9-9-9 and the Sincerest Form of Flattery
It seemed inevitable that Herman Cain's popularity with 9-9-9 would lead to a spate of competing tax plans. So the flat tax proposal from Rick Perry this week makes political sense. And as an unabashed Jack Kemp and Steve Forbes guy from the 1990s, I was wanting to like the Perry plan after seeing Forbes on board with it.
One of my principles in evaluating a tax proposal is to ask, is this something I would pass if it did not cut tax rates. The Perry proposal is not revenue neutral. Since it's optional and currently the earned income tax credit gives many families a negative tax rate, it's unlikely anyone under $50,000 would actually choose the Perry flat tax. Everyone over $50,000 would seem likely to get a lower flat rate and would take the deal. It's going to therefore be sold as a rich guy's tax plan ... and in fact it already is.
Other parts of the plan are better. I like the corporate tax rate cut, but that seems designed to counter the same plan from Mitt Romney. Ditto for the estate tax and capital gains -- there is no daylight I can see between those two. (Ron Paul goes lower both for corporate rates and for repatriation of overseas profits.) But what is important here is that only the Cain plan cuts rates as low as 9%, and only can do so by taxing sales on top of income at 9%.
I am no fan of the Cain plan, for reasons most people now understand. While I appreciate Art Laffer's idea that lower rates lower distortion -- a very standard economics story -- I cannot trust both my car and the liquor cabinet to my teenager, and I cannot trust Congress with an extra tax base to play with. I remember talking to a member of the Council of Economic Advisers for President Reagan when VAT was discussed in the early 1980s and he made that point to me then as why they didn't think much about VAT. The lesson stuck.
The Perry plan has a higher rate which makes it a little more distortionary than Cain's. It maintains deductibility of charitable giving, mortgage interest and state/local taxes; these deductions force the top rate higher, the campaign said in a conference call -- though if you already don't care about revenue neutral, I'm not sure why you go to 20%. What I can't evaluate therefore is how much of the boost to growth would come from changing rates versus how much it would grow because you reduced the size of government.
Diane pointed me to this story with a request to post she said what could I do if I were king (as well as King.) I have always thought the plan of Milton Friedman was wise counsel. You tithe to your church, and you should tithe to your government. Britain in 1900, the U.S in 1920, and Hong Kong in 1960 all had government spending about 10% of their GDPs; all grew rapidly in the succeeding decade. We're nowhere near that now. In my ideal world you would have all levels of government spending 10% of GDP; a flat tax with zero deductions and a plan to curb spending to that level would be needed. If Gov. Perry wants me to take his plan seriously, he should identify the spending cuts he would make to balance his flat tax plan. As we learned during the Reagan administration, you can get tax cuts through Congress without the spending cuts, after which you either get the 1990 Bush tax increase, or Obama economic policy.
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Re: 9-9-9 and the Sincerest Form of Flattery
King,
Thanks so much for outlining your take on this. Your learned analysis is something that even a layperson like me can understand.
I felt uneasy about Perry's stipulation that his flat tax be optional. The reasons you provide above confirm why we should be a little hesitant to readily support the plan. Additionally, Perry's failure to outline what spending he'd cut, and his indifference to the fact that this comes across as a rich man's tax plan makes him appear a bit tone deaf to both Tea Party sorts and the OWS class warfare sorts.
Apr '11
Re: 9-9-9 and the Sincerest Form of Flattery
Could we refrain from referring to it as a flat tax? It's a tax plan on which everyone pays different rates. For a single person making $100k, no change, a 15.8% effective tax rate (ie. average deductions, according to the treasury department). For a married couple with 2 kids and one wage earner making $100k, no change, a 6.5% rate. If that couple made $250k, their tax would probably be lower under the Perry plan at 16.5% effective rate + deductions for state taxes, mortgages and so on. It's hard to know about the lower end, as Perry does not talk about the Earned Income Credit, but this may in effect be a boost to those on income support, too. If you have a 2 child family in Texas and one earner making $50k, and you rent, no change. I you have 2 more kids and your income goes up to $75k, you benefit from Perry.
The people to benefit would be a crazy hodgepodge of different demographics, but mostly it's a tax cut for what appears to be the top 5% or so. Bush's tax cuts were closer to being a flat tax.
Apr '11
Re: 9-9-9 and the Sincerest Form of Flattery
Huh. I notice just now that you see a much lower inflection point for where Cain's tax rate is lower. My calculations were based on the deductions I know about in his, and the Treasury's Office of Tax Analysis claims about current payments. How do you arrive at $50k?
