Last week, in this space, I unveiled my “9-9-3” plan, a response to the 9-9-9 plan proposed by Republican presidential candidate Herman Cain. (If you missed it, you can read it by clicking here.)
As I said in that original blog post, I liked the basic premise of Cain’s plan, which would help to clear out much of the overwhelming clutter of the byzantine U.S. tax code. However, like any plan of the sort, some smart revisions, in my opinion, could make it even stronger.
So I put my idea out there, and asked you, the readers, to comment.
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Well, after receiving nearly 1,000 emails and consulting with some of the brightest financial minds I know, I have decided to "tweak" my 9-9-3 tax plan.
This is how a civilized, intelligent debate can design a tax system that is fairest for all Americans. It’s too bad healthcare and other legislation wasn't passed this way.
The three biggest complaints I heard about my original plan were that:
1) People who earned less than $60,000 paid more tax, or didn’t benefit at all, compared to the current system.
2) Almost no one liked the national sales tax.
3) Many felt that corporations were getting off too easy.
So, I made some adjustments. For income, I decided to tax the first $40,000 of income, minus deductions, at 3 percent for every taxpayer.
The next dollar of income they earn, up to $1 million, would be taxed at 19 percent. Every dollar after $1 million would be taxed at 25 percent. The same tax rates would apply to investment income on interest dividends and capital gains.
For corporations, the first $40,000 would be taxed at 3 percent. Above that amount, it will be taxed at 9 percent up to the first $2 million and 19 percent for any amount more than $2 million.
The national sales tax would now instead be a flat 5 percent on everything that you don't eat or drink, and only on new goods and services, instead of the original three.
I will explain my adjustments.
First, I needed to raise more tax than calculated in the original plan, because my lower sales tax required extra revenue to make it revenue-neutral.
As for corporate taxes, I didn't want to raise them too much because I want to encourage investment here in the United States. But by putting in the much lower rate for the first $40,000 of income or corporate tax, I have addressed the main argument that lower-income people will pay more tax — that is simply not true under this rendition of the plan.
For example, a family of four that earns $60,000 per year with two children (and $20,000 of deductions for medical expenses, mortgage real-estate taxes and charitable contributions) now pays about $8,000 per year in Social Security and federal income taxes.
Under my plan, the family would pay $1,200. Now that family would be $6,800 to the positive, an amount that may or may not be paid in depending on how much they consume and ultimately pay into the national sales tax.
Keep in mind, your largest expenditures — for food and drink and rent or a mortgage — would not be subject to tax.
Even if the family spent $25,000 on new goods for the consumption tax, it would only cost an extra $1,250. That family would have an extra $5,550 under my plan.
Another example: A single taxpayer with no kids who makes $30,000 with $3,000 of charitable contributions and medical expenses now pays $4,500 with Social Security. That person would pay $810 under my plan, plus 5 percent of his consumption tax.
Even if the taxpayer spent $10,000 on taxable consumption, he would be $3,210 ahead. And even if he had no deductions, he would save more than $3,000 with my plan.
Example 3: A senior citizen who has $30,000 of taxable interest and capital gains and dividends is taxed around 15 percent now. Under my plan, he would be taxed at 3 percent for the first $40,000. What percent would you rather pay: 3 percent or 15 percent?
Example 4: A two-earner family that earns $175,000 with $35,000 in itemized deductions with two kids now pays about $36,000 in Social Security and federal tax. Under my plan, they pay 3 percent on the first $40,000 and 19 percent on the next $100,000. That totals $20,200 under my plan, which is $15,800 less.
If they buy goods of $85,000, which get the consumption tax, they are still ahead about $11,600.
All working people who don’t receive tax credits should do better under my plan.
All corporations that don’t get special tax credits should do better under my plan. Even those who get tax credits may be better off if the lower tax rates — and not pay payroll taxes — offset the amount of the credits.
While the national sales tax idea has detractors, a big positive to consider is that it will capture more of the under-the-table income that’s slipping through the tax code (and tax cheat) cracks.
In addition, the price of retail goods should also drop due to the lower taxes. Because corporate taxes are so low, an item that cost $400 regularly will probably now cost $370 plus the extra 5 percent tax.
Many pundits don’t believe the corporations will actually lower their prices or that those who provide services will lower their prices. That is utter nonsense.
Capitalism, like it or not, is a very efficient system, where if you don't please the consumer they won't do business with you.
Wal-Mart became the dominant retailer in the world because it focused on low prices. Thousands of other businesses went under because they were unwilling to match Wal-Mart’s pricing. The customers "voted" with their wallets.
My plan will put more money in working people's pockets.
It will create millions of new jobs because of increased demand, due to lower taxes and working families having more money.
For those with 401(k) and pensions, my plan will boost the value of the stocks they own due to this huge economic boom.
Teachers, firemen, policemen and other hardworking union members and retirees and the 50 percent of Americans who own common stock need a strong stock market to help make up the shortfalls caused by this anemic economy.
The higher wealth effect will spur even more consumption and an extra $2 trillion to $3 trillion of GDP will raise the standard of living for all Americans and help the more than 20 million who are unemployed or underemployed.
Many politicians don't want the people to have this much power because they in turn will then have less power.
Albert Einstein said that insanity is doing the same thing over and over again and expecting different results. But that’s what we’ve seen happening with failed U.S. economic policies.
The recent authorized biography of Steve Jobs reported that the Apple CEO and Obama supporter met with Obama in the fall of 2010 and said it was too difficult to build a factory in the U.S., which led the company to build manufacturing plants in countries like China. That’s ridiculous, and a situation that must change.
Think about how many jobs will remain in America with my fair and pro-growth strategy.
The present system isn’t working for 26 million Americans, and is taxing the heck out 125 million.
Can we change that? Yes we can.
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About the Author: Bill Spetrino
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