Will 9-9-9 Hurt the Middle Class?

There's a lot of mish-mashed conservative talk out there about Herman Cain’s proposed 9-9-9 tax plan being a tax-hike for the middle class.  The latest came from Rick Santorum in last night's debate, in which he suggested that cutting corporate and income taxes to a flat 9% while applying a federal sales tax of 9% would equate to a tax increase for 84% of Americans, as reported in a recent tax analysis.  Exacerbating this travesty, he suggests, is that Cain’s plan allows no deductions for poverty stricken families and the middle class.

In trying to discredit Herman Cain, Rick Santorum discredits himself- by regurgitating scare tactics and broad, untrue statements akin to Obama's promise in 2008 to "cut taxes from 95% of American families."  

First, let's do some basic math.  Utilizing the current marginal tax rates, a family earning $75,000 annually finds itself in the 25% tax bracket.  With the progressive application of federal income tax, this tax is actually ~15% of wages.  This is 3% less than Cain’s suggested 18% that would be paid in federal income tax on wages earned and sales tax on items purchased.  Sounds like Herman might be giving the middle class a raw deal, huh?  Well, consider the payroll taxes that wage earners currently pay, and this same family will see an additional 7.65% of their wages garnished for Social Security and Medicare, for a grand total of 22.65%.  Cain’s suggested plan replaces these costs in the simplistic 9-9-9 plan, and this 18% is 4.65% lower than this number.

If I know anything about which number is lower than the other number, Cain’s 18% is a reduction in federal taxes for middle-class Americans, not a tax-hike.     

Second, consider that high corporate taxes account for added consumer cost, as companies generally pass these levied corporate taxes on to consumers in the form of higher prices.**  By reducing corporate taxes, prices will naturally fall for competing companies in multiple areas of production.  You don't have to call it "cutting taxes for the middle class" if that doesn't agree with you.  Let's just call it, "a plan to let the middle class keep more of their hard-earned money."

Finally, it’s clear that Santorum didn’t think through his accusation that the plan “eliminates” deductions.  Cain’s website clearly states that deductions on both income and sales tax will be applied via “empowerment zones” to lessen the burden on those who might need such support.  Herman kindly reminded him of this on the stage, another well-placed nail in the coffin containing Santorum’s presidential ambition.

Herman Cain's 9-9-9 plan does have some questions surrounding it.  For example, the aboliton of current tax code would decimate the accounting industry, harming growth and GDP while costing American jobs.  Another concern I have is that retirees, who generally keep income low to avoid higher taxation of retirement accounts, might see increases in taxes paid, which could harm their retirement outlook.  But how are we to address these questions and find solutions if Herman Cain is constantly having to deflect untrue claims that 9-9-9 amounts to a huge tax-hike?

William Sullivan

** Argument supporting this economic reality can be found here.