Tag: 2012 election

Grading Perry’s Flat Tax: Some Missing Homework, but a Solid B+

Governor Rick Perry of Texas has announced a plan, which he outlines in the Wall Street Journal, to replace the corrupt and inefficient internal revenue code with a flat tax. Let’s review his proposal, using the principles of good tax policy as a benchmark.

1. Does the plan have a low, flat rate to minimize penalties on productive behavior?

Governor Perry is proposing an optional 20 percent tax rate. Combined with a very generous allowance (it appears that a family of four would not pay tax on the first $50,000 of income), this means the income tax will be only a modest burden for households. Most important, at least from an economic perspective, the 20-percent marginal tax rate will be much more conducive to entrepreneurship and hard work, giving people more incentive to create jobs and wealth.

2. Does the plan eliminate double taxation so there is no longer a tax bias against saving and investment?

The Perry flat tax gets rid of the death tax, the capital gains tax, and the double tax on dividends. This would significantly reduce the discriminatory and punitive treatment of income that is saved and invested (see this chart to understand why this is a serious problem in the current tax code). Since all economic theories - even socialism and Marxism - agree that capital formation is key for long-run growth and higher living standards, addressing the tax bias against saving and investment is one of the best features of Perry’s plan.

3. Does the plan get rid of deductions, preferences, exemptions, preferences, deductions, loopholes, credits, shelters, and other provisions that distort economic behavior?

A pure flat tax does not include any preferences or penalties. The goal is to leave people alone so they make decisions based on what makes economic sense rather than what reduces their tax liability. Unfortunately, this is one area where the Perry flat tax falls a bit short. His plan gets rid of lots of special favors in the tax code, but it would retain deductions (for those earning less than $500,000 yearly) for charitable contributions, home mortgage interest, and state and local taxes.

As a long-time advocate of a pure flat tax, I’m not happy that Perry has deviated from the ideal approach. But the perfect should not be the enemy of the very good. If implemented, his plan would dramatically boost economic performance and improve competitiveness.

That being said, there are some questions that need to be answered before giving a final grade to the plan. Based on Perry’s Wall Street Journal column and material from the campaign, here are some unknowns.

1. Is the double tax on interest eliminated?

A flat tax should get rid of all forms of double taxation. For all intents and purposes, a pure flat tax includes an unlimited and unrestricted IRA. You pay tax when you first earn your income, but the IRS shouldn’t get another bite of the apple simply because you save and invest your after-tax income. It’s not clear, though, whether the Perry plan eliminates the double tax on interest. Also, the Perry plan eliminates the double taxation of “qualified dividends,” but it’s not clear what that means.

2. Is the special tax preference for fringe benefits eliminated?

One of the best features of the flat tax is that it gets rid of the business deduction for fringe benefits such as health insurance. This special tax break has helped create a very inefficient healthcare system and a third-party payer crisis. It is unclear, though, whether this pernicious tax distortion is eliminated with the Perry flat tax.

3. How will the optional flat tax operate?

The Perry plan copies the Hong Kong system in that it allows people to choose whether to participate in the flat tax. This is attractive since it ensures that nobody can be disadvantaged, but how will it work? Can people switch back and forth every year? Is the optional system also available to all the small businesses that use the 1040 individual tax system to file their returns?

4. Will businesses be allowed to “expense” investment expenditures?

The current tax code penalizes new business investment by forcing companies to pretend that a substantial share of current-year investment outlays take place in the future. The government imposes this perverse policy in order to get more short-run revenue since companies are forced to artificially overstate current-year profits. A pure flat tax allows a business to “expense” the cost of business investments (just as they “expense” workers wages) for the simple reason that taxable income should be defined as total revenue minus total costs.

Depending on the answers to these questions, the grade for Perry’s flat tax could be as high as A- or as low as B. Regardless, it will be a radical improvement compared to the current tax system, which gets a D- (and that’s a very kind grade).

Here’s a brief video for those who want more information about the flat tax.

Last but not least, I’ve already received several requests to comment on how Perry’s flat tax compares to Cain’s 9-9-9 plan.

At a conceptual level, the plans are quite similar. They both replace the discriminatory rate structure of the current system with a low rate. They both get rid of double taxation. And they both dramatically reduce corrupt loopholes and distortions when compared to the current tax code.

All things considered, though, I prefer the flat tax. The 9-9-9 plan combines a 9 percent flat tax with a 9 percent VAT and a 9 percent national sales tax, and I don’t trust that politicians will keep the rates at 9 percent.

The worst thing that can happen with a flat tax is that we degenerate back to the current system. The worst thing that happens with the 9-9-9 plan, as I explain in this video, is that politicians pull a bait-and-switch and America becomes Greece or France.

Gov. Christie, Bill Kristol, and the Future of the GOP

The interest in New Jersey governor Chris Christie as a possible 2012 presidential candidate is understandable. His tough line against state spending, his willingness to take on entrenched interests in the Garden State, and his candor and blunt manner of speaking all appeal to Republicans weary of the current candidates. But while his views on domestic policy are relatively clear, Christie’s foreign-policy views aren’t. Indeed, governors have little reason to speak out on foreign-policy issues unless they run for president.

