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Perry tax plan makes no sense

By Peter Morici
web posted October 31, 2011

Seeking to jump start his flagging campaign and establish his pro-growth and fiscal responsibility credentials, Governor Rick Perry is unveiling 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.  However, the Perry plan by giving tax payers the option of filing under the old system will encourage the wealthy and near-wealthy to continue prospecting for loopholes and credits -- most of those folks don't pay 20 percent now, so don't count on them to volunteer for Mr. Perry's plan.

True, well-off face a higher alternative minimum tax of 26 to 28 percent, but the wealthy have lots of tricks, provided by the tax code, for postponing or avoiding realizing income altogether. Ditto corporations like GE that hardly pays tax at all.

About 42 percent of individuals pay no income taxes right now -- and those folks are not likely to op for Mr. Perry's 20 percent plan, and those that do will only choose if they can pay less. Hence, the Perry plan must 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 through even lower taxes for some upper-middle class folks who get most of their income from wages or professional services (doctors, lawyers and talk show personalities) but not in a brick and mortar business but are caught by the alternative minimum -- but as I recall Mr. Perry has declared Keynesian economics is dead. To get the growth Mr. Perry claims, he will have to raise old Lord Keynes from the dead. Having seen the consequences of the Clinton and Obama post-crisis tax holidays, I am skeptical about such powers.

With less revenue in hand, Mr. 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 Mr. Perry wants to slash taxes fine but let's go to a real flat tax and tell Americans how he is going to tame the monster that ate Washington -- escalating health care spending -- and rationalize social security and defense spending.

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.
 
After examining Mr. Perry for the job, all I can say is next applicant please. ESR

Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission.  Follow him on Twitter @pmorici1.

 

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