9-9-9 tax plan: Good for ER types?

[REWahoo]

Has anyone thought about how the 9-9-9 plan, or any other plan to eliminate the income tax, would affect the economy? Just think of all the federal employees that would hit the bricks (no more IRS), all the private income tax practices out of business, all the check cashing business looking for other means of income, the paper companies out of business because no more checks to print, less ink to produce, etc, etc.

Taking this a step further, it would seem that further complicating the existing tax structure would add jobs to the economy. Unemployment too high? Quick, add 1,000 more pages to the tax code...

 

[MichaelB]

Taking this a step further, it would seem that further complicating the existing tax structure would add jobs to the economy. Unemployment too high? Quick, add 1,000 more pages to the tax code...

Uh, I think they've already done enough, thank you. Their share and so much more...

 

[harley]

Still watching

Hey, I thinkk we're doing extraordinarily well. Very little politics, and occasionally even on topic. You mods can take a little nap now. We'll wake you up if it gets loud.

 

[sheehs1]

Even if most average citizens don't need to access all those pages, they still need to be able to find the little needle that does apply within the warehouse of haystacks. Not to mention that a number of those pages contradict each other.



I do my own taxes each year, and have what I consider to be a relatively normal financial situation. But in the past I've had to deal with self emplyment, K1 partnerships, real estate issues including 1031 exchanges, investment income, inheritance income, tax advantaged accounts, cusotodial issues, Roth conversions, and I'm sure there are others. It's not that I have a complex financial life, it's just that I've been around a while, and things add up. It takes me pretty much a full day everyyear to do my taxes. I think under the 9-9-9 plan it would be tons easier to do the taxes. You'd have already paid the 9% sales tax, there wouldn't be any deductions to calculate, just straight income to pull of the W2 (or whatever). And unless you run a business, you wouldn't have to deal with the last 9 either. I think it would be much easier.



I can't argue with this one. Although I suspect they'd have to even it out and make it 11-11-11 or something. To make this work I think there would have to be some sort of spending limit. I'm in favor of limiting spend to 18-19% of GDP. But that's just me.

Do we really think with the 9-9-9 plan, tax code or regulations for things like Roth IRA's, 401k's, Simple and SEP IRAs, 1031 exchanges, trusts, wills and estates , the sale of businesses, rental income, gift taxes will really go away? In many instances, "tax code" either governed the very creation of these or "tax code" was created to ensure the government got it's money.
I think the 9-9-9 plan works well for those with typical W2, 1099 income. I find it hard to believe the tax code will go away with it . I bet we all will still have to reference tax code...regardless of the system in place.It may be simplified but the question remains, to what degree?

And for those things that currently make our taxes "a pain" such as education tax credits, energy tax credits, child tax credits,(all the credits) just seems to me that we could flatten the tax rate while doing away with these credits....and end up in an easier place. Without reinventing the entire wheel which will touch every financial instrument or every financial transaction.

Example: 1031 exchange. Will it go away and we owe 9% tax on the sale?
Roth IRA's. Will taxes be owed on this income when withdrawn?
If not, then tax code is needed to govern it.

The devil will most definitely be in the details.

 

[harley]

Do we really think with the 9-9-9 plan, tax code or regulations for things like Roth IRA's, 401k's, Simple and SEP IRAs, 1031 exchanges, trusts, wills and estates , the sale of businesses, rental income, gift taxes will really go away? In many instances, "tax code" either governed the very creation of these or "tax code" was created to ensure the government got it's money.
I think the 9-9-9 plan works well for those with typical W2, 1099 income. I find it hard to believe the tax code will go away with it . I bet we all will still have to reference tax code...regardless of the system in place.It may be simplified but the question remains, to what degree?

And for those things that currently make our taxes "a pain" such as education tax credits, energy tax credits, child tax credits,(all the credits) just seems to me that we could flatten the tax rate while doing away with these credits....and end up in an easier place. Without reinventing the entire wheel which will touch every financial instrument or every financial transaction.

Example: 1031 exchange. Will it go away and we owe 9% tax on the sale?
Roth IRA's. Will taxes be owed on this income when withdrawn?
If not, then tax code is needed to govern it.

The devil will most definitely be in the details.

