Truth-O-Meter: Herman Cain said workers now pay 15.3% in payroll taxes (How accrate is this?)

Politifact ^ | 10/12/2011

[SeekAndFind]

Herman Cain’s 9-9-9 plan was the talk of the debate held Oct. 11, 2011, in Hanover, N.H., with Cain’s Republican opponents for the presidential nomination assailing the plan as unworkable.

At one point, moderator Charlie Rose warned other candidates that mentioning the plan meant more rebuttal time for Cain. "If you keep mentioning 9-9-9 and Herman Cain, I'm going to have to go back to him every other question," Rose said.

Basically, Cain’s plan would replace the existing laws on income taxes, payroll taxes and corporate taxes with flat tax rates of 9 percent -- a 9 percent income tax, a 9 percent national sales tax and a 9 percent corporate tax.

Cain’s opponents focused on the proposed new sales tax. "We're not going to give the federal government, Nancy Pelosi, a new pipeline, a 9 percent sales tax for consumers to get hammered by the federal government," said Rick Santorum, a former senator from Pennsylvania. "How many people believe that we'll keep the income tax at 9 percent? Anybody?"

Cain’s plan seems to have struck a chord with some voters because it appears easy to understand, particularly compared with the current tax code and its mish-mash of different rates, deductions, credits and loopholes.

But would voters be better off? The day after the debate, Cain was grilled by NBC’s Chuck Todd, who wanted to know how the plan would affect working people. Todd quoted an analysis by economist Bruce Bartlett that said, "At a minimum, the Cain plan is a distributional monstrosity. The poor would pay more while the rich would have their taxes cut."

"First of all, the fact that I got attacked so much and my plan got attacked so much last night, that's a good thing," Cain said. "Because it gives me an opportunity to correct some of those misperceptions.

"For example, here's what a lot of people missed, including Bruce Bartlett. ...Start with the 9-9-9 and the fact that every worker pays 15.3 percent payroll tax. Now they're going to pay 9 percent, okay? That's a 6 percentage point difference. The 9-9-9 plan replaces payroll tax, capital gains tax, corporate income tax, personal income tax and the death tax. So, five taxes we replace with those three. We start with throwing out the current tax code."

Cain is suggesting that the new national sales tax would be a smaller percentage than today’s payroll taxes. But the 15.3-percent number he mentioned didn’t sound quite right to us, so we decided to check it out.

What we found is that Cain is counting both worker and employer contributions to payroll taxes to arrive at the 15.3 percent number.

First, here’s a quick primer on how payroll taxes work: If you work for an employer, the employer deducts payroll taxes before you get your paycheck and then sends the money on to the federal government. The taxes pay for Social Security and Medicare; it's listed as FICA on your pay stub. Typically, workers pay 6.2 percent of their first $106,800 in earnings for Social Security taxes, and they pay 1.45 percent on all their earnings for Medicare hospital coverage. That’s a total of 7.65 percent in payroll taxes for workers making less than $106,800.

But the employer also has to match those taxes, bringing total contributions on behalf of an individual to 12.4 percent for Social Security and 2.9 percent for Medicare. That means total payroll taxes for each worker reach 15.3 percent, the number Cain mentioned.

So most workers see only about half the amount Cain mentioned deducted from their paychecks.

(And for every tax rule now in place, it seems like there are exceptions. The exception in this case is on the self-employed. They are required to pay the worker’s share of payroll taxes and the employer share. So that group would be paying the 15.3 percent Cain mentioned.)

Also in Cain’s defense, many economists believe that if the government were to end payroll taxes, it would mean higher pay for workers -- maybe not immediately, but at least over the long run, because it’s part of the cost of labor.

Still, there’s no rule or law that would require employers to give workers a raise equal to the employer's share of payroll taxes previously paid to the government. The taxes paid now are not considered part of workers’ wages in any formal or legal sense.

We have to add one other note of explanation that’s particular to the current economic downturn. In 2010, President Barack Obama and Congress knocked 2 percentage points off Social Security taxes for workers, as an economic stimulus measure. So this year, most workers are paying 4.2 percent while employers pay 6.2 percent. That means the current overall number isn’t 15.3 percent, but 13.3 percent.

One final note on the 9-9-9 plan itself: In our review of the commentary on Cain’s tax plan, we saw that economic analysts have said the Cain campaign needs to release more detailed information on the plan so that it can be properly modeled, to find out how much revenue it would generate and how it would affect taxpayers of different income levels. Cain said in the interview with Todd that he intended to release more information on the plan soon.

