Thursday, October 20, 2011

Herman Cain's 999: Testing the Math, part 2

Test 2: But what about that 9% income tax? Won't that hurt poor people who aren't paying income tax now?

One concern raised is that the flat 9% income tax will hurt people who aren't taxed right now. Let's try those numbers out, again keeping the assumptions of the tax calculator intact.

Let's take a household of 4 (same as mine), earning and spending at the poverty level. That is, every dollar they earn in a year, they have to spend. Just to make it worst-case-scenario, let's say that everything they buy is new, so everything they buy is taxed. Most sensible families at the real poverty level are buying used wherever they can, which means the tax doesn't touch everything they buy, but let's take this worst case just for the sake of argument. The latest data I have says that in 2005, this family would have earned (and spent) $25,660. Let's say that this family lives in a state with 0% sales tax, just to keep that part of the math simple. Finally, let's assume that their combined federal and state income tax bill is $0 per year. (With both me employed and my wife hit with the self-employment tax, that's what seems to happen for us often, more or less.)

Using the same ratios and methods as before, with $25,660 in annual spending under our existing tax code, our family will only have to spend $23,125.10 in goods plus sales taxes in a year. Ah, but now the income tax! With 9% of $25,660 we get  $2,309.40 in income taxes. That means only $25,435.50 of their original $25,660 is still coming out of pocket. That's a $224.50 not spent over a year. That's within 0.875% of our original "break-even" point, and erring on the side of savings.

Plus, we're again assuming that this family is spending every dime they have on new goods. Every dollar they spend on used items is not going to get hit with the sales tax. So, let's say that $5,000 of their $23,125.10 in spending is for a used car. That's $450 in sales taxes that they won't have to pay. Looks better and better.

In other words, under the old tax code, if I want to reduce my tax hit, I need to hire a tax accountant, spend money on tax software, and/or spend days and days working through paperwork. With the 999 Plan, if I want to reduce my tax hit, all I have to do is learn how to spend carefully and wisely, the way my parents and grandparents did. That doesn't sound so bad, does it?

Update: The news gets better and better. In this model, we're dealing with a family exactly at the poverty level. From an article I have just read, any family earning below the poverty level will be exempt from the income tax. I like it!

Continued in Part 3....

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