Rick Perry’s Flat Tax Plan
October 28, 2011
(This item originally appeared at Forbes.com on October 28, 2011.)
First of all, let me congratulate Rick Perry, and Republicans in general, for focusing on the idea of less spending and lower taxes. This is the complete opposite of the kind of “austerity” approach that fiscal conservatives often stumble into during times of budget distress.
“Austerity” usually means less spending and higher taxes, but, somehow, we always get higher taxes and no meaningful reduction in spending. Governments usually find that higher taxes are not very popular, because the problem was never insufficient taxes to begin with, it is usually excessive spending — particularly spending that never benefits the citizens in the form of government services, but only benefits government employees, bureaucrats, and their corporate cronies.
The first reaction of government insiders and their corporate cronies is never to cut themselves off, but rather to reduce important services. Thus, we get the same waste and theft as before, fewer services, and higher taxes. The citizens are quite rightly disgusted, and begin to demonstrate in the streets. The government says, “see, we can’t cut spending one little bit,” and all efforts to reduce spending are halted. The economy is groaning under the new taxes, however, which then leads to calls for new “stimulus,” which usually means more spending. And thus the cycle begins again, this time with higher spending and higher taxes.
Less spending should be focused on cutting waste and graft, and preserving, as much as possible, the important services that actually benefit the citizens. Lower taxes, at least in the first instance, should be focused on tax reform that is “revenue neutral” in the sense that it aims to raise the same amount of revenue as a percentage of GDP, but to do so in a way that is much more economically beneficial.
Perry’s “flat tax” plan aims for the latter, to raise the same amount of revenue as the existing income tax plan, but to do so in a way that allows much greater economic health. This “economic health” leads to investment and jobs. I think Perry rather overemphasizes the benefits of reduced costs of compliance, and underemphasizes the incredible economic results that have been proven time and again by flat-tax adopters throughout the world in the last ten years.
I wrote briefly about the documented effects of flat tax programs last month.
Perry’s plan is for a 20% income and corporate tax rate. The “single rate” idea is actually not all that important. Singapore has eight tax brackets, but the top rate is the same 20%, and the overall effects are roughly the same as if there was only one 20% bracket.
Perry includes a rather hefty basic deduction of $12,500 per adult and dependant, so that a family of four would be tax-free up to $50,000 of income. I like that a lot. It’s not easy trying to raise a family on less than $50,000 a year these days. Democrats are there with all sorts of handouts and programs. What do Republicans have to offer? At the very least, I say: don’t take their money.
Like most flat-tax proposals, the payroll tax is left as-is. This is fine for now, leaving more comprehensive tax system reform for some future date. There would be no new federal sales taxes or VAT.
Capital gains and dividends would be tax-free. Many of the most successful countries, despite having ample government services, have left capital gains tax free, including Germany, Singapore, South Korea, Switzerland, and, until 1990, Japan.
Perry has taken some flack for allowing deductions for mortgage interest and charities. This may offend some purists. However, by itself, having two simple deductions doesn’t change the overall system much, or reduce its beneficial effects. I probably would just make the basic deduction larger instead, but Perry’s proposal is fine by me.
Perry has also included a somewhat strange option to do your taxes using the existing system if you so prefer. I’m not sure this is such a good idea, but I do think it shows that Perry is willing to allow discussion and make concessions to implement his plan in a way that is easy to accept and doesn’t cause problems. All too many people today are ideologues, who are willing to cause any sort of real-world difficulty in their devotion to some abstract principle. The whole point of a tax reform is to make things better, not worse.
All in all, I think it is a good plan. Maybe the weakest part is how it’s being sold. I’d focus on the benefits for a middle-class family. How about that $50,000-per-family-of-four deduction? With mortgage interest on top of that? I can imagine a lot of families might like that. Second, talk up the economic effects of the plan. Much lower tax rates, and a much simpler system, would lead to a much healthier business environment, which means more and better jobs. Third, emphasize that the plan aims to generate the same 8%-of-GDP in revenue as our existing income tax.
Historically, a reduction in top tax rates has led to a greater percentage of income tax revenue paid by the higher earners. This was true in the U.S. following tax cuts in the 1920s, the 1960s, and the 1980s. It was true in Britain after the Thatcher tax cuts as well.
It’s very exciting today to see both Perry and Cain with aggressive tax reform plans. After the failure of the Keynesian approach, of wasteful government spending and monetary fiddling, it’s the only thing that promises powerful results. Ron Paul supports the elimination of the income tax altogether, and the implementation of a national consumption tax or even no new tax at all (apparently retaining the existing payroll tax, which is a sort of income tax, and having a much smaller federal government). Three different approaches, all valid.
Now we have to do something about the dollar. The principle of a dollar linked to gold, instead of subject to the whims of Ben Bernanke as he attempts to create jobs and prosperity out of monetary trickery, was for a long time a cornerstone of conservative economic thinking in this country. Ron Paul is already there; Cain is halfway there. Steve Forbes and the late Jack Kemp were always on board. Rick, are you in?