Without a track record, however, no one can know how a former governor will perform what is arguably a president’s most important job: deciding whether, where and when to deploy U.S. troops abroad. Recall George W. Bush’s plea for a humble foreign policy and his senior foreign policy adviser Condoleezza Rice’s assertion that the U.S. military should not be in the business of “escorting kids to kindergarten” in foreign lands. This was all forgotten by the time that Bush and Rice exited Washington eight years later. Rice essentially recanted her earlier opposition to nation building, and Bush had presided over a foreign policy that was anything but humble.

With that huge caveat in mind, can we venture a guess about Chris Christie’s foreign policy views? Not quite. But this passage from Christie’s speech at the Reagan Library hints at a measure of humility and pragmatism that is long overdue:

The United States must…become more discriminating in what we try to accomplish abroad. We certainly cannot force others to adopt our principles through coercion. Local realities count; we cannot have forced makeovers of other societies in our image. We need to limit ourselves overseas to what is in the national interest so that we can rebuild the foundations of American power here at home.

Such sentiments strike most Americans as eminently sensible. Numerous polls show that Americans want to stop fighting other people’s wars and building other people’s countries. Most believe it is better to husband our power and deploy our military abroad only when vital U.S. security interests are threatened. We should lead by our example, build a society that others wish to emulate, and avoid the temptation to meddle in other people’s affairs.

Not so, says William Kristol, Weekly Standard editor and Fox News commentator. In a famous essay co-authored with Robert Kagan in 1996  the two made the case for “benevolent global hegemony.” Kristol and Kagan especially took issue with those conservatives who:

succumb easily to the charming old metaphor of the United States as a “city on a hill.”

[…]

Because…the responsibility for the peace and security of the international order rests so heavily on America’s shoulders, a policy of sitting atop a hill and leading by example becomes in practice a policy of cowardice and dishonor.

So why would Kristol be pushing Christie to run for president?

At first glance, it appears that Kristol is willing to look past Christie’s foreign-policy views in the interest of finding a candidate best able to defeat President Obama in 2012. Perhaps Kristol believes that he will be in a better position to influence Christie’s policies at a later stage. Kristol was notably lukewarm on Governor Bush in 2000 but was nonetheless able to influence President Bush’s foreign policy.

But should Republicans listen to Bill Kristol?

Kristol’s brand of foreign-policy activism has always looked more like Woodrow Wilson than Ronald Wilson Reagan. Indeed, notwithstanding Kristol’s deliberate efforts to wrap his foreign-policy views around Reagan’s legacy, Reagan was more skeptical of confrontation with the Soviet Union than the neoconservatives, as Stefan Halper and Jonathan Clarke expertly demonstrate in their book America Alone. And conservatives’ understandable skepticism of nation building at home has never fit with the neoconservatives’ notions of nation building abroad.

Beyond this serious philosophical disagreement, Republicans should recall the terrible effects that the neoconservatives’ foreign policies had on Republican candidates in recent elections. Kristol was a leading champion for some of the biggest foreign policy blunders in U.S. history. Those blunders denied George W. Bush a mandate for major domestic-policy reform in 2005, cost the GOP control of the Congress in 2006, and provided an opening that Barack Obama skillfully exploited on the road to the White House in 2008. Those are all reasons enough for Republicans to ignore Kristol’s advice.

It is too soon to say whether Chris Christie’s few early comments about foreign policy signal a genuine commitment to military restraint, or whether his skepticism toward foreign military adventures will be discarded as quickly and easily as George W. Bush’s humility. But there are modestly hopeful signs that Governor Christie hasn’t fully bought into the neocons’ benevolent global hegemony, and that suggests that he will be open to other points of view.

Cross Posted from The National Interest.

Willie Nelson Endorses Gary Johnson for President

Politico reported earlier today that iconic crooner Willie Nelson has endorsed former New Mexico governor Gary Johnson for president. Johnson came to be known as “Governor Veto” for axing nearly half of all the bills sent to him by the legislature, and I am  starting the rumor rumors are already circulating that Nelson will record a new song, to the tune of his hit “To all the girls I’ve loved before,” celebrating that fact.

We cannot confirm that the lyrics will go something like this:

To all the bills I’ve axed before
That traveled in and out my door
I’m mad they came along
I dedicate this song
To all the bills I’ve axed before

To all the bills that made me laugh
I kept the wheat and axed the chaff
Inane legislation
Explains my great frustration
With all the bills I’ve axed before

Walking dogs just ain’t a proper thing
For government to regulate
Legislators to their powers cling
But that ain’t no role for the state

To all the bills I’ve slashed and burned
The dumb laws that I’ve dissed and spurned
I’m mad they came along
They were profoundly wrong
And that’s why I showed them the door

To all the bills I’ve axed before
We can’t afford dumb laws no more
We need fiscal restraint
That was my main complaint
With all the bills I’ve axed before