Democracy Gone Astray

Democracy, being a human construct, needs to be thought of as directionality rather than an object. As such, to understand it requires not so much a description of existing structures and/or other related phenomena but a declaration of intentionality.
This blog aims at creating labeled lists of published infringements of such intentionality, of points in time where democracy strays from its intended directionality. In addition to outright infringements, this blog also collects important contemporary information and/or discussions that impact our socio-political landscape.

All the posts here were published in the electronic media – main-stream as well as fringe, and maintain links to the original texts.

[NOTE: Due to changes I haven't caught on time in the blogging software, all of the 'Original Article' links were nullified between September 11, 2012 and December 11, 2012. My apologies.]

Tuesday, October 18, 2011

What 9-9-9 Would Cost the Middle Class

After putting up my previous post about Herman Cain’s tax plan, I did a bit more reading about it. Guess what? The plan turns out to be even more regressive than I had thought, and, moreover, it is a “9-9-9” plan in name only.

On the plus side, the plan is less of a deficit-buster than it first appears. But that’s because it would effectively tax workers at a rate of eighteen per cent, not nine, thereby raising a great deal more revenue. Adding in the sales tax makes the Cain tax proposal even more onerous. A more accurate description of it would be an “18-9” plan.

Once you think of the plan this way, it resolves a question that has been hovering over it since the beginning: How can Cain say he will raise enough money to support the federal government with a flat rate of nine per cent when most serious analyses suggest that it would take a flat rate of at least seventeen or eighteen per cent to do the job? The answer is that Cain’s plan is actually an eighteen-per-cent plan disguised as a nine-per-cent plan.

In a new study, some of whose conclusions I referred to earlier, Edward D. Kleinbard, a former staffer at the Joint Committee on Taxation, has laid out how the plan would work. Until I looked at the details of Kleinbard’s paper, I hadn’t grasped the key point, which is the nature of Cain’s nine-per-cent tax on business profits. Like many others, I had assumed that Cain would maintain the existing corporate income tax and simply slash the rate from its current level, which ranges from fifteen per cent for small businesses to thirty-five per cent for large corporations. But that isn’t at all what would happen.

For tax purposes, businesses are currently allowed to deduct the wages and salaries they pay from their gross income. Under Cain’s plan, the deduction for wages and salaries would be abolished, meaning that the “profits” that firms report to the I.R.S. would be much higher, as would their tax bills. Firms would then seek to pass on the higher taxes to workers in the form of lower wages.

To show how this would work, let me offer up a simplified example that is based on Kleinbard’s analysis. Take a firm with gross revenues of a hundred million dollars that pays fifty million dollars in wages and salaries and forty million dollars in other costs (raw materials, advertising, and so on). Under the current system, the firm’s taxable profits are ten million dollars, and its tax bill is $3.5 million.

Under Cain’s proposal, since the firm could no longer deduct the fifty million in wages and salaries, its taxable profit would jump to sixty million. At a tax rate of nine per cent, its tax bill would be $5.4 million. If you compare this figure to $3.5 million, you will see that the firm’s effective tax rate would jump by more than half under the Cain plan. When applied to firms throughout the economy, such a tax hike would generate a very big jump in revenues from the business tax despite the fact that it was being levied at a lower rate.

On this basis, the Cain campaign may be exaggerating only modestly when it estimates that the federal government would have raised about eight hundred billion dollars in business-tax revenues in 2008. As far as the budget deficit is concerned, that’s good news. But who would end up paying these taxes? At first glance, it looks as though businesses would. They would figure out their tax liability under the new rules and wire the money to the I.R.S. However, that is only half the story. Faced with a huge increase in their tax bills, firms would seek to pass the burden on to their employees in the form of lower wages and stingier benefits.

How much of it would they be able to pass on? According to most economic studies that have looked into this type of question, the answer is almost all of it. The “incidence” of such taxes falls almost entirely on workers. (The technical reason for this is that the supply of labor is less sensitive to the level of wages than the demand for labor.) Ultimately, rather than paying nine per cent of their income in income taxes, workers would face a rate of close to eighteen per cent. Half of these taxes the I.R.S. would collect directly. The other half employers would deduct from workers’ paychecks and pass on to the government.

With almost all existing deductions and tax credits to be abolished under the plan, there wouldn’t be any way for people to get around these taxes. In addition, don’t forget, there is the nine-per-cent sales tax. There’d be no way around that, either, unless you choose to save some of your income, which many poor and middle-income families can’t afford to do.

One of Cain’s arguments for his plan is that it would abolish the regressive payroll tax. But, as Kleinbard points out, the plan would end up looking much like a new payroll tax levied at a higher rate, with no upper limit on the income it applies to. Adding the nine-per-cent sales tax to the eighteen-per-cent tax on income produces an over-all tax burden of close to twenty-seven per cent, which would apply to every dollar of income that is earned and spent. “In sum,” Kleinbard writes, “the 9-9-9 Plan operates on wage earners as an effective 27 percent uncapped payroll tax applied from the first dollar of wage income—not an elimination of the payroll tax at all!”

That may be pushing things a bit far. I think it’s more accurate to describe Cain’s proposal as an “18-9” plan. But Kleinbard’s basic point is sound. The more you look at it, the less attractive it seems.

Origin
Source: New Yorker 

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