Fair Tax Take On Cain's 9-9-9 Plan

Herman Cain is getting a great deal of attention for his 9-9-9 plan but there is another tax reform plan that is actually on the legislative table – Fair Tax.

I believe both plans have flaws, as any national sales tax will be an addition to any local sales or income tax. Also, it's added to services and items that are not subject to a sales tax today.

Both stress the fact that the sales tax will only apply to new purchases, I buy an occasional used item but I believe that like the vast majority of the country, 99 percent of my spending is on new items, so that point is spurious.

In Cain's world, 100 percent of every penny I earn will be subject to 9 percent income tax, So if I earn $10,000 I actually receive $9,100, if I spend 80 percent of that, $7,280 I will be subject to, here in Florida to a sales tax of 16 percent, 9 percent Federal + 7 percent Local, for a total of $1,650. My total tax burden would be $2,550 or a little more than 25 percent - Cain's plan is 'fair' in that everyone pays the same percentage 9+9.

Where it falls down is that people earning less will be paying substantially higher dollar amounts than they do today - unless they can buy their food at a used food store!

The major issue I have with Cain's plan - What's to stop the percentage amounts from changing? Lobbyists for business pressure to reduce corporate tax to 7 percent, this means that missing income must come from another source, so now we have 7-10-10... Remember in Cain's plan the IRS is still around.

Fair Tax calls for the elimination of the IRS and makes allowances for those on low incomes, and most importantly repeals Amendment 16 which allows the federal government to collect income tax.

Using the same income and expenditure amounts I used above, in the Fair Tax world I'd pay a total of $1,204 in tax or about 12 percent on $10,000 income. Fair Tax allows for a 'prebate' of $2,491/adult/year this is effectively tax free earnings, federal sales tax is 23 percent + 7 percent local sales tax.

Someone earning $1,000,000 and spending 80 percent would pay about 24 percent.

Both plans claim they'll eliminate all other taxes, but they can't eliminate local taxes, real estate, state income taxes, etc. So your 'real' tax rate will depend on where you live, here in Florida we have no local income taxes, but we do have property and sales taxes. 

A study a few years ago by some Boston University economists came to the conclusion that the 'real' tax rate we all pay is around 40 percent when all federal, local and special taxes are taken into account.

My conclusion, Cain's plan is smoke and mirrors with a real risk of increases in the future. Fair Tax looks better... but has little chance of passing as it eliminates loopholes for businesses and high earning individuals.

I believe little will change, the current rules have been developed and are in place because they are advantageous to the groups and individuals who lobbied for and passed them. 

If there could be change I think the elimination of the loopholes that allow highly profitable businesses to pay no tax and extremely high income individuals to pay reduced capital gains taxes on what is in fact income would be positive moves.

The lifting of the earnings cap on Social Security would save that program - for the new high earning payers it should be considered a charitable contribution!