If the plan is implemented as written, yes, these things will go away or become simplified. 1031s will go away. IRAs might have to be grandfathered, but moving forward there wouldn't need to be any because all income will be taxed at the 9% level. Or not, if it's capital gains. Personally, even if it only cuts the number of pages down to 50,000 it would be a huge improvement. Tearing it down and starting over would be a great thing. A little chaos never killed anyone.

But back to the original topic, I think the effect on ERs would be dependent on their source of income. If you live mainly on pensions and SS, it probably would be a wash, or maybe even more taxes. If you live, as I do, on investment returns, you'll probably come out way ahead. I still am not sure what the difference between cap gains, dividends, and interest will be. but no matter what I would come out ahead based on this plan. Because I'm on the rich side of the scale. I wouldn't be so enthusiastic if I was a poor working stiff. Which is why I doubt it could ever happen as written.

 

[samclem]

And for those things that currently make our taxes "a pain" such as education tax credits, energy tax credits, child tax credits,(all the credits) just seems to me that we could flatten the tax rate while doing away with these credits....and end up in an easier place. Without reinventing the entire wheel which will touch every financial instrument or every financial transaction.

One of the great things about the lower FIT rate is that it makes the deductions worth so much less. At a rate of 9%, it's just not worth the hassle/compliance costs/opportunity costs to jump through the hoops needed to get the deductions. But, it's a chicken-and-egg problem: we can't get to these lower rates without eliminating the huge stack of deductions/credits/special treatment that are embodied in the present tax code.
Yes, it wouldn't be as simple to implement as some folks are implying. But our present tax code is a terrible old jalopy fashioned from parts from Fiats, Hudsons, and Fords. It can never be made efficient unless it is changed so fundamentally that we might as well give it a new name. Maybe "9-9-9". A transition plan to something better would be a smart step--and good "bridge employment" for brigades of CPAs and lawyers who will later be doing productive work not related to gaming the tax code.
Aside from our personal tax computations, I think ERs have as much/more to gain than most from enhancements in US competitiveness. Lots of us have stocks and bonds. Many have corporate pensions that depend on the financial health of the ex-employer for decades to come. A tax code that helps these businesses help every one who depends on these businesses. I'm looking forward to some more rigorous studies of this 9-9-9 plan as we move ahead. Maybe someone in Congress will get the CBO to score it (for whatever that is worth)

 

[eridanus]

Isn't a 9% national sales tax suspiciously close to the rate of a VAT tax? Add in the state tax and we're looking at near 20% sales tax.

We're an economy based on buying crap. When consumption drops, who pays the price (har!)? The service economy would take a hit. It'd affect China more but our manufacturing, such as it is, would also take a hit.

I'm in favor of it, though. A decrease in consumption can only be good and we'd also lose a lot of bean counters in the IRS (maybe they can become FDA food inspectors).

 

[ejman]

It would seem that the 9-9-9 approach would be great for ER's that have a large balance in traditional IRA's. I'm not sure it would be very "fair" not to have paid taxes on the original contribution and only 9% on the amount taken out (if that's the way it would actually work) but if so, it would certainly make a decision not to pay taxes now to convert to a Roth look very wise.

 

[Walt34]

Just think of all the federal employees that would hit the bricks (no more IRS), all the private income tax practices out of business, all the check cashing business looking for other means of income, the paper companies out of business because no more checks to print, less ink to produce, etc, etc.

Well, they could be out making/delivering all those pizzas that everyone would be able to afford since they're not paying for all that other stuff.

Sounds like a plan to me.

 

[Texas Proud]

Is the first '9' on earned income or all income If it is on all income then would not interest and dividends be taxed


On the plus side of this is that it could be very easy to collect the tax at the source and most people would not even have to fill out a tax return... I was surprised that in the UK most do not...

IOW, if you get a salary, 9% is taken out and sent in... if you get interest and dividends, 9% taken out and sent in... when you buy something, 9% added on and sent in...

I also think that a lot of states with income taxes would follow along since their return would not be the big one peope would have to do....

 

[Alan]

It would be great to have a simple tax code but I just don't see it happening. When we lived in the UK I was among the millions of workers that never needed to even file a tax return. The taxation is all done at source and there are very few deductions - none for most people, even charitable donations are after tax and the charities claim back the tax at a fixed rate.

All you had to do was simply take the shirt off your back and send it in each year

Who needs to file a tax return?

