I debated Herman Cain’s economic advisor, Rich Lowrie, last night on the Larry Kudlow Show. A key point here is that the plan, which Bruce Barlett calls a “distributional nightmare,” radically shifts the tax burden from high-income households to everyone else. I focused on the median household, and Lowrie either doesn’t understand the implications of the plan or he’s deliberately misrepresenting it.
For a $50K household, married couple, two kids, all income from earnings and standard deductions, the current tax burden is $8.3K. Under 9-9-9, that would grow to $13.5K, an increase of over $5,000 (hat tip: CCH, BS). The WaPo fact checker came to a similar conclusion. E Klein too.
(I expect that any minute now the Tax Policy Center will release a slew of data supporting these points with their much more detailed tax model.)
But Lowrie wouldn’t accept that conclusion. In fact, he asserted that their federal tax would be lower because they’d move from a 15% payroll tax to a 9% income tax. This, as I said on air, is “patently wrong.”
First of all, assuming they plan to exist, they’ll need to consume stuff, and thus they’ll also face the 9% sales tax. That already makes their tax rate 18%, higher than the 15%.
But as Michael Linden points out, and this is widely agreed upon by tax economists, the incidence of the 9% tax on business income (which denies businesses a deduction for wages paid) also hits them, which is why former Joint Tax Committee chief of staff Ed Kleinbard described the tax as a 27% payroll tax for families whose incomes derive from earnings (note that Lowrie is perfectly comfortable with the standard assumption assigning the incidence of the employers side of the payroll tax to the family—this one re the business tax is equally standard).
For a family with $500K, same assumptions as above, their tax bill would fall by $44K.
But where this plan really gets regressive is when you get up into the families who derive their income from non-labor sources. While the details of the plan are fuzzy when it comes to capital gains and dividends, it seems clear that those earning thousands or even millions of dollars in these types of non-labor income would enjoy a massive tax cut. And that would further widen the disparity between the highly preferential treatment of capital gains and dividends on the one hand, and the taxation of “ordinary” wage and salary income on the other.
We’ve got enough income and wealth inequality coming from the pretax distribution—we don’t need to exacerbate it through the tax code.
Middle class families that depend on earnings will pay more taxes under the Cain tax plan. High income families will pay a lot less. His advisors who say otherwise are misleading the electorate and that must not stand.
What a great tax plan! The rich will be even richer and the poor… Who cares? It reminds me of third world countries.
And all that’s assuming that people don’t make any kind of tax-avoidance arrangements, such as incorporating and taking their pay as dividends (which are untaxed, as I read it.) That’s a double avoidance, because payments to other corporations also are excluded from the business tax, unlike labor. Instant 18% improvement for those who can become “consultants.”
Of course, in many ways the biggest difference is that it hikes the cost of US labor relative to other countries. All of that extra taxation on the lower half of the population is hitting people who are already close to subsistence, so they’re not in a position to take pay cuts to stay in the game. That means that the tax is effectively a surcharge on payroll to their employers, who will thus have an increased incentive to farm out the labor to offshore subcontractors.
You can watch it here:
http://video.cnbc.com/gallery/?video=3000051142
The longer and stronger you maintain your insistence on shifting the tax burden from the top to the bottom, the greater the odds that you’ll occasionally succeed and the smaller the odds that a shift in the opposite direction will occur. The GOP has been playing this game for years. The Dems just get perplexed.
Enjoyed the show Jared and thanks Joe for the link provided above. I have an idea that may exist somewhere on the net but if not then it needs to! Someone could write a web page using Javascript that would calculate a person’s Federal income tax (using simplifying assumptions such as family of four, standard deductions, all or most income from wages etc.) and then actually calculate income tax under both the current tax laws and 9-9-9 plan (or any other proposed plan). Of course, the 9-9-9 plan would have to have an additional entry for consumption (at a certain percentage of net income) to reflect the 9% sales tax. The current tax calculation would reflect payroll taxes also. Both could add in taxes that do not change such as state income tax, state or local sales tax, and other taxes.
