Herman Cain's 9-9-9 Is A Gift To The Investor Class
Last week's Republican debate eschewed the traditional podiums and instead had the candidates seated around a conference table. This could not be a more appropriate setting for America to be introduced to Herman Cain’s catchy and nonsensical 9-9-9 plan, which is boardroom science fiction fantasyland economics at its (not-so) finest.
Herman Cain had early success in the corporate world, primarily with the Pillsbury Company, eventually rising to become the CEO of Godfathers Pizza at the age of 41. Having served in senior roles well before then, he was at a sufficiently high rung of the corporate ladder to have financial self-interest in the performance of the company’s stock. Basically, if Cain wasn’t being paid substantially in stock and dividends in addition to his salary from a relatively early age (which he likely was), he was drawing bonuses based on the big-picture financial performance of the company and not isolated employee incentive plans.
Herman Cain is a shareholder. He owns plenty of stock and has served on boards of directors. He may have an unconventional and disarming colloquial style, but he is just as much of a corporate efficiency-maximizing assassin as anyone on Wall Street.
Cain was clearly a stud in the corporate world and became a shareholder early on, and importantly, not vice versa. He’s not a small bootstrapping businessman, but a large corporate organization executive-man. He’s the guy who worked for Mitt Romney at Bain Capital, not the guy who started the business that Bain bought. This is the lens through which his tax fantasy is viewed.
Let’s take a closer look at why that is by examining the three “9’s” (which sounds more fun in a different context):
9 percent business flat tax
(Gross income less all investments, all purchases from other businesses and all dividends paid to shareholders)
Accounting terms are boring even to accountants, so I am going to use an example of a fictional business to illustrate this 9-9-9 plan. Let’s call our fake business Stevie’s Polish Sausage (SPS), and we manufacture a variety of cased meat products.
According to the IRS, gross business income equals net receipts (gross receipts minus returns or allowances, which is the same thing as gross revenue) minus cost of goods sold (COGS). For SPS, this would be the total amount of money we have earned from selling sausages minus the cost of the meat, casings, packaging materials, aprons and various other supplies. Since the meat, casings, etc. constitute “purchases from other businesses”, Cain appears to be defining gross income as gross revenue, which is the definition I will use from here on out.
Note how purchases from other businesses, investments and dividends paid to shareholders are excluded from the tax, but general and administrative costs, including payroll, are not. The SPS shareholders have every incentive to take their gross profit after paying the COGS and make other investments, but more significantly, issue themselves larger dividends in order to pay a smaller amount of tax, all while applying downward pressure on wages. This is a tax shelter even my non-accountant self could abuse fairly easily.
SPS could pay Stevie and the senior management in stock and dividends and would be encouraged to be generous with this type of compensation, funneling tax-free money right off the top to shareholders and even employees who have enough cash on hand to be able to take compensation in the form of annual dividends instead of bi-weekly paychecks. Those with liquidity pay none of this tax, while those living check to check get their salaries reduced by that 9 percent being taken out before their wages.
This first “9” is hugely beneficial to shareholders but punishes those who need current cash payments, who are the most in need of a break.
9 percent individual flat tax
(Gross income less charitable deductions)
This is fairly self-explanatory; Cain would replace our tiered, progressive federal income tax with a 9 percent flat tax across the board. While the top earners will see a substantial tax cut, some of the poorest Americans as well as the elderly, the most vulnerable groups, would have their taxes raised.
Since abolishing the capital gains tax is part of Cain’s 9-9-9 plan, investment income, including the aforementioned dividends, would be grouped in under this 9 percent umbrella. Recall that while wages were subject to the 9 percent business tax, dividends are not, so wage laborers would be paying an effective 18 percent income tax while dividend earners would pay only 9 percent.
Stevie would take his big money dividends and pay 9 percent, while Frank the sausage maker would have the 9 percent taken out before his direct deposited paycheck, and another 9 percent to deduct at tax time. Herman Cain, again, is looking out for the investor class.
9 percent national sales tax
This is another self-explanatory item which disproportionately impacts poorer Americans who spend a greater share of their income on goods and services. Mitt Romney can afford a more expensive cup of coffee in the morning, but a 9 percent price increase across the board really adds up for those living on an airtight budget.
SPS’s customers would have to pay 9 percent more for sausage, and in a competitive marketplace, would likely have to slash costs (jobs) to maintain a stable level of business.
It is also hard to see how raising the purchase price of goods and services will inspire consumers to go out and spend the money in the economy necessary to stimulate it.
Herman Cain’s 9-9-9 plan is a handout to shareholders and anyone who likes to hoard cash, while shifting a good portion of the tax burden down the income scale. Cain’s plan de-incentivizes discretionary spending on goods and services and hiring wage laborers, both of which directly infuse cash into the economy, while encouraging corporate directors and managers to grant themselves very generous executive compensation packages, money that tends to stay on the sidelines and collect interest.
The whole 9-9-9 catchphrase may seem corny, but behind the silly slogan is the absolutely serious ideology of a man who believes the economy would be improved by redistributing more money to the wealthiest Americans -- those who tend to earn their money through investments rather than wages. The pizza magnate should know as well as anyone that more, not less, Americans need a larger piece of the pie.
Reach Matt Pressberg here.
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