Herman Cain's Hidden Nine(Peter Schiff on 9-9-9, full article post)

Herman Cain has been gaining much traction with his 9-9-9 Plan, a bold proposal to replace our dysfunctional tax code with what could be a simpler, less invasive, and more economically stimulative alternative. While I don't agree with the full spectrum of Mr. Cain's policy choices, I applaud his courage on the tax front. Judging by his rising poll numbers, this appreciation is widely shared. However, the plan has deep flaws, the most glaring of which is its creation of a hidden payroll tax which represents a fourth “nine.” This serious pitfall has been unmentioned by Mr. Cain and overlooked by those who have analyzed his plan.

Cain would replace the current system of income and payroll taxes with a 9% flat-rate personal income tax, a 9% corporate tax, and a 9% national sales tax. Great idea. Such a system would unburden businesses, provide a tax cut for most Americans, and shift taxation to consumption and away from income generation. This is exactly what our economy needs. But unlike our current corporate tax system, the plan eliminates the deductibility of wages and salaries from corporate income. The net effect is the creation of a brand new 9% tax on wages. When this fourth 9 falls from Cain's sleeve, many of his opponents will likely accuse him of cheating.

Much of the plan's virtue lies in its elimination of Social Security and Medicare taxes (payroll taxes) that fall heaviest on lower income workers. This includes the 6.2% Social Security tax and the 1.5% Medicare tax paid directly by the worker. But it also includes the 6.2% and 1.5% portions paid indirectly by workers through their employers. Payroll taxes are, in reality, a cost of employment. From the employer's perspective these costs are part of the wage package. Absent these taxes, employers could raise wages by an equivalent amount without raising labor costs. Inclusive of this portion, payroll taxes currently cost workers 15.4% of their wages.

The Cain plan scraps this tax. But the elimination of wage deductibility from corporate taxes replaces it with a 9% payroll tax. Therefore a more honest name for Cain's proposal is the 9-9-9-9 plan. The forth nine changes everything.

Cain admits that the 9% sales tax would fall heaviest on the poor, but he claims that the elimination of the payroll tax would more than compensate. But when the hidden 9% payroll tax is factored in, more than 50% of workers who currently pay an average income tax rate of just 3% would see a huge tax hike, from 18.4% (former payroll tax plus income tax) to 27%: 9% payroll tax, 9% income tax and 9% consumption tax (poorer worker generally spend all income).

On the other hand, high income tax payers get a huge break. Not counting the consumption tax, the 9-9-9 plan reduces the highest marginal tax rate from 38% (35% income tax and 3% payroll tax - on income over $105,000) to just 18% (9% income tax plus 9% payroll). For the self-employed, who can transform their wages into dividends (that are deductible business expenses under the 9-9-9 plan), the rate would fall to just 9% (all income tax, no payroll or business tax). Of course, in either case, the 9% sales tax will apply to spending, but even if 100% of earnings are spent (which is generally not true of high earners) the top rate would still top out at only 27% for the highest salaried employees and just 18% for the self-employed. In essence, tax cuts for the rich are paid for with tax hikes on the poor and middle class. If these aspects were widely known the plan would become a political dead letter.

Even with its flaws, the 9-9-9-9 plan would create an economic windfall by lowering the top corporate rate to 9% from 50% (35% at the corporate level and 15% on dividends taxed at the individual level), and simplifying the tax code to reduce unnecessary compliance costs and the economically inefficient behavior that is created by perverse tax incentives. These changes alone will make America far more globally competitive. Also by taxing individuals based more on what they spend rather than on what they earn, the plan will encourage more savings (which is a key ingredient for economic growth). As a result, the economy will grow faster, generate greater output of goods and services, and create more jobs.

The problem for Herman Cain is that unless he slashes government expenditures, his pro-growth tax structure will inevitably shift more of the tax burden to low and moderate-income people. The only way to combine tax reform with tax reductions for most taxpayers is to shrink government to a more manageable scale.

