Perry’s Flat Tax and other "bold reform" ideas in context of the richer 1%

by Linda Beale

Perry’s Flat Tax and other “bold reform” ideas in context of the richer 1%

The hard right candidates of the GOP are competing to set forth plans that demonstrate their utter and complete loyalty to the right’s  “make the rich richer and make businesses less accountable” economic program.
This program involves the tired and failed policies of Reaganomics, just magnified:

  • more tax cuts for the wealthy (zero direct taxation of their primary source of income–making money off money, and –to the extent that the incidence of corporate taxes says that corporate taxation should be attributed to shareholders–reducing those taxes as well);
  • elimination of earned benefits for the rest of us (assuring huge revenue shortfalls to the federal government and no dedicated funding of programs, along with dedicated axing of benefits through the ‘deficit/debt’ scare tactic);
  • deregulation of everything to do with business or capital (gutting EPA, Dodd-Frank, Sarbanes-Oxley, and every other regulatory agency no matter the impact on the economy or on ordinary Americans, thus encouraging a return to  speculative frenzy that allows socialization of losses/privatization of gains);
  • privatization wherever possible (Perry’s plan for privatization of whatever Social Security remains after the afore-mentioned gutting; privatization of schools, firefighters, bridges, highways, etc.); and
  • continued militarization.

Michael Kingsley noted that the “economic growth” rationalization of the various flat tax plans that shift the tax burden to the middle class while granting enormous tax cuts to the wealthy is merely “hope masquerading as theory.”   See Kingsley et al,Flat Tax Proposals are Perpetual Fount of False Promises: View, (Oct. 24, 2011) (“This hope masquerading as a theory has dominated conservative economic thinking for three decades, despite all evidence to the contrary”).
Perry’s flat tax proposal is right on track with the right’s apparent goal of enriching the rich and shrinking Social Security and Medicare and other federal government’s programs for the well-being of its citizens.   He offers the so-called “Flat Tax” as an option, part of his “cut, balance, and grow” economic ‘plan’.   He says it’s a “bold reform.” Opel, Perry Calls His Flat Tax Proposal ‘Bold Reform’, New York Times (Oct. 25, 2011).
Perry’s plan involves devastating federal program cuts including cuts to Social Security and Medicare for current and future recipients, as well as a ‘cart before the horse’ constitutional amendment –a ‘balanced budget amendment’ that would, for example, prevent us from borrowing cheaply even if it were to pay for a temporary surge in costs for Veterans’ medical care due to the cohort of soldiers returned from Iraq and Afghanistan.  The proposal entails an unfounded assumption that reducing federal spending from about 24% of GDP today to around 18% of GDP within a decade would be reasonable, given the lingering costs of the Iraq and Afghanistan wars,  expenditures to make up for the drain on our military, the ongoing costs of the financial crisis sparked by deregulation and the ‘too big to fail’ phenomenon, etc.   Perry has argued against “arbitrary cuts” to defense spending while at the same time calling for enormous tax cuts for the wealthy.
Perry says his system is “fair, simple, and flat”.  In fact, it is none of the above.

So perhaps it is time to discuss two questions about Perry’s tax plan: (1) just what is this “Flat Tax”? and (2) what would be the distributional, administrative, government and other impacts of this new system of taxation (option to choose between the current income tax and the ‘Flat Tax)?
Regarding the nature of the Flat Tax, it is probably helpful to point out what it is not, since most Americans do not understand how it would work.

  • The “Flat Tax” is not flat, since it has two rates: it will have an exemption amount of some sort for the poorest taxpayers, just as our income tax provides a standard deduction and personal exemptions (and other provisions, like the Earned Income Tax Credit) to ensure that the poorest Americans do not have to pay the income tax. 
  • The “Flat Tax” does not eliminate all deductions: it will leave deductions for charitable contributions (highly favorable to the rich who are the ones that make the most such contributions) and mortgage interest (also favorable to the rich, who have the most expensive homes and get the full amount of the interest deduction even with a flat tax), and some health and child care expenditures. 
  • The Flat Tax is not just a “single rate” income tax since it is not tax on all types of income:  it will be a tax on wages that are not saved (so for the majority of Americans, a payroll tax or a tax on consumption).  The primary source of income for the rich –money earned by money–would not be counted. 
  • The Flat Tax is not a ‘postcard filing’ tax, Perry’s assertions aside (that “taxes will be cut on all income groups in America” and that taxes can be filed on a post-card size form).  The rich will pay much less, some in the middle class may pay less but only after fiddling with both forms, and the rest will not likely pay less.  The form still will require figuring out what counts as income and when it counts and what type of income it is for anybody in the middle class that might be in either one (lots of filler pages behind that “flat rate” times “taxable income” calculation).

