Parsing the 9-9-9 Plan

Recently, political pundit Dick Morris makes a compelling case for the 9-9-9 Plan – which was recently endorsed by supply-side guru Art Laffer – while acknowledging the downside of its impact on the working poor.  Morris is not a concerned by the fact that it creates another revenue stream for the federal government or that the possibility for tax hike mischief doubles – and I’m inclined to agree with him. What most folks fail to take into account is the fact that Cain’s plan is predicated on the repeal of the 16th Amendment, thereby establishing a transparent tax structure that affects almost all Americans.

Morris points out that

  • Americans now earn $12.5 trillion of personal income. Tax it at 9 percent with no deductions and you generate about $1.125 [trillion].
  • We spend $10.3 trillion. A 9 percent [sales] tax would yield about $927 billion.
  • Net corporate income (after dividends) is $1.1 trillion. A 9 percent levy would generate $100 billion.
  • That comes to $2.152 billion, about the same as our actual revenues of $2.162 billion for fiscal 2010.

And then, when you factor in the economic growth this plan will engender, the scenario becomes even better.

Liberals worry that the tax would shift the burden from the rich to the middle class. No, sir. Americans making $50,000 to $60,000 a year now pay an average of 6 percent of their income in income taxes. But they also pay 6.5 percent in FICA levies and 2.9 percent in Medicare payroll taxes (a total of 15.4 percent). The Cain proposal would replace these with a flat 9 percent, saving them 6.4 percent.

Of course, the middle class would also have to pay a 9 percent sales tax, but it would be largely offset by the savings in their payroll taxes.

Cain says that competitive pressures would hold down prices and force businesses to eat much of the 9 percent sales tax. Employers would not have to pay their 6.5 percent share of payroll in Social Security taxes, and their corporate taxes would be cut. For commodities with high price elasticity — like cars — competition will hold down prices. But for inelastic purchases — like food and drugs — some of the tax would probably be passed on. For the middle class? It’s a wash.

I’m studying the 9-9-9 Plan and have reservations about a national sales tax, which when combined with a national flat tax results in a creature that is neither fish nor fowl. If I had my druthers, I’d repeal the 16th Amendment and replace it withmy “Bulldog 10-10-5-1 Plan:” a flat 10% tax on business income, a flat 10% tax on all household income over $50,000 per year, a flat 5% tax on all household income between $25,000 and $49,999 and a flat 1% tax on all incomes between $0 and $24,999. No exceptions and no deductions whatsoever.

As it currently stands, our tax structure falls disproportionately on the shoulders of a little over half of all wage-earning households; roughly 47% pay no federal income tax whatsoever and therefore have no proverbial skin in the game. If anything, they are incentivized to vote for those legislators and executives who maintain the status quo or wage class warfare against the “rich” in an effort to increase their tax burden.

For that reason I cringed when Herman Cain’s primary opponents caterwauled that taxes would increase for most poorer Americans: counter-intuitive as it seems, poorer Americans should bear a higher percentage of the tax burden than they are presently bearing, as this would incentivize them to oppose future tax increases.

A similar debate occurred in 2009 during the GOP gubernatorial primary in New Jersey, when Steve Lonegan proposed scrapping the entire state tax code (along with the Homestead Tax Rebate) in favor of a flat 2.9% personal income tax and the complete elimination of all business and corporate income taxes. He was immediately attacked by his opponent (and GOP Establishment candidate) Chris Christie, who argued that Lonegan’s plan would increase taxes on 70% of New Jersey residents and the elimination of the Homestead Rebate would deprive homeowners of desperately needed tax relief.

Lonegan countered that the Homestead Rebate was a gimmick that could not and should not be sustained. Christie promised he would never eliminate the Rebate and then eliminated it shortly after taking office – because it could not be sustained.

Christie pointed out that many single tax filers would see their taxes increase as much as 91% and joint filers as much as 66%. The Christie campaign also claimed that its criticism of the Lonegan Plan was supported by such notable conservatives as Steve Forbes and Brent Schundler.

