CTJ: $210K Tax Cut for Richest 1%, $2K Tax Hike for Bottom Three

http://www.ctj.org/pdf/cainplan.pdf

 

CTJ Citizens for
Tax Justice
October 17, 2011
Contact:
Steve Wamhoff
[phone] x 33
Anne Singer
[phone] x 27
Herman Cain’s 9-9-9 Plan:
$210K Tax Cut for Richest 1%, $2K Tax Hike for Bottom Three-Fifths of Taxpayers
If presidential candidate Herman Cain’s proposed “9-9-9 tax plan” was in effect today, then the
richest one percent of taxpayers would each pay $210,000 less in annual taxes on average, while the
poorest 60 percent of taxpayers would each pay about $2,000 more in annual taxes on average, than
they do now. Moreover, under the 9-9-9 plan, the United States government would collect about
$340 billion less in revenue in 2011
alone.
Cain’s proposed tax plan would
replace all existing federal taxes
with three new taxes: a flat nine
percent individual income tax, a flat
nine percent “business tax,” and a
nine percent national sales tax.
9% Individual Flat Tax: The nine
percent individual tax would apply
to “gross income less charitable
deductions” and would exempt
capital gains. This individual tax
would generate much less revenue
than the existing federal income and
payroll taxes and the change would especially benefit the richest taxpayers, who currently pay
effective tax rates much higher than nine percent and receive most capital gains. Cain’s individual
income tax would also result in a big tax increase on the poorest Americans, who would lose the
benefit of existing tax breaks like the Earned Income Tax Credit and the Child Tax Credit.

Impacts of Herman Cain's 9-9-9 Plan if in Effect During 2011
Average Tax Changes
Income Replace Personal Income Replace Corporate Replace Estate & Net
Group & Payroll Taxes with Income Tax with Excise Taxes with Tax
9% Individual Flat Tax 9% Business Flat Tax 9% Sales Tax Change
Lowest 20% $ +418 $ +598 $ +1,057 $ +2,073
Second 20% –509 +1,272 +1,762 +2,524
Middle 20% –2,934 +2,258 +2,311 +1,635
Fourth 20% –7,024 +3,965 +3,079 +20
Next 15% –14,621 +6,500 +3,614 –4,507
Next 4% –35,885 +9,391 +5,511 –20,983
Top 1% –209,974 –7,663 +7,508 –210,129
ALL $ –7,631 $ +2,851 $ +2,425 $ –2,354
Addendum:
Lowest 60% $ –1,009 $ +1,376 $ +1,710 $ +2,077

 

