Economics, Taxes and Spending

The risk and reward of Rick Perry’s flat tax gambit

Internet stocks weren’t the only thing that experienced a bubble in the 1990s. So did the idea of replacing America’s progressive income tax with a flat tax. By the middle of the decade, it was the Big Idea among conservative Republicans with a wonkish bent and an eye on higher office: Steve Forbes, Phil Gramm, and Dick Armey all had plans. Even some Democrats, like Richard Gephardt, tried to jump on the bandwagon. But the same criticisms made of Herman Cain’s 9-9-9 tax plan—that it’s regressive and doesn’t raise enough revenue—popped the flat tax bubble by decade’s end (plus the booming economy made big policy changes seem unnecessary) and little was heard about the idea during the 2000s. But it looks like Rick Perry is about to make the flat tax a core element of his presidential campaign. Here are the pros, as I see them:

1. Conservatives will love it. Key thought leaders like the Wall Street Journal editorial page, Steve Forbes, and CNBC’s Larry Kudlow are huge flat tax fans. And while conservatives are split about the Fair Tax and 9-9-9, the people who like the boldness of those plans should have no problem with a flat tax.

2. Many economists will like it. These folks disagree about a lot, but the idea of a tax code that has low rates, few exemptions, and eliminates the bias against investment should earn rave reviews. Economists like consumption taxes as pro-growth, and most flat tax plans are built off the famous Hall-Rabushka flat consumption tax.

3. It gives Perry something to talk about other than energy. The lack of an economic plan has been a huge disadvantage for Team Perry. Without one, he’s been forced to limit himself to speaking in vague generalities, attacking other candidates’ plans, and chattering endlessly about oil, which reinforces the notion that he doesn’t know much other than Texas issues.

4. It presents Romney with a big problem. Ripping Perry’s flat tax as regressive would alienate conservatives and make him sound even more moderate/liberal than when he attacked Perry on Social Security. And Romney himself lacks a big tax reform plan, only hinting that he would change things along the lines recommended by the Bowles-Simpson commission. Romney’s best case is that a flat tax is impractical and would never pass Congress.

5. It gives Perry a good zinger. Perry now says he wants “to make the tax code so simple that even Timothy Geithner can file his taxes on time.”

And here is the big con:

Perry’s flat tax will be attacked as regressive and a deficit disaster. The devil will be in the details. How high will the rate be? What income levels will be exempted? Will there be any deductions or credits such as for mortgage interest, children, or charitable giving? Will the super-rich pay lower taxes? Perry better know the ins and outs of the plan a lot more thoroughly than Cain apparently knows his. For instance, critics are already pointing to static-analysis studies from the ’90s that showed flat tax plans would have been huge revenue losers if implemented. Perry will need to make the case, which Cain hasn’t, that his plan will create a lot more economic growth to make up for any distributional issues. Remember these two words: dynamic scoring.

This tax plan should force GOP voters to give Perry another look, and give the governor a second chance to introduce himself to them. He needs to make the most of the relaunch because it may well be his final opportunity to make his case.

9 thoughts on “The risk and reward of Rick Perry’s flat tax gambit

    • Romneys whiny supporters. When Perry was not hitting Romney, his supporters were like, look Perry cannot land a bunch, he is weak, and dumb. When he shows himself willing to bloody Romney, his supporters are like, of he is rude and a Bully. Romney is a joke, period.

  1. What good has a progressive tax structure done? It has enabled almost 50% of adults to avoid paying income taxes altogether. It has been the touch stone for class warriors to pit the “rich” against everyone else.

    A flat tax makes every earner a stake holder in watching how Washington DC spends our money. That alone is a major benefit and makes it worth trying.

    Right now this country either has to make major spending reductions or it has to make major tax hikes. I say cut the spending that Obama did above and beyond the last pre-bailout budget of Bush. Then fit the flat tax to support it.

  2. I am quite optimistic about Rick Perry’s plan–I see that Steve Forbes is “elated”.

    On the other hand, I hear Romney has a couple of 59 point plans for equivocating, obfuscating, and avoiding any direct accountability for himself–hopefully long enough to get elected as the establishment’s ‘inevitable’ candidate.

    No more duplictious RINOs! I’m glad Rick Perry is picking up steam in his first national race–I believe he is a real conservative and a public servant, not a self-serving elitist like Romney.

    • Thank you. I am perplexed at people for not supporting the only real conservative, the only person that can win that has stood by what he believes. In the face of all this garbage thrown his way, he stood firm. Romney will tell you what you want to hear, and Cain seem to change positions as soon as he finds out that you dont like it, but Perry will try to explain why its the right thing to do. We have not had somebody like that since Reagan. When he told the moderator that he can ask the questions, and I’ll answer them like I want to, it was very Reagan like. The debate rules have been set up in a way that let Romney always have the last word.

  3. I’m interested in looking at it, but Cain’s plan is really nice for this small businessman. If Perry’s Flat tax means I have to pay 17% income tax and still pay the 15.4% self-employment tax it will be a non-starter.

    • If you’d be paying more taxes at 20% than you are now you must be running a non-profit. The vast majority of “small businesses” would get a 10 to 15 percent cut.

      Regardless, read the article. In his plan you can choose to stick with the old system.

  4. As ‘nice’ as a flat tax sounds, there are MANY problems. It does not produce enough tax revenue so requires deep cuts to entitlements. We can agree or disagree that the poor get too many entitlements, but its very clear that they will be cut in a flat tax scenario. Also, most legitimate economists disagree w flat tax policy so I don’t know where the author comes up w the statement that economists like flat tax proposals. Clearly we need some changes, but the ‘flavor of the month’ flat tax plans being proposed, as nice as they sound, are not legitimate solutions.

    • That’s the whole point!

      “Conservative New Yorker” seems to be an oxymoron. Please note Perry is proposing an 18% of GNP cap on Federal spending and a balance budget Amendment to the Constitution. These would require at least a 40% cut in Federal spending.

      Draconian is the word we’re looking for here. Massive Federal layoffs are in order. If any of our phony “representatives” simply follow the GAO recommendations for eliminating wasteful and duplicative programs whole departments will be eliminated. It is time to get serious about reining in a corrupt, bloated Federal bureaucracy.

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