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Whatever the shortcomings of the respective plans, each of the three candidates has hit on a fundamental truth: to both ease the tax burden on American citizens and galvanize economic growth, the tax code has to be reimagined from scratch.
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| By any fair estimate, the 2012 Republican presidential contest has been whittled down to four serious contenders: Mitt Romney, who retains de facto frontrunner status; Rick Perry, who’s still alive despite a halting entrance into the race; Herman Cain, who was won the affections of conservative voters with his no-nonsense style, and Newt Gingrich, who has seen his previously listless campaign begin to flower as a result of strong debate performances and a relentless intellect.
As each of these men contends for the chance to lead an economically flagging nation, they have all been faced with the question of what to do with the country’s dysfunctional tax system. As Arthur Laffer, one of the economists who authored Ronald Reagan’s tax policies, noted earlier this year in the Wall Street Journal, the cost of compliance alone (that is, fulfilling the responsibility of filling out your taxes correctly) is an astonishing $431 billion a year. That’s the equivalent of an extra 30 cent cost on every dollar that you send to the Internal Revenue Service.
The problem isn’t just unnecessary complexity. The United States’ corporate tax rate, for instance, sits at 39 percent, essentially tied with Japan for the highest in the industrialized world. With the average corporate rate in OECD countries standing at 26 percent, international investors see their incentive to invest in America greatly reduced.
A recognition of the scale of the problems has led three of the leading candidates to abandon the traditional campaign practice of proposing marginal adjustments to the tax code. What they are proposing instead is bold and fundamental reform.
Most prominent among the proposals has been Herman Cain’s incessantly touted 9-9-9 plan, which would throw out the current system in favor of nine percent tax rates on income, sales and businesses. Earlier this week, Rick Perry proposed a 20 percent flat income tax rate for both individuals and businesses. Around the same time, Newt Gingrich unveiled a flat tax plan of his own, calling for a 15 percent rate on individuals and a 12.5 percent rate for business.
As is inevitable with the inherent tradeoffs in tax policy, each proposal is open for criticism. Cain’s introduction of a sales tax would give the federal government a new stream of revenue that could be looted in the future – and that could wreak havoc in states where sales taxes are already high. Perry’s plan would create distortions by eliminating deductions for home ownership and charitable giving for those making more than $500,000 a year. Gingrich’s plan doesn’t address the payroll tax at all, though he pledges to do so at a later date.
Whatever the shortcomings of the respective plans, each of the three candidates has hit on a fundamental truth: to both ease the tax burden on American citizens and galvanize economic growth, the tax code has to be reimagined from scratch. As of 2010, the federal tax code had grown to 71,684 pages in length. Within those pages are a variety of loopholes, deductions and credits that open the way to tax avoidance – the reason a company like General Electric, which made $5.1 billion in the U.S. last year, was able to get by without paying a dollar in taxes.
As a result, businesses and individuals pour money that would otherwise go to productive use in the marketplace into schemes to lower their tax burden. And individuals make decisions based on the vagaries of Washington rulemaking rather than their rational self-interest – making the tax code the nation’s single largest source of social engineering (the housing bubble, for instance, was exacerbated by the fact that home ownership enjoys a tax privilege that renting an apartment does not).
Keen observers will note that Mitt Romney is the only one of the leading candidates yet to propose comprehensive reform. That is to his discredit (the Wall Street Journal called Romney’s tax proposals “timid and tactical”), and should be remedied if he hopes to be the GOP standard-bearer. Romney needs to realize, as the other candidates have, that America has gone as far as it can with the economic status quo.
Without fundamental alterations that make taxes lower, flatter, less distortive and more transparent, we should not expect to escape the gravitational pull of economic decline anytime soon. Any candidate who can’t embrace a vision of that scope isn’t prepared for a White House tenure that will have to undo the damage of the Obama years and the rot of the welfare state. The “timid and tactical” need not apply. |
