Friday, October 21, 2011

9-9-9 For Dummies

Published by AJStrata at 8:11

OK, it seems the GOP establishment candidates are going to try an defend the current unreasonable, unfathomable, unfair and incoherent tax code in order to fend off Herman Cain. Time for a little lesson in math. Bottom line, the Feds get their money, but under 9-9-9 we decide on where to invest it, not DC.

While one can go through incredibly detailed and useless analysis of optional tax/deduction scenarios, these can be misleading because the more complex the analysis the more hidden assumptions are applied thst can skew the result. There are simple boundary checks which show how Cain’s 9-9-9 plan really is less costly to tax payers. These ‘back of the envelope’ calculation are used in engineering all the time to bound the detailed simulations, so do not dismiss the power of an enveloping analysis.

First off, compare the apples to apples. Cain is replacing the income, payroll and many other federal taxes with 9-9-9. As a marginally well off taxpayer with a middle class income, you pay taxes on income plus payroll taxes out of your salary. Income tax rates are applied on a whacky scale, where the first $8,350 of income is not taxed (for anyone, even billionaires), then the next $25,600 is taxed at 15% (plus a $835 (10%) charge for making $8,350), then the next $48,300 is taxed at 25%, and so on. While this Rube Goldberg math looks daunting, it is easy to collapse it down to a representative individual making $82,250 in taxable income (the top of the 25% bracket).

When you do all the adding up the realized tax on $82,250 is $16,750 (20.4%).

OK, now add in the payroll taxes. The employee side is 6.2% for Social Security and 1.45% for Medicare making the payroll tax total of 7.65%.

Add the payroll and income tax together and you get 28.05, and our $82,250 income now loses $23,042 to the federal government. That’s right you started with $82,250 and ended up with $59,208.

Now, the last time I checked a 9% flat income tax is less than a 3rd of the 28% federal taxes now in place. There are no deductions that are going to drop your taxes down to a third of its pre-deduction level, so there is little reason to compute these complex scenarios – none will look better than Cain’s 9-9-9.. So on income/payroll tax alone 9-9-9 is a huge savings. Instead of $59K in disposable income you walk away with $74.8K in disposable income.

Current plan: $23K in federal tax. Cain plan: $7.4K in federal tax.

But this would also mean enormous deficits since we cannot afford to cut the tax rate by two thirds or more for those who now pay all the federal taxes on income. Note I did not say all the income taxes (a subset of the federal taxes on income. Everyone pays payroll tax, which is why it is seriously misleading to say those not paying income tax now will pay a lot more under 9-9-9.

To address this revenue shortfall Cain adds in his 9% federal sales tax. And here is his genius. We invest this money, not DC.

If you add the 9% sales tax to the 9% income tax you get 18% – and would demonstrate why you should not be a tax accountant. The 9% sales tax is applied only to the disposable income that goes to buy taxable goods. Not all of your disposable income goes to buy taxable goods! Mortgage payments are not taxable goods. There probably are exemptions for insurance, etc.

My guesstimate is 50% of the disposable income (income left after income/payroll taxes) would be applied to taxable goods – meaning the additional federal taxes for this example wage earner under 9-9-9 is around $3,370 dollars. You could spend more or less depending on your situation.

OK, the simple wrap up then is;
Under the current system the $82,250 in taxable income results in $59,209 in actual take home pay, giving the government $23,042 of your hard earned money
Under Cain’s 9-9-9 (from the perspective of the tax payer), that $82,250 in income results in $71,430 in take home pay, giving the giving the government only $10,820 of your hard earned money,

Anyone can see this middle class taxpayer is walking away with a LOT more disposable income. Which means they will be buying goods and services in greater quantities and energizing the economy.

And for all the math challenged (or deliberately misleading) GOP contenders on stage last night like Romney who tried to talk about state sales tax, note there is no change. If you paid 0-7% in sales tax before 9-9-9, you still pay 0-7%. But now you have more take home pay to spend, so you will see scenarios showing more taxes as you spend more. Like I said, DC gimmicks.

What you really get under 9-9-9 is a much lowered federal tax burden. Now I admit there are deductions that can lower your income, but you can do the math and realize that while you will still spend money on those currently deductible items (like a mortgage), the amount Uncle Sam let’s you keep is not going to beat 9-9-9 in terms of income in your wallet to spend.

And that’s the kicker isn’t? Do you want to keep sending $23K of your salary to DC to spend, or do you want to spend most of that yourself? That is why 9-9-9 is so smart. The Feds still get their money in the end – we decide where most of it will be invested based on our personal needs. 9-9-9 wins right there. No more dumb, government trickle down projects. We spend, the economy booms, we make more money, etc.

Note: I did not factor in the 10.55% of payroll tax the employer also takes out for each employee (a cost that really comes out of their income level). Think about that as well when you realize labor is the largest cost in all goods and services.

Update: Much more here at WSJ

Major Update: One more thing about Cain’s trading off much lower income/payroll taxes for a sales tax. Income taxes come out all year long. Many of us have to file to get back much of our deductions. Payroll taxes get sucked out all the time (unless you are in the top 5% and make income above the limits).

Basically, the feds will not be confiscating as much money from us up front, but earning more than a third of it off the sales taxes.

Also, since small businesses (like ours) pay our taxes at our personal rate, we see a huge windfall in money we can now put to work on benefits, employee training, new hires, etc. If you don’t run a company the benefit of Cain’s 9-9-9 will not be immediately obvious – so therefore maybe it would not hurt to listen to us small business conservatives given our experiences and expertise?

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