Talking Taxes on Kudlow

October 20th, 2011 at 10:23 pm

Went on the Larry Kudlow show tonight to talk about Gov Perry’s flat tax idea—I mean, you can’t call it a proposal yet because…um…there ain’t one yet (will post clip when it’s available). But the dude (Perry) is still getting a lift in the media from saying he’s got a plan. For those who found it just too darn complicated to keep track of all those 9’s in the other tax plan we’ve been hearing a lot about, this one will simplify it down to one number.

Some issues to keep in mind as this and other such plans come out:

–Most flat tax plans are basically consumption taxes that share a basic equity problem: compared to what we have today, they tend to shift the tax burden to middle and lower income families…it might not look as regressive as 9-9-9, but unless you start carving out low-income folks, it won’t look a lot better.

–Once you start offsetting the regressivity by carving out different income groups or consumption goods (like food or housing) you a) complicate the thing so it’s not as simple as advertised, and b) lower your base so you’ll have to raise the single, flat rate. The Fair Tax from a few years ago was a version of this, and with a very broad base (they excluded the poor but included everything households bought) they were setting it at around 25%. Larry K, who’d been on a call with the Perry folks, suggested that the income exemption would stretch up to the middle class, which gives Gov Perry good optics against Cain, but means he’ll need a higher rate for revenue neutrality. (Though I suspect we’ll get a low rate, low revenues, and a bunch of “dynamic scoring” rhetoric about how this simple, low rate will magically raise all the revs we need.)

–The whole tax reform thing is really overplayed. Yes, there are gross complexities and inefficiencies in the current system—and btw, such complications can easily be replicated in any other system, including a flat tax. Our best move would be to simplify our current system—get rid of loopholes (e.g., deferral of foreign earnings), distortions (favoring of debt financing, special rates for unearned income, some of the large tax expenditures like the mortgage interest deduction), and we’d be fine.

Remember, our biggest problem is pretax–jobs, income, wages, inequality.  And despite rhetoric to the contrary, we can’t solve that through tax reform (though with plans like 9-9-9, we can make it worse).

This excitement bubble re Gov Perry’s flat tax is just a variant of the “where’s our white knight?” syndrome that’s been characteristic or the R’s search for a candidate. It may provide a sugar high for a fraction of a news cycle, but there’s not likely to be a lot of “there” there.

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9 comments in reply to "Talking Taxes on Kudlow"

  1. luko says:

    I was on vacation for a while so I’m just catching up. I’m frankly surprised that people find the flat tax so compelling.

    Since I am a higher-than-average wage earner with virtually zero deductions a 23% flat tax ends up being mostly a wash for me. Thanks to deferred compensation! But it’s a very significant tax increase for our esteemed and beloved job creator class, that >1%, who’s average effective federal income tax rate is about 17%. Does Larry know this?

    Or of course…the capital gains tax will also be zero!?? Man, when are people going to wake up and realize that those of us who get a regular paycheck are being royally shafted? Maybe I can incorporate myself. I hear corporations are people too!


  2. Jordan B says:

    Kudlow’s ‘Insider Information’ cannot be ‘divulged’! Instead of name calling people ‘liberal think tanks’, why not stand behind concrete facts, instead of the fear of progressive taxation!?!

    The Earned Income Tax Credit is one of the most progressive, democratic features of our tax system and I am glad that at the end of the day, all of these bizarre 9-9-9, flat tax plans will never go into law.

    9-9-9 is good for pizza but not taxes!

  3. Tyler says:

    One thing’s for sure: Perry is not going to propose a national sales tax.

  4. Stuart Levine says:

    One aspect of flat tax proposals, such as the so-called Fair Tax, that gets little attention is that state and local governmental entities (as well as charities) are not exempt. Since state and local governments rely on generally regressive taxes, the regressive nature of the flat tax is (i) hidden (since one cannot easily or directly measure the burden on individuals, and (ii) actually magnifies somewhat the regressive nature of the flat tax.

  5. Mary Lou says:

    I’m always pretty leery of proposals that don’t offer some real application. For example, “We used the tax returns of 250 people, with different and similar situations and found this…” Where is the actual application? Who benefits, and who gets really hurt?

  6. pjr says:

    I agree that pre-tax incomes pose a big problem and wonder if, among other things, there might be some tax incentives for businesses to spend less on folks at the top of the ladder and more on creating middle-class customers for each other. Just thinking aloud, should we cap the tax deduction for compensation (wages and benefits) at, oh, say $200,000? Maybe end deductions for “perks” (office space and furnishings above the GSA average for a region, tickets and luxury boxes at sports stadiums, transport costs above bus prices, and the like)? Add some tax incentives to invest/hire/R&D? Give a tax break to businesses based on how much it is unionized?

  7. Simon says:

    While the mortgage interest deduction is certainly expensive, I’d welcome a discussion about the impact its elimination would have on the housing market. I’d think eliminating it tomorrow would knock another ~20% off housing prices. Given the drag housing is on the overall economy, it seems like such a policy isn’t even remotely conceivable in the next decade.

    • Jared Bernstein says:

      Agree re tomorrow–it’s capitalized into current prices. But gradually weaning off of it could work.

    • pjr says:

      If we reduced the deduction cap by 50 or 60 percent, the change wouldn’t have much if any impact the working or middle class. Eliminating the deduction entirely would have severe negative effects.