Written by: Linda C. LaVictoire on October 18, 2011.
Herman Cain (photo by the Atlanta Post)
When billionaire Warren Buffett wrote an op-ed that suggested people like himself should be taxed more because the tax code unfairly favors them, President Obama liked the idea and suggested the “Buffett rule” – a plan to assure that the very wealthiest are not getting tax breaks that let them pay a smaller percentage of their income than their employees. The GOP went expectedly nuts over the idea, calling it “class warfare.” GOP candidate Herman Cain cried “If it’s not class warfare, it’s highway robbery! Pick my pockets, because that’s what he’s doing!” An analysis of Cain’s 999 tax plan – 9% income tax with no exemptions or deductions and replacing the payroll taxes, 9% corporate tax rate with no breaks or deductions and 9% national sales tax – has shown that the plan would make life even cushier for the very rich, exempting them from any taxes on their income.
The plan would end both capital gains tax and inheritance taxes, both things that the GOP has traditionally opposed. But it is in capital gains that men like Buffett make all their money.
The capital gains tax rate was originally conceived as a way to encourage investment in business and real estate. If a person bought a house for $50,000, put $25,000 of improvements into it and then sold it for $100,000, they would only pay a 15% capital gains tax on the $25,000 profit. If they used that profit to buy another profit, they would owe no taxes, because that would be an investment. If a person bought 100 shares of a stock at $10 a share and then sold them at $15 a share, he/she would pay 15% on the $500 profit instead of the income tax rate of anywhere from 20% to 36% depending on their taxable income. Eventually, the capital gains rate was applied (as near as I can figure out) to the increase in the value of a stock if that increase is paid out in some way.
Hedge fund managers are not like stock brokers. They do not simply invest other people’s money and collect a commission, which is taxed as income. Hedge fund managers mix their own money into the money they invest for clients. They invest in more than actual companies that make things or provide services. They invest in “financial instruments” and “derivatives” – things that exist only to be bought and sold as investments with the return coming not from any inherent increase in their value, but from convincing the next guy that they have a value greater than what they were purchased at. When the financial crisis hit, the derivatives market contained more money than existed in the entire world.
During the Bush administration, a change was made to the capital gains tax code. Hedge fund managers were allowed to claim the capital gains tax rate on what is essentially a commission for making money for their clients. The combination of these “financial instruments” and the enormous profits they made (hedge fund manager John Paulson made $3 billion off one Goldman Sachs transaction) and the lower tax code more than doubled the number of hedge fund managers in the Forbes 400 list of top billionaires in America, pushing out people who owned real companies that made things or provided services.
Eliminating the capital gains tax instead of making all income no matter what the source taxable at 9%, Cain’s plan exempts the people who are making the most money from paying any taxes whatsoever. The Waltons (three generations of Sam Walton’s descendants) do not make their billions by running Walmart or doing any actual work. Their incomes are derived from their shares of the company. It is possible for people like the Koch brothers and the members of the Cargill family to own and run companies and take so little in taxable income that they pay less in straight income tax than a family of four at the median income level. It’s done by shifting most of their living expenses to legitimate expenses paid by the companies. Want to go to the Riviera for a week? Set up a couple of “business meetings” and the company pays for the whole trip. There are fewer restrictions on what constitutes legitimate business expenses than there are on the President going on vacation.
We have recently learned the full extent of the Koch brothers’ interest in Herman Cain’s campaign – an interest that promises huge financial support through their PACs and SuperPACs. Now that the 999 plan has been dissected, we can see why Cain has the potential for stacking up the funding. Mitt Romney may have the background in the financial services industry, but his political policies have not favored the moneymen as much as Cain’s deceptive 999 plan does.
According to the American Institute of Certified Public Accountants, in a report prepared for Yahoo News and The Lookout, Warren Buffett’s taxable income would have amounted to $4.9 million of the $62 million he earned last year. He gave more than that away in charitable donations, the only exemption the 999 plan retains. Buffett would have had no taxable income whatsoever for 2010 under 999.
Cain admitted this weekend that “there are some” who will pay higher taxes under the 999 plan. “Some” – try almost half of us. Not only would we pay a higher percentage than currently with just payroll taxes, but we would be hit with the 9% sales tax on everything on top of our state and local sales taxes. Since the lower income families are the ones that spend every penny they get just to survive, this would amount to a 9% loss of income. The rich may have more to spend, but they don’t spend as great a percentage of their incomes on shear survival. Yup, that’s “some” of us alright. They ones who won’t pay more are Cain and his friends and supporters.
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