Our ruling

Cain said, "Every worker pays 15.3 percent payroll tax." That's not accurate. Workers only pay half that, with the exception of the self-employed, as we mentioned above. The worker contribution is normally 7.65 percent, and thanks to the payroll tax rollback of 2010, the number this year is 5.65 percent. You can reach that number only by including the half of the tax that employers pay. Some economists say that if the employers’ half of payroll taxes were ended, workers would see a proportional rise in wages over the long run. But whatever the case, Cain was talking about the reality today. Workers don't pay a 15.3 percent payroll tax, so we rate Cain's statement Mostly False.

[SeekAndFind]

RE: Rent, a mortgage, utility bills, a car payment, school tuition, daycare, the list goes on.
__________________________________

Are you certain that these items are deductible from our taxes under 9-9-9? I thought 9-9-9 was supposed to SIMPLIFY the tax code.

If you’re going to include all these items as deductible from your taxable income then the only difference between 9-9-9 and the current tax code is the tax rate and nothing else.

I am not sure if you are correct in your understanding of 9-9-9 at all.

What reliable source tells you that these items you enumerated are deductible under 9-9-9? They can’t be because if they are, then the advantage of SIMPLIFYING our tax code in order for government not to interfere with our lifestyle goes out the window.

[GlockThe Vote]

and if the employee is a good employee - guess what? the next employer vying for his labor will increase his wages to attact him!

Geez! are you people so ignorant of free market economics not to grasp this?

[TLittlefella]

I do not like that FICA and Medicare are referred to as payroll taxes.

I agree, Years ago I worked in NYC and payroll taxes were defined as all the taxes taken out of your paycheck.

FICA - Fed Tax - Medicare - State Tax - City of New York Tax

All of those were called payroll taxes

[Gaffer]

6.2% OASDI payment (SS), 1.45% Medicare, paid by employee
6.2% OASDI Payment (SS), 1.45% Medicare, paid by employer FOR employee.

If this didn’t exist, there would be 6.2 + 1.45 % extra he could offer the employee in salary. As it is that amount is a benefit that is mandatory.

All in all it’s about 15.3%....self employeds have to pay it all.

[RobertClark]

There are no deductions from your tax bill - they go away. Sales tax is applied to over the counter sales, as it is today. You don’t pay sales tax on your mortgage or car payment or utility bill (you may pay some universal access taxes, but that is a different animal).

[Grams A]

Employers also pay SUI and FUI out of their pocket. I would assume that SUI would continue but FUI would drop off. Several states also have to deduct for City Earnings Tax so that if you live in one state but work across the border in another, you pay this tax in the state where you are working. In some states each taxing entity - County, City, State - requires payment from the employer for each and multiple taxing entity reports are filed and paid at the end of the year. This has gotten absolutely ridiculous for the employer.

[Darren McCarty]

15.3% is what I pay.

[RobertClark]

What reliable source tells you that these items you enumerated are deductible under 9-9-9?

They are not deductible. They just aren't a sale where sales tax would apply. Let's say you put $4000 annually into a savings account - you don't incur a sales tax on that money because no sale took place. This is the reason that it is completely absurd for people to whine about paying 18% on their entire income. It is not going to be the case - you don't spend all of your income in over the counter transactions, and those items don't incur the sales tax.

[Norseman]

Correct me if I’m wrong, but aren’t the SS/Medicare deductions counted in taxable income?

In other words, If you make $50,000 and pay the 7.65%, or $3,825, isn’t that included in your total pay, making it $50,000. I believe that’s the case.

If so, assuming a, say, 20% income tax on the $50,000 (which would be lower on the primary earner, but higher on the second earner in a family) then wages are lowered not only to $46,175, but also by the $765 income taxes paid on the $46,175 (at 20%). This makes the employee share of total taxes equal to $3,825 + $765, or $4,585, or 9.7% of the original $50,000.

Adding the 7.65% employer share yields a total tax of 17.35% of the $50,000, not the 15.3% we’ve been using. Again, this is because the SS/Medicare tax we pay is also considered taxable income (I think.)

[BereanBrain]

7.5 From the Employee, 7.5 from the Employer.

However, Employers are smart enough to figure the “cost” of the employee it is

Wages, Salaries +
Employee Payroll Taxes +
Health Care (in some cases) +
Unemployment Insurance

---

Total cost

If for example, you remove BOTH 7.5 then the employer can raise the wage, and/or the employee negoitiate a higher rate.

For example the first year it's implemented, i would expect a 7.5% rasise, at least. If not, I would look for another employer (change jobs) for the increase.

That's the way COMPETITION works. It’s called Capitalism, it works every time. Big Government does not. Now the question is -- do we believe in Free Enterprise and the Capitalist system or Socialism and Big Government?

[TLittlefella]

This is an excellent article. I have been retired for several years and just could not figure out what the 15.3% included. I thought Cain was talking Fed Tax. The more we check into Cain the more we find out he has a problem with the truth. He may not be a career politician but he sure is acting like one.

[Brookhaven]

Does this mean the child tax credit which went up under Bush will be gone?

