Wednesday, October 19, 2011

Laffer Shoots Down Critics on Cain 999 for WSJ

In an Opinion piece for the Wall Street Journal, Supply Side economist and Reagan advisor, Art Laffer, looks at the number and concludes it is real stimulus for the American economy.

Cain's plan will bring in the same revenue as the current tax code on a "static basis."  This means that given no assumptions for extra "dynamic" growth, the 999 Plan will meet revenue needs.  But, Laffer strongly believes that the Cain Plan will bring in more due to the intrinsic economic positives of the Plan and the resulting growing of the private economy.

"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.

Laffer gives macroeconomic support  for his above belief and addresses the "low income will pay more" myth:

 "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 continues and points to wealth creation and the supply side theory that resulted in Reagan's largest peacetime economic recovery at the time. 

"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." 

Laffer explains the over-regulation and cost of tax compliance under a complex tax system.

"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...  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"

Many in the poverty class will benefit and be brought out of poverty.

"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."

...and what does Laffer have to say to conservative critics who say it opens up a new tax route?

"They argue that...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...Until then, let's not make the perfect the enemy of the good."

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