Gov Perry’s Tax Plan…

October 25th, 2011 at 12:06 pm

…attacks the following problems head on:

–the tax code is too simple

–rich people need more after-tax income

–there’s too much retirement security in America

–multinationals aren’t creating enough jobs abroad.

How does how he meet these goals?

Under the gov’s plan, you can choose to pay taxes either under the current system or pay a 20% flat tax. 

By adding a new tax code to live astride the current one, it adds much complexity to an already too complex system.

Now, as I’ve argued before, the idea that one rate=simplicity is just false.  Under this plan, you still have most of the exemptions, deductions, and credits that create the complexity in the code.  And, since you can choose which system to file under, you get to go through the joy of figuring out your tax bill…TWICE!  (Three times if you count the Alternative Minimum Tax.)

Let me be crystal clear about this.  We could have a system with a hundred different rates that you pay on all your income from any source.  Under this system, you’d look up your income in a table and figure out what you owe.  It would take less than a minute.  In fact, the IRS could probably do it for you.

Or we could have a system with one rate that kept all the myriad income definitions, credits, exemptions, loopholes, etc. of the current system.  That’s where things get complicated.

Now, it’s obvious that under this plan, people will compare their tax bills under the different regimes and choose the one that lowers their payments.  That means Gov Perry either collects less revenue and faces larger budget deficits or has to get the missing revenue elsewhere.

Since, under his new plan, rates are lower at the top (20% vs 35%), and he exempts cap gains and dividends, new revenue will have to come for the middle class (deductions protect the poor).  Of course, this means you can’t really let people choose anymore, so either there’s no internal logic here or we lose revenue.

As Kevin Drum observes:

“…you sort of have to admire Perry’s gimmick of allowing everyone to choose between his plan and the existing income tax. You can almost imagine the conversation: one of his advisors points out that no matter how careful you are, someone will pay more under the new plan. Probably people with low incomes, and you just know the librul media will have a field day with that. “It’s regressive! Rick Perry hates the poor!” It’ll be a nightmare.

But Perry has a brainstorm! Give everyone a choice! This means that not one single person will pay more under his plan, because they can always choose the old system if they want.”

It is perhaps with this in mind that Gov Perry says he wants to freeze spending at 18% of GDP.  The average since 1969 is about 21%.  Does anyone outside of the R base think that with our demographics and pressure from health care costs, not to mention climate, income disparity, bubbles and busts, public debt, external threats, and who knows what else, we can have the government we need with a significantly smaller share of revenues?

That there is one of them rhetorical questions.

There are other problems too—the plan undermines Social Security and incentivizes American firms to invest abroad.

Gov Perry proposes that we let young people opt out of Social Security, thus breaking the intergenerational contract, eliminating pay-as-you-go, and—consistent with his position on Soc Sec—undermining the last guaranteed pension retirees can rely upon.

Then there’s the corporate stuff—repatriation and transition to territorial.  The former lets multinationals bring home deferred earnings at a 5% (!) rate; the latter ends their obligation to pay US taxes on foreign earnings (currently, they’re supposed to pay the US the difference between what they paid where they earned the profits and what they owe here).  Both will incentivize American firms to expand their overseas operations.

If the itches here are: taxes are too simple, rich people don’t have enough money, seniors have too much retirement security, and multinationals are not creating enough jobs abroad, Gov Perry just scratched them all.

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5 comments in reply to "Gov Perry’s Tax Plan…"

  1. the buckaroo says:

    …seems the “we are not men, we are Mises” crowd forgets two simple truths. One is the velocity of money & the second is that government never met a dollar it would sit on…period.

    The government is not in the business of maximizing profits, it is there to put out the fires free market regulations fail to control…it is, after all, a controlled burn this capitalism thing, verdad?

  2. Th says:

    I don’t think the R’s get called on this enough, but you can’t allow current workers to opt out of SS and still pay current beneficiaries full benefits without borrowing a lot of money. Unless you are going to go full MMT, that is.

  3. Jill Shaffer Hammond says:

    I think one thing that may come out of all this flat-tax etc. yak-yak, is the folks are starting to get (perhaps after some of us start explaining it to them) that our current graduated income tax structure does get some things right — like the 47% who pay not fed income tax because they DON’T MAKE ENOUGH, while they are still paying that flat-rate-from-dollar-one-with-no-exemptions-or-deductions FICA payroll tax.

    And that the deductions they get on Fed tax for the very regressive state sales and property taxes are a lifeline.

    But folks who make more (hundreds of thousands to millions) DO pay more in taxes, at a higher rate.

    If only capital gains was taxed the same way (graduated) as wages and salaries.

