Herman Cain is surprising a lot of pundits by staying in the GOP race. I've seen several Facebook posts from people who are behind his candidacy. The appeal of his simple 9-9-9 tax policy on its face may seem like a good idea, but it is not! Like any flat tax, it is regressive. Allow me to explain.
This article from 2005 described the percentage of American families below the poverty line and, most importantly for purposes of my discussion, the percentage of American families who fall short of basic budget thresholds. In other words, they spend every dollar they make (and more) to obtain the basics. In 2005, "42% of families living in cities and 30% of families residing in rural areas f[e]ll short of basic family budget thresholds." Do you wonder what it is today? For the sake of discussion, let's just say that 40% of American families are "below budget."
Mind you, this is the poorest 40% of families in America. We are counting from the bottom up.
Wealthy people make and spend money differently that this bottom 40%. For virtually everyone, our number one expense is housing. But here the road diverges. For the bottom 20%, the second biggest expenditure is food and other absolute necessities at 17% of their earnings. For top earners, they spend 17% of their earnings on transportation.
The more we earn, the smaller percentage of our income we spend on food. The poorest 20% of Americans spends 12% of its income on food at home, while the middle 20% spends 9% on food and the top 20% spends only 6% on food. This makes sense, right? I mean, no matter how much you make, you can only eat so much.
Health care: bottom 20% spends 8% of its earnings, middle spends 6.8% and the top fifth of earners spends only 4%.
You see where I'm going. Top earners spend money on luxuries and travel, sure, but they don't spend all of their money. They save. They invest. They gift it to their kids.
So, here's my point: If 40% of America is spending every dime it makes to try to meet a reasonable budget, that means that under the 9-9-9 plan, the poorest 40% of this country will be paying 18% total tax on their earnings. Period. They get a 9% income tax - no deductions - and since they spend every dime trying to survive, they spend 9% sales tax on everything else. (Hoping they can make it with what is effectively an increase in their taxes for many of the poorest Americans.)
Under Herman Cain's plan, if you don't save, you pay 18% tax.
If you are a high earner, you could choose to live on this "necessary" budget and only pay effective taxes of 12-13%. But even assuming you lived on a nicer, more luxurious budget, you are never going to pay the full 18% unless you just go out and blow your money. Can we agree that this is not a likely outcome?
What about the third 9? That's corporate tax, and while wealthy people do tend to invest more dollars in corporations per person, many, many people in the bottom 40% have retirement accounts with stock ownership. I'm going to call this a wash.
So, when talking about individuals, under the Cain plan, everyone will pay between 9% and 18% of his or her earnings in federal taxes. Unfortunately, since the bottom 40% will always pay the full 18%, and the top earners never will, Mr. Cain has managed to create the most regressive tax policy in American history. What's more, since the wealthiest actually pay fewer taxes when they spend less, we can also count on these so-called "job creators" to be even more incentivized to sit on their money.
So, poor people get poorer, fewer jobs are created, and rich people get even richer. Sounds good if you're Herman Cain. Not so good if you are in the bottom 40%.
The thing I wonder about is this: How many Herman Cain supporters are in that bottom 40%? Ignorance is really, really dangerous. Get above your raisin' people, and stand up for yourself. No one's going to be on your side but you. Well, and me.
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