As Herman Cain’s 9-9-9 plan continues to draw attention, a key component of it remains misunderstood. Cain’s plan would replace the individual and corporate income taxes, estate and gift tax, and payroll and self-employment taxes with three new levies. As is well-known, one levy is a 9 percent retail sales tax and another is a 9 percent income tax.
The misunderstanding concerns the third component. Most media reports, taking the lead from Cain’s own terminology, continue to describe it as a business or corporate tax or even as a tax on corporate profits. Yet, the tax is actually a value added tax (VAT), a fact confirmed by the economic analysis circulated by Cain’s campaign.
A VAT and a retail sales tax are conceptually equivalent consumption taxes, apart from administrative and compliance issues. The plan is therefore better described as featuring a 9 percent income tax and an 18 percent consumption tax, with half of the latter collected using the VAT methodology and the other half collected using the retail sales tax methodology.
One concern about the Cain plan has been overstated. Analysts who thought that the third tax was a tax on business profits or cash flow (in other words, a tax that allowed firms to deduct wage payments) complained that the plan would raise revenue far short of current levels. The fact that the tax is actually imposed on value added (so that firms cannot deduct wage payments) means that it would raise considerably more revenue than those analyses had indicated. Although the 9 percent rate is not quite revenue neutral, a rate around 10 to 11 percent might work, if no deductions or tax preferences are added to the plan.
If the plan was adopted at a revenue-neutral tax rate, it would increase long-run economic growth by largely eliminating the tax penalties on saving and investment. But, it would also cause a massive shift in tax liabilities towards moderate-income households, a disturbing outcome and one that is likely to make the plan politically unviable.
But, the biggest issue is one of truth in labeling. Mr. Cain should level with the voters by explaining that he’s proposing a VAT and allow them to weigh the advantages and disadvantages of this approach.
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Most of the consumers are probably too busy consuming to understand what a VAT is in the first place!
You really need to understand the true definition of the VAT tax. This is where you are being dishonest. This is a portion of an article from “Red State” that explains the Vat clearly.
“A VAT tax is essentially a sales tax, with the caveat that it is levied at every stage of production, on the increase in value of production, instead of on the final retail product. For a detailed comparison of VAT to other types of taxes, see Wikipedia’s article on the subject. In the United States, in most states the end consumer pays a state sales tax on the final retail product at the checkout counter. Manufacturers and other ‘production line’ businesses do not pay sales tax on wholesale purchases. For example, a gas station that buys a carton of cigarettes at Costco or Sam’s Club for resale at their operation location is exempt from paying the sales tax.
As an example of what a VAT tax involves, consider R.J. Reynolds, manufacturer of cigarettes. Hypothetically, R.J. Reynolds purchases a pound of tobacco for $5.00, filters for $10.00 and paper to roll cigarettes for $1.00. These products are used to create a carton of cigarettes, which is then sold to Costco or Sam’s Club for $20.00. The VAT tax would be paid by R.J. Reynolds on the $4.00 profit realized during the manufacturing and eventual sale of the cigarettes. $4.00 is considered to be the “value added” to the product by R.J. Reynolds. In Europe, this VAT tax is levied on top of the consumer’s end-product sales tax and the corporate income tax on net profits (for which the VAT tax is a deduction).
Cain’s “9-9-9″ business tax is absolutely not a VAT tax. Stated succinctly, Cain proposes that businesses pay a flat 9 percent tax on “net” income, basically calculated as gross revenue minus raw material costs, with other deductions. The only difference between today’s thirty five percent corporate income tax and Cain’s 9 percent business tax is that certain deductible expenses would be eliminated, the most important of which is payroll expenses. However, the basic structure of the income tax on businesses remains intact. The tax is NOT collected on inter-business sales, but rather is reported and collected in the same way as the personal income tax; the main difference being that a different deduction rule set applies. While VAT taxes look just like sales taxes, Cain’s business tax does not. It looks just like an income tax.
Most importantly, however, is to consider what Cain’s business tax replaces. Cain’s plan is designed to replace the destructive thirty five percent corporate income tax.”
People don’t seem to realize how badly the 9-9-9 plan will impact seniors who are living off their savings. Those seniors have been paying income tax for 40-50 years at high rates ( some years at 90%, other years at 70%, some at 50%, and more recenly 28-35%). What was left after high taxes became savings to the extent not spent as the cost of living. But, there was no Federal tax on the actual expenditure of savings. That would have been double taxation: first on money as it is made and then again on the same money when it is spent.
Under 9-9-9, seniors will be taxed as they spend their savings even though they paid very high income taxes creating those savings. But, younger people still in the process of building wealth will only be subjected to a 9% income tax. It may be appropriate for those people to pay a sales tax as they spend their money because they won’t be taxed more than 9% of their income. To impose a 9% sales tax on older folks who never had the benefit of low (9%) income taxes is just robbery.
Ah, those pronouns: we, us, they, it, them. Nice, short words. Fit great in slogans and so-I-says. The “they” that is government. The ‘us’ that possesses “our freedom”. Were it so sweetly simple.
But the real “us” has upwards of 300,000,000 names, and an equal number of situations — rising into wealth, falling toward poverty, rolling along, etc.
One thing that is necessarily and always true about changes to taxation is that some will win and some will lose — not just in how much is paid out from a given wallet, but also in how benefits are meted out. Reality.
Some might hold that all who suckle at the public teat are ne’er-do-wells and losers who need a little tough love — you know, ‘them’ — but I’m not one.
So, the hell with the oh-so-mouthable “9-9-9″ plan. I’m not buying breath mints. The devil is in the details, and the details are humans.
Is it just a coincidence that when you turn 9-9-9 upside down you get 6-6-6?
If, as Cain claims, he is really in favor of the Fair Tax (and his 999 is just a step towards that), then he should just back the Fair Tax (which, by the way, does provide a pre-bate for necessities) and be done with it. In for a penny, in for a pound.
This plan would quickly become in addition to income taxes not in lieu of income taxes. The only way to force this out of control government to stop expanding is to starve it. Therefore, I am against ANY tax that would raise more money because they would just spend it and take away more of our freedom.
Apparently, Cain’s plan would exclude most income from savings and investment from his “income” tax, making it a pure wage tax. That makes it the economic equivalent of a consumption tax, as well, the base of a consumption tax being wages. Herman Cain is Steve Forbes in disguise.
In a democratic administration it would become the 13/13/13 and then the 17/17/17 and then the 20/20/20….
typical establishment, going after the only guy with an actual plan (and the courage to run on an actual plan). Please, do tell where Cain’s campaign confirms it is a VAT:
“Yet, the tax is actually a value added tax (VAT), a fact confirmed by the economic analysis circulated by Cain’s campaign.” – please provide links supporting this. Thank you kindly.
The analysis is available at http://www.hermancain.com/docs/999_Scoring_Report.pdf. See first two paragraphs of page 7.
And he would also have to explain what % the cost of goods would fall once the various taxes are eliminated or lowered so people can understand what a 9% tax or 18% tax, whichever way you define it, would really mean. Cain’s Web site refers to it as a “Business Flat Tax.” Where can I get this VAT info you say has been circulated by his campaign?
http://www.hermancain.com/999plan read Phase 1 – 9-9-9 header- describes how it is calculated. That makes it clear it is modified VAT. Might be better than an corporate income tax, but it should be made clear what it is.