Herman Cain hates savvy personal finance savers.
I’m actually really surprised that I haven’t seen anyone point out this fact earlier. I was going to write this article weeks ago, but then just assumed someone else would jump on it. Unfortunately that hasn’t happened and I can’t ignore it any longer.
Republican presidential candidate Herman Cain wants to punish people for saving money.
That’s what a new sales tax does, like the one he’s proposing in his 999 plan. Think about every dollar you have in your bank account, and then realize that if Herman Cain implements his 999 plan, you have to give the government 9% of all that saved money.
Well I guess that’s only if you spend that money. If you want to burn it or make paper airplanes out of it, then you don’t have to give them 9%. But I have a feeling most people expect to spend the money they earn. Or they expect their kids or grandkids to spend it. Eventually, it will get spent and it will be taxed 9%.
Haven’t We Been Taxed Enough Already?
When you include Social Security, Medicare and Federal taxes, I paid a 22% tax rate in 2010. If any of that money has been saved and I hold it until 9-9-9 is in place, add another 9%. It’s pretty simple. 22% of income tax plus 9% of a sales tax is a total tax rate of 31%!!!
Do you see how absurd this policy is? I don’t actually think the point is to penalize savers, but you can’t ignore the fact that it does.
If you want to implement a national sales tax, there should be a provision to ensure current assets are not taxed under both the old system and the new system. Herman Cain has no such provision. I actually find it quite humorous that his website claims:
It taxes everything once and nothing twice.
Yes, it taxes everything earned after the program is implemented once, but it taxes everything earned before implementation twice. As someone with thousands of dollars in savings, I don’t consider that “nothing”.
Implementing This Plan Would Cause a HUGE Market Imbalance
Imagine trying to implement the 999 tax plan. Let’s pretend the 9% sales tax goes into effect on May 1st, 2012. After this day, everything is going to be 9% more expensive because it will have a 9% federal tax on it.
Imagine how many people would go to the store on April 30th and buy as many things as possible to preempt the 9% price hike. Food. Electronics. Clothing. Maybe even Christmas presents. Buying something in April that you would have bought in the future is a guaranteed 9% return on your investment!
Now imagine the economic lull in that would start in May and last for who knows how long. People aren’t going to be buying anything because they spent all of April loading up on everything they need.
Herman Cain’s 999 Plan Is Terrible!
Herman Cain’s tax plan penalizes savers and it will create a huge temporary market imbalance. It is not a good plan for America, and it’s especially terrible for responsible people who have saved up a lot of money thinking it won’t be taxed again.
What do you think about Herman Cain’s Plan?
Kevin McKee is an entrepreneur, IT guru, and personal finance leader. In addition to his writing, Kevin is the head of IT at Buildingstars, Co-Founder of Padmission, and organizer of Laravel STL. He is also the creator of www.contributetoopensource.com. When he’s not working, Kevin enjoys podcasting about movies and spending time with his wife and four children.
I think Obama is praying that Cain gets the nomination, as that’s his best shot to get re-elected. I agree, it’s a bad plan.
Yes, Obama would probably destroy Cain. The polls are showing that much already.
Wait… I think you missed a big part of this plan…
The 9-9-9 plan says that it would scrap all current taxes (income, payroll, cap. gains, and corporate). It would replace the current tax structure with this: tax all personal income at 9%, all corporations at 9%, and all sales at 9%.
So, if you spent all of your money, you would only be taxed at 18%. Your current tax rates are no longer valid.
I’m not talking about money earned AFTER the plan is implemented. I’m talking about money earned BEFORE 999 goes into effect that has already been taxed.
My old tax rates are definitely valid, because I’ve already paid them, and now Herman Cain wants to tax that money that hasn’t been spent an additional 9%
Ahhh… and I missed a big part of your point.
Yes, that would be complete crap and I agree with you.
I think the savers and those who are financially responsible are targeted because it’s essentially a lock that this group will report and pay their fair share of taxes. Unlike many of the rich who avoid paying taxes, and the poor who don’t qualify in most instances to pay taxes.
It’s the same as the mortgage assistance programs. The banks punish those who are current and string them along because they know that they are going to get their money on time every month. But, they are working diligently with those who were irresponsible and behind in the payments, rewarding them with modified terms so they can start collecting money again.