Dec '10
Re: 9-9-9 and the Sincerest Form of Flattery
I think Perry's numbers shoot directly at the median income of approx. $50K. Taking average family size into account you end up with no tax liability. The free rider problem will still exist, perhaps even more glaringly. Even making around $60K/year I would still make out under the Perry plan because my exemptions and deductions would entirely wipe out my taxable income. As much as I like Perry, this part of the plan looks like more of the same pandering and does not solve the problem of getting some skin in the game from everyone.
Apr '11
Re: 9-9-9 and the Sincerest Form of Flattery
With the current system, the average family with 2 dependent kids and one earner has a very slight negative liability at $50k; we pay them. I do agree that there are a lot of people whose deductions and credits would work out differently, but most of the people below $50k aren't paying tax today, and most people earning $50-$100k would seem to find the Perry option pricier (it hits in at 20% from the first dollar after the exemptions, whereas the current system starts at 10%, then 15%). Like I say, for the right combo of exemptions, some people (Bachmann, for instance) would gain, but few people until you're stretching into some fairly serius earnings.
Americans who lack a stay at home parent will be particularly unlikely to save, and there's only 5 million households who have that family set up, many of whom will be either earning less than the average (and not paying currently) or around the federal employee average of ~$100k, where they would again be mostly staying under the current system (an average of 6.5% as opposed to 10% before mortgage/ state taxes.)
Jul '10
Re: 9-9-9 and the Sincerest Form of Flattery
I think Milton Friedman was right. Let's cap it at 10%.
Oct '10
Re: 9-9-9 and the Sincerest Form of Flattery
999 wasn't the reason for Cain's rise in popularity. It was the debate performances.
999 was supposed to be a non-serious marketing gimmick that has become an albatross around Cain's neck. Then Perry ups the ante by proposing his own radical change to the tax code.
it's a shame that the crazier proposals are getting all the attention, while the sane ones aren't.
May '10
Re: 9-9-9 and the Sincerest Form of Flattery
Given our current debt situation and the need to increase interest payments if we are to even try to maintain a fiat currency, 10% is simply not possible. We could go to a Gold standard (and maybe will eventually anyway) but the deval versus current perception would be huge - I guesstimate it to be around $10K - 15K per ounce versus the current $1656. I agree that 10% is a worthwhile target, but the debt hole is big enough that it would be akin to trying to fill the Grand Canyon with a teaspoon.
Leaving a dual (flat/current) system indefinitely is simply not workable and would be counter productive. Executing over a defined time frame to a flat tax should be possible - and would liberate around $4-500 Billion in unproductive cost of compliance per year.
Getting to a tithe requires a federal Govt. (versus our current National) that will be hugely smaller in scope than our present. I applaud the idea but, rather than isolate Perry, none of the "serious" candidates had come out with a serious Govt. scope program that sets on a path to 10%............or 18% for that matter.
Oct '10
Re: 9-9-9 and the Sincerest Form of Flattery
As much as I dislike the 999 plan, it works for Cain because he was able to legitimately argue that he was an executive level problem solver with an actual plan at a time when the rest of the field did not have a plan. That might not have worked for Cain had some of the more substantial candidates had entered the field like Paul Ryan, but given the relative weakness in the field, it works for him.
While I very much appreciate Perry introducing an actual plan and one that is a proper Forbesian (it's a perfectly cromulent word) flat tax plan, I don't like the idea of a bifurcated tax code. The current tax code is an abomination and any plan that is introduced should work from the premise that it must be discarded root and branch and replaced with something entirely new.
Re: 9-9-9 and the Sincerest Form of Flattery
King,
Sorry if mine is a question already answered but I've been a little behind the news lately.
Is Herman Cain's 9% sales tax going to go on top of the 7% state sales tax I already pay here in NJ, making the government vig 17% every time I buy something? Won't that curb spending thus slowing the NJ economy even further?
Has Cain put forth whether certain items will be exempted from the tax like groceries or clothes?
Edited on Oct 26, 2011 at 7:31amJul '10
Re: 9-9-9 and the Sincerest Form of Flattery
Tommy De Seno: King,
Sorry if mine is a question already answered but I've been a little behind the news lately.
Is Herman Cain's 9% sales tax going to go on top of the 7% state sales tax I already pay here in NJ, making the government vig 17% every time I buy something? Won't that curb spending thus slowing the NJ economy even further?
