Before getting too excited about Herman Cain's bold 9-9-9 tax plan, you might want to think through the consequences of how it will affect your real estate business and the industry as a whole.
Do your own research and let me know if you find my analysis to be off.
First, the 9-9-9 plan imposes a new 9% federal sales tax on all new goods and services. Herman Cain's webpage explaining the 9-9-9 plan doesn't exactly say "goods and services", it doesn't say much at all unfortunately. But his plan is to eventually transition to the Fair Tax. So on the Fair Tax site it does say "new goods and services".
That's a 9% sales tax on a new home. How's that going to be handled? If you buy a new $300,000 home you now will have to come up with an additional $27,000 along with your down payment and closing costs. Sure they say that there is embedded tax already in everything that we purchase and over time, new house prices will come down. That's fine if it eventually happens, but until it all works through the system, that 9% sales tax is going to be a huge tax at current pricing.
Many people are used to paying a sales tax on physical goods only. But this 9% federal sales tax is also imposed on services. Isn't what we do as real estate agents a service. So now a seller not only will pay an agent commission, but will have to pay a 9% sales tax on top of that commission. For a $300,000 home at a 6% commission, the 9% sales tax on the $18,000 commission would be $1620. The seller can raise the price of the home by that much and make the buyer pay or the agent can reduce their commission by that amount in order to keep the commission the same.
Another very important detail about the 9% business tax is that wages are not deducted from the taxable income. Even if you don't make a profit, you will have to pay the 9% on your revenue. For example. Let's say you have an assistant who you are paying $50,000/year. Let's say that times are tough and you only bring in $50,000 in commissions. So your profit is zero. But wait. You don't get to subtract out wages from your taxable revenue. Even though you didn't make a profit, you have to somehow come up with $4,500 to pay the 9% business tax on your $50,000 business income. What are you going to do? You'll have to reduce your assistant's pay by the $4,500 tax you have to pay in taxes, so your assistant will only be paid $45,500. So in effect, your employee is paying the 9% business tax.
Your employee will then have to pay 9% income tax on the $45,500 which will be $4095. If the employee spends what's left, $41,405, they will only be able to spend $37,986 in order to have enough to pay the 9% sales tax ($3,419).
So when all is said and done, your $50,000 that you pay your employee leaves them only $37,986 after paying $12,014 in total taxes. That works out to a tax rate of 24% for the employee.
Under the current tax system, a family of four would pay $1963 in income taxes and $7357 in payroll taxes for a total of $9320 in taxes which works out to be 18.6% of $50,000.
Herman Cain has said that his plan has been analyzed by the experts who have confirmed that it will work. So I naively thought that it would be a simple thing to pull up all the details of his plan so I could take a close look at the details to see how it will affect me and my real estate business. Guess what? He really hasn't put out a detailed plan yet so it's really hard to know much about it.
He does have the basics outlined on his website. I found it interesting that he says that the 9-9-9 plan is just phase one on the way to the Fair Tax, a 23% national sales tax. I'm a political junkie. I watch all of the debates. I don't think I have ever heard him say that his 9-9-9 plan was the first step on the road to the Fair Tax. Is it because the 23% sales tax of the Fair Tax is too much for people to swallow?
The day after the Tuesday debate he finally released some new details about his plan to the media. Unfortunately it was in an email to a reporter and not made public on his website. So one has to rely on the stories in the news and hope that they are reporting it correctly. I don't understand why he can't post the details on his website for all to analyze.
But look this stuff up yourself and let me know if I'm off base here and you know something different.
Here's a good article from FactCheck.org that verifies my findings that there just aren't enough details out there to figure out exactly how this 9-9-9 plan will affect various people. It is far from transparent.
Post Fact Checker. Some good links to other analysis.
Another big thing to realize is that the 9% sales tax is a one time hit to all current savings. All the money that you earned and paid taxes on already and have stashed away for future consumption, will now get an additional 9% tax on it when you go to spend it. Let's say you saved $40,000 of taxed income over the past few years and now want to buy a new car. Here comes an additional 9% federal sales tax on the income that you spend. Savers get screwed again.
Herman Cain is a nice guy. People seem to love the way he comes across as a straight shooter who's not afraid to say how he feels. But unfortunately, his plan sounds good on the surface, but when you start looking at the details, it turns out to be a lot different than he portrays it to be. I'm all for tax simplification, this just doesn't seem good to me.