Our Take on the Herman Cain 9-9-9 Plan

Herman Cain and his 9-9-9 Plan have received considerable attention over the past several weeks. Cain’s plan has been lauded for its simplicity and transparency while at the same time derided for its lack of detail and the perception that it will be insufficient to collect the revenue of the taxes it would replace. The 9-9-9 Plan is intended to be a transition to the “Fair Tax”, a national sales tax that would replace all income, payroll, self-employment, estate and gift taxes. Here are the basics from Mr. Cain’s website:

9% Business Flat Tax

The business tax is assessed on the gross income of businesses minus purchases from U.S. located businesses, capital expenditures and net exports. Additionally, payroll deductions will be offered to businesses that employ workers in Empowerment Zones, or designated economically-distressed areas.

Our Take: The key selling features of Cain’s tax plan are simplicity, transparency, and neutrality.  With the business tax provision, these principles are compromised.

If gross income is defined as “revenue from operations”, then this element of the equation is relatively straightforward. The subtractions from gross income to compute the taxable base are less so. If a U.S. business purchases inventory from a U.S. distribution facility owned by a foreign manufacturer, does the taxpayer receive a deduction? What if the inventory is manufactured overseas but assembled and sold in the U.S.? This provision has the makings of an enforcement nightmare.

Additionally, Mr. Cain’s website chastises the current tax regime for picking winners and losers (which it does), but the 9-9-9 Plan favors inventory-driven businesses (via the purchases deduction) over service-oriented businesses whose largest expense, payroll, would be non-deductible unless the businesses are located in a designated Empowerment Zone.

We also question the applicability of the business tax on entities, such as S corporations and partnerships, which pass through items of income, deduction and credit to its owners. The transition issues stemming from a conversion to this tax regime are too numerous to list.

9% Individual Flat Tax

The individual tax is assessed on gross income less charitable deductions. Additional deductions are allowed for taxpayers that live and/or work in designated Empowerment Zones.

Our Take: One could argue that the retention of the charitable contributions deduction is an example of the kind of tax handout that Cain criticizes. However, the feature that causes us the greatest pain is that a flat tax with no exemption amount (except as may be provided in the Empowerment Zones) is bad policy for lower income taxpayers. A 9% tax levy on a household that is struggling to meet basic needs has a far more negative impact on that household than the same percentage levy on a family living more comfortably. A progressive rate system with an exemption amount tied to poverty statistics would not overly complicate the system.

9% National Sales Tax

Mr. Cain’s website does not provide much detail on this provision, but we assume that the tax would be levied against business and individuals. Mr. Cain clarified in a recent interview that the tax would apply only to the purchase of new goods.

Our Take: A lower-income household outside of a designated Empowerment Zone that uses all of its income to cover basic needs will see a large percentage of its income diminished by a 9% individual income tax, a 9% national sales tax, and the prevailing state/county/local sales tax. In a high sales tax state like Alabama where combined sales tax rates are currently as high as 12%, an extra 9% is punitive. The “Fair Tax” does offer a prebate system that has the effect of exempting spending up to the poverty level. While not articulated on Mr. Cain’s website, his 9% national sales tax may contain a similar provision.

About Trey Whitt

I am a CPA and tax professional with the firm of Dent, Baker & Company, LLP serving closely-held businesses and individuals in Birmingham, Alabama and surrounding areas. I primarily focus on professional services industries that include medical practices, dental practices, engineering firms, and advertising agencies.
This entry was posted in Federal Deficit Reduction, Federal Tax Legislation, Taxation. Bookmark the permalink.

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