Herman Cain’s 999 plan: a misleading pitch

at 06:00 AM ET, 10/13/2011


(Toni Sandys/THE WASHINGTON POST)

“9-9-9 will pass, and it is not the price of pizza because, it has been well-studied and well-developed… The problem with that analysis [that it will not raise enough revenue] is that it is incorrect. The reason it's incorrect is because they start with assumptions that we don't make. Remember, 9- 9-9 plan throws out the current tax code. ... Now, what 9-9-9 does, it expands the base. When you expand the base, we can arrive at the lowest possible rate, which is 9-9-9.”

— Herman Cain, Washington Post-Bloomberg debate, October 11, 2011

 A family of four making $50,000 a year “are still going to have some money left over.”

— Cain, on MSNBC, October 12, 2011

It almost sounds like something out of the movie “Dave,” in which the accidental president enlists his accountant friend, Murray Blum, to help him figure out the federal budget.

 During Tuesday’s Washington Post-Bloomberg debate, Herman Cain, the former chief executive of Godfather’s Pizza, named Rich Lowrie of Cleveland as “my lead economist” who helped develop Cain’s signature “9-9-9” plan for overhauling the federal tax system. “He is an economist, and he has worked in the business of wealth creation most of his career,” Cain said.

 Actually, according to Lowrie’s Linked-In profile, he has a bachelor’s degree in accountancy from Case Western Reserve University, not economics. Lowrie, in an e-mail, said he did not consider himself an economist, just “senior economic advisor” to the Cain campaign. Donor information maintained by Opensecrets.org shows he has donated $1,500 to Cain in 2010 and 2011, but also contributed $2,300 to Mitt Romney in his first run for the presidency in 2007.

Okay, so Cain may have exaggerated the qualifications of his economic guru. But he has forcefully defended his ‘9-9-9’ plan, both during Tuesday night’s debate and on MSNBC’s “Daily Rundown” on Wednesday. Many readers have asked us to examine the plan and explain it, so let’s take it for a test drive.

 

The Facts

 The “9-9-9” label is actually a bit of misnomer. Cain would toss out much of the current federal tax code and replace it, eventually and only temporarily, with three taxes — a 9 percent income tax, a 9 percent business transactions tax and a 9 percent federal sales tax. On paper, the first two look like cuts, because payroll taxes for Social Security and Medicare (now nearly 15 percent, including corporate contributions) would be repealed. The sales tax would be new, on top of existing state sales taxes.  

 But note that we said the “9-9-9” would happen eventually — and then only temporarily. That’s because it is only the second step of a planned three-step process. The first step would cut individual and corporate tax rates to a top 25 percent rate (down from a current high of 35 percent). Then the final step would replace all of the taxes — even the 9s — with a national sales tax, known by proponents as a “Fair Tax.”

 (As denizens of Washington, we find this three-step process to be highly dubious. It takes years, even decades, to fundamentally overhaul the tax code. Herman Cain is going to do this three times in his presidency? But we digress.)

 Much attention has focused on whether Cain’s plan, in its 9-9-9 stage, would raise as much revenue as the current tax system. Bloomberg News had calculated it would collect about $2 trillion, thus falling short by about $200 billion a year. But Lowrie sent Bloomberg an analysis on Wednesday that asserted “9-9-9” would actually collect slightly more — $2.3 trillion.

 We think the revenue question is beside the point. Anyone can turn the dials in their computer models to generate the assumptions they want.

Michael Linden of the left-leaning Center for American Progress, for instance, estimates the plan would generate just $1.3 trillion. The biggest difference between the two estimates is that Linden thinks the 9 percent business tax would yield $112 billion a year, and Cain says he would get $862 billion — a gap that simply demonstrates how a few different assumptions can generate extremely different results. (Linden on Thursday updated his analysis, saying he had underestimated how much revenue the business tax would raise.)

 Cain’s proposal is so radical that it makes more sense to examine the potential impact on taxpayers. A key part of Cain’s pitch for the plan during the debate was this: “When you expand the base, we can arrive at the lowest possible rate, which is 9-9-9.”

“Expand the base” really means that more taxpayers will pay taxes under his plan.

