The World Tax is Flat

Ask yourself, tax code, do you feel lucky? Do ya, punk?

 Rick Perry stabs the tax system in the heart.  But under the plan, is it dead or simply pining for the fjords?

Steve Forbes must feel like he’s stepped into a time machine.

The 1996 & 2000 GOP presidential candidate briefly electrified the denizens of political wonkdom with his conception of a national flat tax to simplify – and eliminate – the current overcomplicated tax code over 15 years ago.  Forbes’ idea of broadening the tax base while reducing the individual tax burden proved a temporary hit – too much of one as most of his 1996 rivals embraced similar policies.  Unfortunately for flat tax advocates, the only candidate who didn’t rush towards the concept was nominee Bob Dole, and since then the tax as languished as more theory than practice despite its success in many former Soviet bloc countries.

That is until now, as Texas Governor Rick Perry has revived the concept, winning Forbes’ praise and liberal scorn.  The headlines have screamed about Perry’s new tax rate of 20%, but in most reports, the lead has been buried:

“The plan starts with giving Americans a choice between a new, flat tax rate of 20 percent or their current income tax rate,” Perry writes. “The new flat tax preserves mortgage interest, charitable and state and local tax exemptions for families earning less than $500,000 annually, and it increases the standard deduction to $12,500 for individuals and dependents.”

 

The plan also drops the corporate tax rate to 20 percent and will temporarily lower the rate to 5.25 percent to promote companies working overseas to move to the U.S. along with implementing a “territorial tax system,” which will  tax in-country income.

 

The plan will eliminate the death tax and end taxes on Social Security, which would help an estimated 17 million Americans receiving benefits today. It would also cut taxes on qualified dividends and long-term capital gains.

The drop in corporate tax rate would put the U.S. as the lowest in the world (among major competitors; there are a number of nations with no corporate taxes).  And with most foreign economies unable or unwilling to respond in-kind with similar corporate tax rate cuts, the U.S. could be looking at an immediate repatriation of up to $1.4 trillion with the addition of a “territorial tax.”  Does that mean an immediate increase in jobs?  Not exactly, but a similar “repatriation holiday” for overseas corporations in 2004 spurred massive investments in capital and employment.

Lost in the corporate tax discussion has been Perry’s proposal to cap federal spending to 18% of GDP, or what would be roughly $2.54 trillion.  That’s under the projected 2012 revenues of $2.627 trillion and significantly under the Obama adminstration’s desired $3.729 trillion of spending.  Perry is obviously expecting that projected $1.4 trillion to soften the blow as increased income would (hopefully) spur GDP growth, raising Perry’s 18% beyond projected 2012 revenue levels.

The chief compliants from the right, much like with Herman Cain’s “999” plan, are that Perry’s flat tax doesn’t go far enough.  Indeed, both leading economic fixes from the GOP field disembowel the current tax system but keep it wrapped together in some fiscal Eraserhead policy nightmare.  Both Cain and Perry’s proposals have foreign models to work from – Cain’s VATesque vision which has hindered Europe; Perry’s opt-out Hong Kong-like system which has worked well despite the complication of individuals being potentially able to switch back-and-forth from flat tax to the current system year to year.

Ultimately, Perry’s flat tax needs to be seen as the beginning of a new policy discussion, rather than as a destination.  A total overhaul of the tax code, while popular in spirit, likely polls poorly when the roughly 47% of Americans who don’t pay federal taxes figure out they might be forced to actually contribute to the system.  As proposed, few Americans will find themselves benefiting from the policy, but I think critics are thinking too short term and too little on the potential corporate effects of the plan.

7 thoughts on “The World Tax is Flat

  1. As Wisconsin has seen with the gov’t payroll (to say nothing about Greece), we have about reached a tipping point where far too many people pay little or nothing, but get free stuff. Smart economists have warned about this for decades, to change our method of tax and spending before we reach this point.

    Worst thing? Democrats have to know that Medicare/caid will be the first to bankrupt us, but they also know that they can win elections by blocking any reforms (“Mediscare”).

  2. Two hundred and fifty years ago Adam Smith demonstrated effectively that the lot of workers was best in nations where economies were growing. Even the wealth of a nation, in absolute terms, had almost no effect on the wages of labor. Growth was the key.
    That Democrats and liberals deny this is far more egregious, and damaging to the workers of the US, than any doubts conservatives have about climate change “science”.

  3. Need to start somewhere, regardless whether it is 9-9-9 or Newt or Perry’s flat tax.

    Yet, I am sure MSM, Libturds and WH teleprompter (pardon the redundancy) already have cue cards queued saying Reps have no plan that is better than current (path to destruction).

  4. That Democrats and liberals deny this is far more egregious

    Does not fit the narrative of cradle to grave government control, hence cannot be true, damn history and all that…

  5. Please do your homework. Cain’s NRST (national retail sales tax) is about as far as you can get from a VAT. It’s actually superior to a flat tax in many ways.

  6. I don’t really see any of these proposals as doing much to simplify the tax code because:

    1) My understanding is that when people talk about a “27,000 word tax code” what they’re referring to includes historical revisions not the number of word for the code that’s in effect now.

    2) The majority of the tax code deals with things like defining what constitute taxable income – not the rates. Changing the rates or even consolidating them into a single rate does very little to effect the compliance costs for the tax code.

    3) If we’re serious about broadening the tax base, it seems counterproductive to leave the most popular deductions in place (e.g. mortgage interest, charitable contributions, State income taxes, etc.). I can see offering or increasing the individual exemption to alleviate the burden on the poor but this is basically just preserving the worst aspects of the tax code in order to make what amounts to cosmetic changes.

  7. This issue was a topic of discussion with a couple of my union affiliated buddies this past weekend. For years, these guys have groused about the higher taxes that apply to overtime pay, to which I reply; “Welcome to my world!” Having been a sales geek for years where the majority of my comp comes from commissions which get hammered under special rules, I have no sympathy for them. But, it is a great illustration as to how they would benefit from a flat tax. Fortunately for all of us, they are starting to get it to the point of realizing that the real party for the working stiffs is the GOP!

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