As far as I know it does as of this point. That doesn't mean it won't be in the final version passed, but as of today it isn't.

Remember though, you have to look at the plan as a whole. And as hard as it might be, I suggest you also look at this in non-financal terms. I assume you have kids, so consider how changing/not-changing the system would affect your kids 10, 20, or 30 years down the road.

Does this mean 9% will go on top of existing sales state tax therefore 8% will not be added to the new 9% therefore 17% is added on what you buy similar to a VAT?

It is not a VAT. See this link for the difference: http://www.nerds4cain.com/forums/discussion/106/does-everyone-understand-the-difference-between-a-vat-and-a-retail-sales-taxs

There will be a seperate federal retail sales tax in addition to any current state sales tax. They will be two seperate systems. There is a retail price calculator here that will let you see how the expect changes would affect how much you pay for items here: http://www.nerds4cain.com/Blog/archives/917

Does this mean all deductions will be taken away?

Right now, charitable deductions are the only ones allowed. Personally, I hope it stays that way. Politicians used deductions to buy votes and "warp" the tax system to favor some groups over others. Removing them removes politicians ability to control our lives.

Again, you have to look at the system as a whole and how it would affect you.

I’m under the impression that if you make less than 20 grand then you pay 5.75% tax but this will go up to 9%?

999 has a flat income tax rate of 9% for everyone. It replaces the income tax (5.75% in the case you mentioned, and the payroll tax (15.3%, half is hidden becuase it is paid by the employer). It also replaces death taxes, capital gains tax, and reparation tax--the last two have been killers on business and job creation.

Under your scenario, the person making 20,000 currently has an income tax rate of 13.4% (or 21.05% if you include the taxes paid for the employee behind the scenes by their employer.)

There is a calculator that lets you play around with some of the paycheck numbers here: http://www.nerds4cain.com/Blog/archives/723

The maximum tax rate under 999 is 16.5% (this is if you spend every cent of your income, and spend it all on new (taxable) items.

You'll notice from the calculator that you can significantly affect your tax rate by purchasing used items (say at Goodwill, something that a person making under 20,000 a year is very likely to do)--these do not incur sales taxes.

I appreciate you asking questions. Like you said, these tend to turn into arguments instead of conversations. I hope you find the calculators helpful.

[Utmost Certainty]

Someone posted this earlier, thought I’d spread it around: http://999calculator.net/

[G Larry]

yes...and the mean old employer could reduce you to minimum wage too.....

Good Grief!

The market sets the wage!!!

[manc]

and I really do appreciate you giving me answer how I wanted them, the way with just straight answers and no you’re this or you’re that.

Thank you.

[Bubba Ho-Tep]

and if the employee is a good employee - guess what? the next employer vying for his labor will increase his wages to attact him!

Several times over the last 40 years we've had what economists would consider full employment. Did wages rise during those periods? Not by any meaningful amount.

Geez! are you people so ignorant of free market economics not to grasp this?

And are you so ignorant of the real world?

[GlockThe Vote]

Show me at what point the govt took away the employer part of withholding?

[Brookhaven]

Under the current code this person pays 15.3% in payroll taxes.

But as long as were talking about people that "don't pay anything in taxes", which party is that person most likely to vote for. Given that 47% don't pay any taxes now, and we'll be close to 60% in a decade, what do you think America will look like when the majority of people can voted themselves benefits from the government without any worry about where the money comes from?

Am I the only person that is horrified by the implications of the chart below?

I find the argument that "we can't run on increasing taxes on 47% of the population" weak, because the alternative will be to do nothing and allow the number of voters that pay zero taxes to continue to rise. That's unacceptable. Doing nothing is the same thing as losing, so we should at least try fixing the problem (and I think this is our last shot).

Oh, the answer to what will America look like when the majority of voters pay zero in taxes? Just look at the Occupy Wall Street crowd. There's your future America if we do nothing.

[davandbar]

This is just a guess, but...

The consumption tax should be on things that are “purchased,” not just “money spent,” and it is collected at the time of the purchase by the merchant.

For states that have a sales tax now, it would probably include those same items, but also food.

For example, a car payment is not “purchased,” the purchase was made during the original transaction, and that is when the tax would be collected (or financed within the loan).

I don’t think rent, utilities, tuition would fall under the same category at all because they are not actual purchases.

But, I’m no expert—this just makes sense to me, and I do have a financial/tax background.

[Old North State]

Absolutely right. Concerning employment the 15.3 number is the relevant rate and Cain is 100% accurate. These politifact people are left wing university and bureaucrat types who have no idea how the private sector operates. The way to get people hired is to lower the cost of employment and reduce the burden the government imposes on employers;less tax, less exposure to litigation, fewer mandates, less reporting, and get the government out of the credit allocation process.