Presidential candidate Herman Cain has made quite a splash with his “999” plan, but the catchiness of the proposal’s branding belies a subtle attack on low- and middle-income working families (and a not-so-subtle windfall for financiers and businesses).
Along with efficiency, the core principal behind a progressive tax code is one of equity—that the distribution of the nation’s tax liability should take into account one’s ability to pay. In other words, Americans with higher income should pay a higher share of their income in taxes than those with lower income. Mr. Cain’s plan would radically jettison this principle of equity along with the rest of the code.
Mr. Cain advocates a 9 percent tax on each of earned income, corporate income, and consumption. This would entail two changes: (1) a drastic cut in corporate and individual income taxes for high-earners, and (2) an increase in income and consumption (sales) taxes for low- and some middle-income households. Additionally, the proposal would eliminate all taxes on capital gains, dividends, foreign profits, and large estates and gifts (objectively the most progressive federal tax)—again a boon to the highest-income and/or wealthiest Americans. In a second bait-and-switch, the diminished taxes on earned income and corporate income would eventually be swapped for even higher taxes on consumption (the so-called “fair tax”).
Indeed Mr. Cain’s plan is just about diametrically opposed to Warren Buffett’s plea to stop coddling multi-millionaires and billionaires, many of whom pay lower effective tax rates than middle-class households because of the preferential tax treatment of investment income. It is hard to fathom a hedge fund manager paying a higher effective tax rate than a secretary under Mr. Cain’s plan; financiers would be able to receive all of their compensation as tax-free investment income and taxable consumption presumably accounts for a smaller share of income (certainly a smaller share than that of Mr. Buffett’s secretary). The windfall from eliminating investment income taxes would accrue to the top 1 percent of earners, who will pay over 70 percent of all capital gains and dividends taxes in 2011.
In recent congressional testimony, Syracuse University professor and tax expert Len Burman stated that “the biggest loophole is the lower rate on capital gains” and that “tax breaks on capital gains undermine the progressivity of the tax system.” Rebuilding an equitable tax code necessitates curtailing, rather than exacerbating, the preferential tax treatment of investment income over work income. That does not mean equalizing taxes on investment and work income at zero rates while amplifying a flat consumption tax, which would be even more regressive.
Mr. Cain’s tax proposal only makes sense if you believe that the problem with the current tax code is that low- and middle-income households have it way too good, and they should give more of their income to those poor Americans making more than half a million dollars a year.