The size of the tax increases required to keep Cain's 9-9-9-9 plan revenue neutral demonstrates just how high a percentage of our current taxes are being paid by affluent taxpayers. Couples making more than $250,000 and individuals making more than $125,000 only constitute about 3% of taxpayers but pay almost half of all taxes. Any policy that cuts their taxes will inflict a disproportional hit on government revenue.

Contrary to the rhetoric emanating from the American left, the “rich” are currently paying a lot more than “their fair share.” It is only a handful of mega-rich, those whose entire incomes are derived from dividends and capital gains, rather than salaries or business profits, who have the ability to pay lower tax rates than some members of the middle class. The left knows this but continues to build their “free loading millionaire” straw man because it makes good politics.

In the final analysis, if Cain really wants a 9-9-9 plan that doesn't raise taxes he needs to remove the hidden 9% payroll tax. However, the only way this could be done, without blowing an even bigger hole in the federal deficit, is to combine his plan with significant spending cuts. If he can pull that off, three nines may be a winning hand after all.

The Peter Schiff/Austrian Economics ping. (Washington Bankrupting our Nation by Spending your past, present and future money!)

If you realize both parties in Washington think that our money is theirs and you trust them to do the wrong thing, this list is for you.

If you think there is a Santa Claus that has some magic easy cure for the economy; someone who is going to get elected in Washington and fix everything just by cutting your taxes, investing (more government spending) a few trillion more we don't have and will never have, and who will just command some countries to lower their prices and others to raise their prices all to suit your best interests, then this list is not for you.

You can read past posts by clicking on : schifflist , I try to tag all relevant threads with the keyword : schifflist.

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The Austrian Economics School’s Commandments plus :From : link

1) You cannot spend your way out of a recession
2) You cannot regulate the economy into oblivion and expect it to function
3) You cannot tax people and businesses to the point of near slavery and expect them to keep producing
4) You cannot create an abundance of money out of thin air without making all that paper worthless
5) The government cannot make up for rising unemployment by just hiring all the out of work people to be bureaucrats or send them unemployment checks forever
6) You cannot live beyond your means indefinitely
7) The economy must actually produce something others are willing to buy
8) Every government bureaucrat should keep the following motto in mind when attempting to influence the economy: “First, do no harm!”
9) Central bank-supported fractional reserve banking is an economically distorting, ethically questionable activity. In particular, no government should ever do anything to save any bank from the full consequences of a bank run, no matter what the short-term consequences.
10) Gold is God’s money.

Cain’s Stimulating 9-9-9- Plan (Laffer)
http://online.wsj.com/article/SB10001424052970204346104576637310315367804.html?mod=WSJ_Opinion_LEADTop

Why I Support Herman Cain For President (Charles Kadlec joins Cain’s economic team)
http://www.freerepublic.com/focus/f-news/2795074/posts

Reagan Economist Breaks Down 999 Plan
http://video.foxnews.com/v/1217420754001/reagan-economist-breaks-down-999-planReagan

Backing for Cain’s plan also came from Kevin Hassett, senior fellow at the American Enterprise Institute also praised the Cain’s proposal for moving towards a flat tax. “If someone’s going to attack the 9-9-9 plan, I would say they should be careful because you are talking about the Republican holy grail,” he told the Associated Press.
http://www.newsmax.com/InsideCover/Cain-999-tax-plan/2011/10/14/id/414487

Rich Lowrie Discusses Herman Cain’s 9-9-9 Plan
http://www.youtube.com/watch?v=9iKkDcDmf7I

Paul Ryan Likes Cain’s Plan
http://www.humanevents.com/article.php?id=46850

Dick Morris Defends 999
http://www.youtube.com/watch?v=RuikrVmN6Yo&feature=feedu

How is Herman Cain’s 9-9-9 Plan Good for America
https://sites.google.com/site/giveemcain/home

Club for Growth defends Herman Cain, 9-9-9 plan
Club for Growth President Chris Chocola called the 9-9-9 “an outline for a more prosperous and globally competitive America,” saying it is “both pro-growth and a good starting point on the way to a flat or fair tax.
http://www.politico.com/news/stories/1011/65967.html#ixzz1alhFr6NM

Can Herman Cain’s Plan work?
http://axdwhiteman.info/index.php?option=com_content&view=article&id=102%3Acan-herman-cains-999-plan-work

Why We Need Herman Cain’s plan:
http://www.nerds4cain.com/Blog/archives/759

Office of Tax Analysis for the U.S. Treasury Gary Robbins analyzed and scored his plan. Cain said the analysis shows that his plan will “initially create 6 million jobs and that it will bring the unemployment rate down initially to about half of what it is today.”
http://politics.blogs.foxnews.com/2011/09/22/fox-first-cain-reveals-his-economic-secret-kitchen-cabinet#ixzz1aaTbfWLN

What do these numbers mean for me?
http://www.nerds4cain.com/Blog/archives/723

53% of People Favor Tax Code that Treats Taxpayers Equally
http://www.rasmussenreports.com/public_content/business/taxes/october_2011/53_favor_tax_code_that_treats_all_taxpayers_equally

Embedded taxes
http://www.ipi.org/ipi%5CIPIPublications.nsf/0/3F31DF6F0D040EE986256AB700630B84/$File/PR160-HiddenTax-FINAL.pdf?OpenElement
___________

Calculators:
Income: http://raisingcain2012.wordpress.com/about/
Sales Tax: http://www.999calculator.net

Chart comparing 999 with VAT tax: https://fbcdn-sphotos-a.akamaihd.net/hphotos-ak-ash4/302179_572458911298_70702418_32155573_1088285190_n.jpg

This is exactly what our economy needs. But unlike our current corporate tax system, the plan eliminates the deductibility of wages and salaries from corporate income

Peter, the reason is to fundamentally re-claim manufacturing businesses in America.

We are becoming a service economy nation of hamburger-flippers and tax accountants.

We need to return to an economy of capital investment-intensive manufacturing in order to have a foundation that can support our standard of living and support service jobs in the secondary economy.

Fifty thousand plants and factories have shut down in the last ten years.

As Pat Buchanan pointed out in his book "Suicide of a Superpower", manufacturing fell behind health care and education in 2001, retail sales in 2002, local government in 2006, leisure and hospitality in 2008, all for the first time.

We have run a trade deficit in recent years just in advanced technology products in the hundreds of billions of dollars.

We MUST return manufacturing to the United States, and that is why the 9-9-9 allows deductions for capital equipment but not for labor - in order to dramatically reclaim manufacturing jobs in the United States and start us on the path of returning to a manufacturing economy and not merely a service economy.

“OMG the attacks never end! Jeez if you don’t like him don’t vote for him. But quit trashing him every second.”

Jeez, if you don’t like having your candidate’s political positions critiqued, stay the hell off a political forum. And stop your pals from posting Cain puff pieces. I don’t see Cain fans remaining silent on Perry or Romney threads.

You ‘stop-trashing-Cain’ whiners are just sad. As if a candidate will not be vetted thoroughly after all the RINOs that the RNC has tried to sneak through. As if we’d just let your candidate coast through during an election cycle that is probably the most important of the last thirty years.

The funniest thing is that this is actually a pretty kind article for Cain—and you’re still whining. How ‘bout you just grow a pair and defend the guy if the attacks are so terrible?

Well, I disagree with Schiff on a couple points.

First, he implies that the 9% sales tax applies to almost all of a person’s spending. This is clearly wrong, since Cain’s 9% sales tax only applies to new goods. It excludes services like rent, utilities, professional services like dentist, doctor, haircut, insurance, etc. as well as previously owned cars and homes. That is 70% of spending, and the 9% sales tax will apply to only 30% of spending for low income people. The 9% sales tax means less than 3% of income going to the sales tax. Personally, I think this is a mistake. If the sales tax rate was 4% rather than 9%, but included services, it would raise more revenue and engender less evasion. (Then again, the amount of revenue that will come from Cain’s sales tax is only $300B/yr — not enough to justify opening the door to another tax for Congress to manipulate. If the Income Tax and Business Tax portions were each 10% instead of 9%, and the capital gains income and SS income and employer non-cash compensation were not excluded from income, they’d produce enough revenue that the sales tax would be unnecessary.)

Second, the “business tax” is not presented as a flat rate corporate income tax. It is not a tax on “income” but a tax on “business”. It is essentially a Gross Receipts tax — with deductions for purchases from other DOMESTIC businesses. I don’t see any attempt to hide the fact that payroll is not deductible and is therefor subject to the 9% tax rate. Unlike Schiff, I think this is a high point of the ‘9-9-9’ plan. It replaces a punishingly high tax rate on corporate profits and low rate payroll tax with a single low rate tax on profits, payroll, and ... imports. Yes, businesses cannot deduct their cost of goods sold if they were purchased from foreign suppliers. This is a backdoor 9% tariff without violating trade agreements. Tit for tat for the way other countries rebate their VAT back to their producers if they export to the USA.

Plus, this is an important intellectual excercise for those of us who support, or are leaning toward support of, the 999 plan.

It’s important that we understand the criticisms of it as well as the arguments for it. This is the time to hash them out. This is the time to LEARN and develop our position and our points.

If the Cain train keeps rolling, here in a few months the LSM will become fully engaged in attacking him and 999.

If we go through this process of hashing out critiques, we’ll be much more prepared for the larger, more stupid media onslaught that is coming.

manufacturing fell behind health care and education in 2001, retail sales in 2002, local government in 2006, leisure and hospitality in 2008, all for the first time

Pat Buchanan is an economics moron on a par with Donald Trump. Neither knows a thing about economics, and both are stuck in a kind of pre-Adam Smith mercantilist mindset. That actually might be their appeal to so many people.

The cry that U.S. "manufacturing fell behind" this or that other sector would make sense if it were also true that U.S. productivity declined; but it hasn't. U.S. productivity -- the amount of stuff that a worker can produce with modern computerized equipment -- has not only increased over the past decades, but, at present, it is soaring, and is, in fact, the highest in the world . . . thanks to business investment of capital, mainly in the form of newer and better technology, per worker. Conclusion: manufacturing in the U.S. is going, and will continue to go, the way of agriculture in the U.S.: higher and higher productivity per acre (and higher and higher productivity per worker), therefore necessitating fewer and fewer acres to produce all the food we need domestically and for export (and fewer and fewer manufacturing jobs to make the things we need domestically and for export).

It's called THE LAW OF COMPARATIVE ADVANTAGE. It's stupid, inefficient, and therefore wasteful of scarce resources, including labor to hire U.S. workers to snap together plastic and metal parts for manufacturing smartphones when we ought to be doing more of the high-value work -- designing smartphones -- and letting other labor markets -- like, for example, China -- do the dumb lower-value stuff of snapping the parts together. We BOTH get wealthier by concentrating on tasks that add the most value; conversely, we BOTH get poorer when we try to be self-sufficient and do everything ourselves just because we can.

I suppose I can understand the stubborn ignorance of media whores like Trump and Buchanan; they never needed to learn anything about Economics 101 in the first place so why bother learning it now? But I certainly cannot understand the popularity of 16th-century mercantilist fallacies -- long ago exploded by Adam Smith and others -- by many of the posters on FreeRepublic. If they wish to learn something about basic economics, I can recommend several resources, many of them free PDF downloads or free video lectures. In any case, they should know better.

By disallowing the deduction for payroll expenses, the 9% “business tax” really means replacing the 7.65% employer-paid payroll tax with a 9% payroll tax. It is actually worse than that, since the first 6.2% of the payroll tax only applies to SOME of the payroll while the 9% tax applies to ALL payroll. Instead of employers multiplying salaries by 1.0765 they’ll have to figure a higher multiple of 1.09 to get the total cost for that employee.

So ... how does having a HIGHER payroll tax encourage American manufacturing jobs ? I am not following your logic.

I can see how reducing the tax on Corporate PROFITS from 35% to 9% will encourage American business, but I’m not seeing the higher payroll tax as a jobs advantage.

I suppose that could be spun a 2nd 9% for corporate taxes but as the article says, the employer already matches the employees 6.2% to SS and 1.5% to M/C so to me that would only be an increase of 2.2% to the corportations, not the 4th 9%.

Like somebody else says, it sure is strange to see all the conservative support for our current tax code, unbelievable! I read the Fairtax book a few years ago right at the first of the year, so it was fresh on my mind that next April 15th... There was a suggestion in the book, to wait until tax time and ask all your friends and relatives, how much they paid in taxes that year, for me it ran about 1 in 5 that actually knew what they paid in taxes, the other 4’s standard answer was either just the amount they had to send in on April 15th or else they said, I did not pay anything, I got a refund... Which leads me to make the statement, I believe the majority of Americans do not have a clue how much they acutally pay in taxes.

Only an ignoramus would condescendingly sniff that the manufacturing that has moved or is starting up overseas is nothing but “snapping together plastic and metal parts.”

The fact is that we are running a huge trade deficit in advanced technology products, not just cheap toys.

It is luddite nonsense to conclude that because a particular manufacturing plant becomes more productive and uses fewer workers that these excess workers should become burger-flippers when we see around the world high-tech manufacturing expanding in other countries.

We are placing our own necks in the noose because idiot free-trade purists are spouting comparative-advantage dogma to justify the decline of the United States from a high value-added manufacturing country to an exporter of little other than raw materials and processed food.

The fact is that the “comparative advantage” being gained by other countries is not the natural advantages represented by Scottish sheep or Portuguese wine that were in mind when the theory was postulated but rather the managerial and technological knowledge base which is moving overseas and gaining an absolute advantage because of foolish choices and foolish attitudes on the part of many here.

Take away Boeing, Caterpillar and a few other companies and our ability to compete in export markets in high value-added manufactured products is quite disappointing. We are on the way to being principally an exporter of farm products and other raw materials.

Under the free-trade, open-borders mentality we are stupidly importing a huge population of millions of new workers with an average IQ of no more than 90. As more and more high-tech manufacturing is based overseas, the engineering and managerial expertise will continue to follow and the American workforce will be increasingly unfit to mount a challenge.

In the modern world it is not theoretical unique “comparative advantages” supposedly differing by nation that account for the success of an economy and an opportunity to realize a high standard of living, but rather the brainpower of the workforce and the ability by governments to provide a environment conducive for that brainpower to compete. There is no natural geographic location for that type of advantage. You are stuck in a mindset of the past.

Our worst enemy is our own tax and regulatory policy and political attitudes and brain-dead dogmatists regurgitating misapplied theories.

Only two types of people are against Cain (not counting the liberals trying to protect Romney and Obama). The first type says that 9-9-9 is bad for them or for someone in their family. But that also means they are going to rely on Perry's new (but actually old) support for coal power to get our economy going. That's not really adequate IMO although it is a fair and conservative argument.

The second type of 9-9-9 critic says that class warfare is a better poltical strategy and 9-9-9 won't win the hearts of the liberal media. Most of those people have no idea how capitalism works, it rqeuires capital which is currently being taxed as if it were income. It requires saving and production, not consumption which destroys capital. Finally they deny the reality of competition with claims that producers won't pass on their tax savings as lower prices. Those people can be ignored, they can't be described as conservative.

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