by Herman Cain
October 24, 2011
One of my favorite criticisms of my 9-9-9 tax reform plan is the one where people indicate they would support the plan if only we could find a way to guarantee Congress could never change the rates in the future.
They must really like the plan to ask for that. Has any other presidential candidate ever been asked to guarantee that the tax rates he proposed could never be changed?
I realize, of course, that much of this owes to the introduction of a new federal tax – the consumption tax – as part of the equation. It makes people nervous because they figure politicians can’t raise a tax that doesn’t exist. So once the consumption tax is in place, they say, 9 percent will only be the starting point for politicians to raise it and the other taxes, and 9-9-9 quickly becomes 10-10-10, 11-11-11 and who knows what else?
That’s why it’s nice to have respected economist Arthur Laffer bring a little reality to the discussion in a piece he wrote last week for the Wall Street Journal. Mr. Laffer, you might remember, was the originator of the Laffer Curve, a notion in economics that demonstrates you get diminishing returns from higher marginal tax rates because they discourage investment and economic growth. Specifically, his Laffer Curve showed that you can collect the same amount of revenue from a lower marginal rate as you can from a higher marginal rate because of the impact the rates have on the economy.
Contrary to some of what you hear in current conversation, the theory of the Laffer Curve was proven correct when Ronald Reagan cut marginal tax rates across the board in 1981, and federal revenues soared. So did deficits, of course, and that’s the part you usually hear about. But that’s because federal spending soared even more. Excessive spending, not insufficiently high tax rates, was the problem then and it’s still the problem today.
So having established Mr. Laffer’s credibility on economic and tax matters, it’s nice to see that he cuts to the chase about 9-9-9 by pointing out a couple of things.
First, for all the hand-wringing about introducing one new tax, critics seem to lose sight of the fact that we eliminate so many existing taxes that do so much damage to the economy. The payroll tax robs many people of large portions of their take-home pay. We eliminate it.
The estate tax forces people to sell family businesses after their founders pass away. We get rid of that, too. The capital gains tax discourages investment – a mistake that contributes mightily to unemployment – by presuming to punish people who profit from putting their capital at risk. With 9-9-9, that comes to an end.
Even worse, the myriad of taxes in our complicated code encourages people to engage in an absurd assortment of tax-avoidance maneuvers, and to spend obscene amounts of money on tax lawyers and accountants just to help them minimize their tax burdens. Mr. Laffer estimates that for every dollar of personal and business taxes paid, another 30 cents is spent just on the expenses necessary to comply with our complicated tax code. Consider that, just in terms of federal taxes alone. If $2.3 trillion is paid in taxes, that would mean $690 billion is spend on tax lawyers, accountants and other related compliance costs – because the tax code is so complicated that people can’t figure it out for themselves, or because they’re looking for ways to manipulate their tax liability.
What could we do for the economy if we suddenly freed up that $690 billion to be used in more productive ways? What would happen if people stopped making economic decisions that have no purpose whatsoever except tax avoidance?
You know the answer.
Finally, Mr. Laffer points out how silly is the criticism that the rates could be raised in the future. They certainly would not be raised while I’m in the White House. My veto pen would see to that. But yes, future presidents and Congresses can change the tax code.
That’s true of any tax, any plan or any rate that anyone ever proposes.
But I believe it would be harder for politicians to raise rates under the 9-9-9 plan than it is under the current system. That’s because, under the simplified tax code that the 9-9-9 plan achieves, everyone would know if their taxes were being raised. It would be visible and obvious, and people would feel it.
Today, I doubt most people are even fully aware of the rate they pay. With the mangled web of exemptions, deductions and progressive marginal rates, only people who study the matter intently can really be sure. Under 9-9-9, everyone will know that they pay a 9 percent income tax and a 9 percent consumption tax, and that their employers pay a 9 percent corporate tax. Thus, any proposal to raise these rates will hit home instantly, and I have no doubt such an attempt would generate a massive reaction from the populace.
One of the ways I seek to empower the people is by giving them a government whose workings they can actually understand, and 9-9-9 is the centerpiece of that effort. It’s nice to have someone with the credentials of Arthur Laffer affirm that it can, and will, work.