Has Cain put forth whether certain items will be exempted from the tax like groceries or clothes? · Oct 26 at 7:23am
Edited on Oct 26 at 07:31 am
That's a yes, but only for newly produced goods. No tax on used. And with the rest of the federal tax code and all the related distortions and incentives junked, embedded taxes incorporated into the costs of products go down. Price theory is a lot of fun, elasticity and whatnot, but Cain is saying the price effects should help compensate.
Also, the way we got here was those clever Congress-critters finding thousands of clever place to bury taxes opaquely, so that we just see the resulting price inflation.
With 9-9-9, there is no place for Congress to hide.
Sep '10
Re: 9-9-9 and the Sincerest Form of Flattery
Ron Paul makes the point that all candidates are more or less eager to talk about tax plans, but none seem willing to talk with any specificity about spending cuts. If you take into account state spending mandated by the federal government federal spending is somewhere north of 30% of GDP. Does no one find it strange that none of the candidates except Paul seems willing to seriously talk about how they would reduce spending, but at the same time claim to be proponents of limited government? As Uncle Milton often noted the spending rate is the tax rate. It is clear these candidates either lack the courage necessary to take on the real issue of spending or they are big government hypocrites. These fairy tale tax plans are nothing but a side show. Why does anyone take them seriously?
Dec '10
Re: 9-9-9 and the Sincerest Form of Flattery
Page 80 of the instructions to IRS Form 1040, calculates the 2010 federal tax for a married couple filing jointly on taxable income of $50.000 is $6,666 (no joke).
9% of Cain’s tax reform on that taxable income is $4,500. To pay the same amount to the IRS as under its current policy ($6,666), the additional 9% of federal consumption tax corresponds to purchases of $24,066.67.
Any spending above that amount would mean 9-9-9 lays a higher tax burden, any spending below that amount, a lower tax burden, compared to taxes on income of $50,000.
With Perry's plan of opting in at 20% or paying the current rate, the percentage paid on $50,000 is 13.3%. There is no additional federal sales tax.
For the average American couple filing jointly with $50,000 in taxable income, the Perry plan takes less money from them than Cain’s 9-9-9 proposal.
Apr '11
Re: 9-9-9 and the Sincerest Form of Flattery
Charles Gordon
Page 80 of the instructions to IRS Form 1040, calculates the 2010 federal tax for a married couple filing jointly on taxable income of $50.000 is $6,666 (no joke).
9% of Cain’s tax reform on that taxable income is $4,500. To pay the same amount to the IRS as under its current policy ($6,666), the additional 9% of federal consumption tax corresponds to purchases of $24,066.67.
Any spending above that amount would mean 9-9-9 lays a higher tax burden, any spending below that amount, a lower tax burden, compared to taxes on income of $50,000.
With Perry's plan of opting in at 20% or paying the current rate, the percentage paid on $50,000 is 13.3%. There is no additional federal sales tax.
For the average American couple filing jointly with $50,000 in taxable income, the Perry plan takes less money from them than Cain’s 9-9-9 proposal. ·
Since most couples making $50k have enough deductions available to have a negative income tax, Perry's plan would make zero difference to them; they would stay on the current plan.
Dec '10
Re: 9-9-9 and the Sincerest Form of Flattery
James Of England
Since most couples making $50k have enough deductions available to have a negative income tax, Perry's plan would make zero difference to them; they would stay on the current plan. · Oct 26 at 2:38pm
Thank you for reiterating that in Perry’s proposal the option of filing under the current IRS rates (the 20% rate is elective) allows a couple to incur less federal tax in the event it spends more than $24,066.67 at the 9% consumption tax rate in Cain’s 9-9-9.
Lest there’s a misunderstanding about taxable income and gross income, the example of the $6,666 tax liability relates to $50,000 of taxable income. Perry’s plan for a couple with $50,000 in gross income is to the exempt them from all IRS liability.
His plan can be interpreted as collecting fewer tax dollars than at current rates, but it also caps federal spending at 18% of GDP, corresponding to the post-war trend of taxes collected for Washington (8% of GDP paid in individual income taxes). His “Cut, Balance, and Grow” presentation has a nice graphic presenting this data.
Apr '11
Re: 9-9-9 and the Sincerest Form of Flattery
Charles, I have a post in my member feed explaining why I don't trust Perry's presentations on this subject, although I'm happy that he is embracing a flat tax.
Dec '10
Re: 9-9-9 and the Sincerest Form of Flattery
Yes, never trust a politician.
"... we know that you or anybody else with the same power as ours would be acting in precisely the same way."
(Thucydides, The History of the Peloponnesian War)