9-9-9 Raises Taxes by 32 Percent for Sample Middle Class Family

ABC News has a story about how Herman Cain’s 9-9-9 plan would affect middle class families. And the broad thrust of the piece is correct: while the plan wouldn’t much change the total amount of federal revenues, middle income families would generally pay a lot more. Unfortunately, the piece—whose numbers have been bouncing around in a lot of other news reports—gets a lot of the details wrong. The difference in burden that ABC finds is roughly correct, but the tax bill is higher than they estimate under both current law and the Cain plan.

If you have a family of four with an income of just under \$50,000, they could end up paying more under the Cain plan. Currently, they are taxed around \$3,850 in income tax. Under Cain’s plan, they would be taxed at 9 percent or pay \$4,500.

That’s \$650 more.

Although the family would save almost \$4,000 in Social Security taxes, it would have to give up the child tax credit worth the same amount. Furthermore, it would pay an additional national sales tax of 9 percent on everything purchased, including groceries and clothes, which totals about \$2,000.

That means under the Cain plan that family could end up paying \$2,725 more.

Almost none of that is correct. These calculations understate the family’s liability under both the current tax code and Herman Cain’s proposal. The truth is that the family would pay about \$8,340 under today’s “normal” tax code (i.e., without this year’s temporary payroll tax cut), but would pay about \$11,000 under 9-9-9, for a difference of \$2,660.

First, let’s look at the family’s tax burden under the current tax code. The Tax Foundation has a handy calculator for estimating tax liabilities in relatively simple situations like the one described above. Though the calculator was put together during the debate over tax policy in the fall of 2010, option 2 (the “Compromise Plan”) reflects what was actually enacted.

And the calculator shows that this family would actually pay only \$690 in income tax under current policy, or \$2,690 if you look at the liability prior to the Child Credit. \$3,800 would be the liability for a married couple earning \$50,000 with zero dependent children; I’m not sure how ABC got to \$3,850.

ABC then says that the family gets child credits worth \$4,000 per year. Since the credit is \$1,000 per child, this should be \$2,000.

They also say that, under Cain’s plan, the family would save almost \$4,000 a year in Social Security taxes (actually payroll tax, since part of this liability is Medicare Tax). But that doesn’t count the employer part of payroll tax, the economic incidence of which is borne by workers and which Cain would also repeal. The family’s payroll tax burden under the current tax system is therefore closer to \$7,500 (or \$6,500 if you assumed that this year’s current temporary payroll tax cut would otherwise be extended.)

Add that all up, and the family’s tax liability under current law (except the temporary payroll tax cut) is \$8,340: \$690 in income tax and \$7,650 in payroll tax.

Now, the 9-9-9 calculations. ABC gets the family’s income tax right: \$4,500. But they greatly underestimate the new consumption taxes that this family would pay under Cain’s plan. They assume about \$2,000 in sales tax liability, which would correspond to taxable purchases of just over \$22,000 per year. But since the base of the sales tax Cain proposes would be extremely broad (applying even to food, medical care and housing) it makes more sense to assume that the family would pay sales tax on most of its after-tax income.

And then ABC does not account at all for the fact that Cain’s plan also includes a 9 percent VAT, which would ultimately be borne by consumers. This burden would be actually slightly bigger than the sales tax burden.

Cain’s campaign estimates that the total base for the sales tax would be \$8.3 trillion, and the base for the VAT would be \$9.5 trillion. Comparing this to total after-tax personal income of \$11.2 trillion as of 2010, we can estimate that this family would be likely to pay sales tax on 74% of its after-tax income, and VAT on 85% of it. That amounts to an approximate sales tax burden of \$3,000 and an approximate VAT burden of \$3,500.

That amounts to a total 9-9-9 tax bill for the family of \$11,000: \$4,500 in income tax and \$6,500 in consumption taxes. That’s an increase of \$2,660 over today’s tax code, or a relative increase of 32 percent.

There would be a modest offset to this: Cain repeals the federal corporate income tax, and the family would get a small savings from that. But overall, the plan is a big hit to the middle class.

Update: Due to my own math error, an earlier version of this post said that the tax increase would be \$3,660, or an increase of 44 percent. My apologies for the error.

Update 2: Depending on your assumptions about how the incidence of the corporate income tax is borne, this family might save around \$1,000 from Cain’s abolition of the corporate income tax. On the other hand, Cain’s plan also hits the family in a way I neglected to include: abolishing the employer side of the payroll tax means those payments are converted to taxable income. That would cost this family about an additional \$350 in income tax under 9-9-9. So, if you think about half the corporate income tax is borne by wage earners, this family’s hit from 9-9-9 is closer to \$2,000 than \$2,660. If you use assume more of the tax is borne by shareholders, their hit would be higher than that.

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