tazzygirl
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I was going to post this on the Buffet thread in response to the discussion there about the tax changes for many people under this plan.
But I think it deserves a discussion all its own.
The post this is in reply too is Treasure's and its here
here is what I found....
To summarize the 9-9-9 Plan’s operation, the labor (wage) income part of the 9-9-9 Plan claims to repeal the payroll tax and roll back the personal income tax, but what the Plan really does is substitute for current law's payroll taxes (12.4 percent OASDI payroll tax, capped at about $107,000 of wage income, and the uncapped 2.9 percent Medicare payroll tax), a new 18.9 percent uncapped payroll tax, plus a 9 percent sales tax on an employee’s after-tax income. The combination of the three actually operates as the economic equivalent of a 27 percent uncapped payroll tax.4 In the case of self-employed taxpayers, however, the plan seems to countenance a discounted tax rate of 17.2 percent — that is, self-employed individuals can avoid the 9 percent employer tax (the “business flat tax”) by just paying themselves no salary and taking their profits out as “dividends.”5
The absence of current law's package of a standard deduction, personal exemptions, child
credit, child care credit and the earned income tax credit means a huge tax hike for the working poor and a substantial tax increase on the labor income of the middle class. At the same time, the all-in 27 percent tax on labor income (or less for the self employed) would constitute a tax reduction for the very highest-labor income Americans.
.............
III. LABOR INCOME UNDER THE 9-9-9 PLAN.
Obviously the 9-9-9 Plan is not a fully specified new tax system! Nonetheless a fair
reading of its description leads to some surprising conclusions. As applied to wage earners (moregenerally, to labor income), the right way to see the 9-9-9 Plan is as a 27 percent payroll tax on wage income (and a 17.2 percent tax on self employment income).7
How so? The first part of course is the 9 percent "individual flat tax" on wages or other
labor income. As described in Section IV, it turns out that the “individual flat tax” is imposed effectively only on labor income, with the result that it can be described in a shorthand fashion as just a wage tax.
The second part is baked into the “business flat tax’s” denial of a deduction to employers
for wages they pay. As a result, wages cost the employer 9.9 percent of the wages paid. Again as described in Section IV, the 9-9-9 Plan’s “business flat tax” operates in such a manner that ordinary investment returns are not taxed. (As noted in Section IV, the proposal seems confused about interest income, but I am assuming that this was an inadvertent error.) Since the “business flat tax” is designed not to burden capital income, and to impose tax directly proportionate to wages paid, it operates in a manner that is conceptually indistinguishable from current law’s employer share of payroll taxes. Economists in turn are unanimous that an employer level payroll tax economically is borne by the employee (or in economists’ lingo, the incidence of the tax falls on the employee). As a result, the “business flat tax” also operates in economic substance as just another wage tax.
One mechanical difference between the 9-9-9 Plan’s “business flat tax” and current law’s
employer share of payroll taxes is that the “business flat tax” is measured on pre-payroll tax wages, not after-payroll tax wages paid actually out to employees. (That’s why it’s a 9.9 percent rate as measured against wages paid.) This has no conceptual significance, but is relevant in comparing tax costs under current law and the 9-9-9 Plan.
The third part of the puzzle is the sales tax, which operates as an economic matter as a 9 percent tax on post-“individual flat tax” labor income. A sales tax is a tax on consumption, and conceptually has the same economic consequences in respect of labor income as do the two flat taxes considered so far.
Imagine, for example, that an employee has $500 in her pocket after the two flat tax
liabilities described above — she has $500 available to spend on consumption goods. When she spends that, she will incur a sales tax bill on her purchases. If the sales tax rate is 9 percent, expressed on a tax inclusive basis (for the reasons described in Section II), and the employee spends her $500 immediately, she will incur a sales tax bill of $45 — another 9 percent tax, measured on her post-“individual flat tax” income.
But what if she doesn't spend all the money today?
