Herman Cain's 9-9-9 Tax Plan Is Incredible! (Literally)

Parsing the Republican presidential candidate's wickedly silly idea.615 cain.jpgREUTERS

The most important thing to know about the Herman Cain's famous 9-9-9 tax plan is how little we know about it.

At first glance, it's the simplest tax plan you can imagine. A nine-percent tax on personal income. A nine-percent tax on spending. A nine-percent tax on corporate income. No exceptions. How easy is that? Incredibly. As in, it is totally not credible.

First, consider the logistics. The current income and corporate tax code has $1 trillion in exceptions. Cain is saying his will have none. Not for children. Not for earned income. Not for homes. Medical losses, catastrophic home fires? Not that I see. Planning on donating to charity or spending that money pile on research and development at your firm? No tax credit for you. Imagining a consumption tax without similar exceptions is equally incredible. In Europe, many VATs cover only a third of purchases because so many exceptions have been carved out.

And don't be fooled by the simple three-digit marketing. Bruce Bartlett over at Economix writes that the tax could prove nearly as much of a headache as the existing code:

How benefits would be treated is unclear, because purchases of things like health insurance might constitute a purchase from another company and remain deductible. If so, what is to stop a company from paying its employees by leasing their cars and homes for them and even buying their food and clothing? That would reduce their taxable revenue.

The abolition of any deduction for wages is likely to raise the cost of employing workers, even with abolition of the employers' share of the payroll tax. And since the dividend deduction doesn't appear to be related to profitability, companies could borrow to pay dividends and still get the deduction. Even a novice tax lawyer could easily make a tax shelter out of that.

Second, consider the taxpayers. "The bottom line is that people at the bottom will pay much more unless there's something to protect them, and people at the top will pay much less unless there's something to stop them," Roberton Williams from the Tax Policy Center told me. Consider the 18 percent of households who pay neither payroll nor federal income tax (on account of low wages and high tax credits). Their tax burden will immediately go from zero percent to 18 percent. Now consider the top percentile that makes an outsized share of their income through the capital gains tax. Their tax burdens could easily fall by "more than half," Williams said, adding: "This is very much a regressive plan."

Finally, consider the economy. It is true that reducing the tax on corporate income and eliminating the payroll and capital gains taxes will reduce the cost of hiring workers and making money in the U.S. Incentives matter, and it's in the national interest to have a simpler tax code with lower marginal rates. (A left-of-center suggestion: Reform the personal and corporate income tax codes to lower rates and phase in a carbon tax to help offset the payroll tax?) But the 9-9-9 plan pays for this increase in efficiency by raising taxes on the bottom third, eliminating Social Security's direct money stream and turning our redistributive tax code on its head while introducing a whole new tax to keep government funded.

In sum, Cain's plan cuts taxes for rich, raises rates on poor, hands a gimme to large corporations, and manages to create a tax that Republicans don't want. Pardon Michele Bachmann, but you don't need to turn this thing upside down to see it's a wickedly silly idea.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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