Regarding the feasibility of the “Taxpayer Choice” system of income taxation and Flat Tax:

  • The system would lower taxes for the rich (and some others), with no benefit for the poor and lower middle class, so neither simple nor distributionally fair.
    • About 50% of American families pay no federal income tax anyway or pay less than the 20% rate of the “Flat Tax”.  Those families would have no benefit from the Flat Tax so for half of Americans, no benefit from the option.  But Perry –who says he is “dismayed at the injustice” of Americans who don’t pay any income tax (but do pay payroll and excise taxes) won’t achieve his goal of changing the fact that poorer Americans don’t pay the income tax.  They don’t under our current system because we have designed the stnadard deduction, personal exemptions and earned income tax credit to provide a minimal standard of living.  They won’t under Perry’s system because they can still file under the current system.
    • The wealthy would pay substantially less under the Flat Tax, since their main source of income–income from capital–won’t be taxed at all.  They’ll choose the Flat Tax for a substantial tax cut.
    • Assuming that the system provides an annual choice for taxpayers, it creates a nightmare.  There will be some in the upper middle class  who will have to calculate their taxes both ways and choose the most beneficial.  For some, there may be some tax benefit to the Flat Tax, but their taxes will be that much more complicated and their benefit will be minimal compared to the tax cut received by the wealthy.
    • If it doesn’t permit an annual choice, taxpayers may inadvertently find themselves locked into the clearly wrong system for them–leading to distrust of government, and a sense of lack of fairness in a system that provides a trap for the unaware.
    • The differential treatment of income  depending on its character under the Flat Tax option (zero taxed income from capital and fully taxed income from wages) will be yet a further impetus to tax evasion  and unfair taxation of workers compared to owners–i.e., it is both untenable and unfair.  (This was the reason that the 1986 TRA under Reagan eliminated the category distinction.)
    • Len Burman describes it as “political pandering at its worst.”  Perry Offers Tax-Cut Choice, BusinessWeek (Oct. 26, 2011).
  • The system will result in huge decreases in revenues.
    • The upper middle class and wealthy will choose the most beneficial tax (zero taxation of capital income, still get the mortgage interest and charitable deductions which are the biggest tax subsidies against their taxable income)
    • This will result in substantial decrease in tax revenues, leaving the government wither with huge deficits funded by further borrowing, or the necessity of making huge cuts in long-respected government programs like consumer protection, mine safety, worker safety, food safety, environmental protection and basic research funding for the humanities and sciences
    • The revenue shortfalls will inevitably call for shrinking the parts of government that the right that passes the bill doesn’t like–i.e., New Deal social welfare programs, EPA, etc.  It will make it well nigh impossible for the government to uphold its promise to pay for earned benefit programs like Social Security and Medicare.
    • That impact is an intended result of the revenue shrinkage built into the Flat Tax plans.
  • The choice of tax systems will require duplicate tax administration as well (adding costs).
    • Advocates of Flat Taxes/ VATS/ FAIR Taxes (national sales taxes) claim that their plans will all be “simpler” because of the single rate.  They disregard the facts
    • All of the complexities of the income tax remain for both the income tax and the Flat Tax–what is income, what character is the income, when is it income, is an item deductible or not (charitable contributions can really be quid pro quos, etc.).
    • Having an option means generating an entirely new set of forms, guidance, regulations that underpin the statute, audits, administrative determinations–essentially a new division of the IRS to cover the new option
    • Couple that with the right’s antagonism to the IRS generally and one can expect an underfunded IRS that has trouble enforcing either the income tax or the Flat Tax.
    • Underfunding of enforcement (exaggerated by the right’s demonization of government generally and the IRS specifically) will incentivize tax avoidance behavior–sophisticated, wealthy taxpayers will game the flat tax system in particular by recharacterizing ordinary expenditures as deductible savings or taxable compensation as excludible capital income.
    • Federal revenues will likely decrease even further because of the enforcement problems.
  • The compensatory benefit–the claim that the Flat Tax (and accompanying deregulation of financial institutions and major corporations through the repeal of Dodd-Frank and Sarbanes-Oxley) will unleash pent up investment and create a burst of economic growth that creates jobs is simply unfounded in fact.
    • We’ve tried this philosophy for four decades (since Reagan) and it hasn’t worked–it is not the wealthy elite who create jobs; it is the consumers, whose demand creates the potential for business expansion, that create jobs.  See, e.g., James Livingston, It’s Consumer Spending, Stupid, New York Times (Oct. 26, 2011); Steven Strauss, Actually Tax Cuts Don’t Seem to Have Much Impact on Economic Growth, Huffington Post (Oct. 25, 2011) (noting that “ideology is a poor substitute for pragmatic approaches to complicated problems. In fact the evidence that tax rates influence economic growth in any way is equivocal at best. A myriad of other factors are involved. Simply reducing tax rates, and primarily for the wealthy, may hinder — rather than enhance our economic recovery”).
    • And most of the countries held up as models for how wonderful the “flat tax” is in boosting their economy do not actually provide solid evidence for that.  Many flat taxes are in fact flat INCOME taxes, not just wage or consumption taxes.  Countries like Hong Kong, which had a flat tax and managed quite well for a while, benefited from the extraordinary circumstance of acting as the intermediary between communist China and the capitalist world–so that any tax would have raised sufficient revenues on the kinds of deals going through the city-state.  (And, as my colleague Mike McIntyre just reminded me, Hong Kong also benefited from an early real estate bubble like the one that gave this country a spurt of growth that looked like it was connected to the Clinton and Bush tax cuts but was actually connected to rampant speculation with easy money.)
    • There is no investment need in businesses that can’t be met currently by the vast resources of unspent cash held domestically (as well as offshore).  Corporations are not cash strapped–they are hoarding cash because they don’t have customers for their products.
    • The “Econ 101” Chicago School theory on which the idea of an economic boom from putting more money in the hands of the monied rests is incomplete and just plain wrong. It is based on unrealistic assumptions about human decisionmaking, “efficiency” and “welfare”.  Under that theory of efficiency, the marginal utility of the dollar is essentially disregarded.  Under that theory of welfare, if the rich gain all the benefits of the economy as they have for the last decade, that’s an aggregate increase in welfare so all is fine.  Again, this type of economic analysis is just “hope [for booming economic growth] masquerading as theory.”
    • The facts are different.  Empirical studies show decisively that increasing inequality is extraordinarily harmful to economic growth.  When the top 1% are better off and the 99% are suffering, the society suffers.  See The Spirit Level, Wilkinson & Pickett, or the work of Saenz & Piketty on inequality.  See also Benjamin Friedman’s book on the importance of broad-based economic growth to a sustainable economy.
    • In fact, the shortfalls in government revenues will lead to cuts to social welfare programs and to government spending on everything from infrastructure to disease control and food safety.  As to Social Security, Medicare and Medicaid, Perry himself suggests raising the retirement age, changing age eligibility for Medicaid, and introducing an income factor in determinating eligibility for these earned benefits.  These kinds of changes and governmental program cuts will have a ricocheting bad effect on the entire economy that is likely to throw the economy back into recession.  Indirect impacts including firing of government workers will add to the detrimental impact on the vast majority of Americans in the middle and lower classes.