Below is a list of circumstances which require the taxpayer to file a tax return. The list is not exhaustive:

• Self-employment
• Company director, minister, Lloyd's name or member
• Receipt of any of the following:
  • - income from savings and investments of £10,000 or more
  • - income from savings and investments of £10,000 or more
  • - income from untaxed savings and investments of £2,500 or more
  • - income from property (before deducting allowable expenses) of £10,000 or more
  • - income from property (after deducting allowable expenses) of £2,500 or more
  • - annual trust or settlement income on which tax is still due (even if you're only treated as receiving this income)
  • - income from the estate of a deceased person on which tax is still due
• Receipt of foreign income that's liable to UK tax.
• Annual income of £100,000 or more
• Claim of expenses or professional subscriptions of £2,500 or more
• Some less common reliefs, such as Enterprise Investment Scheme relief or relief on Venture Capital Trusts, can only be claimed by completing a tax return.
• Capital Gains Tax is due
• Live or work abroad or aren't domiciled in the UK

 

[samclem]

It would seem that the 9-9-9 approach would be great for ER's that have a large balance in traditional IRA's. I'm not sure it would be very "fair" not to have paid taxes on the original contribution and only 9% on the amount taken out (if that's the way it would actually work) but if so, it would certainly make a decision not to pay taxes now to convert to a Roth look very wise.

Yes, but--(I'm out on a limb here):
-- The money withdrawn from a TIRA (or 401K) would all be taxed at 9% since it wasn't taxed when it went in (whereas the principal from Roth accounts wouldn't be taxed, since tax had already been paid on it). So that goes a little of the way toward increasing "fairness." Plus, for the TIRA, the money is being withdrawn in order to spend it, so at least some of that money will be hit with the 9% sales tax (though lower prices would likely reduce the "bite" of that 9% at the retail level). In all, Roth withdrawals would still likely be hit with about 15% overall, so it would be close to what many of us would pay today.

 

[ERD50]

Example: 1031 exchange. Will it go away and we owe 9% tax on the sale?

If the plan is implemented as written, yes, these things will go away or become simplified. 1031s will go away.

To elaborate on harley's answer a bit (assuming I understand this correctly), The 1031 exchange goes away because Capital Gains tax goes away. That means 0% tax on the sale, not 9%. The 1031 becomes obsolete, it doesn't shift the income back anywhere - it's not income anymore.

Isn't a 9% national sales tax suspiciously close to the rate of a VAT tax? Add in the state tax and we're looking at near 20% sales tax.

We're an economy based on buying crap. When consumption drops, who pays the price (har!)? The service economy would take a hit. ...

There might be some 'sticker shock' to the 9% adder - but there is an offset to that, people's paychecks will be bigger by the elimination of the FICA and Medicare payroll taxes ( 6.2 +1.45%). We might (debatable) see some salary increases since companies will not be paying their side of those taxes, and we might (debatable) see lower prices from companies not needing to pay all the tax compliance costs. Yes, debatable, but I'll assume we will see at least some (maybe very small) portion of that in consumers pockets. It does offset things, it's not the full 9% hit that it might seem.

-ERD50

 

[samclem]

On the plus side of this is that it could be very easy to collect the tax at the source and most people would not even have to fill out a tax return.

Good point, that would be a big personal plus. But with a down side: It will greatly reduce the awareness of the US public to the pain of taxes, and make it easier to extract more. The annual "challenge" of completing the 1040 is one of the things that contributes to the wonderful crabbiness of the American taxpayer (I'd prefer that we eliminate withholding for the same reason--paying taxes should hurt). If it's all done by deduction and at the cash register it's too easy for us to lose sight of the costs.

On balance, I guess I'd choose to do without the pain . . . But everyone should be sent an email each year showing what they paid and pictures of beautiful things they could have bought with that money.

 

[Alan]

Good point, that would be a big personal plus. But with a down side: It will greatly reduce the awareness of the US public to the pain of taxes, and make it easier to extract more. The annual "challenge" of completing the 1040 is one of the things that contributes to the wonderful crabbiness of the American taxpayer (I'd prefer that we eliminate withholding for the same reason--paying taxes should hurt). If it's all done by deduction and at the cash register it's too easy for us to lose sight of the costs.

On balance, I guess I'd choose to do without the pain . . . But everyone should be sent an email each year showing what they paid and pictures of beautiful things they could have bought with that money.

The annual "challenge" of completing the 1040 is one of the things that contributes to the wonderful crabbiness of the American taxpayer

But everyone should be sent an email each year showing what they paid and pictures of beautiful things they could have bought with that money.

