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Roth fans, remember the 9-9-9 Plan?
Old 02-14-2021, 04:04 AM   #1
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Roth fans, remember the 9-9-9 Plan?

I am a huge fan of Roth accounts, including judicious use of Roth conversions, so I was intrigued but also a bit horrified by the popularity of Herman Cain’s 9-9-9 plan back in 2011. The popularity of Cain’s simple but revolutionary 9-9-9 plan should be a cautionary tale for anyone planning to convert significant portions of their tax-deferred retirement savings.

Cain’s proposal was to replace current payroll, income, capital gains, and estate taxes with a “flat” 9% personal income tax, 9% federal sales tax, and a 9% corporate income tax. The idea was very popular with voters.

Some ideas and questions to consider...

What if in the future Congress significantly LOWERS personal income tax rates, however unlikely that may be, and then your Roth conversion gets taxed AGAIN with a new federal sales tax when you or you heirs spend the money?

Why do we tax income, especially wages, in the US so heavily vs consumption anyway? Many countries in Europe have a 20-24% VAT. Are we trying to discourage hard-working people from earning a living? Many people in the US are struggling financially. Income and wealth inequality are increasing. The natives are restless and some are revolting. There’s a growing sense of discontentment that the economy is rigged against the working class.

Additionally, the so-called “shadow economy” is around 10% of the US GDP. This is that neighbor of yours who gets paid under the table for his all-cash side business as well as anyone who is paid for an illegal product or service. Wouldn’t it be more fair if the money flowing through the shadow economy was taxed when it gets spent?
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Old 02-14-2021, 05:09 AM   #2
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I have considered this also, but I think it more likely that income taxes would stay at the level they are and a sales tax added.

I also believe that there would be pushback calling consumption tax as regressive when most call for a progressive tax system. I guess you could have a proposal that raised the standard deduction and added a sales tax that could be sold as an offset for the lower income.

I don't have any idea on the odds of a federal sales tax and agree it would probably be more expensive if combined with a lowering of existing income tax. I'll take the chances and continue to do Roth conversions. I can only make the best decision with available information today.
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Old 02-14-2021, 05:42 AM   #3
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My concern with a Federal sales tax is they would get it passed by starting it at a small number to get their foot in the door, then the numbers start increasing. Didn’t the income tax start at 3% for those making over $25,000 back when $25,000 was a lot of money?
I doubt implementation of a Federal sales tax would reduce significantly any income tax.
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Old 02-14-2021, 06:34 AM   #4
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This-I've watched the VAT in Europe go from 6% to 21%. This VAT is on top of the income taxes and other fees. They say it is charged all along the production stream, but as always, those taxes are pushed down to the buyer/consumer.

It's too lucrative for the politicians. In any case, we already have a VAT in the USA. It's called a sales tax and rates are set locally either by city, county or state.

Remember, most US States are the size of a European country. Each EU country has a different VAT percentage, but most are double digits. From a scale perspective, we should compare a US state to an EU country and the USA to the EU. The EU is a fairly loose federation, versus a republic like the USA.
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Old 02-14-2021, 07:50 AM   #5
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Quote:
Originally Posted by InvestWisely View Post
I am a huge fan of Roth accounts, including judicious use of Roth conversions, so I was intrigued but also a bit horrified by the popularity of Herman Cain’s 9-9-9 plan back in 2011. The popularity of Cain’s simple but revolutionary 9-9-9 plan should be a cautionary tale for anyone planning to convert significant portions of their tax-deferred retirement savings.

Cain’s proposal was to replace current payroll, income, capital gains, and estate taxes with a “flat” 9% personal income tax, 9% federal sales tax, and a 9% corporate income tax. The idea was very popular with voters.

I remember this plan. What I don't remember was it being all that popular. What do you have that supports this claim? If it were so popular, why has no other politician talked of this since?

Yes, something like this could happen. I don't put the odds very high. I'm not holding up conversions on the possibility it could happen.
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Old 02-14-2021, 08:13 AM   #6
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Like someone said, you can only plan the future with the information available today. My strategy has always been to try and distribute my nest egg into 3 buckets equally: Pre-tax, post-tax and Roth. This should give me enough flexibility if and when tax laws/rates change.
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Old 02-14-2021, 08:33 AM   #7
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Originally Posted by InvestWisely View Post
....Some ideas and questions to consider...

What if in the future Congress significantly LOWERS personal income tax rates, however unlikely that may be, and then your Roth conversion gets taxed AGAIN with a new federal sales tax when you or you heirs spend the money?

Why do we tax income, especially wages, in the US so heavily vs consumption anyway? Many countries in Europe have a 20-24% VAT. Are we trying to discourage hard-working people from earning a living? Many people in the US are struggling financially. Income and wealth inequality are increasing. The natives are restless and some are revolting. There’s a growing sense of discontentment that the economy is rigged against the working class.

