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

[ziggy29]

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.

Yep -- people can talk about balancing the budget with tax hikes and spending cuts until the cows come home. But ONLY if they raise everyone else's taxes and don't touch spending that benefits me. Otherwise I scream bloody murder...

 

[samclem]

[/LIST]
Yep -- people can talk about balancing the budget with tax hikes and spending cuts until the cows come home. But ONLY if they raise everyone else's taxes and don't touch spending that benefits me. Otherwise I scream bloody murder...

For sure. Yet, looking back over various discussion topics on this board, folks of most political stripes voiced support for the Simpson-Boles plan. Nobody loved it, but most thought it good enough. That was either because it was (of necessity) short on specifics, but also likely because it was all-encompassing enough that everyone could see that everyone would be making some sacrifices. This 9-9-9 thing might be the same, though I think there will have to be a "sweetener" to offset some of the pain at lower income levels.
Idea: If we want to spend money on the poor, maybe just do the straightforward thing and spend it rather than give benefits via tax exemptions, etc. This makes clear that everyone has an obligation to support the government. Likewise with supporting various initiatives, businesses, social causes, etc. It's simpler, more honest, and (as we now see from our tax code, compliance costs, drag on businesses, etc) less expensive to just spend the money than to complicate the tax code with this cr*p. I don't know how that would affect ERs, it probably depends a lot on income level.

Sometimes a big change is actually easier to do than a small one. Or hundreds of small ones.

 

[MichaelB]

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.

Right

Yep -- people can talk about balancing the budget with tax hikes and spending cuts until the cows come home. But ONLY if they raise everyone else's taxes and don't touch spending that benefits me. Otherwise I scream bloody murder...

Right again.

 

[JOHNNIE36]

Reading through all the posts, I saw it mentioned quite a few times about "us seniors" consuming less as we get older. Y'all haven't met my wife. I said before that she has taken it on as her personal responsibility to bring this country out of the recession. She's not been doing a very good job, but she continues to work on it.

 

[harley]

I'm questioning the 9% sales tax component. It seems like an opportunity for numerous cash transactions going on below the table and avoiding the tax. The one thing about the VAT (although not my favorite form of tax) is that since it's being added to at each step it gives incentive to pass it on to the next level. I'm not sure how easy it would be to avoid the tax with cash when buying products, but a huge opportunity exists to avoid it when paying for services. Which also would effect the 9% income tax. Assuming services would be taxed as sales.

 

[samclem]

I'm not sure how easy it would be to avoid the tax with cash when buying products, but a huge opportunity exists to avoid it when paying for services.

I'm sure there would be some of that. The 9% rate isn't much different from the sales tax rate already in existence in some localities, so there may already be good data on expected noncompliance rate at this level. My guess is that the problem would be biggest with very small businesses.
Maybe offer a reward program for customers who report those who don't collect the tax? I don't know how you find merchants who collect the tax but don't forward it to the govt.

 

[ziggy29]

I'm sure there would be some of that. The 9% rate isn't much different from the sales tax rate already in existence in some localities, so there may already be good data on expected noncompliance rate at this level.

Except that in this case, noncompliance wouldn't be trying to avoid (say) only an 8% state sales tax. It would be trying to avoid a combined 17% sales tax. You may not jump through hoops or risk potential tax evasion charges for 8%, but you might start getting tempted at 17%.

We may know how many people would try to circumvent an 8% sales tax, but the amount who would do it for 17% is certainly higher. How much higher? It's uncharted territory, at least here; you might have to look at places that charge a VAT in that vicinity.

 

[harley]

I'm sure there would be some of that. The 9% rate isn't much different from the sales tax rate already in existence in some localities, so there may already be good data on expected noncompliance rate at this level. My guess is that the problem would be biggest with very small businesses.
Maybe offer a reward program for customers who report those who don't collect the tax? I don't know how you find merchants who collect the tax but don't forward it to the govt.

That's what we need, a tax revenue system based on narc'ing. I hope there's a better way. The VAT format would work, but I'm not sure how you make sure it comes out to 9% at the final step. I'm sure somebody smarter than me can find a solution, though. Maybe send the army of unnecessary IRS agents out doing spot checking. Secret police is still a step up from citizens reporting on each other.

