9-9-9, Take 2: Cain's Tax Plan Revamp Still Stings the Middle Class

Herman Cain's 999 Tax Plan Revamp Still Stings the Middle Class
Herman Cain's 999 Tax Plan Revamp Still Stings the Middle Class

Republican presidential candidate Herman Cain unveiled several major changes to his popular 9-9-9 tax plan on Friday. The former Godfather's Pizza CEO even announced that those below the poverty line wouldn't have to pay income taxes. Yet the country's middle class won't find much relief in Cain's fleshed-out 9-9-9 plan. Here's a detailed look:

A Simple Plan

Cain's plan seems to be the height of simplicity: It would levy a 9% income tax, a 9% corporate income tax, and a 9% federal sales tax on all purchases. On the surface, the drop in income tax would help most taxpayers, but the sales tax would be very tough on middle class households. Given that middle class families spend most of their income on necessities, a 9% sales tax pretty much functions as an additional 9% income tax. According to the nonpartisan Tax Policy Center, a household making the median income of $49,445 currently pays an effective federal tax rate (income tax plus payroll tax minus deductions) of 14.3%. Cain's proposal would increase this rate by 3.7%.

It gets worse. According to Edward D. Kleinbard, a tax law professor at USC's Gould School of Law, at least part of the 9% corporate tax would also fall on the heads of workers. Cain's tax plan allows businesses to deduct money based on investments, exports, and purchases made from U.S.-located businesses. What it does not do, however, is allow companies to deduct the wages that they pay their employees. Forced to pay taxes on these wages, Kleinbard argues, corporations would face a major tax increase -- and would pass a large portion of that boost on to their workers.

The Tax Policy Center agrees, noting that a household making the median income of $49,445 would see its total federal tax percentage increase by 9.5 percentage points, to 23.8%.

Class Warfare

On Friday, Cain offered some concessions to the nation's poorest citizens, but did little to alleviate the burden his plan would place on middle tier earners.

Speaking in Detroit, Cain told a crowd of supporters that the nation's poorest citizens wouldn't pay the 9% income tax. While generous, however, this cut wouldn't erase the damage that his 9-9-9 plan would do to the poor. According to estimates, the full 9-9-9 plan would increase taxes on the poor by 15.8 percentage points. Although the removal of the 9% income tax for them would help, they would still pay more taxes than they currently do.

What's worse, the poor would also lose tax-based benefits that they rely on. Some programs -- such as the earned income tax credit and the child tax credit -- aren't merely tax deductions: They are actually refunds. In other words, poor families receive these benefits even if they are larger than the total tax levy that they would pay. As Elaine Maag, a senior research associate at the Urban Institute notes, these programs translate into "money in their pockets." Maag points out, however, that "Under Cain's plan, that portion of the social safety net would disappear."

What Kind of Empowerment?

One of the most mysterious aspects of Cain's plan has been his "Empowerment Zones" or "Opportunity Zones." In these areas -- which he didn't really define until Friday -- his plan allowed companies to take "deductions for the payroll of those employed in the zone." As for the workers themselves, his plan offered "additional deductions for those living and/or working in the zone." On Friday, he gave a hint at what those changes could be, noting that in the designated zones, 9-9-9 could become 3-3-3, with taxes slashed in each category.

The fact that he made his speech in Detroit gave a clear idea of which areas he planned to target for empowerment: depressed urban zones. For households either living in these zones or willing to relocate to them, Cain's plan could be a major boon, offering sweeping tax cuts and a major stimulus to job-creating corporations. However, there was also a sharp bite of medicine to go with the spoonful of sugar: To be designated as an opportunity zone, Cain noted that "cities will have to step up and remove some of the barriers that are within their city limits, so that the cities do what they can do to help themselves."

While Cain didn't give a complete list of all the "barriers" that would need to be changed, he outlined a few requirements. Opportunity zones would have to eliminate the minimum wage, enact school voucher programs, and designate themselves as "right to work" areas. Noting that zoning laws and building codes can add to business costs, he also announced that companies in these areas could apply for waivers that would enable them to bypass these rules.

In other words, Cain's plan wouldn't just cut taxes for companies that move into blighted urban areas. Through the empowerment zone program, it would also remove or scale back many twentieth-century laws that were designed to protect workers.

Just Like Starting Over

While Cain's tax plan has alarmed many economists and analysts, it has also highlighted a key problem with the tax code: It's simply too complex. Including all associated laws, the code totals more than 72,000 pages and contains a near-endless collection of cuts, breaks and deductions. However, Kleinbard notes, Cain's plan throws the baby out with the bathwater: "The solution is to directly address the twists and turns of the tax code. You don't abandon a hundred years of intellectual investment in the tax code in favor of a radically different, highly regressive plan. If we have the political will to enact Cain's plan, then we have a political will that is more than capable of addressing the complexities of the current tax code."

Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at @bruce1971.

Your resource on tax filing
Tax season is here! Check out the Tax Center on AOL Finance for all the tips and tools you need to maximize your return.
When are Taxes Due? Important Tax Deadlines and Dates
Make sure your calendar is up-to-date with these important deadlines, dates, possible extensions and other factors in play for both individuals and businesses in 2021.
Read MoreBrought to you byTurboTax.com
Guide to Filing Taxes as Head of Household
The IRS has provided a series of guidelines to help taxpayers understand whether or not they qualify to file as head of household.
Read MoreBrought to you byTurboTax.com
Tax Tips After January 1, 2022
Your tax bill isn't chiseled in stone at the end of the year. Here are 10 tax tips and steps you can take after January 1 to help you lower your taxes, save money when preparing your tax return, and avoid tax penalties.
Read MoreBrought to you byTurboTax.com
Birth of a Child
The birth of a child is not just a blessed event; it's the beginning of a whole new set of tax breaks for your family. Learn how the newest addition to your family can help trim your tax bill, and how to save for your child's future in the most tax-efficient manner.
Read MoreBrought to you byTurboTax.com