NEW ANALYSIS: The Three Things You Need To Know About Herman Cain’s 999 Plan

Our guest blogger is Michael Linden, Director of Tax and Budget Policy at the Center for American Progress Action Fund.

Herman Cain’s 999 plan was the star of the GOP’s primary debate this week, and with the increased attention has come increased scrutiny. Cain has been slow to let the details of his plan dribble out, but in an attempt to back up his claims that the plan is revenue-neutral and not regressive, his campaign finally revealed some specifics yesterday. With those new details, here is an updated analysis, with the three main things you need to know about 999:

1) 999 Will Raise Taxes On Middle- And Low-Income Americans, By A Lot:

Cain’s tax plan consists of three different 9 percent taxes — one on wage income (investment income is exempt), one on sales of goods and services (including food, housing, and medicine), and one on business income (investments and purchases from other businesses are deductible; wages, however, are not). But most Americans will end up paying all three of those taxes, for a combined tax rate of 27 percent of their income.

That’s because middle and low-income Americans get all, or nearly all, of their income from ordinary wages — all of which would be subject to Cain’s 9 percent wage tax — and then they spend all of their income, which means it would be taxed again by the 9 percent sales tax. Finally, the burden of the 9 percent business income tax would be passed on to them as well, either in the form of lower wages — since wages are not deductible — or in the form of higher prices for goods and services.

The bottom line is that most Americans will pay all three of Cain’s taxes, making their real federal tax rate 27 percent. Compare that to the current tax code, under which someone in the bottom quintile pays two percent of their income in federal taxes and someone in the middle quintile pays 15 percent. The fact is that pretty much everyone making up to around $100,000 a year would pay more under Cain’s plan than they do now.

2) 999 Will Give The Rich A HUGE Tax Cut:

Because the 999 plan will operate, in practice, as a 9 percent tax on wages, and an 18 percent tax on goods and services, only a fraction of a wealthy household’s income will end up subject to these taxes. That’s because wealthy people get a lot of their income from capital gains — which are exempt from the wage tax — and they don’t spend all of their income, so anything they save won’t be subject to taxes either.

Today, someone in the richest 1 percent typically pays about 30 percent of his or her income in federal taxes. Since people at the top of the income ladder make about half of their income from capital gains, and only spend about half of their income in a given year, their tax rate would drop all the way down to 13.5 percent. That’s even lower than what middle-income people pay today.

3) 999 Would Cause Massive Deficits, Enormous Amounts Of New Debt:

Despite the Cain campaign’s claims to the contrary, 999 would not raise nearly enough revenue to close the budget deficit. In an earlier analysis that mistakenly assumed his 9 percent business tax would operate like our current corporate income tax, we underestimated how much revenue it would raise. But even accounting for the new specifics, the 999 plan would still only generate around 14 percent of GDP in revenue. That’s even less than we are collecting now, when revenue levels are at historic lows. Even if Cain adopted all of the draconian spending cuts contained in the House Republican Budget, 14 percent of GDP in revenue would still result in $11.5 trillion in added debt from 2013 through 2021.

Hopefully Cain will spend a few minutes giving this analysis a read, since he has “no idea” how his plan would actually work.