If you want to understand why one would or should support Herman Cain’s 9-9-9 tax plan–not that I endorse it–I strongly recommend Art Laffer’s positive review in the Wall Street Journal. With “Cain’s Stimulating ‘9-9-9’ Tax Reform,” Laffer (famous for the Laffer curve and popularizing supply-side economics) first laments the “ever-more arcane” tax code that we have.
“…the sole purpose of the tax code was to raise the necessary funds to run government. But in today’s world the tax mandate has many more facets… income redistribution, encouraging favored industries, and discouraging unfavorable behavior…
Three federal taxes at 9% that would raise roughly $2.3 trillion [the current level] and replace the current income tax, corporate tax, payroll tax (employer and employee), capital gains tax and estate tax.”
Along with simplifying compliance, Laffer emphasizes the increased incentives for productive activity. In other words, if you face a 9 percent marginal tax rate, rather than a 35 percent one, you’ll be more likely to work.
“…with the boost it would give to economic growth it would bring in even more revenue than expected… 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.”
Whether we want a tax system designed to squeeze more work out of us is debatable, but I will give him the point that lower marginal rates would tend to generate more employment. To suggest that it will “soar,” though, is getting a bit carried away and lacking justification.
The impact on progressivity appears to be the knee-jerk concern that follows talk of lower marginal rates. But as Laffer notes, Cain’s plan does not do away with it, as many have asserted. In fact, people below the poverty line would be exempted from any tax. (The poverty line remains a discussion for another day, since it is often referenced but poorly understood. After decades since its inception, it has largely become an arbitrary level tied to inflation.)
The leading disputes I have with Laffer’s analysis are his rosy prediction that this plan would lead to less lobbying of congress and his dismissal of concerns about a new revenue source for the federal government.
“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.”
While I welcome the removal of inequalities embedded in the tax code, we don’t need the 9-9-9 plan for that–we can do it right now–but do you see it happening? And I don’t see how the 9-9-9 plan is going remove incentives to game the system legislatively.
“…a number of my fellow economists don’t like the retail sales component of the 9-9-9 plan. They argue that, once in place, the retail rate could be raised to the moon. They are correct, but what they miss is that any tax could be instituted in the future at a higher rate.”
Not so. At some threshold, enforcement becomes difficult and people change their behavior to avoid a tax–as the Laffer curve, ironically, dictates. Why else would government officials institute different types of taxes rather than simply raise whatever form of tax already exists? They know, as Mr. Cain and Laffer should, that additional revenue sources enable a higher overall level of extraction from constituents. That’s why Grover Norquist of Americans for Tax Reform says that the plan is “very dangerous.”
