Oct 19 2011

9-9-9 For Dummies

Published by at 8:11 am under All General Discussions

Updates Below!

OK, it seems the GOP establishment candidates are going to try an defend the current unreasonable, unfathomable, unfair and incoherent tax code in order to fend off Herman Cain. Time for a little lesson in math. Bottom line, the Feds get their money, but under 9-9-9 we decide on where to invest it, not DC.

While one can go through incredibly detailed and useless analysis of optional tax/deduction scenarios, these can be misleading because the more complex the analysis the more hidden assumptions are applied thst can skew the result. There are simple boundary checks which show how Cain’s 9-9-9 plan really is less costly to tax payers. These ‘back of the envelope’ calculation are used in engineering all the time to bound the detailed simulations, so do not dismiss the power of an enveloping analysis.

First off, compare the apples to apples. Cain is replacing the income, payroll and many other federal taxes with 9-9-9. As a marginally well off taxpayer with a middle class income,  you pay taxes on income plus payroll taxes out of your salary. Income tax rates are applied on a whacky scale, where the first $8,350 of income is not taxed (for anyone, even billionaires), then the next $25,600 is taxed at 15% (plus a $835 (10%) charge for making $8,350), then the next $48,300 is taxed at 25%, and so on. While this Rube Goldberg math looks daunting, it is easy to collapse it down to a representative individual making $82,250 in taxable income (the top of the 25% bracket).

When you do all the adding up the realized tax on $82,250 is $16,750 (20.4%).

OK, now add in the payroll taxes. The employee side is  6.2% for Social Security and 1.45% for Medicare making the payroll tax total of 7.65%.

Add the payroll and income tax together and you get 28.05, and our $82,250 income now loses $23,042 to the federal government. That’s right you started with $82,250 and ended up with $59,208.

Now, the last time I checked a 9% flat income tax is less than a 3rd of the 28% federal taxes now in place. There are no deductions that are going to drop your taxes down to a third of its pre-deduction level, so there is little reason to compute these complex scenarios – none will look better than Cain’s 9-9-9.. So on income/payroll tax alone 9-9-9 is a huge savings. Instead of $59K in disposable income you walk away with $74.8K in disposable income.

Current plan: $23K in federal tax. Cain plan: $7.4K in federal tax.

But this would also mean enormous deficits since we cannot afford to cut the tax rate by two thirds or more for those who now pay all the federal taxes on income. Note I did not say all the income taxes (a subset of the federal taxes on income. Everyone pays payroll tax, which is why it is seriously misleading to say those not paying income tax now will pay a lot more under 9-9-9.

To address this revenue shortfall Cain adds in his 9% federal sales tax. And here is his genius. We invest this money, not DC.

If you add the 9% sales tax to the 9% income tax you get 18% – and would demonstrate why you should not be a tax accountant. The 9% sales tax is applied only to the disposable income that goes to buy taxable goods. Not all of your disposable income goes to buy taxable goods! Mortgage payments are not taxable goods. There probably are exemptions for insurance, etc.

My guesstimate is 50% of the disposable income (income left after income/payroll taxes) would be applied to taxable goods – meaning the additional federal taxes for this example wage earner under 9-9-9 is around $3,370 dollars. You could spend more or less depending on your situation.

OK, the simple wrap up then is;

  • Under the current system the $82,250 in taxable income results in $59,209 in actual take home pay, giving the government $23,042 of your hard earned money
  • Under Cain’s 9-9-9 (from the perspective of the tax payer), that $82,250 in income results in $71,430 in take home pay, giving the giving the government only $10,820 of your hard earned money,

Anyone can see this middle class taxpayer is walking away with a LOT more disposable income. Which means they will be buying goods and services in greater quantities and energizing the economy.

And for all the math challenged (or deliberately misleading) GOP contenders on stage last night like Romney who tried to talk about state sales tax, note there is no change. If you paid 0-7% in sales tax before 9-9-9, you still pay 0-7%. But now you have more take home pay to spend, so you will see scenarios showing more taxes as you spend more. Like I said, DC gimmicks.

