Laffer Defends the 999 Plan


Economist Arthur Laffer, the Gandalf of supply-side economics, spoke well of Herman Cain’s 999 Plan during an interview with HUMAN EVENTS last week.  Today he expanded his thoughts in a Wall Street Journal editorial.  Laffer begins by offering a critique of the current paperwork-avalanche tax code:

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.

Laffer thinks the 999 Plan would be a great way to correct these deficiencies.  He notes that the plan is revenue-neutral despite its vastly reduced marginal tax rates (well, except for sales taxes, which would suddenly become 9% higher across the land) because the base of taxable income is profoundly broadened. 

The current system sucks about 16% out of our Gross Domestic Product with a complex and leaky maze of tax plumbing.  The 999 Plan casts a much wider net:

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.

Laffer goes on to characterize 999 as a “flat tax.”  Given the rising resistance to its sales tax component, this raises the question of why Cain doesn’t just retool it to be a flat tax.  I was always more of a flat tax guy myself, while Cain approached his compromise plan from the Fair Tax perspective.  In fact, his official 999 Plan brochure explicitly presents the program as an intermediate step toward the Fair Tax. 

Perhaps Cain could take that step by stripping away the complex, politicized junk of the current tax code and broadening the tax base first, and then introduce the national sales tax concept later.  If we were discussing any candidate except Herman Cain, I might even think that’s been his strategy all along, since almost all of the heavy fire he took in last night’s debate was aimed at the sales tax component of his plan… but Cain just doesn’t think that way.  Whatever you think about his agenda, it’s hard to describe any portion of it as “hidden.”

James Pethokoukis of the American Enterprise Institute mentioned yesterday that Stephen Moore, an architect of the 999 Plan, has come to support the idea of dropping the 9% sales tax and replacing it with a 9% payroll tax.  “I’m surprised how hostile people are to the sales tax,” says Moore.  “When we designed this plan, I thought people would go along with the 9 percent sales tax.  But the point is they won’t.  And why not just do a payroll tax. It’s the devil we know…”

Cain would stroll out of a heavy barrage of opposition-research artillery without a scratch on him if he took that suggestion.  Also, he could stop talking about apples and oranges.  He’d lose the power of the Fair Tax concept, which makes taxes completely transparent, taxes the rich more without stacking tax rates against them (because they buy more stuff), and provides a huge incentive to investment and savings… but he lost a lot of that power by proposing the hybrid 999 concept anyway. 

Also, speaking again as a long-time flat tax proponent, I question how “transparent” taxation becomes under a national sales tax, because people pay the tax in many small and relatively painless bites.  I’d rather have them filling out quarterly Flat Tax postcards, so they understand exactly how much government costs them.  I want that lesson to be painful.

Back to Laffer: he makes a superb point that gets to the heart of the national transformation Herman Cain wishes to engineer.  It would be a radical change of attitude, in which citizens were finally asked to believe in themselves, and the government was obliged to respect this faith. 

Laffer notes the 999 Plan was crafted to be revenue-neutral under static analysis, which assumes that changes in the tax code have no effect on the behavior of citizens – they go on doing exactly what they were doing before, while the government uses different methods to drain varying amounts of their blood.  This is the official wisdom of Washington… and it is patently absurd.  In fact, it might just qualify as the dumbest thing politicians expect us to believe.  Every single moment of our history flatly refutes the concept of static analysis, as does common sense.

Static analysis is the D.C. religion because it inherently supports constantly rising tax rates.  It pretends that the growth benefits of tax cuts do not exist, while no level of confiscation can kill the geese who lay the golden eggs Washington beats into the welfare-state omelet.  Consequently, every tax increase is scored as bringing in precisely as much tax revenue as the greedy political class anticipates, while the revenue lost to tax cuts is dramatically overestimated.

Laffer sees the 999 Plan changing all that:

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. I support collecting more in taxes from people with high incomes who choose to actually pay taxes at lower tax rates than use lawyers and accountants to avoid taxes at higher tax rates. Some tax revenues at low tax rates is a heckuva lot better than no tax revenues at high tax rates.

That’s a tectonic paradigm shift: a challenge to low-income Americans to believe in themselves, and their ability to improve their lives by taking advantage of opportunities created through dynamic economics.  It’s the precise opposite of Obama’s dead-end class warfare, in which the only hope for the poor lies in grabbing more from the rich, and endlessly trusting the government to deliver something it has never actually delivered. 

Obama says the problem with America is that the private sector has too much money.  Cain asks people to shoulder the expense of government more evenly and believe they can offer each other the opportunity to better in life, instead of giving every drop of that faith to a bureaucracy that has never failed to fail them.  The old deal is rotten to the core, but so far Herman Cain is the only candidate who has offered Americans a truly new deal.