867-5-9-9-9

So, with the race for the Republican Presidential Candidacy race off to a running start, Herman Cain has been the flavor of the month. At the forefront of his debate rhetoric has been his 9-9-9 plan - named for its nine (point one) percent tax levied across the board: 9.1% on personal income, 9.1% on corporate income, and introducing a 9.1% national sales tax. This sounds particularly simple, and that's one of the reasons why Cain has been surging in the polls. "THE DARN TAX CODE IS TOO COMPLEX!" yell a lot of Tea Party followers; they cite it as one of the reasons government it out of control, because no one person can really understand and know the entirety of the US Tax Code.

But I wondered. How would it change things? What kind of tax burden would this result in? How would it affect the revenue of the government? So, woo, another nice statistical diversion! Note that all data for this analysis comes from the 2010 US Census data, unless otherwise noted.

Anyway, the census looks at about 118,683,000 households. Within those households, I divided them into quadrants:

Lower quadrant makes underneath $29,670.75 gross income per year. Second quadrant is between this and $59,341.50. The third goes up to $89,012.25, and of course the top quadrant is unbounded at the top. These equate quite neatly to $30,000, $60,000, and $90,000, so for the sake of easier math, I'll round up in each case. Here are the various take-home amounts for someone making federal minimum wage along with all the other borders currently. Also included are a couple, much higher, incomes. To note, I am using the Single filer for a "worst case" (highest taxation) scenario.

$15,080 -> $13,243
$30,000 -> $25,925
$60,000 -> $48,875
$90,000 -> $71,183
$250,000 -> $182,603
$1,000,000 -> $672,686

Now, this is just the income tax, of course. Additionally, social security taxes and Medicare taxes are also levied. Social Security is taken at a rate of 4.2% up to $106,800 and Medicare at 1.45% of all wages. Presumably, Mr. Cain wishes to roll all these up, along with deductions, into the 9-9-9 plan. In order to deal with this, I have to use the average deductions for each income level along with the Medicare and Medicaid numbers. This is where it gets even more complicated, and so I have to break it out into "individual stories".

Our minimum-wage earner is paid $15,080 in gross income. Let's assume she's a single mother of one, and manages to deduct a fair amount of her income due to medical and taxation deductions, but makes no charitable contributions and does not save because she has to spend the majority of her income. After the 4.2% and 1.45% for OASDI and Medicare respectively, that comes to about $14,237. Assuming deductions of about $8,000 for medical and taxation (the average for $15k-$30k is about $10,000), her taxable income is about $6,237, which is taxed at 10%, about $624. Finally, since she has a child, she receives $3,050 in earned income credit. Thus, her final take home pay is about $16,663.

Whew, that was complicated! Anyway, without factoring in state income tax, our hypothetical person ends up with a little over 110% of her gross income in take-home pay, mostly thanks to her kid. Under Cain's plan, the same person would be taxed at 9.1% for income and another 9.1% on everything she purchases. Assuming she's reasonably thrifty (as anyone at this income level would need to be), she is likely to spend her income mostly on food and shelter. The latter would be untaxed, and would likely take 25-40% of her income. Assume 10% of it is spent on used items such as appliances or furniture. Thus, her final take-home pay less any taxation due to the sales tax, is about $13,146. So she's about 20% worse off in this system.

Next, I'd like to talk about our $60,000 earner. Let's assume he's unmarried as well, with no children. After OASDI and Medicare are taken out, it leaves about $56,646. Assume Mr. Sixty has a 401(k) and a few investments, spends relatively little on medical care, and earns a fair bit of interest on bank accounts, making his deductions total about $22,000 - again, fairly average for his bracket according to the IRS. That leaves a taxable income of about $34,600. The effective tax rate on this income is 13.8%, leaving a take-home income of $51,825.

Under the 9-9-9 plan, 9.1% is skimmed off the top, leaving $54,540. The average single filer making $60,000 is reasonably well off, so let's assume he spends 25% of his income on rent or mortgage payments, saves 20%, and spends the rest on food and entertainment. This results in a take-home income minus federal sales tax of $51,810. So he's about as well off as he was before under this plan.

Finally, for now at least, is the $250,000 earner. Let's say this is a married couple making this amount jointly, and filing jointly. After SS and Medicare, that leaves $241,889. Both have 401(k)s, several investments, and they have a single child. Their deductions total about $65,000, which is again, fairly average for their income level. This leaves about $177,000 as taxable; after federal income tax at a rate of 21.26%, they take home $204,369. They earn nothing from their child or children, as they earn too much to qualify for the Earned Income Credit.

Under the 9-9-9 plan, 9.1% is skimmed from the top of their income, leaving them with $227,250 in take-home pay. Assume they have a nice home and spend about 20% of their income on the mortgage and manage to save about 40% of their income per year, leaving them with $90,900 to pay for everything else. This is taxed at a 9.1% consumption tax rate, leaving $218,978 in total income. So they're about 7.1% better off.

So we can see that this system is inherently a bit more regressive than the one we have now. Now, on the flip side, I'll take a look at revenue differences in the two systems.

In the United States Budget for Fiscal Year 2009, the IRS counts government receipts via taxes at $2.7 trillion. An estimated $340 billion comes from corporate taxes, which we'll deal with later. It hasn't been stated whether excise and customs taxes will be removed for the 9-9-9 plan, so we'll remove that $100 billion to add back in later, assuming they will be kept. That leaves about $2.26 trillion that comes out of personal income taxes, payroll taxes, and estate taxes.

Going back to our data from before, there are about 118 million households in the country. This totals an average of about $19,152 per household. Mean income was about $60,500 in 2004 - following inflation, this would be about $71,000 today. Thus, the average effective rate on all households is 27% when factoring in all federal taxation.

Given that information, the average household under the 9-9-9 plan would be paying $6,461 in federal income tax, generating $762 billion in revenue. For the national sales tax, we need to take a look at consumer spending in the United States. The Gallup organization has it broken down nicely for us, and below are spending numbers on an annual basis:

$6.42 trillion on home improvement, furniture, etc., excluding rent/mortgage

$6.62 trillion on food and drink

$2.75 trillion on travel and leisure

$5.56 trillion on car repairs and gas

$8.83 trillion on generic shopping

$8.16 trillion on health and wellness

The only category that would possibly not be eligible for the 9-9-9 plan's national sales tax is "health and wellness", since it includes taxes on insurance plans. The total of the other categories is $30.18 trillion, taxed at 9.1%, generating $2.74 trillion in revenue. Finally, we add in the corporate tax rate. Currently, the rate is capped at 35%. Obviously, corporations find ways around this - there's no real reason to believe more corporations will pay their mandated amount. Let's assume that 33% more corporations will be willing to part with their money due to this, generating about $120 billion in revenue.

So, what do we end up with? Well, a 34% increase of revenue to about $3.6 trillion, the majority coming from the national sales tax. So what are the problems with this? I'll have to continue this post once again!