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

[samclem]

GOP candidate Herman Cain is proposing a tax plan he's calling 9-9-9:
9% Federal income tax (deductions only for charitable donations, AND this replaces the payroll tax for SS/Medicare). Cap Gains tax= 0%
9% corporate income tax rate
9% national retail sales tax
Here's a link to the page from Cain's website describing the plan.

Now that Cain has moved to first place (tied with Mitt Romney) in the GOP race according to at least one national poll, I'm guessing this tax proposal will get more attention.

So, would it, or something similar, be good or bad for those in ER? Considerations:
- According to the folks interviewed for this (evenhanded) Christian Science Monitor, the plan would raise about as much revenue as the present tax laws.
- Most of what I've read indicates the tax burden would shift down somewhat (with lower income folks paying more) though I haven't seen quantification of this that seems solid.
- This would appear to be good for businesses and job creation--and for those ER folks who own equities. Just the repatriation of capital that is now being kept overseas by US businesses would be a boon. Reduction of compliance costs would also help businesses, as would the reduction of distortion of capital flows that are caused by sticks and carrots in the present tax code. All good for US business, and those who own stocks, which includes most ER folks..
- The 9% federal sales tax would be a negative for ERees. On the plus side, the reduction of "employer-paid" payroll taxes, tax compliance costs, etc would lower the cost of production quite a bit, so it is possible this would lower prices and offset some of the sales tax.
- Zero tax on cap gains will be a plus for ERees with stocks/bonds in taxable accounts.

As for me, I'm still semi-w*rking (self employed). Ditching the 15% self employment tax would be a very nice thing, and removing the uncertainty of cap gains taxes each year would be a plus. Overall, from a "static analysis" basis think I'd come out about even under this plan--my FIT would go down a bit, but the federal sales tax would probably put me about where I started. If we take into account the positive impact on businesses, I think I'd be ahead.

If we can keep this discussion centered on tax policy as it relates to ER, I think Porky will keep his distance.

 

[harley]

And here I was thinking he was talking 9 pizzas for 9 dollars in 9 minutes. Guess I better look a little closer at the plan.

 

[Bestwifeever]

I was hoping he was talking about 9 pounds lost in 9 minutes with 9 simple exercises.

 

[Packman]

I'd love to see an overhaul of our federal taxes, but it ain't going to happen. Personally, Cain's plan would be great for me. No cap gain tax (I assume I would pay 9% on my dividends). This plan would hurt the young and middle aged family types - the ones that have to buy so much stuff. That isn't the American way - we like to give as many breaks as possible to those that have children and make little money. It would also hurt the ecomony as everthing just took a 9% cost hike.

Again, I think the idea is great, but a change so large as this - can you imagine the dems and republicans battling that out? They can't agree on anything. Maybe this will absorb some of the headlines for a while so we don't have to keep seeing Greece's debt.

 

[lemming]

Does that 9% Payroll tax look the same with lower exemptions and deductions .

A 9% flat rate would be a jump for me, retired with medical and home ownership deductions-my effective rate was zero last year.

Why should capital gains be exempt income, it may sound good but makes no sense.
Sales tax would just double the federal tax rate since I only take out what I expect to spend.

 

[W2R]

Just a friendly notice that this topic is being watched closely, and any comments straying from discussion of tax proposals to political parties, candidates, etc. will result in the immediate closing and likely deletion of the thread. Thanks.

 

[REWahoo]

Just a friendly notice that this topic is being watched closely, and any comments straying from discussion of tax proposals to political parties, candidates, etc. will result in the immediate closing and likely deletion of the thread. Thanks.

This thread is getting the old stinkeye!

 

[W2R]

This thread is getting the old stinkeye!

Yep!! You betcha.

 

[JPatrick]

And here I was thinking he was talking 9 pizzas for 9 dollars in 9 minutes. Guess I better look a little closer at the plan.

Actually, this is, more likely to happen than the tax plan.

 

[harley]

OK, now I've read it. I'm responding to Sam's question, not judging the plan's possibility of happening.

I'm of the opinion it would be great for ER types, since we tend to be investors, savers, and LBYM types. Our investments would be tax free from a cap gains POV, and at least during our working years we didn't spend anywhere near 98% of our income. Probably not even the 90% that high earners seem to spend. From Samclem's article

For example, economists have a measure called marginal propensity to consume. Low income people tend to spend about 98 percent of their income, middle income people spend 97 percent and high income people spend 90 percent.

While we may spend those high percentages while in retirement, therefor paying the 9% sales tax, much of our income will come from untaxed investment income. I don't think the loss of deductions and loopholes will effect ER's either. Many don't have mortgages or other major deductions to lose.

