Friday, October 14, 2011

9-9-9 Example

My mind was thinking more about Cain's plan, so I threw together this rough example from the statistics provided by the Consumer Expenditure Survey.

Assume a family of four with an annual income before taxes of $94,807 and the after tax income of $92,147. That's about a 3% tax of their gross income.  Under a flat 9%  their after taxes income would be $86,274. They would pay $8,532 in annual income tax. That's 3 times what they currently pay.

The average annual expenditures for this group is listed as $69,536.

Removing non-taxble expenditures for housing, food, utilities, and the cost of health insurance, etc.....which account for over 70% of the listed expenditures, that leaves about 30% of expenditures on things which would be subject to sales tax.

30% of $69,536 is about $20,860.  9% sales tax on those expenditures would be $1877 annually.

That is over and above the normal state sales taxes that everyone pays.

This particular family would be paying the federal government $10,409 in one year.

Under Cain's plan, this family would be paying $7,749 more than it currently does.

Cain's plan not only would hurt the lower and middle classes, it would hurt the upper classes even more.

Over 31%, and the top 31%, of the "consumer units" fall into the $70,000 and above income level, with the average(or mean?) income listed as $129,151.  These households also make up to 52.4% of the annual aggregate expenditures for the country.  A 9% sales tax would hit these more wealthy people as hard as it would the middle and lower classes because of their higher consumption of goods.  Maybe they wouldn't feel it quite as hard as a family living on $40,000 would, but that is all relative.

Viewed in this way, Cain's plan is actually a disproportionate tax on "the rich" and all those "job-creators" Republicans keep trying to protect.

It's an awful, awful plan. Going over these numbers convinces me that Cain has no clue about how taxes work or the actual breakdown of how his plan would affect the country.


Here are a few articles that touch on the same things I've been posting about.

P.S.  I swear that I hadn't come across any of these things until after my posts. Most of these articles(there are more I didn't list) came out today or the day before.  Things like that always make me wonder if there is some sort of meta-cognition process at work in the world. ;-)


JSA said...

I couldn't access the FTP. How does a family with $90k get away with only 3% tax? I thought that's already in the 25% bracket? I'm somewhere in the 35% range and already pay 9% sales tax, so a flat 9% would give me quite a bit of extra money in my take home, while it would decimate the cash flow of people making $50k or less.

terri said...

The thing about tax brackets is that hardly anyone actually pays the rate listed. By the time people get their standard deductions, plus deductions for mortgage interest, deductions for the amount they pay towards health insurance, IRA/retirement contributions not being taxed.

That's why so many people don't actually owe the government income taxes even if they are currently in the 15%-28% tax bracket. My family would fall in that bracket, but there have been years when we haven't owed any taxes because of various deductions and tax credits.

So, the picture isn't that simple. The tax code is very complex and there are incentives and loopholes for just about every tax bracket, especially if you are knowledgeable about the tax code or your accountant is.

This is one of the reasons why Warren Buffet says he should be taxed more, because he knows that once all of the rules are applied, he's not really paying that super-high tax rate that Republicans quote all the time.

Your take home wouldn't be as well off as you think it would because I think that part of Cain's plan is to eliminate all of the deductions and loopholes.

Think of it this way. Let's say you pay $10,000 for health insurance for your family of four, well that is not taxable as income. The government wants people to buy health insurance, so they don't tax income used to purchase it. Under Cain's "simple plan" you wouldn't get that deduction. You would pay your $10, 000 for health insurance, plus have to pay $900 in taxes on the income that you used to buy it.

Also tax rates are tiered. When someone enters a new bracket, only the income over the the threshold gets taxed at that rate, not their entire income.

If you make $120,000 and the threshold for the tax bracket were $100,000, you only pay the higher rate on the $20,000. The other $100,000 is taxed at the lower rate.

That wouldn't happen with a flat tax.

MInTheGap said...

My problem with all tax predictions is that they (no matter who the person doing the calculations is!) fail to take into account what the effect of said taxes are on expenditures.

Your calculation assumes that expenditures remain the same, but the other possible outcome is that those people making $90k will not choose to save their money instead of spending it and incurring more taxes. This would have the effect of less things being made or prices falling.

I'm not knocking your post, just stating that I don't think Cain's plan will exactly meet any of the predictions-- his, yours, ABC's or the CBO's.