What you really get under 9-9-9 is a much lowered federal tax burden. Now I admit there are deductions that can lower your income, but you can do the  math and realize that while you will still spend money on those currently deductible items (like a mortgage), the amount Uncle Sam let’s you keep is not going to beat 9-9-9 in terms of income in your wallet to spend.

And that’s the kicker isn’t? Do you want to keep sending $23K of your salary to DC to spend, or do you want to spend most of that yourself? That is why 9-9-9 is so smart. The Feds still get their money in the end – we decide where most of it will be invested based on our personal needs. 9-9-9 wins right there. No more dumb, government trickle down projects. We spend, the economy booms, we make more money, etc.

Note: I did not factor in the 10.55% of payroll tax the employer also takes out for each employee (a cost that really comes out of their income level). Think about that as well when you realize labor is the largest cost in all goods and services.

Update: Much more here at WSJ

Major Update: One more thing about Cain’s trading off much lower income/payroll taxes for a sales tax. Income taxes come out all year long. Many of us have to file to get back much of our deductions. Payroll taxes get sucked out all the time (unless you are in the top 5% and make income above the limits).

Basically, the feds will not be confiscating as much money from us up front, but earning more than a third of it off the sales taxes.

Also, since small businesses (like ours) pay our taxes at our personal rate, we see a huge windfall in money we can now put to work on benefits, employee training, new hires, etc. If you don’t run a company the benefit of Cain’s 9-9-9 will not be immediately obvious – so therefore maybe it would not hurt to listen to us small business conservatives given our experiences and expertise?

40 responses so far

40 Responses to “9-9-9 For Dummies”

  1. Frogg1 says:

    Laffer’s article is compelling. He also mentions there would be exemptions for those below the poverty line. I wonder if he is talking about those same exemptions that were built into the Fair Tax?
    That’s just the problem. These economic articles coming out by experts analyzing Cain’s plan preface it by saying they DON’T know the details….then they go on to guess about the details and come up with all kinds of assumptions. Cain is trying to keep the plan simple and sell the “concept”. He may have to take a different strategy on his sell of the 999 plan. We need a mjor tax overhaul. I like the removal of hidden taxes in Cain’s plan. It is so obvious it will bring down the cost of products. I think we need a tax plan that removes all tax loopholes that allow for crony capitalism. I think he can keep Americans with him on this; but, it will take masterful communicating and an exceptional strategy.

  2. oneal lane says:

    Perry is history, he has turned into the clown on stage. I do not think Cain can hold his own. He is lacking a lot of knowledge on non-economic issues, it shows. He has the fire and the spirit, like Palin, but again like he,r he cannot close the game.

    Sorry to say, but I think at this point, we are going to end up with Romney.

  3. Frogg1 says:

    Reid: Parts of Cain’s ’9-9-9? plan ‘make sense’ [VIDEO]
    http://dailycaller.com/2011/10/19/reid-parts-of-cain%e2%80%99s-9-9-9-plan-make-sense-video/

    At first I thought, “Oh crap, what are the Dems up to?”. Even Obama mentioned Cain’s 999 plan with criticism. However, on second thought I think Reid/Dems have realized that Cain has tapped into a vein that resonates with the American people on tax reform.

  4. dbostan says:

    Why do you, guys, gang up on AJ?
    He expressed his oppinion.
    Which is very valid from an economic standpoint.
    Where the 9/9/9 plan suffers is in the political field.
    It will be hard to sell, especially to those 50% who currently do not pay any income tax.
    For them, the hit will 18%.

  5. dbostan says:

    …will be…

  6. Frogg1 says:

    Herman Cain said last night that he will be rolling out a 999 calculator so the American people can directly see how it will affect them.
    http://www.therightscoop.com/laffer-on-999-plan-those-below-the-poverty-line-will-be-better-off%e2%80%94period/

    That can only be good news. He needs to keep control of the message so the democrat-media complex can’t keep making stuff up (ie the poor will pay 18%) and propogandizing it.

  7. dbostan says:

    Frog,

    What do you mean by “making stuff up” about poor paying 18% more.

    If you don’t pay any income tax and federal sale tax now and you’ll pay 9% income under the flat income tax and 9% federal sale tax under Hernan’s plan, can you explain how is this “making stuff up”?

    I am not in the democrat-media complex but I see this small political problem for the 9/9/9 plan.