Now, regarding it's likelyhood of passing. I don't think there's much chance. Too much redistribution of the tax burden to the lower earners. Also, collecting 15% of GDP isn't enough (sadly). We've averaged ~18% of GDP as revenue in the past, and I think that's what we would need to do moving forward. It's going to be hard enough to cut spending down to that reasonable amount. Cutting below that isn't a possibility anytime soon.

 

[samclem]

Does that 9% Payroll tax look the same with lower exemptions and deductions .

I'm not sure I follow you. Under the present system, employees pay a payroll tax of 7.65% starting with their very first dollar, no deductions or exemptions (this is for SS and Medicare). Cain's plan includes no separate payroll tax, just the 9% tax on income.

Why should capital gains be exempt income, it may sound good but makes no sense.

There are all kinds of rationale for every kind of tax, some of it makes more sense than others. Cain's site implies the goal is to increase investment in businesses, to reward risktaking, and thereby encourage growth in the economy. There are good arguments both ways, but that seems to be his answer to your question. Most tax schemes treat cap gains differently than earned income, because at least some of the (apparent) gain is just due to inflation. The straightforward thing to do would be to simply adjust for this inflation, but we don't do that now, instead we tax CGs at a lower rate. Under the present system, CGs are taxed at a rate of 10% to 20% lower than ordinary income. Since Cain's plan taxes them at only 9% below ordinary income, I guess one could say that, from this perspective, Cain's plan actually reduces the disparity between the treatment of CGs and earned income, compared to our present system.

 

[Mulligan]

While I don't know about the triple 9 numbers, getting everyone to have a "skin in the game" even if it's 1% sales tax is very appealing to me. Simplifying tax structure would result in many jobs lost in the accounting department, so I imagine passage of this in any type of form would meet with some lobbying resistance in addition to the fairness issue. Of course by creating another tax mechanism via the national sales tax, you create another method to increase taxes down the road, which isn't appealing to me, though. How many state sales taxes, along with city and county have creeped up over the years. For some reason people seem very docile towards the sales tax compared to the ink written complaining about the income tax.
[mod edit]

 

[Sandhog]

Having a bad plan is better than no plan but I don't think it will work. I like Ron Paul idea better about flat taxes. As right with 15% payroll tax, SSI will run out by 2040 and talks of raising minimum age again. Without payroll tax with an employee and an employer paying 15% or self-employed paying 15%, sure to bankrupt SSI lot sooner than later.

We all know that we need to overhaul tax system but no one wants to pay anymore than they have too including super rich. Of course Warren Buffet is exception.

 

[sheehs1]

I don't think there are intelligent enough people at the helm of this who will be able to assure me there might not be unintended consequences of Cains' 999 plan. It very well could be good for low consumption retirement folks. Just don't know.

But...why reinvent the entire wheel...when tweaking what we have might yield the same if not better results and arguably "might" be easier to achieve than destroying an entire system.

 

[ERD50]

But...why reinvent the entire wheel...when tweaking what we have might yield the same if not better results and arguably "might" be easier to achieve than destroying an entire system.

April 15th: The joy of tax | The Economist

The federal tax code, which was 400 pages long in 1913, has swollen to about 70,000. Americans now spend 7.6 billion hours a year grappling with an incomprehensible tangle of deductions, loopholes and arcane reporting requirements. That is the equivalent of 3.8m skilled workers toiling full-time, year-round, just to handle the paperwork. By this measure, the tax-compliance industry is six times larger than car-making.

Piece of cake, just fix one page a day, and... 191 years later - all fixed!

Can you imagine Congress wrangling over every detail of every deduction, credit, measurement of income, etc? I do think we need a clean slate.

-ERD50

 

[sheehs1]

I hear you ERD50. The average citizen does not need to access all those pages of the code. They are there for "other" entities or reasons that don't involve most of us.
I'm not really bothered by the tax code itself...even with real estate and K1 small business, children (of course they are now all adults).
With all the tax software out there...it really doesn't take that long. What is time consuming for me is gathering the data...AND that certainly won't change regardless of what system we have. Still have to calculate all income from all sources.

I'm very jaded I suppose. If a 999 plan is put into affect, and if it doesn't generate the desire tax revenue, then the 999 plan becomes the 1599 plan or the 2099 plan. Either way we potentially could be left with a 9% consumption tax with the other rates going up.

 

[sheehs1]

We all know that we need to overhaul tax system but no one wants to pay anymore than they have too including super rich. Of course Warren Buffet is exception.

