By Deanna C. White
When Herman Cain, the former pizza tycoon and relative novitiate to the national political scene, entered the GOP debate in Orlando, Florida, last month, he was firmly locked in a dead heat for third place with two of his fellow candidates, each garnering only 5 percent of the vote, according to a USA TODAY/Gallup Poll. But since his strong showing in the Florida debates and Texas Governor Rick Perry's recent tumble in the polls, Cain has been riding a swell of popularity among voters.
At the end of September, Cain pulled out an unexpected victory in the Florida straw poll. Earlier this month, an ABC News-Washington Post poll showed Cain tied with Perry for second place among announced GOP candidates (a twelve-point rise for the Cain camp over a one-month period). The latest Gallup figures show Cain within two percentage points of Mitt Romney, the front runner among GOP presidential hopefuls. Gallup places Cain's "positivity intensity score" at 34, up 12 points from his September 2011 benchmark.
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Cain is also riding a powerful wave with pop culture, using his Washington outsider persona to engage audiences on mainstream talk shows like The View and The Tonight Show with Jay Leno. His autobiography, This is Herman Cain!: My Journey to the White House, recently hit number ten on Amazon's bestseller list.
But as Cain continues to grow his political muscle, the number one read on most financial professionals' lists is Cain's 9-9-9 tax reform plan, which would dramatically impact individual taxpayers, small business owners, corporations, and those who administer their taxes.
"We currently tax income, wages, and estates, but Cain's plan would replace these with three entirely new taxes", said Clinton Stretch, a tax principal of Deloitte LLP and a member of the Tax Legislation and Policy Committee of the American Institute of Certified Public Accountants (AICPA).
Stretch said he believes Cain deserves "a lot of credit for breaking the mold", but he also believes that unlike many of Cain's fellow candidates, whose plans focus on cutting deductions and credits, the key questions to ask of Cain's plan are what he would tax and what size of government he proposes.
According to an outline of the plan posted on Cain's Web site, his 9-9-9 tax plan would effectively dismantle the current U.S. tax code and replace it with a 9 percent flat tax on businesses and individuals and a 9 percent national sales tax. Cain argues the plan would drive production to stimulate the economy and unite disparate tax camps, such as "income taxpayers and payroll taxpayers" and "flat-taxers and fair-taxers."
Cain's plan, as outlined on his Web site, would:
- Tax all businesses at 9 percent on their gross income, reduced by purchases from other businesses and dividends paid.
- Tax individuals' income at 9 percent.
- Impose a 9 percent national sales tax.
- Eliminate taxes on repatriated foreign profits.
- End the payroll tax.
- End the death tax.
- Feature zero taxation on capital gains.
- Eliminate double taxation of dividends.
- Preserve the individual deduction for charitable donations.
- Launch "properly structured Empowerment Zones" to revitalize inner cities.
- Replace individual and corporate income taxes with a 23 percent fair tax (phase two of Cain's plan).
- End the IRS "as we know it."
Cain argues the plan would: increase capital formation, which would stimulate worker productivity and wage growth; make more capital available for small business; make America's exported goods and services the most internationally competitive of any tax system; eliminate the $430 billion "dead-weight burden" imposed by the current U.S. tax system; and end nearly all deductions and special interest favors.
But like all political proposals designed to usher a candidate into office, analysts say the devil is in the details. Taxpayers, and the financial professionals who advise them, need to examine several potential issues raised by each of the new tax rates proposed in the 9-9-9 plan.
"Like all of the candidates' tax plans, there's more generality in the Cain plan than specifics", Stretch said. "The political reality is candidates are giving voters the good news, but they're being vague on the other side of the equation. People need to ask how this plan is going to cut government programs like Medicare, Medicaid, and Social Security. They need to know how it could cut tax benefits, like those for healthcare, homeownership, and retirement savings."
According to Stretch, the plan offers a "very bold" tax on business that would effectively eliminate all of the issues around S corporations and C corporations as well as most deductions and credits, including those on wages and research and development, while allowing an immediate write-off for capital investments. "On the conservative side, you could say the broad-base low tax rate is dangerous because it lays the framework for that rate to be easily increased. That's a big political issue", Stretch said.
While having the virtue of being simple, the individual flat income tax rate should raise questions about how much of the tax burden middle class Americans will be asked to shoulder. "Would this plan mean an average family pays more or less?" Stretch questioned. "I don't know. We'd have to know what standard deductions or personal exemptions they get and what happens to child-related benefits."
Stretch also believes the 9 percent sales tax rate could feel like a tax increase on low income and middle class Americans, unless it includes exemptions for essentials like food, medicine, and schoolbooks. "When you have a sales tax and a flat tax on wage incomes, that tax plan would likely move more tax burden to relatively low income and middle class taxpayers", he said.
Ultimately, between now and November 2012, Stretch says it's critical for taxpayers and financial professionals to look beyond the shiny gloss of these campaign-ready tax plans and learn what they will cost Americans in terms of reductions in government programs and loss of deductions.
"If somebody dangles a carrot in front of you, you should look to see if there's a stick involved too", Stretch said.