I asked an old friend of mine who teaches economics at a university in Pennsylvania about Cain's plan and he gave me this rather in depth review of it:
Cain's plan is asinine. The 9's represent, as I'm guessing you already know, a 9% personal income tax rate, a 9% corporate income tax rate and a 9% national sales tax. Note that the 9% national sales tax would be in addition to local and state sales taxes. For example, I pay 6% sales tax in Pennsylvania. Cain would increase my total sales tax to 15%.
Okay, why do I say it's asinine? The big problem with it is that it pretends to be fair in charging everyone the same tax rate when in fact it would not result in everyone paying the same share of their income to the federal government. Lower income taxpayers would, effectively, shoulder a disproportionate share of the total tax burden. High income earners and corporations would pay less than their fair share. Consider the following scenario...
Taxpayer A (a representative low income individual) has $30,000 in gross income and $20,000 in taxable income Taxpayer B (a representative high income individual) has $150,000 in gross income and $100,000 in taxable income Taxpayer C (a representative corporation) has $1,500,000 in gross income and $1,000,000 in taxable income
The sum of taxable income across these three taxpayers is $1,120,000.
First, using Cain's 9-9-9 plan, the total paid in personal income tax would be $10,800. This would be paid by taxpayer A ($1,800) and taxpayer B ($9,000) who each would pay 9% of their taxable income in taxes. Second, the total corporate income tax would be $90,000 which is paid by taxpayer C, the corporation.
This may appear fair in the sense that each taxpayer pays the same 9% of their taxable income. Two problems though...
Now there's also the national sales tax of 9%. Taxpayer C, the corporation, would write off expenditures (e.g., a new photocopier, computers, snacks for the break room, etc) as business expenses. This means the expenses lower their taxable income and reduce their tax liability. They would pay the sales tax at the time of purchase but would avoid income taxes on the income used for those expenditures. C will spend some portion of its $1,500,000 on consumption/expenses. Let's assume a reasonable percentage goes to wages and salaries of employees. About 70% of total US income is wages and salaries, so using that share taxpayer C would spend, at most, 30% of $1,500,000 on items for which a sales tax would be collected. At a maximum then, C would spend $450,000 and pay 9% of the expenditure as sales tax. That's a figure equal to $37,156.
Second, lower income individuals allocate a higher percentage of their incomes to consumption relative to higher income individuals. (Another way of saying this is that rich people are more likely to save, typically, a higher percentage of their incomes and poor people are typically more likely to save a lower percentage of their incomes.) Assume that taxpayer A spends 95% of his income and saves 5% and that taxpayer B spends 85% and saves 15%. After deducting the 9% income taxes from their incomes, we have that A spends 95% of $28,200, which is $26,790. Of that $26,790, $2,212 would be national sales tax revenue. Likewise, B spends 85% of $91,000, which is $77,350. Of that $77,350, $6,387 would be national sales tax revenue.
Adding up the tax payments (income + sales) for A, B and C...
A: $1,800 + $2,212 = $4,012...which is equal to 13.37% of taxable income (of $30,000)
B: $9,000 + $6,387 = $15,387...which is equal to 10.26% of taxable income (of $150,000)
C: $90,000 + $37,156 = $127,156...which is equal to 8.48% of taxable income (of $1,500,000)
In short, "flat taxes" are regressive. They sound nice and equitable but those least able to pay end up paying a higher share of the total tax burden. This is because a) corporations write down taxable income by taking business deductions for expenses and b) the marginal propensity to consume (that is, the 95% and 85% numbers for B and A, respectively) decreases as income rises. In fact, our current tax system appears to be progressive but, because the capital gains tax is low (15%, I believe) relative to taxes on labor-based income, sales taxes are "flat", and marginal propensities to consume decrease as we move up the income ladder, it is pretty much flat (in a true sense). This means that any movement at all towards lowering taxes for anyone above the median income is, effectively, tilting the tax burden towards the lower half of households.