Herman Cain’s 999 Plan
By Randall Holcombe • Friday October 14, 2011 12:35 PM PDT • 12 Comments
I’ve been asked a few times about Herman Cain’s 999 Plan, so here are some initial thoughts. I haven’t seen the details, and perhaps the specifics haven’t been hammered out at this point, but my information about the 999 plan comes from Cain’s website. Essentially, the plan is to replace the current federal tax system with a 9% Business Flat Tax, a 9% Individual Flat Tax, and a 9% National Sales Tax.
One criticism I’ve heard of the plan is that while it would be a tax cut for the rich, most people will pay higher taxes under Cain’s plan. This is unlikely to be true for people who are working, and spending less than their incomes. Those people would pay at most 9% of their incomes in income tax and 9% of their incomes in sales tax if they spent all of their incomes on sales-taxable items, for a total of 18% in personal taxes. But the employee and employer shares of the current Social Security Payroll tax is more than 15%, which is pretty close to the 18% in the 999 Plan. If people don’t consume their entire incomes, and don’t pay the whole 9% income tax (Cain deducts charitable contributions from taxable incomes, and would have additional deductions for those in “empowerment zones”) they would pay less than 18%, and today anybody who pays federal taxes beyond the Social Security tax already pays more than 15%. That criticism only appears to hold water for people who are consuming more than they are earning.
Another criticism I’ve heard is that the 999 Plan would generate less revenue for the federal government. Of course, some people (especially people who tend to read this blog) would not consider that to be a criticism. Let’s see how that holds up with a back-of-the-envelope calculation. Consumption is about 70% of GDP, and if that is what is taxed by the National Sales Tax it would raise 6.3% of GDP in revenue. Corporate profits are about 5% of GDP, and if that is what is taxed by the Business Flat Tax it would raise 0.45% of GDP. Labor income is about 75% of GDP and if that is what is taxed by the Individual Flat Tax it would raise about 6.75% of GDP. Add them together and the 999 plan would raise about 13.5% of GDP in taxes.
Federal tax revenues as a share of GDP are 14.4% for 2011, so even with revenues depressed as a result of the recession it appears Cain’s 999 plan would not raise as much in revenues as the current tax system. Perhaps my back-of-the-envelope calculation underestimates some revenue, and in particular the Business Flat Tax might raise more. But even if it raised twice what I estimated, that would put 999 revenues at around 14% of GDP. So, the criticism that the 999 plan would generate less in federal tax revenues appears to hold up.
The biggest issue I have with the 999 plan is that it would introduce a new national sales tax, and it is easy to envision the tax rate starting at 9% and doubling or more (which would still leave it below the Value Added Tax rates in most of the EU). Cain’s longer-term plan is to phase out the business and personal income taxes and replace it with a larger National Sales Tax. But one could easily imagine the larger sales tax along with rising rates on incomes when spending continues to be so much larger than revenues. My reservations on the 999 Plan would be mitigated if it were implemented as a result of a Constitutional amendment that would mandate that the rates not rise.
Tags: Budget and Tax Policy, Economics, Politics, Taxation 
The percentages of GDP don’t add up. If consumption is 70% of GDP, how can labor income be 75% of GDP?
Kris S. | Oct 14, 2011 | Reply
Might want to check your figures a bit. Since most people only pay half their SS tax, (and it’s a little ridiculous to assume that employers would automatically throw you a 7.5% pay raise), the average taxpayer pays less than 18% in income tax. Especially once you factor in mortgage interest deductions (gone under 9-9-9), credits for dependents (likewise), 401 (k) contributions (assuming they are no longer pre-tax) and so forth. And considering that most Americans (especially mid to lower income) don’t spend much less than they earn, it’s a dramatic tax hike on lower to middle income Americans.
Even though progressive taxation sucks, intentionally regressive taxes intended to share the tax burden downward are even worse.
Stefano | Oct 14, 2011 | Reply
People’s incomes are taxed once when they earn it, and then again when they spend it. That happens to you now. You earn your income and pay income tax on it, and then you spend the income you already paid income tax on and you are taxed again when you pay (state) sales tax.
Randall Holcombe | Oct 14, 2011 | Reply
There are a few problems I see in claiming this plan will bring in less money. The most immediately obvious is that it assumes no economic growth as a result of a simpler, and less burdensome tax code. It assumes no new businesses start, and none relocate to the US. Another possible oversight is how much in sales taxes would be collected from foreign tourists and illegal immigrants, who now would end up paying part of the tax burden. Does the data cited in this article account for them?
Nathan | Oct 14, 2011 | Reply
With the 999 plan, the rich would pay a much smaller percentage of their money on taxes.
The reason for this is that if everyone pays 9% tax on their income, the poor man would pay a MUCH larger percentage of their remaining income on taxable items than a wealthy person.
I like the simplicity of the 999 plan, but it would be better if it was just a flat 10% of income, or 10% sales tax...I know that means less money going to the Government, but they need to learn to do more with less anyway (like all of us had to do).
Drew | Oct 14, 2011 | Reply
why don1t more tv station talk about the 999 plan fox doest talk about it were it would hurt people on ss like if a married couple receive 2000 a month paying on the gross would be a lot plus they have to choose maybe between food and meds
palmer rogers | Oct 14, 2011 | Reply
And the fmr “FEDERAL” RESERVE BANK GOVERNOR! does NOT address the everpopular tool of tyrants PAPER FIAT CURRENCY...gee..wonder why!!! this Weimar Republic-like plan gets the FedGov into EVERY TRANSACTION.....and now with the technology and the GUN of the FedGov on the ear of Americans and their business, this will enable the State to CONTROL people at level undreamed of(by those of us NOT into power or ruling others)..... Cain is a shill for the Banksters...an obviously pathetic/pathetically obvious one...
Chris Bieber | Oct 14, 2011 | Reply
Stefano, don’t you think employers consider their share of the SS tax as a cost of employees just as much as wages? If wages are set by market conditions, it’s not that employers would like to give their workers a 7.5% raise if their share of the SS tax were eliminated, but rather that market forces would set wages that way. I’ll stand by my statement that the SS tax takes 15%+ from workers’ pay.
Randall Holcombe | Oct 15, 2011 | Reply
I think it is unconstitutional that we are paying income taxes at all. I wish someone would calculate how much revenue the government collects from all the 101 other taxes we now pay. and just eliminate income taxes altogether. The immediate effect would be that local and state governments would have less burden as well as businesses.People would be free to spend, save or contribute as they see fit.In the mean time, hopefully our government will learn to live on less. But only if we make our voices heard. At the ballot box.
Marge Bramschreiber | Oct 16, 2011 | Reply
@ Kris S It’s because the numbers are independent of each other. It’s not necessarily taking several slices of the same pie, it’s comparing numbers to GDP. Cumulative labor income amounts to 75% of GDP, but that doesn’t mean there’s only 25% remaining for consumption spending to amount to. Put another way, one could also compare consumption spending to individual incomes, and find that consumption amounts to 93% of income.
Cody | Oct 16, 2011 | Reply
OK Randall, I agree with you on the SS point, but what about Stephano’s second point:
I think this point is the far more compelling and most ignored by the media.
Drew | Oct 18, 2011 | Reply