“9-9-9” (What Herman Cain’s Not Saying)

Let me begin by saying I have a lot of respect for Herman Cain.  He is a vision of what being an American is all about.  You work, you persevere, and you succeed.  He is an attractive American and my hat is off to him for his success as a leader in the business world.

However, during the debate last night, Mr. Cain made the unfortunate choice to include “accountants” in his list of folks who seek to purposely attack his plan for their own gain.

As a full-time accountant who also happens to be part of the middle class, I can promise you, I do not seek to criticize Cain’s plan on the basis of any personal gain for myself.  I seek to explain it on the basis of what it can do to middle-class taxpayers and families.

If you are a middle-class taxpayer, this will apply to you.  I want to highlight a few things that Cain keeps erroneously repeating in interviews.  I’d also like to point out what his own website says and compare it to the current tax code for a real-life scenario.

Talking Point: It eliminates the 15.3% Payroll Tax

What Cain is failing to note is that the majority of middle-class taxpayers (me included) receive a wage from an employer.  Currently, we have Social Security and Medicare deductions from our gross wages (FICA) at 5.65% (7.65% in all previous years).  Our employer then has to match it.  The 15.3% is the combination of our portion and the employer’s paid portion.  7.65% X 2 = 15.30%.  Most Americans, unless they are self-employed, will not save 15.3% because of his plan.

Talking Point: Middle-Class Americans will not be impacted

Nothing can be further from the truth.  Regardless of what one thinks of Michele Bachmann, we have to respect her tax experience and take it seriously.  According to Cain’s website, his 9% flat income tax replaces the current tax code.  Under his “plan,” the taxpayer saves the “15.3%” payroll tax (as I explained above is only 5.65%) and their gross income minus charitable deductions is taxed at a flat rate of 9%.

Now let’s compare Herman Cain’s ability to donate generously to charities versus that of a struggling family making $50K per year with two children.  With all of his “apples and oranges” rhetoric, Cain fails to realize that state income taxes and state sales taxes come into play as they are deductible to the federal income tax on Schedule A.  Also, Cain’s website mentions nothing about the mortgage interest deduction or the real estate tax deduction.

Almost 100% of my middle-class taxpaying clients itemize their deductions on their tax returns not because of charitable contributions but because of the mortgage interest deduction.  In fact, when talking with them on the phone and finding out if they file “short form” (standard deduction) or “long form” (itemized deductions); I ask the following two questions:

1.)    “Do you own a home?”

2.)    “Is it paid off or do you have a mortgage?”

Usually those two questions are all I need answered to determine how they will file.

Sadly, Cain’s plan removes the incentives provided for the growth of family and acquirement of home ownership.

Let’s examine the tax liability of an average family and compare the current tax code with Cain’s plan.

John works, Suzy stays at home with their two children.  They own a modest home.  They earn $56K a year from John’s employment at ABC Company on Main Street.  Their total mortgage interest paid is $9K, real estate taxes are $3K, and state income taxes are $2K.  The IRS also gives them $1,000 per child under age 17 for the Child Tax Credit.  They also receive an exemption of $3,650 for both of them and their two children ($14,600 for all 4 members of the family).  Here is the comparison between their current liability and Cain’s proposal:

Current Tax Code

Cain’s 9-9-9 Plan

Gross Income                 56,000.00                56,000.00
Exemptions               (14,600.00)
Mortgage Interest                 (9,000.00)
Real Estate Taxes                 (3,000.00)
State Income Taxes                 (2,000.00)
Charitable Contrib.                     (100.00)                    (100.00)
Taxable Income                 27,300.00                55,900.00
Income Tax                   3,216.00                  5,031.00
Child Tax Credit (1K per child)                 (2,000.00)                               –
Total Tax Liability                   1,216.00                  5,031.00

 

As you can see, John and Suzy pay 3,815.00 more in personal income tax under Cain’s plan.  Even with the reduction of the payroll tax (5.65%) which saves them 3,164.00, they are still in the hole by 651.00.

After all that, ask John and Suzy how they feel about paying an extra 9% federal sales tax on top of the 10% state sales tax they already pay in Illinois as well as the 5% state income tax.

Also, the “payroll tax” is their contribution to something they’re supposed to get back some day.  Their employer also matches it out of the company’s pocket.  Cain doesn’t explain to what extent, if any, “9-9-9” covers the “Chilean Model” of Social Security he desires to implement in the United States by use of private accounts per individual.

Bottom line: we have to demand specificity out of Herman Cain and his campaign to find out how this plan impacts all Americans.  Also, if your instincts tell you to be wary of supporting the creation of new taxes for future politicians to play with, take them seriously.

If Herman Cain wants the support of Palinistas, he should take a look at Governor Palin’s speech in Indianola, Iowa — the same one Newt Gingrich said was “very impressive.”  In the end, it’s all about jobs.  It’s all about slashing corporate taxes and regulations.  You create millions of new jobs and millions of new taxpayers.

It might not be as catchy as “9-9-9” but it’s a lot simpler and we only need to look at history to see its results.

You can see the IRS Tax Tables I used here.

You can see Cain’s criteria I used here.



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