Arthur Laffer approves of Herman Cain's 9-9-9 tax plan and he says why in today's Wall Street Journal.
Republican presidential candidate 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%. Sometimes it's a good deal higher, as in the boom of the late 1990s, and sometimes its lower, as in today's "Great Recession." 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.
Some of those points haven't come through very well in the Republican Presidential debates.
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.
Let the recovery begin.
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