Art Laffer's Column: Herman Cain's Stimulating '9-9-9' Tax Reform

Wall Street Journal ^ | 10/19/2011 | Art Laffer

[fightinJAG]

I still don’t see any substantive comments on Mr. Laffer’s analysis in your reply.

[TheOldLady]

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[richmulv]

I respect Laffers opinion but when it takes an extensive article in the WSJ to explain the 999 plan, one must consider the fact that the average American is not going to fully understand it. On the surface the idea is too open to demagogery because it is difficult to understand. We saw that last night when all of the other candidates seemed to attack it.

[flaglady47]

“All of this is based off of Moore’s single interview on Kudlow’s Radio show.”

LOL, then ask for a transcript from the radio show that day, or call up and ask Larry Kudlow and/or his staff. Don’t take my word, send an email to Moore or Laffer and ask them if they were the creators of the plan. I guess they are lying in saying they were? Whatever.

[flaglady47]

Actually, the more I think of it, Moore is being honest in saying he and Lowrie and Laffer were the architects of the plan. Laffer is actually being deceptive in not stating this up front when singing the praises of Cain’s plan. He’s making it sound like only the other guy Lowrie was the creator of the plan, and that he, Laffer, wasn’t involved, which is a very unfair thing to do and is fooling the public into thinking he is a detached observer of the plan and saying how good it is, when he was one of the authors of it. The word sneaky comes to mind.

[Lazlo in PA]

I am not calling you into question. I am calling the Hill piece and the Red State piece I found into question. This should be big news yet no other outlet is saying this or the two people involved, Laffer and Moore, disclose this in any interviews they did this week. It doesn’t add up to me especially when Moore is grumbling about the sale tax.

[Lazlo in PA]

I agree if you are right, but other than Moore saying this briefly, they are all keeping quite about it. I saw an interview with Lowrie on Kudlow last week and he even said it was all his. This whole thing needs to be investigated. If Laffer and Lowrie are lying or not giving all the details, someone needs to find this out and ask why.

[flaglady47]

“If Laffer and Lowrie are lying or not giving all the details, someone needs to find this out and ask why.”

Right you are.

[Norseman]

>>It’s actually a 9% business profits tax, plus a 9% payroll tax on business, (plus 9% sales tax, and 9% income tax to the earner).<<

So, essentially, you’re agreeing with me that the business tax is a VAT. After all, the a product price breaks down to: 1) cost of materials + 2) cost of labor + 3) profit margin.

All you’re saying is that the 9% is paid on everything but the cost of materials, i.e., it’s a VAT. The tax is levied only on that portion of the product’s sale price that hasn’t already been taxed as a supplier’s level. That is exactly how a value-added tax is applied.

I don’t understand why Cain is so dense on this point. Either he doesn’t understand it himself (a scary thought) or he’s obfuscating the issue in order to avoid the criticism that he wants to introduce not just one new type of tax (the national sales tax), but two (the sales tax and a VAT).

I think his position is defensible, but can’t understand why he won’t state it in a more forthright way. People aren’t idiots, and will figure it out eventually anyway.

[Norseman]

To be a little clearer on the VAT concept, if a company has purchase inputs which have already had the tax paid by the supplier, even if that input is something like a consultancy fee, for example, then the cost of those inputs is deducted from the total revenues before the VAT is paid by the next company up the supply chain.

In other words:

Tax = 9% of (”Total Revenues” less “Inputs that VAT has already been levied upon”). And this is approximately how Cain’s plan is set up, with some exclusions for dividends, I believe.

Example: If a company’s total sales are $1,000,000 and it has purchased $400,000 of good and service upon which the suppliers have previously paid the VAT, then this company will owe 9% of $600,000, or $54,000, a number, incidentally, that is completely unrelated to whatever profit the company might have made. In other words, it’s not a business profits tax as it keeps being described. In fact, even as the company in question pays that $54,000, it might be having a losing year as far as profitability goes. It will still owe the VAT, however.

[Pagey]

bttt

[Atlas Sneezed]

So, essentially, you’re agreeing with me that the business tax is a VAT.

---

If you think we have a VAT now (profits tax plus payroll tax) then by that bizarre definition of VAT I can’t disagree.

[Norseman]

>>If you think we have a VAT now (profits tax plus payroll tax) then by that bizarre definition of VAT I can’t disagree.<<

You’re the one trying to re-define the VAT, not me. I was just pointing out that your definition is pretty close to what a VAT actually taxes when it taxes “value added.” This is because most of the value added is in the form of labor cost and profit margin.

And no, I don’t think we have a VAT now. Companies are taxed on profits at 35% and employees are taxed on wages in up to four different ways, income tax, ss/med taxes, dividends, and capital gains. Hardly a VAT, as no value-added calculation is ever performed, and the rates on the various forms of income are all wildly different besides.

The issue boils down to whether or not Cain’s business tax is a VAT, as many are now claiming, and as he has so far denied. It certainly appears to have all the characteristics of a VAT, i.e., a flat tax based on the value added by any particular company, paid directly to the treasure by the company. I’m not sure why you want to confuse the issue so much?

Perhaps you could tell me how you define a VAT and then explain how Cain’s business tax differs (other than in minor ways such as excluding dividends.)

[Atlas Sneezed]

Perhaps you could tell me how you define a VAT and then explain how Cain’s business tax differs.

---

No, I’ll let you tell me how the same corporate tax (but at vastly lower rates) and the same payroll tax (but at slightly higher rates) is a VAT.

Please.

[SuziQ]

I respect Laffers opinion but when it takes an extensive article in the WSJ to explain the 999 plan, one must consider the fact that the average American is not going to fully understand it.

Americans vote for things they don't understand completely all the time. As long as it's explained in plain terms, most will understand it enough to decide whether they like it.