One way of seeing what happens in the deferred consumption case is to imagine that the
employee sets aside $45 today into a little fund to pay her eventual sales tax bills attributable to spending $500. If the employee spends all her available money ($455) on consumption goods tomorrow, the money just immediately goes out of the little set-aside fund. If by contrast the employee defers consumption for a few years, then her budget for consumption (her $455 of cash, net of her mental sales tax set-aside fund) goes up by the time value of money (which in turn is exempt from tax under an ideal form of the “individual flat tax”), but so does her $45 set-aside fund. When she does consume she will consume more in absolute terms, but the same in original present value terms, and meanwhile she will have enough in her set-aside fund to cover her future sales tax bills (because the fund grows at the same pretax rate as her consumption fund grows).
The net consequence is that the sales tax is equivalent to another 9 percent payroll tax,
albeit measured on the employee’s post-“personal flat tax” base, because it reduces the
employee’s income by the same amount on a present value basis.
Now let’s put the three taxes together in one example.
~~~ here is where this all gets interesting~~~
Imagine that an employee generates $100 in added value to her employer, after all
relevant expenses but before any taxes are considered, and that markets are efficient, so that the employee extracts her full value from the firm. Then the firm will have $100 of gross income attributable to the value added by the employee, and will pay out to the employee all of that income, less the employer-level payroll taxes attributable to those wages. I refer to the $100 available to pay both wages and employer-level taxes on those wages as the “wage pool.”
If the 9-9-9 Plan operated mechanically like current law’s payroll tax, except using a 9
percent rate, the employer would be able to pay out $91.74 in salary, because current law’s payroll tax is measured against wages paid, not the employer’s income dedicated to paying wages. (Nine percent of $91.74 is $8.26, so the wages paid plus employer-level taxes on those wages would equal the employer’s $100 of gross income attributable to the employee’s added value.)
In fact, the 9-9-9 Plan denies a deduction for wages paid, and applies its 9 percent
“business flat tax” rate to the firm’s pre-wage income, not to the wages paid. As a result, the employer would incur a “business flat tax” liability of $9, and could afford to pay the employee only $91.8 To make the comparison to current law payroll taxes clearer, as measured against the wages received by an employee, the “business flat tax” thus operates as a 9.9 percent tax on wages ($9/$91).
The employee would pay a 9 percent individual flat tax on the $91 of wage income she
receives. That would add another $8.19 in tax. At this point, the $100 of the employer’s “wage pool” attributable to the employee would have borne $17.19 of total tax, and she would have $82.81 in her hands available to spend.
Finally, on the assumption that the 9-9-9 Plan’s sales tax operates on a “tax inclusive”
base, the employee must set aside $7.45 to fund the future sales tax she will incur when she spends her post-flat tax income on consumption goods (9 percent of $82.81). As a result, the employee will have $75.36 after all federal taxes to invest or spend, and the $100 of income that the employer was willing to pay in compensation will have been burdened by a total of $24.64 in tax.
Many readers are interested in comparing the hypothetical tax burdens imposed by the 9-
9-9 Plan with current law – including for this purpose both current law payroll and income taxes. One convenient way to organize such comparisons is to convert the $24.64 of aggregate taxes paid under the 9-9-9 Plan on a $100 “wage pool” (pre-“business flat tax” firm income dedicated to paying wages) into a rate applied to an employee’s gross wages received, because that is the base employed under current law for measuring OASDI and Medicare payroll tax liabilities.
Converting the $24.64 in total tax on a $100 wage pool to a rate imposed on a payroll tax equivalent base – that is, as a percentage of wages – requires that we compare the aggregate tax burden ($24.64) to the $91 in wages the employee receives. Doing so yields a payroll tax equivalent rate of 27.08 percent ($24.64/$91), which for convenience this essay rounds down to 27 percent.9
That is, under the 9-9-9 Plan, every $100 of wages received by the employee will be burdened by about $27 of tax, some imposed in the first instance on the employer and some on the employee. The portion borne in the first instance by the employer (the “business flat tax”) is invisible to the employee, in that it does not appear on the employee’s wage statement, but nonetheless economically burdens the employee’s income. The same concept (but of course with different numbers) applies today when one looks at both the employer and employee sides of payroll taxes, along with the personal income tax.
This 27 percent payroll tax equivalent rate calculated above was determined by reference
to wages received after the implementation of the 9-9-9 Plan. If instead we begin with wages received under current law and wish to calculate tax liabilities under the 9-9-9 Plan, then one final adjustment is needed.
