EVEN RICK PERRY'S TAX PLAN WON'T FLY

October 26, 2011

The best thing Rick Perry can do for his campaign is to stay out of the debates, don't answer questions about things he know nothing about, quit thinking about how to stick a ten inch shive into Mitt Romney's gut, and knock it off with that goofy smile. If he can do these things, maybe he can get back into double digits.

But not so fast! Now he has come out with something he thinks he knows a little about.

Taking his cue from Mitt Romney (the 59-point plan), Herman Cain (9-9-9) and Newt Gingrich's flat tax plan, now Perry has come out with his own tax plan. He has unveiled a tax plan that will not jump start the economy and is fiscally irresponsible.

In a nutshell, Mr. Perry would give taxpayers a choice between filing under the current income tax system—with all its flaws—and an alternative flat tax 20 percent system. Under the latter, families could maintain their mortgage deductions if they earn less than $500,000, which is about 99 percent of taxpayers, and could declare exemptions of $12,500 for each family member.

It seems appealing—a simplified tax system, fewer IRS agents, and so forth. But the plan falls short in two important respects—it won’t encourage many better investment decisions and foster growth, and it will spin the federal deficit permanently into the stratosphere.

The whole purpose of a flat tax is to encourage individuals and corporations to invest more in sound business opportunities, instead of prospecting for tax breaks by buying homes bigger than they need or spending on government hobby horse projects like solar panels. By giving tax payers the option of filing under the old system, however, the Perry plan  will encourage the wealthy and near-wealthy to continue prospecting for loopholes and credit. -- Most of those folks don’t pay 20 percent now, so don’t count on them to volunteer for Mr. Perry’s plan.

It's true that the well-off face a higher alternative minimum tax of 26 to 28 percent, but the wealthy have lots of tricks, courtesy of the tax code, that allows them to postponing or even avoiding realizing income altogether. Ditto corporations like GE which hardly pays any taxes at all.

About 42 percent of American individuals pay no income taxes right now, these folks are not likely to opt for Mr. Perry’s 20 percent plan; those that do pick it will only choose it if they can pay less. Hence, the Perry plan will raise considerably less revenue than the present system, unless it can boost economic growth and the tax base.

It won't increase the base, though it might provide a bit of Keynesian stimulus by lowering taxes for some upper-middle class folks. In particular, those who get most of their income from wages or professional services (doctors, lawyers and talk-show personalities) and are currently caught by the alternative minimum tax. 

As I recall Perry has declared Keynesian economics is dead; to get the growth Perry claims, he will have to resurrect old Lord Keynes. Having seen the consequences of the Clinton and Obama post-crisis tax holidays, I am skeptical about such powers.

With less revenue in hand, Gov.. Perry proposes slashing government spending to 18 percent of GDP—that would require $900 billion in annual spending cuts, when the Congress is having trouble agreeing on an additional $100 billion.

Such cuts are possible by increasing the retirement age to 70 and slashing Medicare and Medicare spending and gutting the defense budget.

If Gov. Perry wants to slash taxes that's fine but let’s go to a real flat tax. Let Gov. Perry tell Americans how he is going to tame the monster that ate Washington—created through escalating health care spending—and rationalize social security and defense spending.

His plan reads like a second draft. He has chosen to avoid the political liabilities of a flat tax by forgoing its distinctive advantages of simplicity and low compliance costs. The hybrid tax system he would create would in no important sense be flat, and Perry seems unwilling to spell out the cuts necessary to get spending in rough balance with the amount of revenue it would collect.

Republicans need a responsible standard bearer after President Obama has recklessly spent the country broke with little more to show than 9 plus percent unemployment. I think Mr. Perry's fifteen minutes of fame are over.


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