Herman Cain's 9-9-9 tax plan has its flaws, but until recently it had the virtue of being the only plan that started with blowing up the current tax code instead of tinkering with it. Now, though, things are starting to liven up as other GOP candidates start to realize the need for radical structural reeform.
The plan starts with giving Americans a choice between a new, flat tax rate of 20% or their current income tax rate. The new flat tax preserves mortgage interest, charitable and state and local tax exemptions for families earning less than $500,000 annually, and it increases the standard deduction to $12,500 for individuals and dependents.
This simple 20% flat tax will allow Americans to file their taxes on a postcard, saving up to $483 billion in compliance costs.
A tax option with limited deductions or under the current U.S. income tax code. Anyone who strongly favors a deduction or credit under the federal government's current complex income tax system would have the choice to keep filing that way.
This optional flat tax system will create a new personal deduction for every adult of $10,000 to $12,000 (double for married couple), which would be above the established poverty level at $40,000 to $48,000. The current $1,000 tax credit for each child age sixteen or younger would also apply, as would the current earned income tax credit (EITC).
Should we have a 20 percent flat tax or a 15 percent flat tax? Now, that's my kind of debate. Both would make it voluntary, though, which seems to introduce an unnecessary level of complexity. The one Republic with whom we probably wouldn't see a major reform proposal is Mitt Romney. His plans for revision run on for about 160 pages.
Comments
The flat tax has a nice ring to it. It even sounds fair. However, what is the actual tax rate that would be needed to produce the revenue needed to fund the government?
If we look at the personal income reported to the IRS we have about $7.5 Trillion potential to tax. If we have no deductions, exemptions, just tax it at 20%, Federal Revenues would be $1.5 Trillion. This is about what Personal, Corporate, Estate taxes produce in a year. However, it does not include the FICA tax that is about $637 Billion from Social Security and $182 Billion in Medicare taxes. So if the flat tax objective is to eliminate the payroll tax as well, we have a problem. There would be enough money to fund these two program, pay the interest on the debt, but little else.
However, the flat tax generally exempts a fixed amount up front and some times a personal exemption. Perry
Edward Kleinbard of the USC Law School did his own analysis of Hermain Cain's 9-9-9 plan and concluded that the net result of the proposal is a 27% tax on wages that would sorely punish the middle and low-income taxpayers making less than $100K. At the same time, self-employed taxpayers would only pay 18% and folks living off of investment income will pay zip-zero-nada.
Herman apparently agrees with that assessment since he is now prposing a 9-0-9 tax for low-income folks. Suddenly the Cain plan is no longer revenue-neutral!
The morale of this story is that the liberal press will never back off of a progressive tax rate system. As a result, we can anticipate an ugly VAT compromise -- if any change is ever made.
One problem with the flat tax is defining "what is taxable income". It's hard enough when you're talking about someone who is a paid employee. If you get use of a company car, is that taxable income? What about a 10% employee discount if you work at a store? What about food if you work at 12-hour shift, or a taxi to send you home because you missed your car pool by working unexpected overtime?
It gets infinitely more complicated when you're talking about a self-employed person. How much should you get to deduct for conducting your online dating service business from the rear bedroom of your house? If your next door neighbor gets health care as a benefit where he works, so should you be able to deduct your entire health care costs?
And if there's an oil well drilled on the back 40, how much of that money is profit? You're making that land less valuable by pumping out the oil, so *part* of the purchase price should be deducted, but what portion?
If you buy an apartment building for $3 million and collect $150K in rent this year, do you deduct $3 million this year, or $100K. or some other figure?
The problem with "flat tax" proponents is that most of the "unfairness" of the tax system isn't in the brackets, it's in the details of how we figure out how much income there is to tax in the first place.
Here in Pennsylvania, the governor is trying to sell the state stores off, and I'm thinking that's a really dumb thing to do. The profits from the monopoly on retailing liquor are the least controversial tax we have. (The fact that he wants to sell off a system that generates $500 million annually for enough cash to generate $50 million annually is another issue. Why are scoundrels so obvious in their greed?)
Harl brings up a good point as to what is taxable. For companies, the tax code pretty much defines it as sales minus cost to generate those sales. From this tax credits, exemptions are subtracted and the tax rate applied to what is left.
For individual working for a company, they generally are not allowed to deduct food, housing; things that are not used directly to produced income. You could say that eating is needed to generate income, but I guess all that "essential" stuff is stuffed into three categories "standard deduction" and "itemized deductions" and "dependent exemptions."
The flat tax proposals I have seen are generally pretty straight forward. They start with total income subtract a standard deduction and in some cases provide for dependent exemptions. What is left is the taxable portion. The problem is that payroll taxes are not defined as being part of the flat tax - are they incorporated into the flat tax and eliminated or is the flat tax in addition to the payroll tax?
The vast majority of Americans pay more in payroll taxes than they do in Federal Income Taxes. This means that a vast number of American workers pay no federal income tax, but pay payroll taxes while a large minority of filers pay the majority of Federal Income Taxes, but little Payroll tax due to the cap. The cap also caps the social security benefit as well.
As with any design, one must look at what is needed to produce a desired outcome. Does the design have to many options that cost money (Defense, Social Security, Medicare, Medicaid, Education, Food Stamps, Transportation, SSI, etc). Does the structure to support the costs exist?
Generally you start with a design, in which case there are two criteria; spending and revenue. A design that does not balance both of these opposing forces will fail.