It would seem to be very enlightening for the average American to be able to enter and compare the numbers. An of course the user would be free to enter higher income levels to compare how wealthier people fare under both plans. Any thoughts on this Jared?
IANAE (I am not an economist!).
Great idea!
Jared
At some point let’s call a spade a spade! Mr. Lowrie, though he may be many other things, is probably capable of simple arithmatic. He knows full well the truth of your assertions regarding the tax impact on low/middle/high income americans. Let’s not call his responses misleading. Let’s call them what they are – outright lies. We are being subject to an endless ocan of dishonesty across the board, and to characterise this as “misleading” is weak and insubstantial. This dishonesty and its purveyors should be called out, and people such as yourself who have the opportunity, the credibility and the platform must do this. We must stoke some outrage at the utter distortion of the national debate being perpetrated on american society!!
Rick P
“Lowrie either doesn’t understand the implications of the plan or he’s deliberately misrepresenting it.”
I guess you couldn’t outright call the guy a liar to his face, but one has to assume it’s more likely the latter than the former. One of the key republican catch phrases of the season seems to be “broaden the base,” i.e., make the poor pay. Regressive taxation–push the tax burden of the corporations and investors further downstream onto people who actually have to work for a living–is clearly the goal, but they can’t come out and say it. Cain has taken the somewhat unusual step of outlining an actual plan to do it. Will people figure this out before voting time? Cain may be counting on most people not being very good at math; after all, the whole housing bubble demonstrated that a lot of people were not very good at math.
Could someone comment on the effect this tax plan would have on imports versus domestic production. My reading here would be, that a shifting taxation from income/payroll tax to a sales tax would actually level the playing field for domestic production vs. imports and especially for domestic employment. Am I wrong about this? If not how large would you expect the benefits of this to be?
It’s becoming increasingly clear to me that we need to tax income from capital at the same rate as income from labor. It will be a very small step in leveling the playing field between the very wealthy and the middle class, but it will eliminate the abomination of “carried interest” where Hedgies are taxed (at least partially) at 15% and working folks are taxed at marginal rates of 25% and higher.
Can you explain how this plan would affect Social Security and Medicare? How will those be funded without payroll taxes?
I agree in general, but…the 9% sales tax isn’t on their income, it’s on their expenditures. So assuming they don’t spend their entire income on sales-taxable things, the 9% sales tax contributes less than 9% to their overall tax rate, no?
Jared:
One question nobody wants to touch with that 10 foot pole:
Mr. Cain can you explain why you believe the doctor/patient relationship only applies to certain people?
It applies to seniors, and everyone else except those people who are pregnant and wish to have an abortion.
I deeply resent your association of “Say Anything” with this tax plan. Shame on you.
When we — that would be you, Jared, rightly standing in for all of us because of your greater expertise — come up against someone like Rich Lowrie, or any garden variety Republican hack, we have to make a decision as to whether they are acting as fools or knaves when they “patently” misrepresent facts, including the demonstrable consequences of their own proposed regressive policies, whether on taxes, entitlements, the environment, you name it, they are consistently regressive in that they favor and/or shelter the rich(er) and stick it to the poor(er).
But rather of using the binary logic of fool or knave — and thus diluting to some extent the critique: “He can’t really be THAT foolish or THAT knavish, can he?” — let me propose the hybrid category of “knoolish.”
Thus, someone like Rich Lowrie, or his patron, Herman Cain, really do seem to reason as follows, though the reasoning is hardly ever explicit:
“If what you said about what I have proposed is true, then I really would be a monumental fool or knave. But clearly I am neither of those things.
“Why?
Well, I wouldn’t have gotten this far in life — e.g., I can get on Fox News any time I want — if I were so stupid. So there is overwhelming circumstantial evidence to support the claim that I can’t possibly be the fool you say I have to be to advocate what I am advocating.