Do the right thing, get screwed over. That seems to be the way things are going these days.
They will keep attacking the middle class until the middle class starts fighting back. That’s why we need to get people educated about what this plan really means.
I thought something similar to you when I was reading about a national sales tax – it’s an insidious way to tax Roth IRA balances. It’s also a handout to the traditional 401(k) and IRA – income tax would never be paid on those issued. That made me think that if this plan were implemented, some aspect would have to address that disconnect.
Another thing to think about – you tax the things you want less of. So, taxing consumption would lead to less consumption in aggregate. If you follow that logic, think about this fact: we’ve been taxing income since 1913…
Yeah, a sales tax would punish all consumers (not just savers). Is it worse or better than an income tax, in principal? Tough questions, all!
I see the point of a sales tax. It gets money from illegal immigrants and tourists that you wouldn’t otherwise capture in an income tax. But you can’t punish people for being financially responsible as you make the switch.
And yes, you tax consumption and you’ll get less of it, but that’s not such a bad thing. We could use a little more savings in America!
I’m not against a national sales tax, but I am against a national sales tax AND an income tax AND doing this in a way that doesn’t hurt savers.
I’m surprised Cain is still pushing the 9-9-9 plan.
Frugal savers are often punished by the economy. Just look at how low interest rates have been for the last few years. Just when more people are saving money, we’re penalized for doing so with savings account interest rates that tanked from 5% to 1% or less. Borrowers and those in debt (those who can qualify to be) are rewarded with low interest rates as well, encouraging spending to boost the economy (not that it’s working).
Yes, the low interest rates are killing people who would like to save. If I could get a 5% return on a savings account, I’d probably have 30-40% of my portfolio there. Unfortunately at 1%, I have essentially 0% of my portfolio in a savings account.
There’s actually a really funny SNL skit that bashes his 9-9-9 plan:
http://www.hulu.com/watch/289402/saturday-night-live-gop-debate-ii
I like when he says, “Well let me explain…I never thought I would be taken seriously”
Seriously though…worst plan ever
I think it’s true. At the end of the day when it’s Romney against Obama (with Paul as a 3rd party candidate), Cain will be happy to have upgraded his Atlanta Radio Show to a Fox News TV show. I think that’s his goal anyway.
I appreciate your analysis here but think you’re conclusion is a little sensational. The 9% sales tax will make everything more expensive as you describe, but you will bring home much more money by having a lower income tax… 13% in your example. That’s a huge raise! When’s the last time you heard of someone getting a 13% raise at work?
Your analysis also assumes “saved” money is in a non-tax sheltered account. For those with accounts like Roth IRA’s, their money instantly earns 6% by removing the capital gains tax of 15% or more if the money would have been taxed at a normal income tax rate.
There will always be implementation challenges to any wide-ranging change. I’d argue that those costs or logistical hurdles shouldn’t be a barrier if the new system is better in the long run. Would you keep a high-interest mortgage instead of refinancing because there are closing costs?
In my opinion, Herman Cain “gets it.” His plan actually keeps more of your money in your hands, so you can do what you’d like… spend, save or give it away. That always benefits frugal savers!
Why do you call it a 13% raise when you know that everything is 9% more expensive? Isn’t that actually a 4% raise? And consider the fact that I’m a single guy with no dependents and no house, and I pay 22%. Anyone who makes what I make but has kids or a wife or a house would pay less than 18%, which means that person would see their taxes go up!
And unfortunately, you’re wrong about Roth IRAs. Money in a Roth IRA has already been taxed and, under the current rules, would NEVER be taxed again (capital gains or otherwise). That’s the whole point of a Roth IRA. However, under Herman Cain’s plan, this money that SHOULD never be taxed again will end up being taxed an additional 9% via the sales tax.
The fact is, an 18% tax rate raises taxes on essentially every low income household and lowers taxes only on most high income households. If 50% of the country is not paying income taxes, then I say we’re half way there. I don’t want to raise taxes on anyone; let’s just get the other 50% down to 0 as well.
Yup, I was wrong on the Roth… was thinking traditional IRA or 401k. Not taxed now, taxed when you pull it out. It would be like normal income then. You’re a smart guy, you probably knew what I was getting at though.