As described above, the “business flat tax” operates as a hidden wage tax collected
directly from the employer. The “business flat tax” rate is greater than current law’s employer share of payroll taxes (9 percent, versus 7.65 percent up to about $107,000 of income, and 1.45 percent thereafter), and is applied to pre-payroll tax equivalent income, not after-payroll tax wages.
If an employer today pays $100 of wages to an employee, the employer in fact has set
aside a “wage pool” of $107.65 from which to pay both wages and payroll taxes. In turn, if one accepts the usual economic assumptions that markets are efficient and wages are freely negotiated between employer and employee, and that the incidence of the “business flat tax” falls on employees, then the aggregate amount paid by an employer in respect of the services of an employee (including employer taxes directly measured by wages) – that is, the “wage pool” – should remain constant when moving from current law to the 9-9-9 Plan.
If the “wage pool” remains constant, then gross wages must go down a little bit under the 9-9-9 Plan, to reflect the higher wage tax rate imposed by the “business flat tax” than the rate imposed on employers today under current law’s payroll tax, which tax also comes out of the “wage pool.” The amount of the decrease in gross wages received by an employee would not be very great, at least when observing employees whose compensation is less than current law’s payroll tax cap (about $107,000), but may be relevant for readers attempting highly refined calculations of tax liabilities arising from this completely underspecified plan.
Assuming that current law’s payroll tax cap is binding, then, as described above, $100 of
wages received by an employee under current law implies an employer “wage pool” of $107.65. The 9-9-9 Plan’s 24.64 percent tax rate on this “wage pool” (pre-“business flat tax” income) translates into a 26.53 percent rate on the current law payroll tax wage base.10
This modest adjustment probably is most fairly described as a first-order direct
consequence of the move to the 9-9-9 Plan, not an elaborate indirect second-order effect, because it follows ineluctably from keeping the “wage pool” constant. Nonetheless, the amount at stake is not terribly large for most wage-earners, and different assumptions would not change this essay’s fundamental analysis at all.
In sum, the 9-9-9 Plan operates on wage earners as an effective 27 percent uncapped
payroll tax applied from the first dollar of post 9-9-9 Plan wage income– not an elimination of the payroll tax at all! (Alternatively, if one’s starting point is an employee’s current law wage income, one might think of the 9-9-9 Plan as having an effective tax rate of 26.53 percent, because gross wage income should be a little higher under current law than under the 9-9-9 Plan.) Moreover, it turns out that (as described below) self-employed individuals can avoid the “business flat tax” component entirely by paying themselves through dividends rather than salaries. Their all-in tax on $100 of gross income therefore works out to be $17.19, rather than $24.64 for an employee. Expressed as a payroll tax equivalent rate, that is a 17.2 percent effective rate on the owner/employee’s labor income, because the owner/employee pays himself $100, not $91, after the “business flat tax” but before the other two taxes.
The 9-9-9 thus replaces current law’s payroll tax and income tax with a new system that
is the economic equivalent of a 27 percent payroll tax on employees. An uncapped 27 percent payroll tax in fact raises a great deal of money, but does not do so in a distributionally neutral manner when compared with current law’s allocations of burdens.
In one direction, the fact that the new 27 percent payroll tax-equivalent system is
uncapped means that the rate applies to high incomes as well as low ones. Of course that must be balanced against current law’s income tax, whose marginal and effective tax rates on high labor incomes exceed that rate, particularly if the 2001-03 temporary tax discounts are allowed to expire. It also must be balanced against the substantial discount in rates afforded self-employed individuals.
In the other direction, as described at the outset of this essay, the 9-9-9 Plan would mean a huge tax hike for the working poor and middle class. For these taxpayers, the income tax is irrelevant or a relatively small component of their total federal tax liabilities, by virtue of current law's package of a standard deduction, personal exemptions, child credit, childcare credit and the earned income tax credit. Taking these tax-reducing features out of the tax system and jumping from a flat 15.3 percent payroll tax rate (on the first $107,000 of wages) to the equivalent of a 27 (or 26.53) percent flat rate payroll tax rate applied from the first dollar of income thus would represent a large increase in tax liability for many millions of households.
