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

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.

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.

The taxes paid now are not considered part of workers’ wages in any formal or legal sense.

Of course it is. Employers have to factor this in when deciding what to pay an employee.

And Cain is actually underselling his own plan.

Rather then calling it a 6 percentage point reduction, he should call it a 40% reduction, which it is.

I am convinced that the biggest critics of this plan don’t have a CLUE about business.

My husband and I have a small business and employ 50 individuals. We have already crunched the numbers, and my husband added the 7.65% back in WITHOUT MY MENTIONING IT. It was a no-brainer, it IS their compensation.

We also realized through figuring out the numbers that we would be able to grow our business, which means jobs.

Doesn't matter to your point. You're arguing that pressure to keep employees will lead employers to raise wages or the employees will walk. I'm saying that in the real world, even in time of full employment when workers enjoy more mobility, that doesn't happen. In constant dollars, wages have been in decline the early 1960s. Where the money comes from is irrelevant.

Would you favor a law in conjunction with 9-9-9 that mandates the employer passing that savings to employees in the form of wage increases?

Services are generally not covered under a sales tax at the state level. Cain has modeled his federal sales tax on the state sales tax systems, so it’s reasonable to assume they would have the same exemptions.

Repayment of a loan (mortgage or auto)
daycare
dry cleaning

All of the current services exempt under state systems would likely also be exempt under a federal system. Although, you are right, they haven’t been totally spelled out in the plan.

Utilites like electricity and water would probably be taxed, since the involve the sale of a product.

Utilites like trash collection wouldn’t, since they are a service.

“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.”

Used items may not incur the 9% tax, but I can guarantee you that the price of used items, particularly cars and houses, will rise in tandem with the higher cost of new items. The 9-9-9 plan will not be implemented in an economic vacuum....

(How accrate is this?)

How accurate are all the other claims by past and present candidates and elected officials? I don't even pretend to know where they come up with those figures, all I know is I pay my payroll tax on my pension, my property taxes, my state taxes, my state sales taxes, my gasoline taxes......etc, etc, etc...........

Personally, I can't see how I can benefit from a 9-9-9 tax plan............

9% federal tax added to my state 6% equals 15% of all my expenditures after my income tax.........

I'm no longer in a saving mode, what I receive from my pension goes to pay all my expenditures and an additional 9% on those payments will definitely hurt........

Absolutely right. Concerning employment the 15.3 number is the relevant rate and Cain is 100% accurate.

My God can you not read and understand the facts presented in this article. Cain is NOT 100% accurate.

“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. “

Unless you are an idiot, Cain is telling the truth. Money the employer pays ‘on your behalf’ in taxes is money that would go to YOU if it wasn’t for the tax. The only reason SS taxes are split is so the idiot employee - you, in this case - won’t realize that the tax is actually costing him over 15%.

How does it feel to be stupid?

Dear God are these fools delusional! The employer 7.5% is wages directly out of the employees compensation!

What you said! Also, I'm for pretty much anything that removes progressivity (Read: Marxism) from the tax code.

Used items are currently exempt under state sales taxes.

You’re right, the demand for used items might increase, which would cause their value to go up.

But that’s not really an argument against Cain’s plan is it?

That’s like avoiding having kids, because you’ll have to change their diapers. The long term benefits of having children far outweight the temporary problem of changing diapers.

The long term benefit of getting rid of the current 90,000+ page tax code far outweighs problems like used items going up (imho).

What did Churchill say about democracy? “It’s the worst form of government, except for all the others that have been tried.”

I know the plan isn’t perfect, but compared to the current system it’s a definite step up.

The adjustment to gross income for self-employment tax doesn’t reduce the amount of self-employment tax paid. It only reduces the double taxation of income taxes.

For some reason, lots of folks think that double taxation is an intolerable anomaly that everybody is against. On the contrary, every working person and every investor is double taxed. The income tax double taxes social security and one-half of self-employment taxes. It also double taxes dividends that are paid out of already taxed corporate income.

Double taxation is no bug in the system; it is a feature, albeit one that punishes productive workers and investors for the benefit of politicians and other deadbeats.

Cain is telling the truth. The social security tax is 15.3%. The employee pays half, and the employer pays the other half, which is money that he may otherwise be able to pay to said employee in salary.

Ergo, it is a 15% tax.

Self-employed people pay the entire 15.3%.

I did some calculations based on different assumptions.

2010 - paid about 13.59% to the Feds

2012 - after the changes that are slated to come about already, this becomes 16.37%

999 - with everything taxable and nothing from my employer: 17.19%.

999 - with employer passing on FICA and MC, this becomes a rate of 13.46%, though with a 4.5% greater take home pay.

999 - with only 75% of purchases taxable or some savings is a rate of 15.14%

There are too many guesses still to calculate it more accurately. I am quite sure your mileage would vary.

I can share the calculations with you tomorrow if you care to private mail me.

There was a FR thread/post from an old article (New Deal era IIRC). It talked about gov’t wanting more of the economic pie - or in their example - more of the “water”.

If the pool of resources ($) is in private hands, dipping water out of the spring-fed pond is a hard way for the gov’t to get resources AND make the pool of water smaller.

However, if the gov’t can divert some of the water from the springs/creeks going into the pool - they get their money AND reduce the pool available for the private interests.

[Hmmm - my visual: along with the pyschological advantage of tapping the springs “before it is really yours anyway”; compared to a huge pump in your pond and the hose running past the house to the gov’t tanker truck parked in your driveway.]

Anyway - an interesting visual when it comes to payroll taxes, SS, and now of course healthcare. (Boy - talk about diverting resources from the private to the government!).

Can you imagine how much an employee would have saved up over time if 155 of their wages were put away in a private account over their working life?

No - instead - we get told we need the SS ponzi scam.

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.

You may need to use the feigning ignorance tag. /FI

Do you pay any income tax now? Do you collect social security or will you in the future? Do you have any children or younger friends who need jobs presently or in the future? Do you think if the economy gets worse you will be better off? If it gets better?

Pensions are exempt, from what I have seen. That would be 0% Federal Income Tax. We’re not sure yet on what would or would not be taxable on the Sales Tax. I suspect some of the reports of exemptions for retirement might be true, but there is not enough information to know.

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