Art Laffer. It’s a name that pops up every now and then in economic circles, but not one that is on the tip of many tongues. Well, that may be about to change!
Mr. Laffer is an American economist who first gained prominence as a member of President Reagan’s Economic Policy Advisory Board. In addition he has a distinguished career of professorships at the University of Chicago Graduate School of Business, the University of Southern California, Pepperdine University, and in 2008 was named a Distinguished University Professor of Economics by Mercer University in Atlanta. He is the founder and CEO of Laffer Associates in Nashville, Tennessee, an economic research and consulting firm. In other words, he ain’t no dummy! Mr. Laffer explains the 9-9-9 proposal in a lengthy article in the current Wall Street Journal, much of which I will attempt to condense here.
Laffer is best known for the Laffer curve, an illustration of the theory that there exists an optimum tax rate between 0% and 100% that will result in maximum economic growth and tax revenue for governments. If it is too high, economic growth will be stymied, along with a reduction in tax revenues. If lower, economic growth will be stimulated, resulting in greater total tax revenues. This was proven in both the Reagan and Clinton administrations. Mr. Laffer is among those leading economists who assisted Republican presidential candidate Herman Cain develop his Federal tax proposal, known as 9-9-9.
There was a time when the purpose of taxation was to raise the necessary funds to run government. But today, government tax structures, especially the Federal Income Tax, are the primary method used by politicians to reward friends and punish enemies.
As an example, to incur the political favor of the greatest number or potential voters, 47% of our citizens pay no Federal Income Taxes at all, while the remaining 53% carry the total burden. Of these, the top 10% pay over 70% of the total, while those few
individual and businesses who can afford the best attorneys and tax accountants, or have the best political connections, connive ways to avoid Federal taxes completely, such a Warren Buffett or a General Electric Corporation. The Federal Tax Code has become so complicated that we spend an average of an additional 30 cents of every tax dollar to an accountant or attorney to make sure we don’t pay more than we owe, or to keep from getting imprisoned for paying too little.
Republican Candidate Cain’s 9-9-9 proposal promises to eliminate this confusion and complexity. But since its objective is to tamper with the life blood of political cronyism, you can see why it is being so strongly opposed. Mr. Cain 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. The 9-9-9 plan, rather than, say a 12-12-12 plan was calculated to maintain total revenues at the same level as they are under our current tax code… without the 44,000 pages of instructions!
Naturally his political opponents, especially those with whom he is currently competing for the Republican presidential nomination, falsely characterize his plan as adding an additional Federal Sales Tax, which would be totally distasteful. They use as an example the state of Tennessee where there is already a State Sales Tax of 9.5%. They say with Cain’s plan, Tennesseans would be paying a total sales tax of 18.5% on their purchases. This is true, but what they fail to mention is that the 9-9-9 program will eliminate all personal and business Federal income taxes, all payroll (FICA) taxes, capital gains,
gift and estate taxes. One look at your pay check stub will convince you that what most of us are paying now greatly exceeds Mr. Cain’s 9%. So the individual’s total tax costs will be significantly less.
With lower marginal tax rates, both the demand for and the supply of labor and capital will increase. Output will soar, as will jobs. Tax revenues will increase enormously—not because tax rates have increased, but because marginal tax rates have decreased. By making the tax codes a lot simpler, individuals and businesses would spend a lot less on maintaining tax records; filing taxes; hiring lawyers, accountants, tax-deferral experts; and lobbying Congress. Under 9-9-9 plan, these expenses would plummet without a penny being lost to the U.S. Treasury. It’s a win-win situation for both the government and the taxpayer.
Another criticism is that the 9-9-9 plan lacks the progressivism that protects those less well off. But with this plan, giving each us at least a small initial involvement in maintaining government, once the dynamics take hold many of those below the poverty linewill find good jobs and thus will rise above the poverty line and start paying
taxes. Congresswoman Michelle Bachmann, also a Republican presidential wannabe, says that once the 9-9-9 plan is enacted Congress would just raise it to 12-12-12, or 20-20-20 or whatever! Well, she should know, since she is a member of the Congress who has an insatiable appetite for raising taxes. Mr. Cain says he will prevent this by writing into the legislation that any increase in the rates will require a two-thirds majority vote in both houses of Congress. And besides, if he is elected President, he would veto any such change.
All that sound goods, but whatever one Congress creates, the next one can destroy. Insider the current struggle to maintain the Bush tax cuts! The best way to control such tampering will have to come from an alert citizenry. You and me!
Our current tax code is so complicated (purposefully) that it can be
manipulated in so many ways we can never understand, or even be aware of, until it hits us in the pocketbook.
With the 9-9-9, any tinkering will be transparent. Although we may not be able to understand the tax implications of a Generalized Autoregressive Conditional Heteroskedasticity (GARCH), for instance, we do know the difference between a 9% or a 12% or a 20% tax rate. That we can understand, and if we hear of such a rate change being discussed, we can immediately jump on our Congressional representatives and head it off at the pass, not after it’s been voted into law!
Is the 9-9-9 plan perfect? Probably not. And even if it was, it would still be hard to get it past those politicians who have created the loopholes and special exemptions in the current tax code for their cronies and special interest groups. But 9-9-9 is no middle-of-the-night “cash for clunkers” creation either. It is a well thought out and documented change to our current disastrous tax structure,
crafted by such authorities as Mr. Laffer, Gary Robbins, former assistant to the U.S. Treasury’s Office of Tax Analysis, and other expert economists who realize that a drastic change in our tax structure is required if we are to ever see a recovery of the American free enterprise system, and the jobs that will be required to support it.