In anticipation of the primary election, two Republican presidential hopefuls — Texas Gov. Rick Perry and business leader Herman Cain — are promoting new tax plans. We asked William Dickens, a University Professor in the Department of Economics in Northeastern’s College of Social Sciences and Humanities, to evaluate Perry’s flat tax and Cain’s “9-9-9” plan.
What are the nuts and bolts of each plan?
Cain’s “9-9-9” plan would eliminate all federal taxes and replace them with a 9 percent sales tax; a 9 percent tax on corporate revenue minus investment and business expenses; and a 9 percent tax on all earned income minus charitable contributions. State and local taxes would be unaffected. Those with incomes below the poverty line could be exempt from the income tax, while special credits may help individuals and firms in certain urban areas.
Perry’s tax plan is nowhere near as revolutionary as Cain’s. Perry would simply allow anyone to pay taxes of 20 percent of their earned income. Alternatively, they could choose to continue to pay taxes as they do in the current system.
Both of these candidates’ plans claim to be flat taxes that would simplify taxes. While Cain’s comes closest, neither plan really delivers on this claim.
How would these plans affect Americans?
While most people would pay a lower tax on their income under Cain’s plan, standard tax analysis would suggest that most people would face a much higher tax burden. In addition to the 9 percent income tax, those who spend most of their income would face a 9 percent increase in sales taxes. Further, since wages aren’t deducted from business income, most of the 9 percent business tax would likely be passed onto workers in the form of lower wages. On the other hand, those with very high incomes earned mostly through investments would see a huge drop in their taxes because of the lower rate and the exclusion of all capital gains from taxation.
Perry’s plan would provide a big tax cut for that same group, with a lower tax rate and an exemption for capital gains. Middle-class Americans with substantial deductions for mortgage interest, those who operate small businesses and those with other valuable deductions or credits would find staying with the current tax system to be the way to pay the least in taxes. Like Cain’s plan, this would be a boon for rich investors. Unlike Cain’s plan, it would have little or no effect on the vast majority of taxpayers.
Would either plan solve the nation’s economic woes?
Under both plans, shifting the tax burden from the rich to the middle income and poor would likely worsen the employment crisis. And neither plan would do anything to improve our nation’s budget crisis. At best, Cain’s proposal is revenue neutral and would leave the same gaping budget deficit we face today. Perry’s plan would substantially reduce tax revenue, making the deficit worse and requiring more spending cuts.
Cain’s plan would “broaden the base and lower the rates” to increase the number of people paying the tax so that everybody’s rates can be lower. It would do this by eliminating large deductions such as the mortgage interest deduction. In the long run, there would likely be modest gains in efficiency.
Perry’s plan would do little to stimulate growth. Eliminating the tax on capital gains could spur investment in the long run, but not in the short run when the existing capital stock is underutilized.