  8. crosspatch says:

    I’m still seeing quotes that ‘mortgages’ won’t be taxed. Some provide a link to that fact for me (in Cain’s plan).

    exactly what would and what would not be subject to the tax would be up to Congress, this isn’t something Cain could implement if he were elected. He is saying he would make a proposal to Congress. What actually comes out of Congress would probably look a lot different.

    We are really wasting energy trying to get too detailed in our discussions of this.

  9. crosspatch says:

    I wonder if anyone knows how much money is transacted each and every day by line level street drug dealers, street walkers, and under the table cash transactions that never goes reported to the federal government.

  10. Redteam says:

    dbostan, your quote:
    “If you don’t pay any income tax and federal sale tax now and you’ll pay 9% income under the flat income tax and 9% federal sale tax under Hernan’s plan, can you explain how is this “making stuff up”?”

    You didn’t make anything up. I would say that one scenario is that someone is not paying any income tax now because they get paid under the table. That would still be the case, so in reality it would likely only go up 9% (but note that is a 9% increase over what they are now paying (or 4.5% if you only assume 50% spent on taxable goods) But we also don’t know what will have sales taxes and what won’t.

    Crosspatch, I agree that what would and wouldn’t be taxed will be up to congress, that’s why I’m a little concerned about all these people that are trying to sell it stating that: mortgages will be exempt, used cars will be exempt, poverty level people will be exempt, only new retail items will be taxed, used goods won’t be taxed, etc, etc. I will note that Herman Cain has not said all these things, at least not on his website under his 999 page.
    I get no comfort from those claiming that well, at least, those that are getting paid under the table will still have to pay the sales tax. I thought the idea was for everyone to pay what they should be paying and have it revenue neutral.

    MerlinOS2 where did you get the info that the exemption only applied to the income tax? If someone makes the statement “there will be no increase in taxes for people below the poverty level” we’re supposed to assume that means that the 9% sales tax is not counted as taxes for that person? wow…..

  11. dhunter says:

    Wow Herman Cain on Gretta Va Sustren just explained 999.
    Better than I had even thought.
    Sales tax on New Goods ONLY. A product is taxed one time ONLY.
    Effective corporate tax is 24% will be lowered to 9% at every phase of production, five products in a loaf of bread, 5 taxes lowered from 24 to 9%, end product cost of production much less so product price will be less!
    This is huge for business and pricing of goods.
    As I suspected the 9% sales tax bite will be much less than the professional political panderers would have us believe.
    Your free to buy used Cars as I ALWAYS do. No sales tax. Used Homes I assume no sales tax!
    The lower price of new goods due to cost of production savings by eliminating the employers income tax match and lowered corporate tax on each component will blunt the sales tax on new goods.
    I can see why Art Laffer said it would cause an economic boom I would say tsunami!
    The professional political panderers and demagogues are about to have their asses handed to them as this is the best I have heard yet to drive America out of the hole both political parties have dug us into and fill the hole for a good long time.
    Those who demagogue it show their ignorance or their insistence that we play the game the same old way letting the two party players pick winners and losers and pander to their constituents with those constituents OWN MONEY.
    Cain 2012

  12. Redteam says:

    dhunter, i recorded Greta and will watch it later, but as of now, Cain still does not have that info on his website. He may have said used cars will be exempted, but that remains to be seen. I know in La. when we buy a used car, we pay state sales taxes.

    Did he say how below poverty level people will avoid the sales taxes? I’d like to hear that scenario described. (I’m assuming an ID card, kinda like the food stamp card that certifies they live in poverty) And did he say that a person would be described as below poverty level if they do not have a payroll job, they only make their 100k under the table, and how he would know. Will it be unlawful to get paid under the table or do you have to declare that income and pay the 9% tax on it? and how do you get credit for the SS and medicare that payroll people will now quit paying and get a pay increase for. There are many more questions that have not been answered than have been answered. I can see no scenario where my taxes remain the same or are reduced. I only see more taxes in my future. I’ve posted my numbers, somebody that has seen them that want to disagree, point out where I’m wrong.

  13. Redteam says:

    Here is a direct quote from Cain’s site:

    “9% National Sales Tax.

