Art Laffer’s view

Art Laffer in the WSJ:

Cain’s now famous “9-9-9″ plan is his explicit proposal to right the wrongs of our federal tax code. He proposes a 9% flat-rate personal income tax with no deductions except for donations to charity; a 9% flat-rate tax on net business profits; and a new 9% national tax on retail sales.

Mr. Cain’s 9-9-9 plan was designed to be what economists call “static revenue neutral,” which means that if people didn’t change what they do under his plan, total tax revenues would be the same as they are under our current tax code. I believe his plan would indeed be static revenue neutral, and with the boost it would give to economic growth it would bring in even more revenue than expected.

In the recent past, federal tax revenues from the personal and business income taxes, all payroll taxes, and the capital gains, gift and estate taxes have averaged $2.3 trillion, while gross domestic product has averaged about $14.5 trillion. The total revenue from these taxes as a share of gross domestic product averages around 16%. Sometimes it’s a good deal higher, as in the boom of the late 1990s, and sometimes its lower, as in today’s “Great Recession.” But a number in the 16%-19% range is as good as you’ll get under our current tax code.

By contrast, the three tax bases for Mr. Cain’s 9-9-9 plan add up to about $33 trillion. But the plan exempts from any tax people below the poverty line. Using poverty tables, this exemption reduces each tax base by roughly $2.5 trillion. Thus, Mr. Cain’s 9-9-9 tax base for his business tax is $9.5 trillion, for his income tax $7.7 trillion, and for his sales tax $8.3 trillion. And there you have it! Three federal taxes at 9% that would raise roughly $2.3 trillion and replace the current income tax, corporate tax, payroll tax (employer and employee), capital gains tax and estate tax.

The whole purpose of a flat tax, à la 9-9-9, is to lower marginal tax rates and simplify the tax code. With lower marginal tax rates (and boy will marginal tax rates be lower with the 9-9-9 plan), both the demand for and the supply of labor and capital will increase. Output will soar, as will jobs. Tax revenues will also increase enormously—not because tax rates have increased, but because marginal tax rates have decreased.

By making the tax codes a lot simpler, we’d allow individuals and businesses to spend a lot less on maintaining tax records; filing taxes; hiring lawyers, accountants and tax-deferral experts; and lobbying Congress. As I wrote on this page earlier this year (“The 30-Cent Tax Premium,” April 18), for every dollar of business and personal income taxes paid, some 30 cents in out-of-pocket expenses also were paid to comply with the tax code. Under 9-9-9, these expenses would plummet without a penny being lost to the U.S. Treasury. It’s a win-win.

A static revenue-neutral tax change requires static winners and losers. And this 9-9-9 plan has made certain that even on static terms those below the poverty line will be better off—period. Once the dynamics take hold, many of those below the poverty line will find good jobs and thus will rise above the poverty line and start paying taxes. This is the type of tax increase I wholeheartedly support.

We don’t particularly care which of the leading contenders gets the GOP nomination. After all, look what he’s up against. But we think a few things are noteworthy about Mr. Cain: (a) he keeps getting written off by insiders although not a single primary has taken place and the Tea Party really likes him; (b) he has sparked some welcome and long overdue debate in the unlikeliest of places; and (c) whatever you think of 9-9-9 it is a marketing masterstroke — every presidential candidate on stage in the GOP debate was forced to focus on one man and an economic plan for America that came from a guy that no one had ever heard of 60 days ago.

2 Responses to “Art Laffer’s view”

  1. kalashnikat Says:

    Yes, but given the Republican and Democrat parties proven tenedencies, 9-9-9 would soon turn into 29-29-29…and it still wouldn’t be enough for Government.

  2. feeblemind Says:

    So…… Just what would Uncle Sam apply the national sales tax to?

    Will Real Estate be subject to the 9% tax?

    How about the sale of stocks?

    I buy inputs for my business that are not subject to sales tax. Will that change when the Feds get their tentacles into a sales tax?

    I just don’t like the idea of a Federal sales tax. I just see way too much potential for mischief making on the part of Congress.

    But the Dinocrat is right about Herman Cain.

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