Right now, nearly half of taxpayers don’t pay income taxes, but they do pay their share of payroll taxes, which amounts to 7.65 percent of wage income (though much of it is capped at $107,000). Cain would also eliminate the earned-income tax credit, which is intended to lift working Americans out of poverty. Many of these workers currently receive tax refunds.

On top of that, Cain would introduce the new sales tax, which would affect lower and moderate-income people who spend most of their income on purchases, not savings and investments. Depending on how you do the math, people now paying zero or negative taxes might be faced with a 27 percent tax on income.

In other words, while on paper Cain is promising a tax cut, in reality tens of millions of lower-income Americans would face tax increases. People in high tax brackets — 28 percent and higher — would likely see big tax cuts. (As part of his plan, Cain would also eliminate estate taxes and capital gains taxes, which, again, mostly affect higher-income people with stock and real estate investments.)

There have been several interesting analyses done on the “9-9-9” plan. Edward D. Kleinbard of the University of Southern California School of Law identifies several unusual quirks, including a “disguised one-time 9 percent tax on existing wealth — no doubt much to the surprise of Mr. Cain and his followers.” Kleinbard, former chief of staff of the nonpartisan Joint Committee on Taxation, says that “contrary to casual impressions, the Plan could be expected to raise substantial amounts of revenue, but does so largely by skewing downwards the distribution of tax burdens when compared to current law.”

Bruce Bartlett, a former Reagan administration official who now calls himself an independent, also offered a critical examination this week on the New York Times Economix blog. He (as did Kleinbard) noted that the business tax allows for no deduction for wages, which he said  “is likely to raise the cost of employing workers, even with abolition of the employers’ share of the payroll tax.”

Cain, in his television appearances, glosses over such details. “The fact that we are taking out embedded taxes that are built into all of the goods and services in this country, prices will not go up,” he asserted on MSNBC. “They will not go up.” He then gave an example of a family of four earning $50,000.

 “Today, under the current system, they will pay over $10,000 in taxes assuming standard deductions and standard exemptions. I've gone through the math, $10,000. Now, with 9-9-9, they're going to pay that 9 percent personal — that 9 percent tax on their income. So that's only $4,500. They still have $5,500 left over to apply to this sales tax piece. …They are still going to have money left over.”

We’re not sure how Cain calculates that this family now pays $10,000 in taxes, but the reliable Tax Foundation calculator comes up with a much more reasonable figure: a total tax bill of $3,515 — $690 in federal income taxes and $2,825 in payroll taxes. (The family gets a big income-tax savings from the child tax credit, which Cain would eliminate.)

So, in other words, under Cain’s plan, this family would instantly pay $1,000 more in income taxes. They would also pay additional sales taxes, probably more than $3,000, on their purchases. It’s unclear how the business tax would affect the family’s tax bill but it appears this theoretical family would get no tax cut but instead a 100 percent tax increase.

(The picture changes somewhat if you assume that all the employer-paid payroll taxes automatically would revert to the employee. We’re not sure that’s a good bet given the design of Cain’s business tax, but pro-Cain advocates make that assumption with their own tax calculator. But even under this scenario, the family appears stuck with at least a $2,000 tax increase.)

We take no position on whether it is good or bad to make the tax code less progressive. Perhaps in response to questions, Cain appears to still be tinkering with the plan. In Concord, N.H., he said on Wednesday that, among other changes, he would preserve the deduction for charitable donations and would exempt any used goods, including previously owned homes and cars, from the new 9 percent sales tax.

The Pinocchio Test

We can excuse Cain inflating his adviser’s resume, but his campaign needs to do more to address the fuzzy math behind his tax plan. (We asked the campaign for a copy of Lowrie’s analysis but did not receive a response. UPDATE: The documents are posted below.)

Give Cain credit for thinking boldly, but he’s not talking clearly. As far as we can tell from the limited information Cain has provided, the plan he touts as a big tax cut would actually increase taxes on most Americans. Just like it would be wrong to claim pizza is a low-calorie meal, Cain’s description of the plan’s impact on working Americans is highly misleading.

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    About the Blogger

    Glenn Kessler has covered foreign policy, economic policy, the White House, Congress, politics, airline safety and Wall Street.

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