  4. perplexed says:

    How is it that we can continue to have these discussions about tax policies without any mention whatsoever of the critical role our tax policies play in redistribution of the “arbitrary and inequitable distribution of wealth and incomes” that a capitalist system produces? Instead we hear discussions about debunked theories of efficiency propagated by years ago by Okun only to be refuted (earlier by Keynes) but more recently by studies such as this one

    It seems that all of these recent discussions about taxes incorporate some or all of the following obfuscations instead of the real purpose behind progressive taxation:

    - The complete lack of discussion of the critical role of progressive taxes in acting as a force (actually the only force) countering the tendency of income and wealth to concentrate in a small percentage of the population; and that greater equality of wealth and income provides greater opportunities and a better quality of life to more of the population.

    - Government is viewed as a large condo association who’s “costs” to fix the “roof & roads” must be allocated to the “owners” and everyone must pay their “fair” share; followed by all kinds of subjective arguments about what constitutes “fair.”

    - There seems to be an “understanding” that money paid in taxes is just “gone” somehow without regard to the fact that when the government spends that money, it is income to someone else and grows the economy just as much as if someone else spends it. (As if the food at the restaurant had been consumed and now all that’s left is to split up the bill without regard to the fact that this payment is the “income” for the cooks, servers, bus boys, owners and suppliers.)

    - The search for some logical justification (other than redistribution) of why those who earn or have more should bear more of the costs than those that have or earn less as well as some justification for how much more “they” should pay, all in a complete vacuum of what our objectives (other than revenue) are. If we articulate our wealth and income concentration objectives, it will become quite obvious that redistribution alone provides sufficient justification.

    - There is little recognition or discussion of the fact income and wealth concentration like we have in this country now, means loss of opportunity to large numbers of the population who’s only “opportunity” now is to buy a lottery ticket and hope to become one of the lucky winners. Our wealth Gini is .84 and rising, an incredibly high number considering that 1.0 means that one individual has all of it; yet no one mentions the impact of various tax proposals on this number

    - The complete lack of a solid explanation of what the goals are with respect to “progressiveness” of our tax system allows the system itself to be attacked from almost any angle depending on what any person’s specific bias is. If there are no specific goals and rationale for the system it appears arbitrary and corrupt and subject to manipulation by those who influence and control it. So why do we have a “progressive” tax system? Obviously the poor can’t pay their “per capita” share because “you can’t get blood from a turnip,” they simply don’t have the money. So why not take the whole amount and divide it evenly by those that can pay? (Obviously some things need to be worked out at the margins for those who can’t both eat and pay their taxes but that shouldn’t be a show stopper.) Can’t get much more “fair” than that right “flat taxers?” (Of course there are lots of digressions we could get into about who actually uses what government services and how those costs should be allocated to those users but can we stay above the din, even for just a little while?)

    - The wealthy would have us believe that the reason for a progressive system is so we can extract more of “their” “hard-earned” money from them to spend on unimportant things that “we” could do without or charge someone else for if “we” really wanted them. The poor and middle class on the other hand, claim that because the wealthy have so much more, its “only fair” that they pay more to ease someone else’s suffering. Round & round we go without ever mentioning that the real reason for a progressive tax system is “REDISTRIBUTION” of the “arbitrary and inequitable distribution of wealth and incomes” that a capitalist system produces; and that this redistribution benefits the entire economy by providing additional demand and growth, two things we are in dire need of.

    - There are over 300 million definitions of what a “fair share” is in this country and yet its constantly mentioned in a huge percentage of these tax discussions as if it were something that somehow can be objectively determined and agreed upon. While we may have some agreement on things we can point to as blatantly “unfair” (like over 20% of the entire Nation’s income going to a tiny fraction of the population) we will likely never see any agreed upon objective definition of what a “fair” tax policy is. Its time to move on and stop wasting time talking about “fair” taxes; its an oxymoron and doesn’t really matter anyway. What matters is what’s the “best” tax policy; that’s the one that will achieve our objectives. Asking what the “best” tax policy is will force us to articulate our objectives and discuss possible ways to achieve them. If the objectives are “fair,” the policies that follow will be “fair.” The best tax policy will be the one produces the largest “pie” and distributes this production most effectively to achieve “our” goals. If Keynes was right, we won’t solve our current problems without more effective redistribution of wealth and incomes and recent studies are confirming what he told us 70 years ago: Its time we started discussing what our goals are for wealth & income concentration (based on objective measures like Gini) and which tax policy gets us there the quickest.

    Follow this link for a great discussion of the purpose behind progressive taxation:

    There may be no better time than right now to resolve these disputes that produce the gridlock that prevents us from moving beyond this crisis. Let’s find out if Keynes was right:

  5. Nathan Belomy says:

    Rick Perry doesn’t seem like that bad of a guy. I appreciate his concern for the existing tax system enough to compose an entirely new one. But I do not agree entirely with taxing the poor more. I think that we really need to balance the future equation of megalithic organizations, legal structures historical for the United States of America were not organized for such large business.

    I believe this is the true problem in the USA. Along side with the ethical dilemma of business nationally, but more so globally, in the era of globalization; presents new concerns to ethical policies. Then you are tying in military conflicts globally, with business interests; which are equally important as tax code.

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