 

[samclem]

Except that in this case, noncompliance wouldn't be trying to avoid (say) only an 8% state sales tax. It would be trying to avoid a combined 17% sales tax. You may not jump through hoops or risk potential tax evasion charges for 8%, but you might start getting tempted at 17%.

Which brings up the issue of the knock-on effect to state and local taxes. Most states now have an income tax. If something like Cain's plan were to pass, most people wouldn't need to file a federal tax return. I'm guessing the states would be under tremendous pressure to modify their own systems so a return wasn't required--probably they'd just add their own 3-4% income tax and let the same collection mechanisms do the work as for the federal taxes. Regarding state sales tax rates--would they decline? Seems likely, if they decide to shadow the federal sales tax system as they do now with income taxes. Cain's plan taxes all purchases of services and new items (incl food, medicine, tuition, rent, etc--all the "we can't tax that!" items). If states broadened their tax base in this way, their tax rates could come down a lot with no loss of revenue. And, given that the income tax would be so easy to collect (very little paperwork, etc), states might choose to shift some to that form of taxation. All the same applies to localities. So, maybe another 4-5% state/local tax tacked on to the federal sales tax? It doesn't sound like a deal breaker.

 

[samclem]

Secret police is still a step up from citizens reporting on each other.

There's always somebody trying to squash the little folks who are just trying to make a buck and do their civic duty!

 

[ziggy29]

So, maybe another 4-5% state/local tax tacked on to the federal sales tax? It doesn't sound like a deal breaker.

Well, Canada certainly has that with GST and PST -- but Canada has a different set of social expectations and services than the US so that won't necessarily mean it would work here.

 

[Hamlet]

I'm sceptical that this plan would bring in anything close to the current revenue.

The numbers I've seen having it coming in well below what we currently collect (which is giving us trillion dollar deficits). Add in what I would expect to be a massive increase in sales tax fraud and I think plan would be an utter failure.

I am also leary of giving the Feds another means of collecting taxes. I think a national sales tax is a bad idea.

 

[jdw_fire]

I am also leary of giving the Feds another means of collecting taxes. I think a national sales tax is a bad idea.

+1

and a sales tax has the added disadvantage of impacting lower income people harder than higher income people

 

[ziggy29]

and a sales tax has the added disadvantage of impacting lower income people harder than higher income people

There are easy ways around this. One is to "rebate" a certain amount of money each year to offset the first $X paid in sales taxes. If one wanted to "exclude" the first $10,000 of taxable sales a year, you could provide a household with a $900 "rebate" or tax credit if the tax rate is 9%.

Another way to do is to simply exempt many of the necessity items from sales tax like food, medicine, et cetera. (Many states do exempt many of these things). Since the lower income people disproportionately buy these "staples" they would be spending most of their money on tax-exempt items. This is the most common way (currently) to prevent the sales tax from becoming too regressive.

 

[ERD50]

+1

and a sales tax has the added disadvantage of impacting lower income people harder than higher income people

I addition to ziggy's response - I'm curious if/how Cain's program addresses this. It could be just based on the standard deduction? Oh, and in 'fair-tax' terminology, they refer to the rebate as a 'pre-bate', you would get it each month. The idea being that it offsets the tax for basics. Remember, most of it is already effectively offset by eliminating the payroll tax.

The problem in exempting items like food, is then you get into angel-pin microscope arguments over what is 'food'. Lobster, fast-food, candy (no, that's a health-nut, energy bar!),soda-pop versus a 'health drink', ad infinitum.

I always get a kick out the fact that the ingredients I buy to make beer are taxed at the lower 'food' rate here in IL. They are food (grains, sugars, spices, herbs) until I brew them up into a beverage that would be heavily taxed if I bought it at retail. Occasionally, I do bake with them (the grains are nice in bread, malt extract can be really yummy in a cake).

-ERD50

 

[samclem]

I addition to ziggy's response - I'm curious if/how Cain's program addresses this.