Everyone gets an annual statement in the UK showing their income and the taxes, but not pictures - that would be a great idea, I can just see it - This year you paid $x, that's the equivalent of 12,000 Mars bars.

 

[sheehs1]

To elaborate on harley's answer a bit (assuming I understand this correctly), The 1031 exchange goes away because Capital Gains tax goes away. That means 0% tax on the sale, not 9%. The 1031 becomes obsolete, it doesn't shift the income back anywhere - it's not income anymore.



There might be some 'sticker shock' to the 9% adder - but there is an offset to that, people's paychecks will be bigger by the elimination of the FICA and Medicare payroll taxes ( 6.2 +1.45%). We might (debatable) see some salary increases since companies will not be paying their side of those taxes, and we might (debatable) see lower prices from companies not needing to pay all the tax compliance costs. Yes, debatable, but I'll assume we will see at least some (maybe very small) portion of that in consumers pockets. It does offset things, it's not the full 9% hit that it might seem.

-ERD50

Consider the possibility ...that everything could be recharacterized as "income" including proceeds from the sale of real estate. I suppose I took it literally when "they" said, 9% tax on all income. We might get to deduct the basis, but I bet appreciation would be considered "income". Particularly, if cap gains tax goes away. Seems to me, the definition of "income" might have to change.
This is interesting. Had not really thought about some of this stuff until this thread.

 

[HFWR]

Number nine, number nine, number nine...

Revolution Number 9-The Beatles - YouTube

 

[samclem]

Consider the possibility ...that everything could be recharacterized as "income" including proceeds from the sale of real estate. I suppose I took it literally when "they" said, 9% tax on all income. We might get to deduct the basis, but I bet appreciation would be considered "income". Particularly, if cap gains tax goes away. Seems to me, the definition of "income" might have to change.
This is interesting. Had not really thought about some of this stuff until this thread.

Profit from the sale of a home is cap gains now, I don't know why we'd assume that changes under Cain's proposal. From an ER perspective, that would make it less of a hit to sell the house and downsize. Cha-ching.

I wonder if any implementing legislation for this or other total revamp to the tax system could preclude a re-growth of complexity. If the govt needs more/less money, the only thing that can be changed is the tax rates. Any additional carve outs/deductions/credits would require a supermajority. I'd love to vaccinate ourselves against a regrowth of the kudzu vine that is our present tax code. We know how it happens, let's prevent it.

 

[Texas Proud]

Good point, that would be a big personal plus. But with a down side: It will greatly reduce the awareness of the US public to the pain of taxes, and make it easier to extract more. The annual "challenge" of completing the 1040 is one of the things that contributes to the wonderful crabbiness of the American taxpayer (I'd prefer that we eliminate withholding for the same reason--paying taxes should hurt). If it's all done by deduction and at the cash register it's too easy for us to lose sight of the costs.

On balance, I guess I'd choose to do without the pain . . . But everyone should be sent an email each year showing what they paid and pictures of beautiful things they could have bought with that money.

The annual "challenge" of completing the 1040 is one of the things that contributes to the wonderful crabbiness of the American taxpayer

But everyone should be sent an email each year showing what they paid and pictures of beautiful things they could have bought with that money.

Everyone gets an annual statement in the UK showing their income and the taxes, but not pictures - that would be a great idea, I can just see it - This year you paid $x, that's the equivalent of 12,000 Mars bars.

Well, I was going to say that is the way they do it in the UK... but Alan said you get a statement (I never did, but was only there for two tax years).....

But, the VAT is buried in the price... you don't see it.... (I remember seeing some people who posted receipts showing it on another thread, but I did not see it when I was there 12 years ago)...

Heck, the good thing was that the price shown was the price you paid... no sales tax to add in your head....


But, I agree... I would like to get rid of all corporate taxes and make all citizens pay a higher tax so we KNOW how much we are paying... right now a lot of what I pay in taxes are buried in the price of the things I buy... corporate income tax and excise tax....

Does the plan get rid of excise taxes Probably not....

 

[MichaelB]

I’d sure like to see the data behind this. A simplified tax system is a powerful thing, very alluring. Because total tax composition would shift from mostly income based to income and consumption, it would conceptually affect older and retired people favorably just because we consume less and have less income.

