9 Responses To 9 False Attacks On The 9-9-9 Plan

Business corporate taxes are reduced from 18% to 9%. The effective 35% individual income tax rate is reduced to 9% and there is a 9% national sales tax. Its a tax applied once to those who pay it and no one pays taxes twice.

Trying to compare the 9% tax corporate tax proposed by Mr. Cain with the existing corporate income taxes is not that simple since two completely different definitions of income are used. For the present corporate income tax, almost all of the corporation's expenses are deductible, but under Mr. Cain's plan very few expenses are deductible. For example, salaries are deductible expenses to a corporation now, but they are not under Mr. Cain's plan.

If, as I believe you are saying, the sales tax is truly a "first end user" tax, meaning it does not apply to goods bought for resale or goods that are sold used, then there will have to be a tremendously complex reporting and enforcement methodology. For example, if you buy materials to build a garage next to your house, are the materials taxed or not? If you intend to use the garage, then presumably they are. If you intend to sell it, then they should not be. But if you built the garage from parts, then when you sell it a sales tax should be due, right? Note that this is exactly what happens in a business that builds things. So if everything is taxed once, and the 9% sales tax is not a VAT in disguise, then you should be able to buy goods for resale without paying the tax. Including the parts you need to build that new garage, right?

Alternatively, the tax would be paid on the parts, but not on the finished good. Which would mean GM would pay the sales tax on all the car parts it bought, but not you at the dealership.

This is why states that have retail sales taxes have elaborate exemptions for businesses that resell goods. And then even more elaborate audit and enforcement schemes to make sure goods bought without paying the tax are really meant for resale.

So if a business had a billion dollars in what Cain classifies as taxable revenue and $100 million in profits then it's tax bill is $90 million dollars. If the business has a billion in those revenues and $100 million in loses then its tax bill is still $90 million dollars. How is that good for business?

You have identified one of the many issues with the 9-9-9 plan. Since presumably the 7.65% FICA and 1.45% Medicare payroll taxes are repealed under Mr. Cain's plan (if not its a giant tax increase) the employer sees a .1% reduction in payroll taxes for most employees earning less that $105,000. This is because the corporation cannot deduct payroll as an expense, so it pays 9% on its total payroll under Mr. Cain's plan but it currently pays 9.1% on the first $105,000, and then 1.45% above that.

So if the company in question has a high payroll, then its tax burden is about the same. Note however that it can deduct all purchases from other corporations. So if, instead of having a large payroll it buys all of its goods from a Chinese corporation, then it saves $90 million in taxes. So while the 9-9-9 tax plan may not change much for the corporation, it will lead to a faster migration of jobs out of the country.

A smart company will outsource everything to foreign suppliers and invest the tax savings in those companies.

Since presumably the 7.65% FICA and 1.45% Medicare payroll taxes are repealed under Mr. Cain's plan (if not its a giant tax increase) the employer sees a .1% reduction in payroll taxes for most employees earning less that $105,000. This is because the corporation cannot deduct payroll as an expense, so it pays 9% on its total payroll under Mr. Cain's plan but it currently pays 9.1% on the first $105,000, and then 1.45% above that.

The problem with that is that under 9-9-9 Cain claims that the whole cost of FICA is borne by the employees and not split between them and the corporation. That's the only way he can claim that his flat tax and sales tax are not a tax increase for individuals. You can't have it both ways, so in Cain's world the corporation passes on the FICA savings to the employees as salary increases, and gets taxed on them anyway.

Note however that it can deduct all purchases from other corporations.

Only if those goods were manufactured in the U.S. Which brings us an interesting problem; what do you do with purchases that were assembled in the U.S. from imported parts. Do you deduct, not deduct, or partially deduct?

A smart company will outsource everything to foreign suppliers and invest the tax savings in those companies.

It may well hasten that, yes.

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