After Herman Cain shot to the top of the polls, the other republican candidates started sniping at his 999 plan. Much like when Rick Perry was at the top and Mitt Romney - of all people - turned attack dog on Texas' waiver of out of state tuition for children of illegal immigrants, the republicans turned their sights on each other rather than President Obama - Newt excepted. The result is that the plan will be nit picked to death. Much time will be wasted and very little accomplished. Well Art Laffer who likely knows more macro economics than any of the candidates has embraced 999. Laffer says “Herman Cain’s 9-9-9 plan would be a vast improvement over the current tax system and a boon to the U.S. economy,” Laffer told HUMAN EVENTS. “The goal of supply-side tax reform is always a broadening of the tax base and lowering of marginal tax rates. Cain’s plan is simple, transparent, neutral with respect to capital and labor, and savings and consumption, and also greatly decreases the hidden costs of tax compliance. There is no doubt that economic growth would surge upon implementation of 9-9-9.” Laffer is mostly correct. 999 is better than the Rube Goldberg machine that we have now and decreases the costs of tax compliance. It does broaden the tax base and lowers marginal tax rates. So what is not to love? First, it includes a national sales tax that hides the cost of government. Again a flat tax is far superior in that everyone knows how much government costs. Bur a consumption tax layered on top of an income tax even if that income tax is a flat 9 percent is inferior to a simple flat tax that eliminates the income tax altogether. As Rick Santorum pointed out in the debate, how many consumers would like to see their sales tax increased? In non-sales tax states like Delaware, this will be a shock. In high sales tax states like Tennessee, it will be a bigger shock especially on high ticket items. Let's go back to Econ 101 and see what will the impact be on supply and demand. First, the reduction in income taxes will shift demand curves for goods and services and for savings outward as net income increases. Cet. par., this means an increase in the prices of goods and services due to the increase in demand and a decrease in interest rates due to the increase in savings. The increase in demand will prompt an increase in the production of goods abetted by the decrease in interest rates. This, in turn leads to a decrease in prices as more supply comes on board. However, counter to this is the impact of an increase in all consumption goods caused by the consumption tax. The higher prices of goods and services will decrease the quantity demanded and works counter to the increase in net income. This may discourage consumption and encourage savings instead causing interest rates to decline further. However, given the decrease in demand, the additional savings will not generate real investment in plant and equipment. With deepest respect to Art Laffer, there is no way that a significant increase in prices can cause demand and production to increase. Thus, rather than mucking around with prices and wondering about the net effect of an increase in income and an increase in prices, the cleanest solution is to not have the government directly interfere with the prices set by the market for goods and services. Instead of 999, Herman Cain and the US would be better served by 18. That is an 18 percent flat tax on all earned income with no exceptions. no deductions and no IRS.
Harold A. Black is professor emeritus in the Department of Finance, University of Tennessee, Knoxville having retired after 24 years of service. He has served on the faculties of American University, Howard University, the University of North Carolina - Chapel Hill and the University of Florida. His government service includes the Office of the Comptroller of the Currency and as a Board Member of the National Credit Union Administration. He also has served on the boards of directors Home Savings of America and its parent company, H. F. Ahmanson & Co., Irwindale, California prior to its merger with Washington Mutual Savings Bank, on the board of New Century Financial Corporation, Irvine, California, then the nation’s largest real estate investment trust and as director and later chairman of the Nashville Branch of the Federal Reserve Bank of Atlanta. He writes an occasional article for the Knoxville News-Sentinel at http://www.knoxnews.com/staff/dr-harold-black/. His web page is haroldablackphd.com