Posted by: Deborah D | October 19, 2011

Art Laffer likes Cain’s 9-9-9 plan.

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Art Laffer likes Cain’s 9-9-9 plan.

With all of the bad-mouthing of Herman Cain’s 9-9-9 plan from both the Left and from establishment Republicans, a big contributor to Ronald Reagan’s economic team, has only good things to say about the plan. This is from Art Laffer in the Wall Street Journal.

It used to be that 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. These include income redistribution, encouraging favored industries, and discouraging unfavorable behavior.

To make matters worse there are millions and millions of taxpayers who are highly motivated to reduce their tax liabilities. And, as those taxpayers finagle and connive to find ways around the tax code, government responds by propagating new rules, new interpretations of the code, and new taxes in a never-ending chase. In the process, we create ever-more arcane tax codes that do a poor job of achieving any of their mandates.

…Herman 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%…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. Snip –

…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. If I could figure a way to stop future Congresses from ever raising taxes I’d do it every day of the week and twice on Sunday. Until then, let’s not make the perfect the enemy of the good.

Laffer touches on something in his column that might end up being a bigger problem for the 9-9-9 plan than the attempt to sell the 9% retail sales tax, and that is the elimination of the massive tax code and all of the industry that has grown up around it. In reality it would be a boon to businesses, but in Washington D.C., that constitutes a problem. Here’s what Laffer said: “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.”

The highlighted sentence in that quote is what will get the establishment Republicans in an uproar. I touched on this in a previous column here:  . Jeffrey Lord over at the American Spectator goes into amazing detail to say how big a problem this is in the beltway. The revolving door between Congress and lobbying firms is a huge business in itself, and they stay alive due to the tax code and Big Government . It’s not only Democrats that need the “big gov”, but establishment Republicans. It’s obvious in their fight against the Tea Party, to which Herman Cain (and Sarah Palin) is connected.

It would seem obvious that a (Republican) party that repeatedly states as its central belief the idea of limited government has somehow managed to produce an “elite” that in fact believes nothing of the kind…

No wonder Rush Limbaugh took to the airwaves at the close of last week… to say in essence — and sadly — that he was coming to the conclusion that in fact there were a number of Republicans who were on the other side — as in those who once supported the conservative argument having jumped the fence…

Lord calls these people “Clark Clifford Republicans,” basically just as tied to Big Government as those (like Clifford) who lived at its trough, feeding off of it and supporting others to feed off of it. Clifford, after meeting with Reagan in the White House and not getting what he wanted in the way of his lobbying efforts, is the one who coined the phrase “amiable dunce” in relation to President Reagan.

“Clark Clifford Republicans” defined as those who really don’t believe in the Reagan/Coolidge view — the conservative view and once upon a time the Republican view — of the world at all. Even if they give good lip service to the idea in public, it is clear from this (article in the NY Times) that in the quiet corners of this or that Washington bistro they are muttering their equivalent derogations for Tea Partiers that match in some fashion Clifford’s “amiable dunce” derisive. Although, it appears, they have dropped the “amiable.”

It’s not simply that they have a Thomas E. Dewey/Nelson Rockefeller view of the world or, to use Barry Goldwater’s pithy description, they favor a “dime store New Deal.”

The real problem here is that all of Clark Clifford’s friends across the decades have so rooted Big Government in the psychology of Washington that “Republican Elites” have elected to accept the whole premise — and for reasons having to do with self-preservation simply cannot bring themselves to get seriously Reaganesque or Coolidge-like because to do so gnaws at their own economic vitals and capacity for influence. Both now hopelessly entangled with the concrete boxes of bureaucracy that literally litter the Washington landscape.  Snip –

…where is it written that the government being targeted by lobbyists must be a $14.5 trillion-in-the-red behemoth? Where is it written that the federal government has to have almost two million employees? Some 320,000 of those employees in Washington alone? Where is it written that life will end if America has no Department of Energy or Education to lobby?

There is something decidedly off-kilter when the party elite for a party whose core premise is limited government is itself addicted to Big Government. So addicted that the very idea of eliminating program X (much less Department Y) is viewed with alarm as an expression of Outside the Mainstreamness or, more viscerally, “paranoia.” Creating in turn the impression to a growing number of alarmed Americans that the Party of Reagan has become the Party of Jabba the Hutt…

Whereas most Americans don’t particularly mind “lobbying,” when lobbying becomes a big business that needs a big government in order to survive, then lobbyists, whether they have an “R” or a “D” after their names, become anti-American. Lord mentions Vin Weber, a former Republican congressman who left Congress for lobbying firm Clark and Weinstock. He was one of those in the NY Times article that was bad-mouthing Tea Partiers.

…Clark & Weinstock spends its days and nights figuring out how to help regular Americans navigate the indecipherable maze of Big Government literally constructed by Mr. Clifford’s presidential heroes and friends over the course of the last eight decades. With not inconsiderable help from “the Republican elite.”

And, you can believe, Clark & Weinstock charges a pretty penny to navigate you. Making Mr. Weber surely a pretty well off guy.  Snip —

…Vin Weber and Clark & Weinstock are not the abnormal in the world of Washington — they are the norm. In fact, as of 2007 there were 17,000 registered lobbyists in Washington. Every last one of them doing their version of what Mr. Weber and Clark & Weinstock do.  Snip –

…The big deal here is that after 80-plus years of this mentality growing like topsy in the nation’s capital, on the eve of a presidential election in which the incumbent, a left-wing liberal Democrat, is leading the charge to make this a nation of, by and for the federal government — the so-called “Republican elite” is sitting in Washington feeding — literally — off of this Big Government mindset.

As you can see, we lowly American taxpayers have huge obstacles to overcome. It will take more than one or two election cycles to cure our ailing economy and our ailing corrupt political system. When everyone is feeding off the government trough, nobody wants the elaborate buffet to come to an end. Spread the word. These government pigs won’t leave the table willingly, so a fight is going to have to come to a head, and soon. Read all of Lord here:


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