“Perry is offering taxpayers two choices – either stick with the current tax system or opt into a new system in which they pay a 20 percent flat income tax. That incentivizes those who would pay less under the current system to stick with it, and those who would pay less under the flat tax plan – largely Americans on the upper end of the income scale – to opt for the new plan.
“That would add up to a ‘substantial’ decrease in revenues, says Ted Gayer, the co-director of the Economic Studies program and a Senior Fellow at the Brookings Institution.
“Perry has yet to lay out all the specifics of the plan, which makes it difficult to estimate its full impact. But ‘it’s clearly going to be a reduction in revenues, I think fairly substantial,”‘said Gayer. Many conservative Republicans want to reduce the role of government in society in part by starving it of funds.”
“But here’s the thing that gets my attention: Governor Perry has some pretty serious entitlement-reform measures in here: Raising the retirement age for Social Security and Medicare benefits, changing the indexing formula to CPI rather than wages, giving younger workers at least a partial opt-out into private accounts, block-granting Medicaid, putting Medicare recipients directly in control of their own spending—this would be huge. A Republican president who got nothing else done in a four-year term would be a smashing success in my book if he achieved that kind of entitlement reform. I expect Perry to emphasize taxes, but the entitlement measures are the meat of the Perry proposal, in my view, though there’s a lot of good gravy: repealing Dodd-Frank, procedural reform for spending and regulating, repealing section 404 of Sarbanes-Oxley, expanding the ‘Galveston model’ (another Social Security opt-out) to most government employees, etc.
“Yes, I, too am inclined to scoff at promises to cut $100 billion in non-defense discretionary spending, as though that were something to call an achievement, and I doubt very much that Governor Perry’s proposal would produce an actual balanced budget in the foreseeable future. But getting a big piece of entitlement reform done would be a major victory that would set the fiscal Armageddon clock back significantly. And beginning the process of flattening and simplifying the tax code is worthwhile as well, though the Perry plan does less along those lines than I would like.”
“Some conservative policy bloggers are apoplectic about the optional nature of the Perry plan. But these critics appear to be entirely ignoring the central political flaw of a mandatory flat tax: that a mandatory flat tax necessarily raises taxes on lower- and middle-income earners. The only way to rebut this political criticism is to make the flat tax optional, so that the middle class doesn’t face higher taxes. This is especially important for those who depend on the employer tax exclusion for their health benefits.
“Some complain that the proposal means that everyone will have to do their taxes twice each year to figure out whether or not to opt-in to the flat tax. But most people’s incomes aren’t so volatile. If you calculate your effective tax rate in year one, you’re likely to know which plan will suit you best in the future as well…
“My take on the plan: it’s excellent. It addresses the key political weaknesses of a mandatory flat tax, while still moving us meaningfully in that direction. While it maintains certain popular deductions, it recognizes the importance of a transitional phase between our current system and a flat tax. And Perry appears to be off to a promising start on Medicare reform.”
“A flatter tax code is both an economic and political reform. Economically, its lower rates would attract more capital from abroad, encourage more domestic investment, and increase growth and jobs. It would also minimize, if not eliminate, the tax favoritism and loopholes that misallocate labor and capital. Politically, this would reduce the legal corruption of handing out favors that has soured so many Americans on their government…
“All of this is bold enough that it will require an informed and articulate promoter, and the question about Mr. Perry is whether he can make that case better than he has so far been able to defend his Texas record. He’ll be helped by Steve Forbes, the original flat-tax proponent, who is now advising Mr. Perry and knows the attacks to come.
“The good news is that Mr. Perry and most of his competitors are thinking big, with proposals that will reverse the U.S. slide to high-debt, slow-growth stagnation. President Obama wants to portray the economic debate as pro-growth government spenders vs. the austerity of budget cutting. But the real debate is over whether government or the private economy is the main engine of prosperity. The flat tax puts Republicans on the side of private growth and government reform, a potent combination. Perhaps Mr. Perry and his comrades can even coax Mitt Romney to join the party.”
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