Why 999 is good for poor and middle class:

• It eliminates Social Security FICA taxes (the toughest, most regressive tax of all on lower income working Americans)
• It eliminates all federal taxes for those below poverty line
• It will trigger explosive economic growth by dramatically reducing taxes on business and investment
• It cuts the top income tax rate from 35 percent to 9 percent.
• It eliminates the onerous Alternative Minimum Tax
• It drastically simplifies the tax code

ART LAFFER: 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. 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.

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.

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. As I wrote on this page earlier this year (“The 30-Cent Tax Premium,” April 18), 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 without a penny being lost to the U.S. Treasury. It’s a win-win.

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Art Laffer explains 999: Calls it a “wonderful plan”

Here’s the famed “Laffer Curve” that shows why the government actually gets more money when tax rates are lower

BEN SAYS: Remember, when Reagan cuts tax rates from a top rate of 70 down to 28 percent, the federal government ended up collecting a lot more money because of explosive economic growth.  In fact, the federal government was collecting an incredible 80 percent more money in 1988 than it was in 1980. If you adjust for inflation, the federal government was collecting 50 percent more money in 1988 than it was in 1980. And if you adjust for both inflation and population growth, the federal government was collecting 19 percent more revenue per capita in 1988 than in 1980.

So, however you slice it, the federal government was collecting much more money after the top tax rate was cut from 70 to 28 percent. And this explosive economic growth continued through the Clinton years, even through 7 of the W years.  So, under Reaganomics, we had steady, non-stop economic growth from 1983 through 2007 — a quarter century.  Not bad.

The principle is this:

Would you rather have 1 percent of a successful company like Apple or Microsoft, or 100 percent of what you have now? That’s the idea here. If the government taxes 100 percent of what you earn, the government gets nothing because no one’s going to work for zero.

Laffer believes there’s an ideal tax rate that produces the most revenue for the government by creating the most explosive economic growth.  We don’t know exactly what the ideal tax system and rates are. He favors a low top rate and a simple tax code that rewards people for being industrious and productive instead of spending their time trying to figure out ways around the tax code.

Laffer believes it’s better to tax consumption than production and investment.  The government needs revenue to operate and do the things we think government should do. The most efficient, least punitive tax system taxes consumption. This also makes taxes more voluntary.  If you want to pay less taxes, just buy less and live more modestly. So taxing consumption encourages savings and investment — all good for the economy and your own fiscal health.

Keep in mind also that Cain views his 999 plan as a transition to the “Fair Tax” — where the income tax is eliminated entirely and replaced with a national sales tax.  So the sales tax would be high if we insist on revenue neutrality (rather than cut spending); but all income taxes, FICA taxes, and capital gains taxes would be gone. The IRS would then be out of our lives — at least in the sense of tracking or incomes and monitoring our bank accounts.

Cain does not suggest his 999 plan is a magic bullet that solves all problems.  It rights some of the wrongs with the byzantine, anti-business, anti-production tax code we now have. Cain’s 999 plan is a good start.

What we also need to focus on is slashing government spending. That’s the only real way to reduce the overall tax burden. Every dollar the government borrows is, in reality, a tax increase . . . because we pay interest on borrowed money and have to pay it back. Right now, the federal government borrows 43 cents of every dollar it spends.  That’s clearly unsustainable. So we also need to radically cut spending and stop the borrowing.

Then we need to cut the size of the federal government all the way back down to Constitutional size — which is about one-third the size it is now.

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