My Cain Mutiny

Once you’ve written a candidate off your not supposed to reconsider them. Right? I had written off Cain based on some earlier missteps. Well, like many, I found myself inspired by Cain’s dramatic 9-9-9 proposal.

I am an economist by training so I ran the numbers as best I could given only the basic details known about his plan. The numbers basically add up– perhaps 9.99 rather than 9 but close enough to give benefit of doubt and if the economy grows at a faster pace the numbers may work.

There are two simple additions that Cain must add to his plan to make it politically possible and to prevent me from jumping from Cain’s Ship. Before I discuss these additions, Cains’ baisic proposal is:

Eliminate the payroll tax of 15.3 %. Cain stated that workers would save 15.3% by not having to pay this tax. Households instead of paying 15.3% and the current federal income tax, households would pay a 9% income tax and a 9% sales tax on new goods.

Households would save 6.3% in taxes from the 15.3% payroll tax to Cain’s 9% income tax. This savings would allow middle income households to offset part of Cain’s 9% sales tax assuming a poor household spent every dollar of earnings on only new goods. Cain argues that by eliminating the burdonsome tax code that firms would be able to lower prices. Even the poorest household who spent their entire income on new goods, would only need prices to be 3.5% lower to be no household worse off. (For brevity’s sake, I will not show how the 3.5% figure was calculated.)

Now for my threat of mutiny.

I love Cain’s plan but it needs two simple changes. It turns out Cain was not going to give workers back the entire 15.3% of the payroll tax. The payroll tax is actually split into two equal parts, half paid by the employer the other half by the worker. Cain actually only intends on returning half of the 15.3% to the workers, the other half would be a reduction paid by employers. This makes the math harder for workers. Now, instead of getting a 15.3% reduction they only get a 7.65 % reduction. This does not cover Cain’s 9% income tax not to mention the sales tax. He claims that workers would either see an increase in wages or reduced prices because firms are saving on their portion of the payroll tax. While economic theory suggests this is correct. It is only correct after enough time has passed for markets to adjust.

DEMAND 1: Cain should have firms continue to withold 15.3% of their payrolls but instead of sending that money to Washington at the end of each year, send the entire 15.3% to the workers. Now the 9% income tax is covered and a substantial portion of the sales tax as well–no waiting for markets to adjust.

Cain’s plan has been criticized because it does not allow for the Earned Income Tax credit. Well, neither does the current tax code! The earned income tax credit is considered spending. It is found under the budget for Welfare in the budget item “budget exclusion” The government spent $54.7 billion on the EIC and another $22.7 billion for Child Deductions and Obama’s budget included $19 billion for “making work pay”.
The current amount spent on these tax credits is more than enough to compensate for the impact of the sales tax. The lowest 20% of households in this country make up approximately 24 million households. We spend $77.4 (not including Obama’s making work pay program) on tax credits. This is enough for each of these households to be given $3,225. Considering the average income of this group is only $15,800 and would therefore only pay a maximum of $1422 (if they spent every dollar and only on new goods) under Cain’s sales tax, this is more than enough to prevent low wage earners from being harmed.

Demand 2: Promise to use the money currently spent on the EIC and other payroll deductions to offset the modest burden of the sales tax.

Given the advantages of Cain’s plan and the economic growth I believe it would inspire, I want him to succeed. While I know some believe we should not have government give aid to lower income households, this is a debate we can have later, it would be ashame for Cain’s boat to sink because he did not make two rather insignificant changes that would make his plan much more politically acceptable.