Back in the ’90s, Steve Forbes ran for president with the promise of tax returns that would fit on a postcard. Herman Cain’s 9-9-9 plan revels in the same simplicity: a 9 percent flat tax, a 9 percent national sales tax, and a 9 percent corporate tax. No deductions. No taxes on investment income.
There’s something to be said for simplicity and elegance. This is why the flat tax, fair taxes, and consumption taxes are always part of the debate around campaign time. It’s hard not to look at all the hours and dollars spent by individuals and businesses in preparation for April 15 and see them as a massive waste. But the reason Americans keep choosing waste and complexity over elegance becomes clear when you look at the winners and losers in these scenarios.
The big losers under 9-9-9 are the 47 percent of Americans who, because of the effects of the recession, didn’t make enough money to have a federal-income-tax liability last year. Their income taxes would go up to 9 percent.
The winners, meanwhile, live in Greenwich, Conn. Today, a hedge-fund manager who takes home 20 percent of his firm’s profits pays a 15 percent capital-gains tax. Under Cain, that hedgie pays nothing.
The sales tax favors richer Americans, too. It takes money to save money, after all. Poorer people have to spend a greater percentage of their incomes, and anything spent is taxed. According to Gallup, self-reported consumer spending is just over $23,000 a year. Cain’s 9-9-9 adds $2,000 to that bill.
A 9 percent flat corporate tax seems like a huge cut on the surface. But a company like GE is probably happier right now with the current 35 percent statutory tax rate. That’s because the enormous losses from its GE Capital unit during the financial crisis sheltered the company from paying any federal income taxes at all during a highly profitable 2010.
Hand in hand with 9-9-9 is the elimination of Social Security in favor of private accounts, along the lines of what Cain calls the “Chilean model.” In Chile, workers are required to set aside 10 percent of their salaries for investment in individual retirement accounts that are managed by private companies.
But this would amount to a tax increase for most Americans. While the total contribution to Social Security under current law is 10.4 percent on up to $106,000 in wages, the reality is that only self-employed workers pay that much. Employees pay just 4.2 percent currently, and 6.2 percent most years.
Also, Chile’s system doesn’t work quite as advertised, as the government now supplements private accounts with “solidarity pensions” funded from the general tax revenue.
Other countries in the region that have tried the Chilean model, like Argentina and Peru, have since changed their laws to allow citizens to go back to the old public pension systems. Not that we’ll have to worry about that in the U.S.: Social Security is too popular for Cain to muck with, as even the twice-elected George W. Bush learned.
Michael Maiello is a writer and journalist in New York.