Insofar as Mr. Christie claimed to be a conservative Republican, this line of attack puzzled and ultimately troubled me because the substance and style of his attack reflected little in the way of conservative Republican thinking and much in the way of liberal Democrat thinking. Ultimately, Mr. Christie’s strategy was disingenuous at best and destructively deceptive at worst, because he employed the very rhetorical devices one would have expected from a populist liberal Democrat such as Jon Corzine.

Der Blimpmeister knew perfectly well that Lonegan’s plan involved slashing the size of state government, abolishing COAH entirely, eliminating all corporate and business taxes and reducing school taxes in addition to a flat 2.9% income tax and the elimination of the Homestead Rebate. The various elements of the plan were designed to act in concert, creating optimal conditions for a rapid economic renaissance that would invigorate the state with new businesses, more job opportunities and an increase in the number of taxpayers who shoulder most of the tax burden.

Surely, as a Republican who claimed to be a conservative, he was aware that 19% of taxpayers who reported at least $100,000 of income per year in 2006 accounted for 64% of all the income in the state and yet shouldered almost 83% of the tax burden. The 1.2% of taxpayers in the highest bracket with incomes over $500,000 made 23% of the income and paid 42% of the total tax.

Think about that for a moment: almost HALF of all the income tax collected by New Jersey is paid by less than 2% of taxpayers.

The tax percentage increases in the lower brackets that sounded alarming in Christie’s campaign ads actually amounted at the very most, to a $442 per year increase  – about $6.05 in extra withholding per week.

Christie and his supporters also knew perfectly well the engine of growth for this or any state lies with the upper percentage of income earners who own or invest in businesses large and small that drive the economy. In the current environment they are the ones shuttering their businesses and leaving New Jersey, further draining revenue from the state while former employees swell the ranks of the unemployed.

He knew that he implementation of the flat tax plan, coupled with the complete elimination of all corporate and business income taxes would have an immediate and profoundly stimulative effect upon the economy of this state. Businesses, investors and others with money to spend would flock here from New York, Connecticut and even California to escape the burdensome taxes under which they currently languish. The situation would be improved considerably by the abolition of both COAH and the Abbott funding debacles.

And here is where the logic of Christie’s attack collapsed, for it conflicted with the reality of the marketplace. He employed the same erroneous presumption liberal Democrats employ when they criticize efforts to abolish the minimum wage: that wage earners who currently occupy the lowest brackets will always remain there. While it is true the current 1.4%, 1.75% and 2.45% income tax rates are lower than the flat 2.9% rate, it’s also true that they will not avail the taxpayers very much in a failing state economy where those who provide the jobs are fleeing the state in record numbers.

If Christie were a truly conservative Republican, he’d have known that the Lonegan tax plan would have acted like a shot of adrenaline administered to a long distance runner. As businesses move back into New Jersey they would begin hiring, creating a competitive environment for job seekers. Those in the lower income brackets would have opportunities to migrate to better paying jobs they otherwise would never have had; indeed, in their own companies they may very well have seen their own salaries increase as a result of the elimination of ALL business and corporate taxes which would create a more prosperous and therefore more competitive business environment.

Christie would have done better to ask lower income earners the following question: If it meant you not only kept your job but very likely got a pay increase or were able to easily find a new job with a higher salary, would you be willing to spend a couple of hundred dollars extra per year?

Unfortunately, Christie choose to either ignore or deny these realities and adopt precisely the line of attack one would expect of a liberal Democrat whose political success is predicated upon half-truths and untruths cloaked in populist, scare-tactic clichés.

