Last week I mentioned that the tax code needed to be simplified. This week I’d like to point out Republican presidential candidate Herman Cain has a simplified plan. It is referred to as the 999 tax reform plan. The plan calls for getting rid of the tax code as we know it and implementing 9% income tax, 9% corporate tax and a national sales tax of 9%. Cain acknowledges it will raise taxes for some. It doesn’t take a rocket scientist to know that it will hurt those who qualify for the earned income credit. Married couples who have at least 3 children and earn $48,362 or less receive an earned income tax credit of up to $5,666. This credit is refundable, which means they will receive a refund even if they did not have $5,666 withheld from their wages. Those people will for sure be impacted by this proposed tax and they can least afford it.
But let’s look at see how it would affect those not receiving the earned income credit. For example, a husband & wife with 2 kids who had income of $91,000 and itemized deductions of $18,800 paid $5,664 in taxes after child tax credits. Under Cain’s proposed plan they would pay $8,190. This particular couple did not receive the earned income credit and their tax liability increased by $2,526 with a flat income tax of 9%, plus they would also be subject to the new national 9% sales tax. If you’re curious how this would affect you, get out your 2010 tax return and look at the number on line 22 of Form 1040. Multiply this number by 9% and compare that number to what you paid in tax for 2010. Did it increase your taxes? I know it did mine and that’s before you factor in the proposed 9% national sales tax.
The 9% national sales tax is in addition to the sales tax already paid on new goods. I believe Fort Collins sales tax is somewhere around 7.5% so an additional tax of 9% would be a total of 16.5%. Imagine the sticker shock when purchasing new clothes, computers & cars!
Herman Cain’s plan is a variation of the flat tax that others have tried to get passed as a way to get rid of big government and simplify our tax code. It will be interesting to see if his plan gathers more supporters and moves him from being a long shot at election time to someone to consider. I urge you to apply what is being said to your own tax position. It might sound like a good plan to move to a flat 9% income tax but will it actually reduce your taxes?