Thursday, October 20, 2011

Herman Cain's 999: Testing the math myself, Part 1

By now, most everyone's heard about Herman Cain's 999 Tax Plan. Some love it, some love to bash it. But who can you trust? It seems everyone's got something to gain. A lot of the negative statements about it have come from other candidates who see it as a great target, or from tax lobbying institutes who depend on the complication of the existing system to justify their existence. But then, even though I like Cain, I don't want to risk trusting his math blindly, without checking it out myself. I mean, sure, he's got a degree in math, another in computer science, and he used to calculate rocket trajectories for the Navy, but he could be wrong this time, right?

So, here's a little experiment. I ran across a 999 Tax Calculator web site, not affiliated with or funded by the Cain Campaign, which lets you plug in numbers and see the effect of the new tax plan on prices. The best part is, you can see the calculations and check them for yourself. Will the poor pay more? Is it regressive? Let's see.

Test 1: Will prices go up, with both state and federal sales taxes?


The Test Calculator has two inputs: Your state sales tax rate, and the price of whatever it is you want to hypothetically buy. For starters, I put in my state sales tax rate of 5%, and a price of $200, which is roughly my family's weekly grocery bill when Granny is staying with us. Three adults and a baby, for reference.

First, the calculator tells me that with $200 of groceries, I'm paying about $10 in state sales tax, so my real bill right now is $210. Good starting point so far.

Now, statistically speaking, 22% of my $200 grocery cost (that is, $44) goes to pay the taxes for all the companies that put those groceries into my hands, from the farmer to the store. That's under a 35% corporate tax rate. The Calculator assumes that those ratios will stay consistent, so with a 9% corporate tax rate, the corporate tax will make up a 6% portion of my bill. (We can test with other assumptions later.)

So, what does that mean in actual dollars? My $200 grocery bill (minus state tax) is really buying me $156 of groceries, when I take out the existing federal corporate tax. The new federal corporate tax will be $9.36. So, the new price is $156+$9.36=$165.36. The 9% Federal sales tax on that will be $14.88, and my state sales tax is $8.27.

Final bill: $188.51, including state and federal sales tax, for groceries that cost me $210 today. A savings of $21.49.

Hey, I wouldn't mind keeping an extra $21.49 in my pocket every week, just from groceries. So far it's looking good. But we've got more questions, more test, and more math to go.

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