The Tax Policy Center, a joint venture between the Left-leaning Urban Institute & Brookings Institutions, has declared that Herman Cain’s 9-9-9 plan will mean a tax increase for wage earners between $30,000 and $40,000. As a static, effective-tax-rate model, that is likely to be true. However, the analysis does not include the effect on the Consumer Price Index.
As most rational people know, corporations do not pay taxes in the sense that they pass that cost along to the purchaser of the goods. In my business, for instance, we are an ‘S’ Corporation. That means that the net income from the business is taxed at the individual rate. For the purposes of the discussion, let’s call that rate 30%. Under the 9-9-9 program, that tax rate drops to 9% — a difference of 21%. The same cost reduction will happen to my competitors.
I wish that I could keep that 21%, but I can’t for one compelling reason: competition. To win business, price is always a factor (not always the primary factor, but always a major factor). So, prices will come down and average margins for my industry will, once again, reach 3-5%. This price competition between market participants means that the prices that consumer will pay will come down by, in my example, 21%. But, even if they only come down ~12%, the consumer will net out ahead by paying the new low price plus the 9% sales tax. (Note: There is a multiplier effect, too. A business who buys printing from me will experience lower print purchase costs. That lower cost will also be passed along to their customers and ultimately down the line to the consumer.).
As Herman Cain said, “Do the math.”
Now, if you want to debate how long the 9% sales tax will stay at 9% (or if a “luxury” sales tax will be added to boats, planes, etc.), that is a worthy discussion. But, please, enough of the trivial analysis of the tax rates themselves. A strong, vibrant economy that is growing jobs and lowering prices is a very real outcome of Mr. Cain’s plan. It is a serious proposal.