Republican presidential candidate Herman Cain’s 9-9-9 tax proposal would generate as much revenue for the U.S. government as the current tax system does, according to an analysis released by his campaign.
With a 9 percent tax rate for sales and gross income for individuals and businesses, the U.S. would have collected about $2.3 trillion in 2008 had the tax been in place. That’s on par with the amount the federal government collected that year, excluding excise taxes and user fees, which Cain would retain, according to his analysis.
The figures were provided today to Bloomberg News in an e-mail from Rich Lowrie, who Cain said yesterday in the Republican presidential debate was his “lead economist on helping to develop” the proposal. Cain’s plan would replace the current tax code with a 9 percent national sales tax along with 9 percent levies on gross income for businesses and individuals.
During the debate yesterday with other Republican presidential candidates in New Hampshire sponsored by Bloomberg News and the Washington Post, Cain said the proposal is his top policy goal. He said it would simplify the U.S. tax system without generating less revenue than the current code does.
“It expands the base,” he said during the debate. “When you expand the base, we can arrive at the lowest possible rate, which is 9-9-9.”
Those expansions of the base mean that long-standing tax breaks, such as the mortgage interest deduction and the exclusion from income of employer-sponsored health insurance, would likely vanish to keep the rates lower.
Before Cain’s campaign provided the analysis today, Bloomberg News had calculated that the proposal would have collected almost $2 trillion if it were in place in 2010. The U.S. actually collected almost $2.2 trillion in taxes that year.
Cain has previously said an independent group conducted an analysis of his plan, though his campaign didn’t share the results of that study until today. The analysis, conducted by Fiscal Associates Inc., used economy-wide data to project the size of the tax base for each of the three planks of the plan.
The estimate projected a tax base of $9.5 trillion from businesses, $7.7 trillion from individuals and $8.3 trillion from sales. With the 9.1 percent rate he uses, that would generate $862.6 billion in tax revenue from businesses, $700.8 billion from individuals and $752.6 billion from sales.
‘In the Ballpark’
Alan Viard, a senior fellow at the American Enterprise Institute in Washington, which favors smaller government, said the revenue estimates were “in the ballpark in some vague sense.” Viard said the rate might need to be a percentage point or so higher to generate the same amount of revenue that the current tax code does.
The estimate, he said, includes too small of an adjustment for underreporting of income and sales. It also doesn’t reflect that federal revenue in 2008 was lower than average or attempt to project the federal government’s future spending needs.
The public appeal of the 9-9-9 plan has propelled Cain to the top ranks of the Republican presidential contest. Other candidates used yesterday’s debate to put him on the defensive over the plan’s details.
Former Senator Rick Santorum of Pennsylvania during the debate said the 9-9-9 proposal is “naively” designed. Representative Michele Bachmann of Minnesota said it would provide Congress with a new layer of revenue to manipulate.
Gives Congress ‘Pipeline’
“The last thing you would do is give Congress another pipeline of a revenue stream,” she said. “And this gives Congress a pipeline in a sales tax.”
Viard said Cain’s description of the business tax has been misleading as it is nothing like the current corporate income tax, which applies only to profits of companies organized as corporations. The Cain tax would operate as a value-added tax similar to those in the rest of the industrialized world, which Republicans have often opposed.
“The elephant in the room is the fact that Cain is proposing a value-added tax,” said Viard, a former economist at the Federal Reserve Bank of Dallas who says a VAT will be necessary to cover the government’s long-term fiscal needs. “The question of whether the revenue numbers add up is almost secondary to that.”
The analysis released by the campaign doesn’t address how the proposal would change the distribution of the federal tax burden, other than including a provision for some sort of “poverty grant,” which Cain has described as a lower rate in targeted “empowerment zones.”
Shifting Tax Base
Without the poverty grant, the rate for each of the three taxes could be as low as 7.3 percent, the analysis said.
Other tax experts have said Cain plan’s switch to a tax base that leans more heavily on consumption would shift the tax burden down the income scale.
“The absence of current law’s package of a standard deduction, personal exemptions, child credit, child care credit and the earned income tax credit means a huge tax hike for the working poor and a substantial tax increase on the labor income of the middle class,” wrote Edward Kleinbard, a law professor at the University of Southern California, in an Oct. 10 paper about Cain’s plan. “At the same time, the all-in 27 percent tax on labor income (or less for the self employed) would constitute a tax reduction for the very highest-labor income Americans.”