What the Expert Says
Bright Hub: In your own words, how would you describe the 999 Tax Plan?
Deborah Sweeney: The 999 Tax Plan is the name given to Herman Cain’s economic plan that he has been heavily marketing during his presidential campaign. The idea behind it is simple--9% tax on income, 9% on national sales and 9% on corporations.
Everything is taxed at the same rate, completely revolutionizing the tax code and simplifying tax season for everybody. Naturally, many conservative pundits love the idea of a flat tax, so this has a bit of support behind it.
However, if you notice, consumers are essentially double-taxed while the producers are taxed only once. So the average person pays 9% on their income, followed by 9% of everything new they buy (the rate is not applicable on used items) while corporations only pay a 9% corporate tax. The idea is to shift the burden from producers to consumers, which has serious implications as, while the upper classes may see their total tax burden go down, the middle and lower classes will have their burden grow.
Bright Hub: You have stated that in your opinion, there are at least five ways that the 999 plan will affect small businesses. Like most factors that affect the operation and profitability of a company, these have the potential to be either positive or negative. Would you elaborate on that, please?
DS: The first negative: An across-the-board 9% sales tax hurts consumption. Not only will American workers have to pay 9% of their income to the government, but also they will now be required to pay an extra 9% on anything they buy. While a certain amount of consumption will always be necessary, most consumers will greatly curtail their spending.
To make matters worse, the majority of consumers come from the middle and lower classes, both of which will be more heavily impacted by this tax increase. All of this negatively affects businesses from all sectors, from production to retail, as, without demand, there is no reason to produce and no financial support. Even with a decrease in the corporate tax rate, if there is no one to buy the goods then many businesses will fail.
The first positive: While people may not spend money on consumable goods, they will begin to save more. That increases national savings, which in turn, increases national investment. Combine that with the flat 9% tax on corporate earnings and incorporated businesses can end up seeing quite a bit of growth, as more money is available, both from their own revenues and in the forms of loans, to invest in their company. Because Cain has stated he would not eliminate business deductions for investment in capital, this would really help capital-based corporations like those in the manufacturing industry, a sector hit hard by cheaper labor and capital overseas.
The second negative: Industries in the service sector that are more labor oriented would be negatively impacted; not only will the national sales tax hurt the demand for their services, but labor deductions will be erased, meaning hiring the necessary amount of workers may be difficult and will add to the unemployment rate. Cain is separating capitol and labor in the hopes of getting more out of every worker, but it does not make sense to favor one vital section over the other.
The second positive: This plan eliminates the payroll tax burden on small businesses. The average business owner will not have to worry about sending the government the necessary amount of money out of each worker’s paycheck. While this may seem small, withholding payroll taxes and filling out all the necessary paperwork for them can be quite burdensome and either takes a bit of time or requires hiring an accountant. Eliminating this burden makes life easier for small business owners.
The third negative: Finally, as tax burden increases the incentive to cheat does as well. We can pretend that all retailers will comply with this new tax and always collect an extra 9% on every dollar spent on their store, and many certainly will, but such a heavy tax increase will cause many retailers to try to sell products under the table. Therefore, if one retailer is selling their goods for 9% less than another and all you have to do is pay cash to eliminate a money trail, then the cheating business will be rewarded. That puts all businesses into a precarious position with the law and, unless Cain’s government is willing to invest heavily in infrastructure and officers to enforce compliance, the pressure to cheat will continue to build.
BH: So, what is the bottom line here in your opinion? How will the 999 Tax Plan affect small business over the long term?
DS: In conclusion, while we should be aiming for a clearer, fairer tax plan, Cain’s ideas probably are not what we should be looking to implement. A shift of the tax burden from the producer to the consumer makes a bit of sense, but the poorer classes will assume more of that burden and, unless Cain wants to abandon the simplicity of his 999 plan for another convoluted tax scheme, that won’t sit well with most people.