For his part, Christie claimed that his plan would “cut taxes across the board.” When pressed on the matter he offered no detailed rate reduction plans for individual, family, corporate or business income taxes, saying only that he would lower them. But how much farther can one reduce taxes for those paying only 1.4% of their income? Perhaps reduce that bracket entirely? No one knows. A vague promise to “cut taxes across the board” may sound encouraging and make for good ad copy, but it amounts to little more than an offer of “Hope and Change.” We all know how that worked out. To this day, New Jersey wage earners and business have yet to see any of those sweeping “across the board” tax cuts promised by Gov. Zeppelin during the campaign. Oh wait…he did effect a tax cut for working New Jerseyans: starting in 2012 the state payroll tax will be lowered from 0.5 percent to 0.2 percent on the first $30,300 that workers are paid, for a maximum of $61. That’s not $61 per week, but a whopping $61 per year – roughly $1.17 per weekly paycheck.

The style and substance of Christie’s disingenuous and downright deceptive attacks should have alerted the GOP electorate about the sincerity of his conservatism. Ultimately, he was less a physician than a witch doctor – an economic shaman chanting a talismanic incantation he once heard Ronald Reagan say, but otherwise offering no substantial or tangible prescription for economic recovery other than “Hope and Change.”

THAT is the true meaning of voodoo economics.

This entry was posted in Economics, Politics and tagged , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , . Bookmark the permalink.

3 Responses to Parsing the 9-9-9 Plan

  1. owleyepundit says:

    The consumption tax, unlike income taxes, gives no advantage to foreign producers. In addition, the consumer has a great deal of control over how much he pays. Don’t want to pay a lot? Buy a Kia. Wealthy enough to share more of the burden? Buy a Chrysler? Want to really help with the budget? Buy a Lexus or a Porche. Need a suit for weddings and funerals? Spend $280. Need one to argue cases in County Court? Spend $600. Need one to argue before the Supreme Court? Spend $2800. Making a deal with Donald Trump? Spend $6000. It’s up to you.

  2. firesign58 says:

    Christie was and is no conservative, but he’s a heck of a lot better than more of Jon Corzine would have been. Next time, Bulldog, you run for Governor, against Christie.

    Re: Homestead rebate: If the state does not collect the money in the first place, then it doesn’t need to refund it – duh. Lonegan was right – “rebates” are a gimmick, a behavioral “carrot”, as are “credits” and the tax incentives doled out to stimulate government-approved tax avoidance behavior.

    There is zero appetite for a new federal sales tax – I don’t care if it’s 9-9-1. Nobody wants a new revenue stream for federal government to exploit. It is a sure path to taxpayer abuse. . Possibly I’d listen to the rationale again if we do away entirely with federal income tax, the IRS and repeal the 16th amendment before implementing a federal sales tax. However, even then, should a the federal sales tax be levied now, then it could be revised in the future, incrementally increasing, and potentially being levied on interim transactions so that it effectively equals a VAT. This is why a federal sales tax gets zero traction in the US: we see the effective (cumulative) 70% tax rate imposed on goods in Europe because of the VAT. It’s part of what’s crippling their economy, so why would we want to go down that path?

    The truth is, as bad as the tax code is, people intuitively understand that it could be much worse, and the devil known is better than the devil unknown. We know what these politicians are capable of: every form of graft, taxpayer abuse, and illegal/unethical behavior. We do not trust them 1 millimeter with any issue of substance.

  3. HeleneH says:

    firesign58 you are missing one very important point, that is with the addition of a sales tax there are 3 taxes eliminated. Also, this is not a VAT, this tax comes at the consumer’s end. Unlike a VAT where taxes are added along the way. You are also missing another important point, right now there is a coorporate tax of 30+%. Do you honestly think you are not paying that when you purchase a product, any product? What I find increasing fustrating all the naysayers are getting their talking points from those who are quite content with the current tax code. Firesign58 are you content with the current tax code? Most of the criticism is directed at one component of this plan, one that can be identified as a concern for some. Take a look at the current tax code. Can you even identify all the problems? I can’t, I don’t understand the current plan, and I am far from stupid even if I do say so myself. If you want the status quo continue to trash everything new. If you have concerns regarding 9 9 9 ask questions, don’t spread rumors, don’t fall prey to rhetoric.