Perry’s system also gets rid of the Estate tax.  All told, the right’s slogan here might as well be:  Make the Rich Richer! (no matter who else is hurt).
Note that this is all happening in a context where the rich are getting much richer, and everybody else is barely hanging on.  See, e.g., Pear, Top Earners Doubled Share of Nation’s Income, Study Finds, New York Times (Oct. 26, 2011).  The article reports on the CBO’s Oct. 25 report that the top 1 percent more than doubled their share of the nation’s income over the last three decades of the ascendancy of hard right economic ideas.  Their income increased an astounding 275% between 1979 and 2007.  Meanwhile, the bottom 20% had only an 18% gain in all those years–and in fact their share of the national income dropped from 7% to a measly 5%.  This is because government policies that can counter the upwards redistribution of income from everybody to the rich have been weaker since Reagan–“the equalizing effect of federal taxes was smaller” as the progressive income tax has become less progressive in nature and more federal revenues have been raised by the regressive payroll tax.  See also One Percenters’ Income Nearly Tripled in Last Three Decades: CBO, Huffington Post (Oct. 26, 2011) (noting that the US ranks alongside Uganda and Rwanda in terms of the gap between rich and poor, and adding that inequality at that level is “likely holding back the economic recovery”). The Perry and Cain plans would exacerbate this trend.  If we are almost at plutocracy (rule of the wealthy) now, we will surely be there if any of the hard right tax plans are put into effect.
Perry’s system dramatically changes the corporate income tax to favor multinationals–20% rate, removal of various deductions, almost tax-free repatriation of foreign earnings, and a territorial tax system.  Incredible breaks for the multinationals who are moving jobs offshore as fast as they can.  The right’s slogan here might as well be:  Give It Away to the Multinationals! (so they can move everything offshore).
Makes one think that Charles Pierce is correct when he says that these Flat Tax (Perry), FairTax (Cain) and VAT (Cain) plans are just an “unwieldy parade of hackneyed talking points (Kill the Estate Tax and Save the Family Farm!) and tired applause lines (The Job Creators Are Uncertain!).”  See Ken Houghton’s link on Angry Bear, here.  I only wish I were as certain about the chances of the right’s not being successful at enacting some form of flat/”fair”/VAT tax as Pierce is.