Sunday, October 30, 2011

Perry's Pathetic Plan: 6 flaws with the optional flat tax

A while ago, I went through Cain's 9-9-9 plan and found that while it was an improvement, it was not nearly as good as the FairTax.

Today, it's time to analyse Rick Perry and his optional flat tax (you get to choose between a 20 % flat tax or the current system). If you thought I was harsch on Cain, oh you aint seen nothing yet. Here is a list of six reasons why Perry's plan is pathetic, wrong, and probably the worst thing a Republican has come up with since someone thought it would be a good idea to break into Watergate.

Let's start:

1) It is not revenue-neutral. While with Cain's plan, I'm simply not sure if it's revenue-neutral, with Perry's plan I can tell you straight away that it's not. It means extreme tax cuts for the rich, while no cuts whatsoever for the middle class (more about this later). There is no way the US can recover all the money that this reform will cost, in particular considering that it is the rich who pay most of the taxes (the top 1 % pay about 8 % of all taxes). While cutting taxes for the rich can make sense because it encourages education, that shouldn't be the focus in the midst of an economic crisis. If we want to increase private investment, we should focus on getting rid of the horrible capital gains tax, not cutting income taxes in general for those with high incomes - they might not even invest the extra money in the first place, a lot of them would much rather take another trip to Paris. In order words; it's inefficient and expensive.

2) It does nothing to help the middle class. You have to be pretty well off to profit from Perry's plan. I ran the numbers through a simple tax calculator, and I found that you, if you're single, have to make roughly $85,000 or more to profit from Perry's plan. How many people make that much? About 20 %. Not all of them single, of course, I'm just trying to keep things simple. It makes perfect sense: A flat tax is good for those who would otherwise, in a progessive system, pay a high tax. Those who would otherwise not pay any, or very little are worse off. With this plan, most Americans would have to stick to the old, complicated system, and Perry seems to have no ideas as for how to help them (except for a few, well-used catchphrases - like all politicians have). The fact that the cornerstone of his economic plan has to do with helping the rich shows exactly how out of touch he is.

3) No good news for the young. Like I said above, if you're single, as most people still are when they leave college, you have to make $85,000 in order to profit from Perry's plan. How many people make that much straight out of college? Unless you work on Wall Street, you won't. Republicans should be reaching out to the young, in particular since it's likely we'll soon become much less popular among the retired once we start campaigning on entitlement reform (which Perry plans to do). If it's anything you hate when you're 20-25, it's paperwork. By proposing a tax reform (such as the FairTax) that would lead to a simpler tax code for this group Republicans could win votes that are going to be vital in winning an election, given that the retired might not like us so much.

4) It makes things MORE complicated. One of the reasons we need tax reform is because the current tax code is too complicated for an average person to understand. This just makes it worst. Now, not only do you need to file your taxes, you need to go through both systems to see which one you should pick. This takes more time than simply filing your tax returns today. Rick Perry claims the plan will save about 483 billion, which is a figure he took from the FairTax organisation. He simply assumes, with absolutely no evidence, that his plan will be just as efficient as the FairTax. It won't be - it will most likely be even less efficient than the current system. Instead of administrating one tax code, the IRS will now have to administrate two. And that's going to save money? Give me a break, governor!

5) It will give the election away to Obama. I promise you, if Perry doesn't flip-flop on this plan, and he becomes our nominee, Obama will win in a landslide. I'm willing to bet all my credibility on that. Cutting taxes - but only for the rich? Simplifying the tax code - but again only for the rich? I can see the attack ads in front of me. Add entitlement reform and the electoral disaster is complete. It also has absolutely zero chance of passing in congress.

6) It is not scientific. Maybe it's because I'm in academia, maybe it's because I'm a professional economist (well, economist-in-training), but I prefer when candidates use science when they create their economic policies. I would rather they stood on firm, scientific principles when they designed their economic plans, rather than political "principles" which says that anything goes, as long as it gets you elected. The flat tax is slogan-friendly, just like the 9-9-9. But a plan that has been developed by a team of economic advisors over a couple of months is not the same thing as a plan that's been designed by professional economic researchers and tested scientifically. That's why I prefer the FairTax to both Cain's and Perry's plans; they're both designed for political, not economic, purposes. Of course, Perry's plan hasn't really been received the way he certainly thought it would, but none-the-less it's obvious he had his own political career in mind (he thought it would increase his chances of winning the Republican nomination) when writing it, not the country's economy.

Now, of course someone is going to say "but Steve Forbes likes it". Well, Forbes is a famous flat tax-proponent, so of course he likes anything that resembles a flat tax (although this isn't really a flat tax as not everyone is paying it, and since it has deductions). The thing about Forbes, and the reason why he never became president, is because he never had a natural constituency - he was a smart businessman, for sure, but it wasn't easy to identify with him. He was out of touch with regular people, or at least that's how he appeared, and that's still the case. Forbes flat tax remains an impossible sell to voters, no matter how much sense it may make in economic theory. He never understood this, which is why we got President Bush and not President Forbes. He was convinced that if you just repeated something that was true a million times, sooner or later people would believe it. That's not how politics works though. With Perry, you get everything that is bad with the flat tax (only benefits the rich economically, hard to sell politically etc) with none of the good stuff - mainly the simplicity that one single tax rate means. He has really managed to put together the worst of two worlds, the two worls being flat and progressive taxation.

Perry is not stupid. I can only imagine that either this plan was put together in a rush when he saw his poll numbers drop and he realized he needed something, anything, that could make people talk about something else than his performance at the debates, and he didn't really have time to run the numbers. If he did, he would have realized what a disaster this plan was. Or, he was planning on changing it. He figured activist republicans on average earn more than most americans, and so a lot of them would benefit. That would help him win the primaries. Once nominated, he would redesign his plan, blame it on changing economic circumstances or similar, and reach out to the low-income earners. After all, Perry does know a thing or two about political strategy, so it's not impossible that this was his plan in the first place. I really hope so. I would rather think that Perry is a slimy politician willing to flip-flop in order to win elections, than to believe he is stupid enough to like his own plan. That thought just scares me. He's a governor after all.

However, this won't help him win the primaries. We are not seeing any positive movements in the polls for him, and I count on the other candidates to rip him to shreds in the next debate. And Perry, not being a very good debater, will of course find a way to make this plan come off if possible even worse in the ears of the voters. After that, he'll hopefully throw in the towel and head home to Texas.

Thank you all for reading. Please leave a comment below.


Machtyn said...

I have to agree with James Carville (as crazy as that is), "He managed to couple the flat tax with the IRS bureaucracy in one sentence. Way to go, Rick."

Rick Perry has managed to foul up almost every announcement or face to face attack he's tried to make.

Machtyn said...

Here's the link that I referenced: