline" that are the Washington norm. The answer is this:

Combined with the 999 Revenue Plan, the Congressional Super Committee must establish a "Prosperity Baseline Budget" of $2.2 Trillion. (That's approximately 2004 level spending) and re-establish the "growth baseline" to be limited to 1% per year. Sparing everyone the laborious calcs after the first year of implementation the resulting outcome would be:

999 Revenue Plan + Prosperity Budget Baseline =

9% annual economic and revenue Growth, and the virtual elimination of all Federal debt - in 9 years.

Year	Federal Revenue (in Trillions)	Payment on Debt
	2.3947	0.19473
1	2.6103	0.3882557
2	2.8452	0.60095871
3	3.1012	0.8345826
4	3.3804	1.09102801
	5	3.6846	1.37236683
6	4.0162	1.68085762
7		4.3777	2.01896235
8	4.7716	2.38936478
9	5.2011		2.79499039
		13.36609699

Wishful thinking? Sure, but a solid goal for which to aim. If we achieve the growth sought and projected, the ability to cut the Federal Budget will be enhanced due to significant decreased reliance on unemployment benefits and Medicaid.

In other words:

9% Personal Tax +

9% Corporate Tax +

9% Sales Tax

=

9% Real Economic Growth and

ElIMINATE FEDERAL DEBT - in 9 YEARS

[MontaniSemperLiberi]

It would not be unreasonable for the 999 plan to result in a 10% growth rate. Ok, that's a bit aggressive, but not unreasonable.

Wishful thinking? Sure, but a solid goal for which to aim.

So wishful thinking is a solid goal? Who wrote this? Obama and Pelosi?

999 probably won't work at a level to bring in the current level of revenue ($2.2T), let alone 18.5% of GDP ($2.6T) that we historically count on to balance the budget and not nearly the 25% of GDP ($3.5T) required to pay for the current level of spending.

Moreover, Americans are smart. Americas will figure out a way to pay less taxes. If 999 doesn't tax second hand goods, the market for car and appliance repairs will sky rocket.

As mush as I like Cain, I can't get behind him because of 999.

He could convince me though if he were to be clear about how he will reduce spending to $2.2T or how he will increase taxes under 999 to pay for more spending.

I fear that 999 will be yet one more failed Washington policy that puts us over the edge of the debt cliff, that we will become like Greece. There is no room on our national credit card to fool around with one more experiment. We need to do what we know will work and that is to drastically cut spending.

[M. Thatcher]

He IS a politician worked for John Connally and Romney. Now he’s shilling for CAIN. Don’t any of you ever do any research?

Are you claiming the brilliant economist Steve Moore (Cato, Club for Growth, etc etc) worked for John Connally and Romney?

[justsaynomore]

No one says the 999 is perfect, and I’m sure the idea will be tweaked as time goes on.

The hard truth is this. Our current tax system is not sustainable. Not anymore. We are quickly on our way to the goal of the socialists.

Cain is the only one thinking outside the box.

[roamer_1]

Can Herman Cain's 999 Plan Work?

No. Introducing a sales tax just opens another revenue stream. Soon enough 999 will become 101010... and so on infinitely.

As an interim position, perhaps, leaning toward pure fair tax... but then there is nothing to keep a later congress on the path of removing all other revenue streams...

[justsaynomore]

Cain’s economic plan is 2 phases.

999 is a (1-2 year) bridge to the repeal of the 16th and Fair Tax. The rates can only be changed by 2/3 majority vote

This will put more on Congress than are already there now with the current tax system.

Plus, with everyone paying, no special treatment, no tax loopholes, pressure will be enormous not to change these rates.

No sales tax on used goods.

9% income tax replaces FICA (15% or half whichever way you look at it) and it is minus gifts to charity. If you don’t like giving your money to government give it to the church.

[justsaynomore]

***This will put more limitations on Congress

[marty60]

The author of this supposed informative article.

