Thursday, October 27, 2011

The Wholly Ridiculous Perry Tax Plan, Did Tim Pawlenty Bow Out Too Soon?, Deficit Plan PR Wars

A Very, Very Bad Plan
There are some things to love about the concept of a flat tax.  Our current income tax system is overly complicated, causing a huge cost of enforcement, large scale fraud (or at least graying of the tax law) and places an efficient time and financial burden on tax payers.  A true flat tax, that eliminated all the itemized deductions and at least carved out an exemption for the first $20K or $30K of income (so we aren't taxing working class people into poverty) would probably be preferable to our current system, particularly if it was structured to encompass existing payroll taxes.  It has the drawback of, on face, making the system less progressive, but the reality is that our existing code really is regressive in many cases, because of the myriad of tax credits and deductions that distort the stated rates.  Besides, by exempting, say, the first $30K in income and setting a tax rate of say, 20%, the progressive nature of the code would be preferred, since a wage earner of $30K would pay an effective rate of 0%, an earner making $60K would pay an effective rate of  10% and an earner making $150K would pay an effective rate of 16% and so on.

So shouldn't I love Rick Perry's plan that applies a flat tax of 20% and exempts the first $12,500 in income for individuals?  Absolutely not.  Perry's plan combines all of the worst drawbacks of a flat tax while gaining none of the advantages.  His plan lets taxpayers CHOOSE between the existing system and his new system.  This means that all of the loopholes and carve outs stay for those who benefit them.  It doesn't get rid of the cost of enforcement, since any number of taxpayers may continue to pay under the old system, if it benefits them.  It doesn't reduce the burden on taxpayers for preparing their returns, since you would need to do your taxes both ways in order to determine which one was more beneficial.  Even in the "flat tax" option, it leaves carve outs to deduct state income taxes, charitable deductions and home mortgage interest. 

Worst of all, it would amount to a massive decrease in federal revenue.  How can I be so sure?  Think about it.  If I have an option between the old system and Perry's new system, which system would I choose?  The answer, of course, is the one under which I pay less taxes.  There would be no taxpayers that would pay more...and many who would pay less (those who would owe less under Perry's new system.)  It's simple math that you can't have no one pay more and lots of people pay less and not collect a lot less.

Worse still, Perry eliminates taxes on capital gains and dividends, meaning he is effectively not taxing the investing class and relying entirely on taxes on wages.  This makes the system massively more regressive than our existing system.

This is a far inferior system to Herman Cain's 9/9/9 plan, although that has flaws too, which I have previously discussed.  It is completely unserious.  He has absolutely zero in specific budget cuts to offset the revenue, instead only a broad statement that he wants to get federal spending down to 18% of GDP.  Even if that were possible without either massive cuts to military spending or serious changes to entitlement programs (one of those two would be necessary), to get to a balanced budget at 18% of GDP, we'd need Clinton-era tax levels, not rates even lower than the ones today.

It's fine to believe in lower taxes.  But lower taxes should be a byproduct of lower spending.  So if you want to cut taxes by slashing Social Security, Medicare or Defense, then say so.  There is no free ride.

Shame on the conservative blogosphere for embracing Perry's plan.  A flat tax debate would be a great debate to have in this country.  But let's debate a real plan, not a PR gimmick.

I probably shouldn't waste much more digital ink on Perry.  Between this and his ridiculous identification with birthers this week, I think he is pretty well done as a national candidate.  Frankly, I think GOP primary voters were done with him even earlier.

Where is Tim Pawlenty When You Need Him?
75% of the GOP seems to want someone other than Mitt Romney to be the nominee, judging by his stuck-in-neutral poll numbers.  Perry has effectively flamed out.  Michele Bachmann's brief surge is a distant memory.  Herman Cain looks unready for the national stage on many levels.

If he were still in the race, wouldn't Tim Pawlenty seem like a logical guy to go to?  Sure, he once supported Cap and Trade.  But his conservative bona fides are a heck of a lot better than Romney's and Pawlenty has the credibility of a successful governor.  Does anyone else think he would be a player if he hadn't dropped out so early?

A Tax Increase by Any Other Name...
The PR leaks around the deficit reduction super committee's work are coming fast and furious (perhaps a bad term to use after watching Janet Napolitano get grilled this week over the botched operation by that name.)  First, the Democrats leak that they had proposed a $3 trillion deal that included significant entitlement cuts but also significant tax increases.  Now the GOP leaks a $2 trillion counter proposal that contains a lot of the same cuts, but no tax increases, although it has some enhanced revenues from increased federal fees.

At least they are talking and passing specific proposals back and forth, but it seems like we are at the same log jam - the GOP simply won't accept higher taxes, no matter what.

How about some creative solutions to get to a solution that both sides can stomache?

How about a proposal that tax the cuts, doesn't raise taxes now, but includes a poison pill that would have tax increases kick in in 2013 or 2014 if the deficit isn't brought down to x% of GDP by those years?  The GOP still controls the House, so they could argue that they aren't really voting for a tax increase since they won't let spending drive deficits that high.  And Democrats could claim victory in that they kept tax increases on the table but just pushed them out to later to help the weak economy.

Some type of creative compromise will be necessary to get something on the table that can pass.  We'll see if the super committee is up to the task.

No comments: