9-9-9 Will Get You…Eventually

October 17th, 2011 at 4:38 pm

Re Herm Cain’s 9-9-9 tax plan, a number of commenters (very reasonably) question why you would assign the full 9% of the sales tax to people who don’t consume all of their income. 

Perhaps the easiest answer is to just think of the sales taxes you face today, if you live in a city or state that has one.   If it’s X%, you probably don’t think of it as <X just because you don’t spend every penny.  You correctly think of it as X, because eventually, you (or your progeny) will spend what you’re not spending today, and at that point you’ll face the tax.

If you don’t consume your income today, you will tomorrow, and it amounts to the same thing in “present value” terms (“present value” is just the value of future income streams in today’s dollars).

Ed Kleinbard explains it here, but I grant you it’s not exactly intuitive:

Imagine, for example, that an employee has $500…available to spend on consumption goods. When she spends that, she will incur a sales tax bill on her purchases. If the sales tax rate is 9 percent…she will incur a sales tax bill of $45…

But what if she doesn’t spend all the money today?

One way of seeing what happens in the deferred consumption case is to imagine that the employee sets aside $45 today into a little fund to pay her eventual sales tax bills attributable to spending $500. If the employee spends all her available money ($455) on consumption goods tomorrow, the money just immediately goes out of the little set-aside fund.  If by contrast the employee defers consumption for a few years, then her budget for consumption (her $455 of cash, net of her mental sales tax set-aside fund) goes up by the time value of money [meaning she invests it, for example, so it grows–JB]…, but so does her $45 set-aside fund. When she does consume she will consume more in absolute terms, but the same in original present value terms…

The net consequence is that the sales tax is equivalent to another 9 percent payroll tax…

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3 comments in reply to "9-9-9 Will Get You…Eventually"

  1. Will Gordon says:

    Does consumption include paying for my kids’ college education or buying houses?

    Also, if a household can’t afford to cover all of their expenses and have to take out loans to cover the bills (as many low income households do), are we effectively taxing them at higher than 27%?


  2. Jennifer says:

    You cannot assume 9% sales tax based on someone’s income because they do not purchase goods and services on their total gross income, much of it is spent on housing (mortgage or rent). Does Cain’s plan tax rent as though it were a sale?


  3. tom says:

    Much of the income of the super rich is not spent, it is hoarded and the interest is spent.


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