    Unlike a state sales tax, which is an add-on tax that increases the price of goods and services, this is a replacement tax. It replaces taxes that are already embedded in selling prices. By replacing higher marginal rates in the production process with lower marginal rates, marginal production costs actually decline, which will lead to prices being the same or lower, not higher.”

    So, is he saying that retail sales prices will be reduced 9% and then the ‘replacement’ tax will be added back to bring it only back up to the original sales price? Will the law require that the embedded taxes be removed and that the prices have to be lowered? Oh, I’m sure it does. And is he saying, that in all cases, only new stuff that presently have this embedded tax will be included?

    Since no one here but me watches O’Reilly, here is Millers take on debate last night.

    Millers pick in Horse race parlance:

    Obama, won
    2 Romney
    show Gingrich
    Herman, out of the money
    Perry, needs to be put down

  14. Redteam says:

    Well, I watched Greta and was kinda disappointed, according to dhunter, above, he explained the plan ‘very well’. He did? The only thing I learned was that he says no sales tax on used cars, and he expects that the manufacturer will lower the price of a loaf of bread to below 9%. Well, that’s nice, but I thought food was gonna be exempted anyhow.. guess not.

    and this is a quote “we have our analysis that we are willing to share with people”
    but he forgot to supply where he is sharing it. No link to that analysis and no mention of it on his web site.

    I hope he actually has a plan. On Hannity tonight, Luntz focus group stated that while some candidates only talked about having a plan that Cain actually has one. No one seems to know ‘where’ it is. Somebody tell us…… and please don’t say on his website, it’s not there.

  15. dhunter says:

    ” By replacing higher marginal rates in the production process with lower marginal rates, marginal production costs actually decline, which will lead to prices being the same or lower, not higher.”

    There is no law that can mandate what a company sells its products for HOWEVER, something called the free market and competition will dictate that.
    I am a retailer my costs go up my prices go up I pass on 100% of the local sales tax, HOWEVER if my costs go down I will not feel compelled to pass on the 9% national if I can make the same or more money by lowering my prices. I will show the 9% as a cost in my sales but my lowered price blunts that cost.
    This is not rocket science here, for anyone who has sold something, attempts to make it so must come with an agenda or a serious lack of knowledge on how free markets and competition work.
    In a Crony capitalist world or Government caused monopoly, where are headed now, prices would stay the same, but not in a free and competitive market.

    Where are the details?
    Were are the other candidates plans, where are the details on Mitts 59 page overhaul and his inability to explain it.
    Maybe Herman is giving the other candidates just enough rope to demagogue, bad mouth and denigrate his plan before he fully explains it and hands them their words and makes them eat them!

    Effectively if the cost of a loaf up bread goes down 9% and a 9% a sales tax is charged the price of the loaf is smaller than before because the 9% is figured on the lowered price when added back in.
    100-.09=.91 .91 x.09 = .0819 .91 + .0819 = 99.19 end net cost of product.

    Multiply this times billions of transactions. Corporations and business only have to be asked to co-operate the consumers will hold them accountable.

  16. dhunter says:

    The above price of bread ends up costing LESS with the 9% sales tax than before thus the poor still pay less than before.
    The costs of production will be lowered more than 9% if the effective cooperate tax of 24% goes to 9% AND the employer match income tax of around 4- 6 % is eliminated FOR EVERY SUPPLIER that supplys an ingredient in that loaf of bread.

  17. [...] example. when I wrote my 9-9-9 For Dummies post I was clear that anyone who added 9% income to 9% sales tax and arrived at 18% was pretty much [...]

  18. Redteam says:

    dhunter:

    so you’re saying the loaf of bread, which is food, will have the tax added to it? Cain used that example, so I guess he is planning to have food taxed with the sales tax. (so that 50% number that we can expect to have to pay sales taxes on, should be increased?)

    He also said clearly the price would end up the same, or lower, but not higher. I’m sure that wording must be included in this mystical plan.
    Congress needs to insure that wording is in the law, that retailers have to lower their prices a minimum of 9% before they add on the 9% sales tax.

    In that case, I think we should charge the sales tax on everything because then the government will be collecting 9% on everything sold in the country and everyone will only be paying the same thing or less. sounds like a win/win deal to me…fantastic, or fantasy?

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