Using the tax system to further interests that are important to society (like saving for retirement) is something of value that we would lose with flat tax. In addition, collectability is critical. How much consumption is done in cash or carried out with very small businesses that are more difficult to audit?

It will greatly reduce the awareness of the US public to the pain of taxes, and make it easier to extract more. The annual "challenge" of completing the 1040 is one of the things that contributes to the wonderful crabbiness of the American taxpayer (I'd prefer that we eliminate withholding for the same reason--paying taxes should hurt). If it's all done by deduction and at the cash register it's too easy for us to lose sight of the costs..

As another one of those members with working and tax experience in multiple countries, everyone everywhere dislikes paying taxes, and the VAT on every invoice is a neverending reminder. There is no less painful way and most people are aware of how much they pay regardless of how it is done.

 

[ERD50]

... saving for retirement ... is something of value that we would lose with flat tax.

I'm not following - why is that?

In addition, collectability is critical. How much consumption is done in cash or carried out with very small businesses that are more difficult to audit?

The fairtax site has some sections on this.

Americans For Fair Taxation: Frequently Asked Questions Answers

The FairTax reduces rather than increases the problem of tax evasion. The increased fairness, transparency, and legitimacy of the system induces more compliance. The roughly 90-percent reduction in filers enables tax administrators more narrowly and effectively to address noncompliance and increases the likelihood of tax evasion discovery. The relative simplicity of the FairTax promotes compliance. Businesses need answer only one question to determine the tax due: How much was sold to consumers? Finally, because tax rates decrease, tax evasion is less profitable; and because of the dramatic reduction in the number of tax filers, tax evaders are more easily monitored and caught under the FairTax system.

Considering the source, I wouldn't take that as Gospel, but it makes some sense to me. Somewhere else I think they mention that something like 80% of sales are from a small number of retailers (WalMart, etc). It just seems to make sense that the number of businesses they need to audit would be far less than the number of individuals plus businesses.


-ERD50

 

[ziggy29]

It's no different than a state's mix of sales, income and property taxes -- whether or not it's "good" for any individual (retired or not) depends on their own situation. Someone with a high income and doesn't buy much "stuff" would do well on Cain's plan. Someone with a more modest income who spends most of it? Not so much.

In reality, though, this plan would also make Roth IRA contributions at today's income tax rates a pretty terrible deal, especially if one contributed to it instead of a traditional IRA or 401K.

 

[MichaelB]

Thanks for the link. I'll look at it when I have more than a couple of minutes.

Somewhere else I think they mention that something like 80% of sales are from a small number of retailers (WalMart, etc). It just seems to make sense that the number of businesses they need to audit would be far less than the number of individuals plus businesses.

80% is big number for retain sales. That would certainly be a solid base to start.

It just seems to make sense that the number of businesses they need to audit would be far less than the number of individuals plus businesses.

More data would be needed before reaching this conclusion. Individual tax returns are more easily automated. The IRS is very secretive so we probably won't know how they really allocate their resources. It would be safe to say, however, that the IRS should need fewer resources overall under this type of tax scheme.

As for your first question, I didn't say "saving for retirement" would be lost, I did say using the tax system to promote interests important to society would be lost, and then used retirement as one example. A flat tax does not allow deductions or exemptions, which is how the tax system is used to promote specific interests.

 

[samclem]

Using the tax system to further interests that are important to society (like saving for retirement) is something of value that we would lose with flat tax.

I think a lot of folks would disagree strongly regarding the value of government using the tax code to reward and punish (retirement savings or other goals), but since this is treading on thin ice I'll leave it alone.

In addition, collectability is critical.

Yep, I agree that collectability is important. On the retail tax side, there are clearly fewer points to monitor than we have today with the FIT. But the other issues are compliance costs and compliance monitoring. As Texas Proud points out, most of the collections on the FIT side would be via automatic deduction, with no (cheat-prone) tax return required. The opportunity to cheat is severely reduced compared to today's system. And at a marginal rate of 9%, the whole incentive to cheat is significantly reduced. How much does it benefit ER folks (and everyone else) if everyone actually pays the taxes they owe?

 

[chinaco]

It seems many peoples' definition of a tax system are:

1. a bad tax system is one where they have to pay
2. a good one is where they have to pay less
3. and a great one is where they do not have to pay at all.

For some reason... no matter what the collection mechanism is (i.e., what we have today or something new)... I think we will all wind up with definition # 1.