Outside the Beltway

Architect Of 9-9-9 Says Herman Cain Should Replace Sales Tax With A Payroll Tax

Doug Mataconis · Tuesday, October 18, 2011 · 4 comments

One of the economists who apparently helped Herman Cain put together the 9-9-9 plan is saying that the plan needs to be revamped:

Economist Stephen Moore, one of the architect’s of Herman Cain’s 9-9-9 tax plan, said Cain needs to rework a critical component of the plan.

Cain’s plan would replace the current tax structure with a nine percent corporate tax rate, nine percent personal income tax rate and a nine percent federal sales tax. But speaking on Larry Kudlow’s radio show on Saturday, Moore said the sales tax should be replaced with a nine percent payroll tax.

“I’ve come to the conclusion that the American people and the voters do not want a national sales tax,” he said. “(Cain’s) going to have to replace that national sales tax with a 9 percent payroll tax. And if you do that it’s a total winner.”

The plan has been under fire from both the left and the right since Cain’s recent surge in the polls. Democrats say the plan would lower the tax burden on the wealthy while increasing the burden on the middle class, and Republicans say the sales tax opens an additional revenue stream for the federal government to abuse.

“I’m surprised how hostile people are to the sales tax,” Moore continued. “When we designed this plan, I thought people would go along with the 9 percent sales tax. But the point is they won’t. And why not just do a payroll tax. It’s the devil we know.”

The plan doesn’t seem anymore workable under Moore’s changes than it did before, and it still seems unlikely to pass Congress. One wonders how the Cain campaign will react to this, though. Moore is well respected on the right, so a comment like this is going to hurt and is likely to come up at tonight’s debate.

There’s something that Moore isn’t telling you, though. In reality, the 9-9-9 plan as it exists now already effectively contains a Payroll Tax, but it’s completely hidden:

Unlike our current corporate tax system, the plan eliminates the deductibility of wages and salaries from corporate income. The net effect is the creation of a brand new 9% tax on wages. When this fourth 9 falls from Cain’s sleeve, many of his opponents will likely accuse him of cheating.

Much of the plan’s virtue lies in its elimination of Social Security and Medicare taxes (payroll taxes) that fall heaviest on lower income workers. This includes the 6.2% Social Security tax and the 1.5% Medicare tax paid directly by the worker. But it also includes the 6.2% and 1.5% portions paid indirectly by workers through their employers. Payroll taxes are, in reality, a cost of employment.

From the employer’s perspective these costs are part of the wage package. Absent these taxes, employers could raise wages by an equivalent amount without raising labor costs. Inclusive of this portion, payroll taxes currently cost workers 15.4% of their wages.

The Cain plan scraps this tax. But the elimination of wage deductibility from corporate taxes replaces it with a 9% payroll tax. Therefore a more honest name for Cain’s proposal is the 9-9-9-9 plan. The forth nine changes everything.

Cain admits that the 9% sales tax would fall heaviest on the poor, but he claims that the elimination of the payroll tax would more than compensate. But when the hidden 9% payroll tax is factored in, more than 50% of workers who currently pay an average income tax rate of just 3% would see a huge tax hike, from 18.4% (former payroll tax plus income tax) to 27%: 9% payroll tax, 9% income tax and 9% consumption tax (poorer workers generally spend all their income).

On the other hand, high income tax payers get a huge break. Not counting the consumption tax, the 9-9-9 plan reduces the highest marginal tax rate from 38% (35% income tax and 3% payroll tax – on income over $105,000) to just 18% (9% income tax plus 9% payroll).

Think of the Payrolll Tax part of the 9-9-9 plan as the stuffing inside the crust of a really bad pizza.