Nope, Cain's plan doesn't have a pre-bate or exclusions for staple items. If you buy a service or new item, the tax is 9%. Of course, if we start excluding items, the required tax rate goes up if we need to raise the same revenue. And with the higher rate comes more cheating, etc. With excluding items comes the whole arbitrariness about what constitutes a staple.

I think the underlying, unstated premise is that we all need to contribute materially to support the common functions our government performs on our behalf (as the President says, we all need to have skin in the game). It's 9% of what you earn, 9% of what you spend. If (as a nation) want to redistribute wealth to the poor, then there should be a mechanism to do that in a deliberate way--outside of the tax code.

Used items aren't subject to this retail sales tax. That's a great way for poor people (or anyone else) to avoid such a tax on clothing, cars, appliances, etc. (Hey, and a great way to discourage the early scrapping of useful objects!)

 

[jdw_fire]

There are easy ways around this. One is to "rebate" a certain amount of money each year to offset the first $X paid in sales taxes. If one wanted to "exclude" the first $10,000 of taxable sales a year, you could provide a household with a $900 "rebate" or tax credit if the tax rate is 9%.

Another way to do is to simply exempt many of the necessity items from sales tax like food, medicine, et cetera. (Many states do exempt many of these things). Since the lower income people disproportionately buy these "staples" they would be spending most of their money on tax-exempt items. This is the most common way (currently) to prevent the sales tax from becoming too regressive.

I addition to ziggy's response - I'm curious if/how Cain's program addresses this. It could be just based on the standard deduction? Oh, and in 'fair-tax' terminology, they refer to the rebate as a 'pre-bate', you would get it each month. The idea being that it offsets the tax for basics. Remember, most of it is already effectively offset by eliminating the payroll tax.

The problem in exempting items like food, is then you get into angel-pin microscope arguments over what is 'food'. Lobster, fast-food, candy (no, that's a health-nut, energy bar!),soda-pop versus a 'health drink', ad infinitum.

I always get a kick out the fact that the ingredients I buy to make beer are taxed at the lower 'food' rate here in IL. They are food (grains, sugars, spices, herbs) until I brew them up into a beverage that would be heavily taxed if I bought it at retail. Occasionally, I do bake with them (the grains are nice in bread, malt extract can be really yummy in a cake).

-ERD50

my thought (just about the regressive nature of a sales tax) is that if you do something to make it less regressive (as suggested above) the rate will have to be increased to make the change in the tax system revenue neutral. so much for 9-9-9.

that being said, of equal importance to me is that i still dont want to open up a new means of taxation to the federal government, as i am sure it will be abused in the future.

btw, since FICA goes away, would this change appropriately fund SS and how would the SS benefit be computed in the future?

 

[kjpliny]

VAT

I don't like the idea of a VAT or national sales tax because if it like the current sales tax in my state, items put up for resale are taxed again each time they are transferred. For example, if you buy a new car for 30k, with a 15% combined VAT/Sales tax, you're paying $4500 in taxes.

Then if you decide to sell the car 2 years later, the new buyer pays tax again (must be reported via the form from DMV). So they take another $2-3k in taxes. And on it goes...

How this is even legal is beyond me...they already got their taxes on the first sale. Thieves I tell you, thieves.

 

[ERD50]

my thought (just about the regressive nature of a sales tax) is that if you do something to make it less regressive (as suggested above) the rate will have to be increased to make the change in the tax system revenue neutral. so much for 9-9-9.

Mathematically, that is certainly correct. I need to read through the details, but it sounded to me that this was already taken into account, and it is supposed to bring in the same overall revenue. And with the elimination of payroll taxes (6.2 +1.45%), there isn't much to make up (9-7.65= 1.35%). I need to look at what they did with the 'standard deduction'.

that being said, of equal importance to me is that i still dont want to open up a new means of taxation to the federal government, as i am sure it will be abused in the future.

I'm plenty abused with the present system. I would think dropping all those exemptions & loopholes would make any abuse more obvious.

btw, since FICA goes away, would this change appropriately fund SS and how would the SS benefit be computed in the future?

Again, I gotta read the details, but I believe he looked at total taxes. Since there is no actual 'lockbox', it's all fungible. Revenue is revenue, whether it has a FICA label on it or not (which is true today).