The Appendix offers sample tax calculations for two hypothetical families under current
law and the 9-9-9 Plan, as summarized in Section I. Those calculations follow the analysis presented in this Section III. To be as explicit as possible, the calculations include as a tax burden on wage earners the 9-9-9 Plan’s “business flat tax,” because it functions as a payroll tax equivalent. Conversely, the calculations do not include any attempt to allocate current law’s corporate income tax. The corporate income tax does not as a first-order matter burden wage income, because wages are deductible for that purpose. Therefore, putting to one side the question of the incidence of the corporate income tax on profits (whose incidence as a formal matter falls on shareholders, but whose incidence as an economic matter is disputed), the corporate income tax can be ignored in these simple calculations.11
Sample Tax Rate Calculations
Common Facts. Married couple filing a joint return, one wage-earner, two children eligible for the child credit, no other sources of gross income beyond wages, standard deduction, four personal exemptions, no other deductions or credits. Tax year is 2010. Assumptions and analysis as specified in Section III.
Family AB - $120,000 Gross Income
Current Law
Employer share of payroll tax = $8,362 [$6,622 OASDI + $1,740 Medicare]
Employee share of payroll tax = $8,362
Pre-employer share of payroll tax “wage pool” = $128,362
Family AB gross income = $120,000
Family AB taxable income = $120,000 – [$11,400 + $14,600] = $94,000
Tentative federal income tax (from tables) = $15,869
Child credit = $2,000, subject to 5% reduction for adjusted gross income in excess of $110,000 (= $10,000 x 5% = $500) = $1,500 child credit
Total federal income tax = $14,369
Total federal payroll taxes (Both employer and employee "halves") = $16,723
Grand total tax burden on employee (all payroll and individual income taxes) = $31,092
Total take home pay of employee, beginning from $128,362 of “wage pool”:
$128,362 - $31,092 = $97,270 after-tax disposable income
9-9-9 Plan
Business flat tax = $128,362 x 9% = $11,553. (Business flat tax comes out of constant $128,362 “wage pool” and thus functionally reduces cash available to pay wages.)
Wages received by employee = $128,362 - $ 11,553 = $116,809 [not $120,000]
Individual flat tax = $116,809 x 9% = $10,513
Amount available for consumption = $116,809 - $10,513 = $106,296
2010 Present value of sales tax (regardless of when spent) on tax inclusive basis = $106,296 x 9% = $9,567
$106,296 - $9567 = $96,729 after-tax disposable income
Effect of 9-9-9 Plan = $541 decrease in after-tax disposable income
Family CD - $50,000 Wage Income
Current Law
Employer share of payroll tax = $3,825
Employee share of payroll tax = $3,825
Pre-employer share of payroll tax “wage pool” = $53,825
Family AB gross income = $50,000
Family AB taxable income = $50,000 – [$11,400 + $14,600] = $24,000
Tentative federal income tax (from tables) = $ 2,766
Child credit = $2,000
Total federal income tax = $766
Total federal payroll taxes (Both employer and employee "halves") = $7,650
Grand total tax burden on employee (all payroll and individual income taxes) = $8,416
Total take home pay of employee, beginning from $53,825 of wage pool:
$53,825 - $8,416 = $45,409 after-tax disposable income
9-9-9 Plan
Business flat tax = $53,825 x 9% = $4,844. (Business flat tax comes out of constant $53,825 “wage pool” and thus functionally reduces cash available to pay wages.)
Wages received by employee = $53,825 - $4,844 = $48,981 (not $50,000)
Individual flat tax = $48,981 x 9% = $4,408
Amount available for consumption = $48,981 - $4,408 = $44,573
2010 Present value of sales tax (regardless of when spent) on tax inclusive basis = $44,573 x 9% = $4,012
$44,573 - $4,012 = $40,561 after-tax disposable income
Effect of 9-9-9 Plan = $4,848 decrease in after-tax disposable income
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1941800##
This is the link about the person who offered the above analysis.
http://weblaw.usc.edu/contact/contactInfo.cfm?detailID=68912
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