Good discussion here, thanks for posting. Two additional points for you to consider:
1. Even if the sales tax was a net-new tax, it wouldn’t equal a 18% tax on your money. 100% of your income isn’t subject to the 9% sales tax because you never spend 100% of your income on goods that would be taxed under the 999 plan. Things like charitable contributions, mortgage, rent, insurance, new savings/investments, etc. wouldn’t be taxed. That stuff makes up the majority of my budget (I’m a saver, too).
2. The 9% sales tax isn’t a a net-new tax. It is designed to replace and simplify the mess of taxes that are already built into goods and services. According to Cain’s website, the design is for the total price of a good to cost the same or less. I found this site that illustrates it pretty well: http://www.999calculator.net/
So at the end of the day, we’re really looking at a 9% flat income tax rate at will impact individuals/families. If you want to discuss that being too high or raising taxes on people that currently pay 0 taxes, then we can have that talk. That’s a fair discussion but separate point.
Another thing to consider about the sales tax is that 1. you have control over it to an extent by controlling your spending and 2. you delay the time between earning the money and paying the taxes, kind of like in a traditional IRA, so you can allow that money to work for you some before being taxed.
Great points, as well. That’s why I actually believe the plan is pro-frugal savers.
We don’t need 999 to lower the corporate income tax (which is the main benefit in Herman Cain’s calculator)
In 2010, less than $200 billion of US income came from corporate taxes. Instead of some $700 billion stimulus program, why don’t we just reduce corporate income to 10% or 5% or 0%? It’s less than 10% of our total federal revenue and would do WONDERS for employment and reducing the cost of goods.
Lower, flatter corporate taxes is a great solution. But we don’t need all of 999 to implement it.
I think a national sales tax is a terrible idea, and it’s the main reason that I think this plan is stupid. Currently, sales tax in my county is one of the highest in the state at 6%. We are state mandated to collect 4%, and the extra 2 percent are from votes that come up every 4 years.
I do understand that the basis for this 9% sales tax is that you’ll save on federal income taxes and capital gains and all that, but I also worry about this bringing in needed revenue – will it bring in as much as we are currently getting, or will the deficits just get larger?
The only candidate who has a real plan to attack the deficit is Ron Paul. Everyone else just wants to play around the edges and balance the budget sometime down the road. Even if this plan is revenue neutral, it doesn’t address the real problem, which is spending.
Lower taxes are the key to job growth, so don’t write them off as an issue. Spending is also a huge issue, but I believe Cain has very similar stances to the rest of the primary candidates in that regard. They all want to reign in Fed spending by cutting entitlements, foreign aid, education, EPA, etc. The only real outlier I’ve seen here is Ron Paul who want to make additional cuts to Defense spending.
Interesting take on the transition period. Once in place, the Cain plan will hurt the poor since they will spend the majority of their income. Not to mention all credit card loans and other loans will be taxed at 9% once that money is spent so the cost of borrowing would sky-rocket. I doubt he would be able to get it through Congress anyway.
If he wins the presidential nomination, then you’d think this would have to go through. He doesn’t have anything else, so voting for Herman Cain essentially means voting for 999.
I question his character because of the sexual harrassment suits. I question what kid of organization he created for his campaign. I also question the economist he quotes regarding the 999 plan.
I don’t know what to believe about the sexual harrassment, but I do know that I hate his tax plan, and that he’s completely clueless on foreign policy, and that he was a chairman of the Fed. 3 strikes, you’re out dude!
“If any of that money has been saved and I hold it until 9-9-9 is in place, add another 9%. It’s pretty simple. 22% of income tax plus 9% of a sales tax is a total tax rate of 31%!!!”
I believe the actual rate would be more like 29.9% Since the 9% sales tax is coming from the 88% not from the entire 100%.
22%+(9%*88%)=29.92%
I think you mean 78%, but I get your point.
It also only counts for the money I didn’t spend. Let’s assume I only saved 20% of what I earned and spent the other 80% already. Then I’m only taxes 9% on 1/5th of what I earned last year.
However, think about people who have been saving money for 40 years. For me it’s only a few thousand bucks. For someone else with hundreds of thousands or even millions, they are taking a very large haircut.
Like I said, he wants to punish the frugal savers.
Im a republican, and I think Herman Cain is a douchebag. Actually, I think someone on Seeking Alpha website mentioned that he is penalizing savers too, but just briefly.
