Roth fans, remember the 9-9-9 Plan?

[InvestWisely]

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?

[RetireBy90]

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.

[Dash man]

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.

[deserat]

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.

[RunningBum]

Quote:

Originally Posted by InvestWisely 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.

[pjigar]

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.

[pb4uski]

Quote:

Originally Posted by InvestWisely ....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%).

[RunningBum]

Quote:

Originally Posted by pb4uski 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.

[pb4uski]

Quote:

Originally Posted by RunningBum 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.

[sengsational]

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.

[thod]

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.

[skyking1]

@pb4uski
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.

[InvestWisely]

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.

[Which Roger]

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.

[CRLLS]

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.

[FIREchief]

Quote:

Originally Posted by RunningBum I remember this plan. What I don't remember was it being all that popular.

It wasn't popular with mainstream voters. It went over about as well as Forbes' flat tax, once people who made less figured out that their taxes were going to increase. Let's face it, the majority of Americans have very little idea of how the progressive tax structure works, or even how basic math (i.e. percentages) works.

[PoorOldCountryBoy]

Politicians are far too crafty to tax you again on Roth income. Tsk.


But when it comes to rationing other benefits like Medicare (HSA anyone) or Social Security, there will likely come a day very soon when "Roth IRA millionaires" will be asked to pay "their fare share" and "burden share to do their part".


...and the horse they rode in on.

[ncbill]

Quote:

Originally Posted by FIREchief It wasn't popular with mainstream voters. It went over about as well as Forbes' flat tax, once people who made less figured out that their taxes were going to increase. Let's face it, the majority of Americans have very little idea of how the progressive tax structure works, or even how basic math (i.e. percentages) works.

Yep, at my HH income I'd pay less in state income taxes in California than I pay in my current state with its 5.25% flat tax.

[jollystomper]

I do not remember the Roth 9-9-9 plan, so it must not have been popular .

Look, from my view the bottom line with taxes (not a rant, just a humorous observation):

- The more complex they are, the more they can be leveraged by politicians and/or powerful people of any ilk, so do not expect any simplification. It would be like politicians in office voting for term limits for themselves .

- "Income inequality" (which some view as "those making whatever I consider is ginormous amounts of money, made all of it unfairly in a rigged system") the deficit, and the belief that money is the solution to everything (The Temptations sang in best in 1970: "Politicians say more taxes will solve everything.. and the band played on" ) will result in more taxes.

- More taxes may not only "vertical" (high rates of existing taxes) but horizontal as well. There are a lot of things that are not taxed than can be. In addition to VAT, a "wealth" tax and a "mileage" tax are also being floated around. That is probably the tip of the iceberg.

- Roth may not be taxed directly, but indirectly. For example, whatever you have in a Roth reducing Medicare/SS benefits.

The successor to Bush's "read my lips, no new taxes" is "read my lips, no new taxes on you, we will just tax others, or we will call it a 'fee' '" . Most folks are fine with others paying taxes that they do not have to (case in point for this group is the ACA subsidy ). So, to bring it back to this topic for every vehicle that enables you to save taxes, expect sooner or later another vehicle to balance it out the other way.

[braumeister]

Thanks for the interesting discussion.

https://www.youtube.com/watch?v=gBzJGckMYO4