Additionally, the so-called “shadow economy” is around 10% of the US GDP. This is that neighbor of yours who gets paid under the table for his all-cash side business as well as anyone who is paid for an illegal product or service. Wouldn’t it be more fair if the money flowing through the shadow economy was taxed when it gets spent?
I agree that a shift to a VAT or natio sales tax would hurt Roth savers but it would capture more taxes from the shadow exonomy.

At the same time, I would not favor a VAT tax or national sales tax because it is regressive.

Now let's say that a $50k single person spends $45k to live and saves $5k. A 9% VAT would collect $4,5004,050 and a 9% income tax would collect $4.500 for a total of $9k8,550... 1817.1% of income.

Now let's say that a $100k single person spends $75k to live a nicer lifestyle because of their higher income and saves $25k... a 9% VAT would collect $6.750 and a 9% income tax would collect $9k for a total of $15,750... 15.8% of income.

Seems regressive to me... the lower income person is being taxed more heavily (1817.1%) than the higher income person (15.8%).
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Old 02-14-2021, 08:38 AM   #8
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Originally Posted by pb4uski View Post
Now let's say that a $50k single person spends $45k to live and saves $5k. A 9% VAT would collect $4,500 and a 9% income tax would collect $4.500 for a total of $9k... 18% of income.

Now let's say that a $100k single person spends $75k ... 15.75% of income.

Seems regressive to me... the lower income person is being taxed more heavily (18%) than the higher income person (15.8%).
Slightly off. 9% of $45000 spending is $4050 VAT, resulting in a total of 17.1% for the lower income person. Still regressive. I agree this probably wouldn't fly.
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Old 02-14-2021, 08:40 AM   #9
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Slightly off. 9% of $45000 spending is $4050 VAT, resulting in a total of 17.1% for the lower income person. Still regressive. I agree this probably wouldn't fly.
You're right, I goofed the numbers. Fixed it.
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Old 02-14-2021, 08:43 AM   #10
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There could be a rebate in the tax code for Roth spending. You document the VAT you paid and document the Roth withdrawal, and get a kickback. This would only be logical if the federal income tax burdon was significantly reduced, and I don't see that happening. Show me cases in history where once they had their claws in it, they relinquished their grasp.
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Old 02-14-2021, 08:47 AM   #11
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I prefer fewer ‘levers’ for politicians to play with.
I live in Texas and we only have property taxes and sales tax. Both are highly visible to tax payers, so changes will often cause pushback.

If we added a third option, then I could see them saying ‘we have not raised ‘income’ taxes for 3 years’
Of course next year it will be the same just for ‘sales’, then ‘property’, then repeat the cycle again.

Keep in mind, most politicians have to run about every 2 years.

Given that, I would oppose letting the federal government start taxing us with sales or property taxes.
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Old 02-14-2021, 08:47 AM   #12
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There is no "seems", it is totally regressive and I don't see it flying in any form in the US. I do understand the question as an exercise in what if's.
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Cain was the GOP front-runner in 2011 until rumors destroyed his chances
Old 02-14-2021, 09:05 AM   #13
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Cain was the GOP front-runner in 2011 until rumors destroyed his chances

Reference: https://en.wikipedia.org/wiki/Herman...ntial_campaign

Side note... In college I took an accounting course. The textbook had a direct quote from the government about a new payroll tax to support the nascent Social Security program. It said something like “1%, that’s the most you will ever pay”. Well, we know how that worked out. If the US ever does implement a national sales tax, maybe it would happen with a similar broken promise, but I hope not. People don’t like being lied to.

I am doing modest Roth conversions myself as a hedge against higher future income taxes. Currently, Roth savings make up around 17% of my retirement savings. I’m shooting for 25-30%. I’m also growing my HSA as fast as I can.

One way or another, I believe higher taxes are coming and clever politicians will need to get creative in order to sell any future tax increases to voters. Washington got the memo after George H. W. Bush’s disastrous “Read my lips, no new taxes” comment.
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Old 02-14-2021, 09:38 AM   #14
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I don't think future tax laws can be predicted any better than future returns. Tax diversification should be part of one's asset allocation strategy, just as diversifying amongst different asset classes is.
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Old 02-14-2021, 10:27 AM   #15
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I could get behind a VAT with a flat income tax (with deduction). I think the 9-9-9 is a bit off the mark though. I haven't crunched any numbers to see what the delta would be for federal income, and I don't plan to. Something along the lines of a 12-15% income tax on both individuals and companies with a $15-$20K flat deduction for individuals and a 1-5% VAT on non-food and non-drug items. That way those in the lower income group would pay no income taxes and the VAT wouldn't be too much of a burden.

I do believe that every citizen/ resident should pay some amount of tax.

That said, I am currently trying to get eBay to reduce the sales tax they charge me. I have a zip code assigned to a city that has a 1% sales tax. However, I live outside of the city limits (by a few feet). I was successful at getting the sales tax rate reduction with Amazon.
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