About Buffet. There was an article in my state paper this week-end addressing that comment he made. Reminds me that "sound bites" sound good but can be incomplete data.
Article stated that his true tax situation is closer to 45% if one takes his corporate tax rate into account for Berkshire. He quoted only his dividend income...and that may be true...but other taxes affect him thru his ownership of Berkshire that were not included in the sound bite.

 

[ERD50]

I hear you ERD50. The average citizen does not need to access all those pages of the code. They are there for "other" entities or reasons that don't involve most of us.

But they do end up affecting us. We pay the price of corporations needing to work through that complex code.

I'm not really bothered by the tax code itself...even with real estate and K1 small business, children (of course they are now all adults).
With all the tax software out there...it really doesn't take that long. What is time consuming for me is gathering the data...AND that certainly won't change regardless of what system we have. Still have to calculate all income from all sources.

Well, I certainly find it complex. There are ~ 4 different credits/deductions for education expenses, and they all have their own set of rules, can be used some years, not others, some with higher rates, but lower maxes. It's a mess. And I don't trust the programs (though I use 'em)- I've found errors in them, the kind of error no one would catch if they didn't already know enough about the tax code and manually checked things to notice. I spent a LOT of time on that one, figuring it must be my mistake - but NO, TurboTax had errors.

edit/add - oh, if no cap gains, that certainly simplifies taxes. No wash sales, cost basis tracking, etc.

I'm very jaded I suppose. If a 999 plan is put into affect, and if it doesn't generate the desire tax revenue, then the 999 plan becomes the 1599 plan or the 2099 plan. Either way we potentially could be left with a 9% consumption tax with the other rates going up

I'm jaded also, but they can jack up the rates either way. I hardly see where a simplified system makes that any more likely.

-ERD50

 

[harley]

I hear you ERD50. The average citizen does not need to access all those pages of the code. They are there for "other" entities or reasons that don't involve most of us.

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'm not really bothered by the tax code itself...even with real estate and K1 small business.
With all the tax software out there...it really doesn't take that long. What takes the longest for me is gathering the data...AND that certainly won't change regardless of what system we have.

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'm very jaded I suppose. If a 999 plan is put into affect, and if it doesn't generate the desire tax revenue, then the 999 plan becomes the 1599 plan or the 2099 plan. Either way we potentially could be left with a 9% consumption tax with the other rates going up.

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.

 

[chinaco]

If Cain becomes a serious contender and continues his standing in the polls or improves... there will be many people analyzing it closely and he will be pressed for more detail.

Its a catchy phrase.... I believe any system can work. But the devil is always in the details.

I do not know enough about it to make much of a comment. Except that there are two problems. Tax collection (the amount and who pays) and balanced spending. We are finding that one does not automatically control the other. He seems to think changing the collection mechanism will fix several related problems. I don't believe it is that simple. Plus, transitioning a catchy phrase into a well rounded and workable plan of action to solve interrelated problems will be a big challenge in many ways.

I suppose we will have to stay tuned to learn more about it.

 

[donheff]

I think the plan would actually be better for me than the current system since my pension is almost fully taxable and withdrawals will become largely taxable later on. Do the stats indicating that it would produce as much revenue as the current system assume that the current employer portion of the SS payroll tax would be converted to salaries? Fat chance of that.

 

[rescueme]

Article stated that his true tax situation is closer to 45% if one takes his corporate tax rate into account for Berkshire.

Yes, I've always said that the argument of the 15% capital gains tax never counts for the total tax paid (on the same money, thus reducing distributions) on the corporate side, nor accounting for one to take the risk to invest, or not - which cannot be quantified with a tax percentage.

He took on investment risk for his "income". His secretary (other than risk of losing her job) did not.

 

[skyvue]

I like the proposal but it has less than a zero percent chance of ever being put into practice regardless of whose plan it is. There is no way to spin this without having to admit that it would raise taxes on lower income americans while lowering taxes on the wealthiest. While it certainly is more "fair" in my opinion, nothing that raises taxes on the poorest americans has a chance of getting passed in congress. Just imagine the political commercials that would pop up agains the candidate supporting this? Just too easy to turn the masses against it.

 

[MichaelB]

Just a friendly notice that this topic is being watched closely, and any comments straying from discussion of tax proposals to political parties, candidates, etc. will result in the immediate closing and likely deletion of the thread. Thanks.

Still watching

 

[JOHNNIE36]

I was just thinking about the 9-9-9 plan, how it might be good for some folks and how it might hurt others, and maybe a revision to the current tax code might be better. 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.