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Battle of the Flat Tax: Cain’s 9-9-9 vs. Perry’s Optional 20%

Posted By Miranda Marquit On 11/03/2011 @ 12:15 pm In Taxes | 14 Comments

Almost no one likes the current tax code. It’s big. It’s complex. Many think it’s “unfair.” Which is why Republican presidential candidates are eager to float their own ideas for a new tax code. So far, both of the recent tax system overhauls are based on a flat tax structure. Herman Cain has the now-famous 9-9-9 plan, and Rick Perry is offering his optional 20% flat tax.

How would either of these taxes impact you?

Cain’s 9-9-9 Plan

Herman Cain’s 9-9-9 plan has been drawing a lot of fire, especially since the Tax Policy Center [3] pointed out that 84% of taxpayers would see a tax raise. Originally, the 9-9-9 plan offered no deductions and no loopholes, with the exception of a break for charitable donations. All earned income would be taxed (but not dividend, interest or capital gains) at 9%, businesses would all be taxed at 9%, and there would be a 9% national sales tax on all new goods. Some estimates pointed out that the poorest would see a significant percentage their income eaten up by taxes as they paid sales tax on items like food, and actually started paying the income tax.

The result of the outcry was some back-pedaling for Cain. He has since modified his plan to provide low-income tax breaks, and even exempt those at or below the poverty line from the income portion of the tax. Even so, for many folks, the Cain plan could still result increased costs due to the national sales tax, which would be added on top of state sales tax [4].

Additionally, some who already pay taxes would see an increase in their income tax bills under the 9-9-9 plan. I would. My itemized deductions and other breaks put me in a situation where paying my marginal tax rate now is less than what I would pay if I paid 9% of my income without deductions. Even with a deduction for charitable contributions, I would end up paying almost double in income tax under Cain’s 9-9-9 plan.

Perry’s Options 20% Flat Tax

Rick Perry, on the other hand, is offering voters a choice: Pay a 20% flat tax, or stick with the current system. Like Cain’s plan, taxes wouldn’t be levied against dividend income and capital gains, and the estate tax disappears. However, perhaps learning a lesson from the reception of the 9-9-9 plan, Perry has deductions built in. There’s an exemption for $12,500 of income. Each dependent results in a $12,500 deduction. And, for those with incomes of less than $500,000 a year, the mortgage interest deduction, charitable contribution deductions, and sales tax and state tax deductions all remain in place.

Oh, and Perry makes his plan optional. Run the numbers, and see what works best for you in terms of lower tax liability, and pick what you prefer. Like Cain’s plan, some might find that the lack of deductions means that paying 20% on a higher income could result in higher taxes than paying on a lower income in a marginal tax bracket [5] with a higher percentage attached. Plus, Perry doesn’t make it clear whether this would be a permanent choice, or whether the choice would disappear over time.

What is clear, though, is that Perry’s plan would require massive cuts to government spending. While such a move might be welcomed, at the same time it would probably also mean cuts to programs that you might benefit from. And it could also make things difficult in terms of funding infrastructure projects and other projects that we come to associate with an elevated quality of life.

What do you think of these flat tax proposals? Do you like either one? Do you have a tax overhaul idea of your own?

(Photo: ChuckHolton [6])


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[2] Email: mailto:?subject=http://www.bargaineering.com/articles/battle-flat-tax-cains-999-perrys-optional-20.html

[3] Tax Policy Center: http://www.taxpolicycenter.org/numbers/displayatab.cfm?Docid=3222&DocTypeID=2

[4] state sales tax: http://www.bargaineering.com/articles/internet-sales-tax-state-deals-amazon-bring-questions-pay.html

[5] tax bracket: http://www.bargaineering.com/articles/federal-income-irs-tax-brackets.html

[6] ChuckHolton: http://www.flickr.com/photos/rangerholton/9480323/

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