“And if I were as knavish as would be necessary if I were knowingly promoting such dysfunctional policies as you describe, then almost certainly my knavishness would not be confined to just my public policy choices. Knavishness is a moral condition, and morality, though it isn’t necessarily knit together as tightly as Hamlet’s raveled sleeve of care, does tend to be of a piece. So by saying I am a knave as far as my public policy proposals are concerned — and you are saying that, because we have already demonstrated that I could not possibly be the fool you say I am — you are to some degree implying that I am deficient as a matter of morals, you know, as most objective observers regard Mitch McConnell as being. But clearly I am not as knavish as that. How do I know? Well, ask my wife, ask my former employees at Godfather’s Pizza, ask all those institutions which have given me humanitarian awards of one sort or another. They would not have pal-ed around with someone as knavish as that, someone whose a God-fearing church-goer in fact.
“So, your argument that I am a fool or a knave collapses under the weight of any probabilistic analysis.
“So, let’s get back to discussing my real 9-9-9 plan rather than the obvious caricature you have — foolishly or knavishly — presented.”
What to say to such an argument, which really is the argument going on under the covers from Herman Cain — or Rick Parry, or Michelle Bachmann, or … pick your non-Colbertian GOPer — to his target audience?
“OK Herman, Rich Lowrie, whomever, you are not a pure fool or a pure knave. Few people other than John Boehner (on the foolish side) or Mitch McConnell and Newt Gingrich (on the knavish side) fit that description. So let’s just say, armed with a fairly large dose of bad faith, which causes you not to be self-critical, you are a reasonably good embodiment of the phenotype (since we’re not determinists, we won’t say genotype) we will henceforth refer to as a knool, or, adjectivally, knoolish, i.e., a “propitious” mix of both elements.
Why in the world would someone of your stature stoop to debate a plan and its sponsor with so little credibility? It’s like Einstein debating Michele Bachmann on Quantum Mechanics.
I have read the 999 plan but a lot of details seem to be missing.
A few questions:
Will all SS income be taxed? Will people on SS be exempt from sales tax? How about the unemployed? Exactly what is subject to the sales tax?
Food? Health care? Insurance?:Basic services? Utilities? Haircuts? Gas?
OMG… I can think of a lot of other things.
Would he really tax the cost of a new home or stocks and bonds? Housing would end as we know it and we all would be investing in another country.
I checked and there are no official comments from the AARP yet but this will not fly as written with seniors or most low income people.
As usual, the devil is in the details but there’s a lot of devil in NO details.
I sent him an email about this and a lot of other things but was also critical of his stance on the Fed. I still can’t believe he made that comment about Greenspan. That will not escape the Tea Party.
He is going to lose his momentum if he doesn’t provide more details soon. In the meantime, comments that are critical of the plan are probably premature. Everyone is just guessing.
Jared, your math is wrong. The 15% taxpayer will not pay 9% + 9% =18% unless they pay 100% of their income on purchases of “stuff.” In reality, that taxpayer pays 50% of their income on rent, car payments, etc. That makes it 9% + 4.5% = 13.5%; 1.5% less than they pay now.
A number of people have made this comment–see the various links in the piece–especially Kleinbard–for a longer discussion. The issue is not how much they consume–it’s what federal tax rate they face on their expenditures under 999 compared to the current system–that difference is 9%.
[…] idea. Families at the median level (around $50,000 per year) will see their federal tax burdens go from $8,300 annually to $13,500. Hello, my name is Herman Cain, and I am running for President. If you are an average American […]
I’m just trying to understand it here. I honestly don’t have a dog in the fight, but if 9-9-9 eliminates the payroll tax won’t that save workers 6% and their employers another 6% which would theoretically be passed on to the worker? So the $50K salary turns into $56K and 9% income tax would be $5K.
Then, if the worker spent ALL of the remaining $51K (not likely) their 9% sales tax would be $4600, for a total tax bill of $9600. This is in the ballpark of the current tax amount assuming the employee saved at least some spending was on nontaxed items. Correct?
Business tax of 9% would trickle down to the consumer somehow but that’s in similar fashion to the business tax now, only a different (lower?) amount, right? So the 27% seems like a distortion. Granted, the tax receipts woild be much lower than currently, but that’s another argument.
What am I missing?