Has the world gone flat? It seems that the concept of the flat tax has now become almost universal among Republicans candidates, at least to some degree. Herman Cain offers a version of a flat income and corporate tax as a means to get to the Fair Tax; Newt Gingrich and Rick Perry have similar flat-tax proposals intended as ends in themselves. Mitt Romney talks about how his plan makes taxes “flatter,” although he’s not exactly a flat-tax purist.
But then, neither are Mitt’s competitors. Cain wants the Fair Tax as an end result, not a tax of any kind on personal or corporate income. Both Perry and and Gingrich offer exemptions and deductions on mortgage interest and donations to charities (Cain’s also includes a charitable-contributions deduction), and both retain the existing tax code as an option, at least temporarily. Why? A flat tax on personal income is a tough sell, especially when economic turmoil exists at the levels it does now. Policies that raise taxes on the rich remain popular, and a flat tax goes in the opposite direction. Small wonder, then, that politicians looking to champion these proposals want significant hedges on those bets.
In my column for The Fiscal Times, I suggest that the GOP should focus less on selling the personal-income flat tax and focus more on the reforms that a corporate flat tax would provide:
Taxpayers like their own deductions and exemptions, but they despise corporate carve-outs, and not without cause. Although the U.S. has the highest explicit corporate tax rate among free-market nations, we have a corporate tax code filled with loopholes that confers benefits on politically connected companies and imposes competitive disadvantages on the rest. A poorly researched claim by The New York Times thatGeneral Electric had no tax liability in 2010 overshadowed the accurate report that GE claimed $3.2 billion in tax credits for the year on a total net income of less than $12 billion, which highlighted the inequality in the corporate tax code.
Too often, larger corporations successfully lobby for tax exemptions and carve-outs that put smaller businesses at a competitive disadvantage. This contributes to the income gap, reduces competition, and ultimately creates economic stagnation. Unfortunately, it also contributes to incumbent job security in Washington. Rep. Ryan explained how tax reform got killed in the early part of the last decade while Republicans controlled Congress, under pressure from the “tax-expenditure lobby,” which Ryan also called “the gauntlet.” When the corporate lobby sensed that their ability to get politicians to manipulate the tax code might be in danger, they quickly used their leverage to end the threat.
If Republicans put corporate-tax code reform at the center of their platform, they might be able to take a “flatter” personal income tax along for the ride. If they feature that as a means to clean up Washington and address the problems of natural wealth distribution, they could end up attracting both Tea Party and some Occupy grassroots to their banner in 2012. The only question would then be whether Republicans in 2013 will stand up to the gauntlet and produce real reform.
There aren’t many similarities between the Tea Party and the Occupiers, but a healthy distaste for crony capitalism is one of those few ties. Eliminating the ability of Congress to manipulate the corporate tax code to bolster big donors would not just reform the economic impact of taxation but also the politics of Washington. The Tea Party has demanded this kind of reform since it erupted in early 2009, and just like the Occupiers, prompted from a disgust at the bailouts given to financial institutions and automakers.
Not too many of the hard-core Occupiers will ever cast a ballot for a Republican. There are many, though, who share the somewhat-incoherent anger and resentment of the Occupiers, but who are honestly looking for actual reform. The GOP has an opportunity to make that their platform in this election by focusing on their proposals to rid the corporate tax code of its inequities — “close loopholes,” as Democrats have demanded in the past — and strip it of any political value for the “gauntlet,” as Ryan called it yesterday. That would cut the rug out from underneath Barack Obama and Democrats in 2012 by offering real change as an option from Obama’s Solyndra-style crony capitalism.
Of course, if Republicans win the election, they had better deliver on that promise. Will the Paul Ryans of the GOP lead the party in defeating the “tax-expenditure lobby” and produce honest tax reform? If they do, they could set themselves up as the governing party for a generation — an opportunity that they rejected in 2001-2006.