Other econs are not quite as enamored. a little reality always helps.
The fact that proposals for “flat taxes” seem to be back in vogue. Take Republican presidential candidate Herman Cain’s “999 Plan.” A reporter called me about it, which was the only reason I went to the Cain website to check it out for a few seconds, which was all it took to “get” what his proposal is basically about: (i) switching to a consumption-based tax system that exempts income from capital–which on its own is “regressive”; (ii) switching to a single (”flat”) marginal tax rate schedule–which on its own is (also) “regressive”; and then (iii) switching to a not-just-double-but-triple tax of consumed income (instead of saved income) through the 9 percent business tax (exempting capital income) and the 9 percent sales tax (which naturally exempts savings) that are layered on top of the 9 percent income tax (which exempts capital income as well)–which means all that regressivity I already listed is tripled! Where did the 9 percent rates come from, I was asked by the reporter–and would it be revenue neutral? My response: “probably because 9 is one digit long” and theoretically, yes, it’s possible that a triple tax on consumed income with no or few exemptions which has an effective rate of 9+9+9 or 27 percent could indeed be revenue neutral. (From Cain’s description of the 999 base, it’s not clear what is exempt other than charitable deductions–oh, and all of capital income, of course.)

I don’t know if I’ll feel compelled to say anymore about the Cain tax plan unless the candidate actually seems to have a decent chance of getting the Republican nomination, but on the way to seeing if that happens I hope people recognize how insane his tax plan is (without needing any detailed analysis). This is one plan where my biggest reaction to the plan is not that it doesn’t raise enough revenue. Like I said, theoretically it could, but why would we ever want to do it that way?

http://www.csmonitor.com/Business/Economist-Mom/2011/0929/Cain-s-999-plan-Not-sane-tax-policy

[M. Thatcher]

Sorry, don’t know you. Do know Steve, however. And if he’s positively disposed to the Cain concept, I want to know more. None of your statements are persuasive, especially your raising “regressivity” as a bloody shirt; it’s word repetition masquerading as argument.

[palmer]

Business owners like the one I work for, who employ several hundred thousand people, cut all our salaries by 5 to 15 percent a couple of years ago. Not because they were losing money, but because they weren't making enough.

Must you be so blatantly socialist? Your salary depends on your own career choices and your job performance, so stop trying to shirk your responsibility for those.

[DTxAg]

Business owners like my husband, who employs 50 people said if FICA were cut, that would go back to them, for one.

Does your husband realize that under Cain's plan, his payroll to his 50 employees is now TAXABLE under the business income tax? Cain's plan only lets your husband deduct payroll if he is in an "empowerment zone." So, if your husband pays those 50 employees $50,000 each for a total of $2,500,000, your husband now gets to pay $225,000 in business income taxes. Under current tax law, he would have only paid $191,250 in Social Security and Medicare taxes.

But that's OK, right?

[DTxAg]

Hit post to early. Meant to finish with:

But that's OK, right? Your husband will still give all employees a 15.3% raise, he'll just pay the extra 9% out of his pocket.

[justsaynomore]

There is no “business income tax” in Cain’s plan.

There is a 9% flat income tax the employees pay that replaces all payroll taxes.

There is a 9% corporate tax (which is currently between 25-30%)

There is a 9% sales tax.

[DTxAg]

Call it whatever you want. Right now, if a company pays its employees $100,000, it pays $7,650 to Social Security & Medicare, but the $100,000 is a business deduction (so there is no 35% tax on that).

Under Cain's plan, the business pays $0 to Social Security & Medicare, but the $100,000 is NOT a business deduction, so the business owes $9,000 under the "corporate tax."

[DTxAg]

In case you're curious, here is the relevant part of Cain's plan:

Business Flat Tax – 9%
Gross income less all investments, all purchases from other businesses and all dividends paid to shareholders.(My comment: no payroll deduction)
Empowerment Zones will offer additional deductions for payroll employed in the zone.(My comment: payroll deduction)

[justsaynomore]

LOL, you still miss the point that the business tax is still much LOWER than the the current business tax. Your assumption that we would pay more does not take into account what tax amounts we had to start with. Even minus a payroll deduction we would come out on top

Have you actually run the numbers? My husband and I have run them for our business and ourselves and we save in both cases.

[DTxAg]

I don't miss the point at all. The Cain plan redefines what falls under the "corporate tax". Regardless that the tax rate is lower, the business is paying more for payroll. If you've got a small business where the profit is near zero every year because the owners take what profits they can as income, the Cain plan increases the tax burden on that business. If you're any business that has an operating loss for the year (in which case you'd pay no corporate income taxes under current law), you'd get stuck with a larger tax bill under the Cain plan since the 9% exceeds the 7.65% now, so the Cain plan increases the tax burden on that business.

And the point you started with was that your husband would pass on the 15.3% FICA savings to his employees, apparently despite the fact that we'd owe an extra 9% on payroll.