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Do Cain, Perry tax proposals add up?

3Qs with University Distinguished Professor of Economics William Dickens
November 1st, 2011

In antic­i­pa­tion of the pri­mary elec­tion, two Repub­lican pres­i­den­tial hope­fuls — Texas Gov. Rick Perry and busi­ness leader Herman Cain — are pro­moting new tax plans. We asked William Dickens, a Uni­ver­sity Pro­fessor in the Depart­ment of Eco­nomics in Northeastern’s Col­lege of Social Sci­ences and Human­i­ties, to eval­uate Perry’s flat tax and Cain’s “9–9-9” plan.

What are the nuts and bolts of each plan?

Cain’s “9–9-9” plan would elim­i­nate all fed­eral taxes and replace them with a 9 per­cent sales tax; a 9 per­cent tax on cor­po­rate rev­enue minus invest­ment and busi­ness expenses; and a 9 per­cent tax on all earned income minus char­i­table con­tri­bu­tions. State and local taxes would be unaf­fected. Those with incomes below the poverty line could be exempt from the income tax, while spe­cial credits may help indi­vid­uals and firms in cer­tain urban areas.

Perry’s tax plan is nowhere near as rev­o­lu­tionary as Cain’s. Perry would simply allow anyone to pay taxes of 20 per­cent of their earned income. Alter­na­tively, they could choose to con­tinue to pay taxes as they do in the cur­rent system.

Both of these can­di­dates’ plans claim to be flat taxes that would sim­plify taxes. While Cain’s comes closest, nei­ther plan really delivers on this claim.

How would these plans affect Americans?

While most people would pay a lower tax on their income under Cain’s plan, stan­dard tax analysis would sug­gest that most people would face a much higher tax burden. In addi­tion to the 9 per­cent income tax, those who spend most of their income would face a 9 per­cent increase in sales taxes. Fur­ther, since wages aren’t deducted from busi­ness income, most of the 9 per­cent busi­ness tax would likely be passed onto workers in the form of lower wages. On the other hand, those with very high incomes earned mostly through invest­ments would see a huge drop in their taxes because of the lower rate and the exclu­sion of all cap­ital gains from taxation.

Perry’s plan would pro­vide a big tax cut for that same group, with a lower tax rate and an exemp­tion for cap­ital gains. Middle-​​class Amer­i­cans with sub­stan­tial deduc­tions for mort­gage interest, those who operate small busi­nesses and those with other valu­able deduc­tions or credits would find staying with the cur­rent tax system to be the way to pay the least in taxes. Like Cain’s plan, this would be a boon for rich investors. Unlike Cain’s plan, it would have little or no effect on the vast majority of taxpayers.

Would either plan solve the nation’s economic woes?

Under both plans, shifting the tax burden from the rich to the middle income and poor would likely worsen the employ­ment crisis. And nei­ther plan would do any­thing to improve our nation’s budget crisis. At best, Cain’s pro­posal is rev­enue neu­tral and would leave the same gaping budget deficit we face today. Perry’s plan would sub­stan­tially reduce tax rev­enue, making the deficit worse and requiring more spending cuts.

Cain’s plan would “broaden the base and lower the rates” to increase the number of people paying the tax so that everybody’s rates can be lower. It would do this by elim­i­nating large deduc­tions such as the mort­gage interest deduc­tion. In the long run, there would likely be modest gains in efficiency.

Perry’s plan would do little to stim­u­late growth. Elim­i­nating the tax on cap­ital gains could spur invest­ment in the long run, but not in the short run when the existing cap­ital stock is underutilized.

- by Casey Bayer


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