The Economist
The craze for flat taxes
Republican candidates are competing to race to the lowest point
“ZERO-zero-zero is better than nine-nine-nine,” claims Rick Santorum, a Republican presidential candidate, trying to outbid the tax plan of his rival Herman Cain. Mr Santorum’s is not the only effort at one-upmanship: “I’ll bump plans with you, brother,” Rick Perry, another contender, told Mr Cain before unveiling a proposal for a flat tax this week (see above). Yet another of the candidates, Newt Gingrich, does not want to be left out. “Bump plans w/ me,” he implored Mr Perry by tweet.
It has been more or less compulsory for Republican presidential candidates to promise a tax cut of some sort—or at least indefatigable opposition to tax increases—ever since Ronald Reagan pledged a 10% reduction in marginal rates every year for three years during the campaign of 1980. Over time, the proposals have been getting bolder. Mike Huckabee, the runner-up for the nomination last time around, suggested replacing the entire federal tax code with a 30% federal sales tax, deftly if misleadingly branded as the “fair tax”. John McCain, the nominee, advocated a two-tier system. Taxpayers could either stick with the present code or switch to a massively simplified alternative, with much lower rates but few exemptions or deductions.
This time around the smorgasbord of tax plans on offer is even more radical. Most undertake not just to lower bills, but to dispense with whole tomes of the 3.4m-word code. Mr Santorum, for example, wants manufacturing firms to pay no corporate tax at all (one of his three zeroes). Ron Paul, a libertarian candidate, wants to do away with federal income tax altogether. Mr Cain denounces the current tax code as “the twenty-first-century version of slavery”. There is a consensus among all the candidates that the federal corporate tax rate of 35%, the highest in the rich world, must be slashed. Most candidates would like to put an end to taxes on capital gains and dividends as well.
Meanwhile, negotiations over a “grand bargain” to eliminate America’s gaping deficits seem to hinge on sweeping tax reform. What with Occupy Wall Street’s protesters railing against the power of America’s plutocrats, and Barack Obama’s insistence that the wealthy must pay more, a row about tax seems likely to dominate the campaign.
Messrs Cain, Gingrich and Perry are all hawking flat taxes, whereby individuals would all pay the same rate, with few exemptions and deductions. The idea is not new: Steve Forbes, a publishing magnate, made a flat tax the centrepiece of two presidential bids, in 1996 and 2000—both resounding flops. But Mr Cain has garnered lots of attention, and a lead in some polls, with his relentless refrain of 9-9-9. He wants to cut personal and corporate income taxes to 9%, abolish most other federal taxes, and make up for the lost revenue with a 10% sales tax (billed as 9% thanks to a mathematical sleight of hand). “If 10% is good enough for God”, he quips, “then 9% should be just fine for the federal government.”
That, by all reckonings but Mr Cain’s, would provide the rich with a whopping tax break (chiefly because tax on capital gains and dividends would be eliminated), paid for by higher taxes on everyone else. It was concerns about how regressive the switch to a flat tax would be that caused Mr Forbes’s campaigns to founder. At the time, a certain Mitt Romney called it “a tax cut for fat cats”.
This time around, however, raising taxes on the poor seems to be a point of pride among Republican candidates, although Mr Cain has modified his original plan slightly to make it less regressive. In launching his campaign, Mr Perry expressed dismay at “the injustice” that 47% of Americans do not pay any federal income taxes. Most of the people Mr Perry is referring to live below the poverty line, and still pay payroll taxes on what little they earn. Yet an indignant campaign called “We are the 53%” has sprung up online, to complain about the loafing remainder. Most of the Republican candidates, including Mr Romney, the erstwhile scourge of the fat cats, argue that more of the poor should pay at least some income tax. Mr Gingrich goes even further, accusing both Mr Perry and Mr Romney of “class warfare” for putting upper limits on certain tax breaks in their plans.
Mr Cain’s rivals do worry, though, that his scheme will introduce a new federal revenue stream, in the form of a sales tax. That would come on top of the already hefty sales taxes levied by many cities and states, they point out, and would inevitably rise over time, much as income tax did until Presidents Kennedy and Johnson in the 1960s cut the top rate by 21 percentage points. Doing without a sales tax obliges Messrs Gingrich and Perry to propose higher flat taxes, of 15% and 20% respectively. Moreover, both would make their plans optional, like Mr McCain’s, and retain a few cherished tax breaks, on mortgage interest and donations to charity, presumably in an effort to placate suspicious primary voters.
Judging by the polls, such efforts are likely to fall flat. Only 3% of participants in the latest Economist/YouGov sounding said they would leave the tax code as it is, whereas 62% agreed that a big overhaul is needed. But there was no consensus as to what shape reforms should take. Flat taxes, including the 9-9-9 plan, seem to put off far more voters than they attract. Even Mr Romney’s much more modest call to cut the corporate tax rate and extend income-tax cuts dating from George Bush junior’s presidency generates more dismay than enthusiasm among voters.
In fact, the only tax scheme that wins approval from most Americans is the one pushed by Mr Obama and other Democrats, to raise rates for the rich. In support of the idea, Democrats point to studies such as one out this week from the Congressional Budget Office, which found that the share of national income accruing to the richest 1% of Americans has doubled over the past 30 years, to over 20%.
A clear majority supports higher taxes on those earning more than $1m a year to pay for job-creation schemes; a narrower one supports tax increases for those earning more than $200,000. Mr Obama won the presidency while campaigning on a similar proposal, but did not get it enacted when Congress was under Democratic control, and now faces implacable opposition to the idea from Republicans, who dismiss it, as usual, as class warfare. The received wisdom in Washington is that the two parties are so divided on tax that only an election can resolve the impasse. At any rate, Mr Obama says his desire to raise taxes on the rich will be a prominent part of his campaign for re-election.
Yet both parties profess to believe that the tax code should be simplified and the base broadened, chiefly by eliminating most loopholes. This holds out the prospect both of lowering rates, a notion dear to Republicans, and raising revenue, which pleases Democrats.
The idea appeals to populists on the left and the right, as a blow to special interests and corporate welfare. It is the crux of all deficit-reduction schemes that enjoy bipartisan support, and is thought to feature prominently in the discussions of the “super-committee” charged by Congress with deflating the deficit. It was also the basis of the last big overhaul of the tax code, under Reagan. Catchy campaign slogans, in other words, can sometimes evolve into sensible policy.
http://www.economist.com/node/21534799
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