I can’t believe he is still in the race after FOUR women have accused him of sexual harrasment.
Certeris paribus (if there is truly such a thing in economics) I’m not sure if you are worse off than a saver. The plan also lowers taxes on businesses, which are either passed onto consumers with higher prices or employees with lower wages. If the laws of economics are accurate, you might actually see prices drop with lower business taxes than the rise in a sales tax.
But, you do have to put a lot of faith in a field of study where lines always neatly intersect.
The notion of a national sales tax is like the camel’s nose in the tent. Next thing you know, you’re sleeping next to a smelly cud-chewing beast.
When looking at accumulated wealth, you are correct that it would appear to be taxed twice. I assume that you also despise tax on capital gains as the original capital was taxed when it was earned.
If total federal taxes account for only 22% of your income, you must have relatively little income. Payroll (or self employment taxes) account for at least 15% of your income. Even if your employer pays half of payroll taxes, that is taxes going to government rather than you. If the plan does go through, it would seem that the rate would be 18% (paid as 9% income, 9% sales). Since this would be 4% less than the current rate, it would seem that this would be a better deal than the current system.
As far as anonymous sexual harrassment allegations, I think Bill Clinton has already made that a moot point. I seem to recall the same type of unfounded allegations made against Clarence Thomas.
As financial wizzes you’re all aware that the US needs to get it’s money back in balance. That’s either reducing spending, or increasing earnings or both.
And since a lot of the spending is fixed (you can’t fire all teachers for example) a large part will have to come from increasing earnings.
From there it’s quite simple, you can get more money from people who have money in contrast to people who have spend everything already.
Yes, it’s not fair that you’ll be paying twice with this new proposal. But without a good alternative…
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Also, some of the maths is wrong. You’re paying 9% of sales tax over the 91% that was left after income tax. Making the tax burden closer to 16% rather than 18%.
Which is fenominally low, in my opinion, coming from a country where you work until september to pay taxes and what you earn after that is yours.
That is absurd! No way in hell he’s taking my money.
I agree! Of all the plans I’ve seen this one is by far the worst.
There’s only one candidate serious and principled enough to tackle our problems but sadly he’s not a “mainstream” politician. I think the Republican line-up is a joke.
I’m voting for Ron Paul.
While I think we need some serious work done to the tax system most politicians aren’t willing to address the real problem of out-of-control spending. Fix that problem and it would make changing the tax code a much easier task in my opinion.
Couple points/thoughts in no particular order:
1. The current Tax Code is somewhere in the 64000 page range… and it is, by my peoples opinions, unfair. No one really knows how it will turn out if they were to institute the 999 plan; but ask yourself this: At what point is enough, enough with the current tax code? If your car breaks down non-stop and continues to become more expensive through repairs, maintenance and general inconvenience of dealing with it, you junk it and get something else, be it bike, sailboat, roller skates or a Corvette.
2. Many people immediately (and narcissistically) look at exactly how it will affect them when something changes, without looking at the big picture. Did anyone consider that now Super Rich Guy with his awesome tax breaks and income hidden in capital gains and stock options spends a lot of money? (yes I am sure part of it is corporate spending… got it… noted… but do you care whether he or his corporation pays the sales tax on his corporate jet? Didn’t think so.) What about the umpteen million illegal aliens that live in America and work under the table? Surely they will continue hiding from income tax, but at least you are getting 9% of all the money they spend as Federal Tax.
3. Though roughly half of all Americans pay no income tax (and most of those probably get a social redistribution of wealth via EIC or some other program), the fact is that those people end up paying Federal Taxes in other ways (Gas taxes, etc.) and the percentage ends up being more percentage-wise than you’d think. By all means don’t be an entitled OWS and look it up.
4. Entitlement spending is going to DESTROY our country. The simple fact of the matter is at some point someone, being current Social Security recipients, the next generation of them, or the one following, is going to have to realize that they are essentially screwing over future generations. So instead of being generally narcissistic, that segment of the population will have to come up with an altruistic epiphany and vote to stop the madness. This will be tough because someone is going to have to be the first to not get it (Social Security and Medicare). Frankly all currents point to this not happening anytime soon since we have a bunch of people protesting the government and demanding all manner of socialist subsidies/entitlements to make their lives easier or to cover for their inability to adapt and overcome.