It's always the unintended consequences that kill you, and I'm firmly in the camp that says that we shouldn't give the government another "revenue pipeline."

terri said...

Well, there are always unintended consequences. How people will behave may change under a different system.

However, change happens in the places where it can happen. Certain things wouldn't change. People have to buy certain goods all the time: clothes wear out, appliances wear out, home repairs need to be done, cars need to be fixed.

Also, if you have more income, you probably drive nicer cars and have nicer homes and the repairs for fixing those items are generally higher than they are for fixing smaller homes and lower-end cars.

IF the rook of your 3,000 square foot home needs to be replaced, it's going to cost more than the roof of a 1500 square foot home sheerly on the size of the roof. If you live in a gated community, it may even have to be a nicer, more aesthetically pleasing roof in order to meet homeowner association rules.

That roof is going to have a sales tax on it and the amount of that tax is going to be more for the larger, more expensive home.

Also, that nicer, more expensive home is going to have a much larger real-estate tax bill, which currently would be tax deductible......but if most deductions are wiped out, then the wealthier person is paying income tax on the money used to pay those higher real estate taxes..

There are lots of ways that this can come back to bite wealthier people.

JSA said...

Yeah, if I came anywhere *near* to keeping 91% of my gross, I'd be ecstatic. I take home slightly less than 50% of each paycheck right now, and have always ended up owing about $7,000 additional to the IRS at the end of each year (capital gains withholding is something like 30%, and is never enough). Some of the withholding is for stuff like FSA, 401k, ESPP, etc. but I don't think I'm keeping even 66% of the gross.

I have a good accountant, and most people I know are in the same situation, so it seems pretty obvious that a flat 9% tax would be massively regressive. It makes no sense at all.

terri said...

hmm...I tried to find out more about the numbers used in the report I linked to.

I think what throws it off is the grouping of "$70,000 and above". That is a very broad range...and I never found out whether they were using an average or a mean, which would make a difference.

However, according to these tables from the Tax Foundation the average rate for the top 1% of earners is
23.27%...Table 1 and Table 8.

Someone has to have an Adjusted Gross Income of about $380,000 to be in that 1 %

Of course...these are all averages. Two individuals may earn the same income and have varying tax liabilities depending on whether they are married, have children, are self-employed(in which case they are paying both portions of payroll taxes, instead of just the employee portion) etc.

I'm not sure why your particular tax picture seems different than the top 1% of earners.


terri said...

tax foundation

JSA said...

Very interesting. I just pulled up the most recent tax filing I could find, for 2007. My wife and I filed jointly, and ended up paying 27.8% of our gross income in federal income tax (that doesn't include social security or medicare, which admittedly are a shrinking percentage as income goes up). Looking at the charts you linked, we weren't too far off of the average for our range. The top end range will be skewed because as a person builds more assets, they can take tax-free income off of things like municipal bonds. IOW, beyond a certain point, you can shift your income to non-taxable sources. We've shifted more to these sources in the past couple of years, but last year's W2 looked pretty much the same.

So a 9% flat tax would be like a 66% tax reduction for me. According to the charts you linked, it would be one hell of a tax hike for the bottom 50% of income earners.

james said...

Others warned that a federal sales tax would most likely be a VAT, which has proved horribly easy to tweak higher without anybody having to vote on it. And in Europe the VAT bureaucracy is huge--some things are taxed at different rates, and I gather there's a lot of behind-the-scenes lobbying for reclassification--more invitation to cronyism.

terri said...

A VAT tax could fly under the radar, that's for sure, though I don't know if it would ever pass. After all, only socialist countries use VATs! :-0

Actually, the whole 9-9-9 discussion is really not a big deal. It would never ever pass.

Many years ago Steve Forbes never got any where with his idea of a flat tax, I don't see Cain going much further with it, especially with a national sales tax added to it.

The first thing Congress could do is simply start eliminating a few deductions here and there, and then maybe slowly increase taxes by a small percentage across the board, or even focusing on the lower and middle class.

It's just that 9% would be a huge spike for a vast majority of the country, especially if most deductions and exemptions were removed from the tax code.

JSA said...

Amazingly, Cain is soundly in first place in Iowa and nationwide now. Here is a graph of how people's taxes would be affected, that matches the math I did on our taxes.

It's utterly farcical that anyone could take this plan seriously.