9% Business Flat Tax: The nine percent business tax would apply to a business’s “gross income less
all investments, all purchases from other businesses and all dividends paid to shareholders.” As a
result, it appears that there would be nothing left of a business’s revenue to tax other than the
revenue going towards wages. (Companies would have no incentive to retain unreinvested earnings,
since they could avoid the “business tax” by paying those earnings out as dividends.) In other words,
the nine percent “business flat tax” under Cain’s plan actually seems to be a payroll tax. Of course,
such a payroll tax would affect low- and middle-income people far more than the corporate income
tax it would replace, as illustrated in the table above. These calculations incorporate the assumption
of the Congressional Budget Office that the existing corporate income tax is ultimately paid by the
Impacts of Herman Cain's 9-9-9 Plan if in Effect During 2011
Average Tax Changes
Income Replace Personal Income Replace Corporate Replace Estate & Net
Group & Payroll Taxes with Income Tax with Excise Taxes with Tax
9% Individual Flat Tax 9% Business Flat Tax 9% Sales Tax Change
Lowest 20% $ +418 $ +598 $ +1,057 $ +2,073
Second 20% –509 +1,272 +1,762 +2,524
Middle 20% –2,934 +2,258 +2,311 +1,635
Fourth 20% –7,024 +3,965 +3,079 +20
Next 15% –14,621 +6,500 +3,614 –4,507
Next 4% –35,885 +9,391 +5,511 –20,983
Top 1% –209,974 –7,663 +7,508 –210,129
ALL $ –7,631 $ +2,851 $ +2,425 $ –2,354
Addendum:
Lowest 60% $ –1,009 $ +1,376 $ +1,710 $ +2,077
Source: Institute on Taxation and Economic Policy tax model, October 2011
Note: The "baseline" against which the 999 plan is measured is current law taxes for 2011 except
that the temporary payroll tax holiday (which is not part of the normal tax rules) is not included.
2
“owners of capital,” or the owners of stocks and other business and investment assets, which are
concentrated among the well-off. This is why replacing the existing corporate income tax with Cain’s
proposed business tax (which has the effect of a wage tax) would result in an average tax increase
for all income groups illustrated in the table except for the richest one percent.
9% National Sales Tax: Finally, Cain’s plan would introduce, for the first time, a broad-based national
sales tax, with a rate of nine percent. Replacing the remaining federal taxes (estate and gift taxes,
tobacco taxes, gas taxes) with the nine percent sales tax will result in a tax increase for all income
groups. Compared to income taxes, consumption taxes like sales taxes or value-added taxes are very
regressive, meaning they take a larger percentage of a poor family’s income than they take of a rich
family’s income. Unlike an income tax, a consumption tax does not apply to income that is saved or
invested, and rich families are able to save and invest a much larger percentage of their income than
less well-off people. Poor families are likely to put all of their income towards consumption; they
typically have nothing left to save after buying necessities.
Revenue Loss and Regressive Impacts Even Greater in the Future
The estimates here compare the Cain plan to the tax rules in effect in 2011, which themselves
collect less revenue, and are more regressive, than the tax rules that will be in effect in 2013. That’s
because the tax cuts first enacted under President George W. Bush and recently extended under
President Obama are in effect only through 2012. Under current law, the federal tax system in 2013
will therefore generate more revenue and will be more progressive, because the Bush tax cuts
(which disproportionately benefit the wealthy) will have expired.1 In other words, the Cain plan
would be even more costly and regressive compared to the tax rules that will go into effect in 2013.
Appendix: Technical Details
The nine percent individual flat tax would apply to gross income minus capital gains and minus charitable deductions. It
is assumed that the exemption for capital gains would apply only to long-term capital gains. The plan says nothing about
Social Security benefits, most of which are excluded from gross income under current tax law. This analysis assumes that
the individual flat tax only applies to the portion of Social Security benefits that are taxable under current law.
Current law only allows charitable contributions to be deducted by taxpayers who “itemize” their deductions. It is
assumed that taxpayers who currently take the itemized deduction for charitable contributions would deduct the same
amount of contributions under the Cain plan as they do now and that many of those who are non-itemizers under
current law would also deduct contributions. It has been estimated that non-itemizers make a fifth of all charitable
contributions,2 meaning their charitable contributions are equal to about one fourth of the contributions deducted by
itemizers. This analysis therefore assumes that those who are currently non-itemizers would deduct about a fourth as
much in charitable contributions as those who currently itemize.
The 9 percent sales tax would be essentially a tax on personal consumption. Cain’s plan does not specify what exactly
the base of this tax is. (In other words, the plan does not specify the types of consumption the tax would apply to). It is
practically impossible to tax all personal consumption. (For example, it would be difficult practically and politically to tax
all consumption of health care services.) For states that currently levy a sales tax, the base of the sales tax is only 43
percent of total personal consumption expenditures (PCE), on average. It is assumed that the base for Cain’s national
sales tax would be larger, but not unrealistically out of line with those of European countries that have a VAT (which has
the same effect). We therefore assume his 9 percent sales tax would apply to 55 percent of PCE.
1 If the Bush income and estate tax cuts were extended through 2013 and beyond, federal revenue would be reduced by about $5.4
trillion over a decade and over 47 percent of the benefits would go to the richest one percent of taxpayers. See Citizens for Tax
Justice, “Another Decade of Bush Tax Cuts Will Cost More than Twice as Much as the First Decade,” June 7, 2011; Citizens for Tax
Justice, “The Bush Tax Cuts After Ten Years,” June 2, 2011.
2 Congressional Budget Office, “Effects of Allowing Nonitemizers to Deduct Charitable Contributions,” December 2002, p.2.