So, a brief thought I had about Herman Cain's 9-9-9 plan today: it sucks. Pretty much everyone with a brain thinks that it sucks. But I think I came up with a way that it sucks even more than it was previously thought to suck. Walk with me, will you?
The 9-9-9 plan consists of three taxes: a nine percent income tax, a nine percent sales tax, and a nine percent "business tax". The business tax is a receipts tax rather than a profits tax (as the current corporate income tax is). What this means is that you don't get to deduct anything except "investments, all purchases from other businesses and all dividends paid to shareholders." In other words, you're now taxed nine percent on all wages and salaries paid to employees.
Under the current system, an employee whose pre-tax salary is $50,000 actually costs an employer $53,825 once FICA taxes are added. (For the purposes of this post, all we're concerned about is the employee's pre-tax salary and the employer FICA contribution.) This is because the employee pays 7.65% of their income in FICA taxes, and the employer matches with another 7.65% contribution. The 9-9-9 plan would do away with FICA taxes, and one of Cain's promises is that your employer will pay you that 7.65%. He claims to have worked in private industry before, but that statement makes me doubt this claim.
Anyway, there's no FICA tax under the 9-9-9 plan…but there is a business tax. And the money used to pay your $50,000 salary is subject to a 9% tax. That means the cost of paying you is actually $54,500. Using powers of math, the cost of employing you is $675 higher under 9-9-9.
Amazingly, the problem gets worse the more you're paid. FICA tax is not assessed on wages over $106,800. For someone paid $250,000 a year, the total employer-side FICA charged is $8,170.20, for an effective employer rate of 3.26% and a total cost of $258,170.20. Under 9-9-9? Your employer would pay $22,500 in taxes on your salary for a total cost of $272,500.**
Not only do poor people get a drastic tax increase, but every single person in America would instantaneously become more expensive to employ!
**Figures changed (I accidentally used the lowered 2011 FICA withholding rate).