-ERD50

 

[jdw_fire]

my thought (just about the regressive nature of a sales tax) is that if you do something to make it less regressive (as suggested above) the rate will have to be increased to make the change in the tax system revenue neutral. so much for 9-9-9.

Mathematically, that is certainly correct. I need to read through the details, but it sounded to me that this was already taken into account, and it is supposed to bring in the same overall revenue. And with the elimination of payroll taxes (6.2 +1.45%), there isn't much to make up (9-7.65= 1.35%). I need to look at what they did with the 'standard deduction'.

i am not following your response. i was talking about making the sales tax part of 9-9-9 less regressive (by either excluding classes of items from taxation or providing a rebate/prebate to everyone) and you seem to be talking about the income tax part of 9-9-9. how does your comment relate to mine?

I'm plenty abused with the present system. I would think dropping all those exemptions & loopholes would make any abuse more obvious.

and "dropping all those exemptions & loopholes" from the income tax code does not require starting a national sales tax (again what i was commenting on)

 

[ERD50]

i am not following your response. i was talking about making the sales tax part of 9-9-9 less regressive (by either excluding classes of items from taxation or providing a rebate/prebate to everyone) and you seem to be talking about the income tax part of 9-9-9. how does your comment relate to mine?

Sure, I was just looking at it overall. IOW, if an estimated $1,000 adjustment is made to the average sales tax by excluding certain items, or by giving a pre-bate, or by increasing the standard deduction by an equivalent amount - it's all the same to the individual.

and "dropping all those exemptions & loopholes" from the income tax code does not require starting a national sales tax (again what i was commenting on)

True. But it's part of the plan, and has certain advantages. As others have said - 9% in 2 different areas reduces the motivation to cheat, as the max benefit is 9%. A high rate in any one increases the motivation. Sales Tax also at least captures some current illegal/unreported activity.

-ERD50

 

[samclem]

The WSJ will run a short editorial on Cain's 9-9-9 plan in tomorrow's paper. In part:

. . . Mr. Cain's 9-9-9 plan would certainly help the economy, but its political flaws may well be fatal.
. . . The plan is designed to raise as much revenue as the current tax code, and the Heritage Foundation estimates it would not increase the budget deficit.

The plan's chief virtue is its sharp reduction in marginal tax rates, to 9% from 35% for businesses and top-earning individuals. Another benefit is that it would eliminate the current double taxation on savings and investment. When this is combined with expensing of capital investment and the sales tax on retail sales, Mr. Cain's plan would in effect convert the federal tax system into a de facto consumption tax.
In an instant, the U.S. would have the lowest corporate tax rate among our major trading partners, from the second highest today. All of this would provide a significant boost to U.S. domestic investment and global business competitiveness. If Americans want more jobs, this plan would produce them in a hurry.
The simplicity of 9-9-9 is also a selling point, as is its elimination of loopholes. Businesses, for example, would deduct all of their legitimate business expenses (except wages paid) from their gross receipts. The provisions that have allowed companies like General Electric to pay little or no federal income tax would be gone.

They liked the plan--it's design, the expected impact in the economy, etc. But then:

The real political defect of the Cain plan is that it imposes a new national sales tax while maintaining the income tax. Mr. Cain's rates are seductively low, but the current income tax was introduced in 1913 with a top rate of 7% amid promises that it would never exceed 10%. By 1918 the top rate was 77%. European nations began adopting national sales and value-added taxes on top of their income taxes in the 1960s . . . tax rates usually started at less than 10%, but in much of euroland "the rates have nearly doubled and now are close to 20%," according to a study by the Cato Institute's Dan Mitchell. . . .
. . . Better to reform the devil we know—the income tax—than to introduce another devil and end up with ever-rising rates of both.

Hmm. Seems there might be some way to put a leash on the monster we might be creating, either in the law itself or with a mechanism that puts another check/balance into the mix. I agree the opening of this new revenue stream is a potential problem.

 

[retire@40]

...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...

And with no IRS, who would enforce the tax plan?

 

[Bestwifeever]

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.

So th... th... th...at's all:

Porky Pig Cartoon Ending "That's All Folks!" - YouTube