Perry's flat tax: What to watch out for

Remember, our biggest problem is pretax–jobs, income, wages, inequality. And despite rhetoric to the contrary, we can’t solve that through tax reform.

Went on the Larry Kudlow show to talk about Gov Perry’s flat tax idea—I mean, you can’t call it a proposal yet because…um…there ain’t one yet (will post clip when it’s available). But the dude (Perry) is still getting a lift in the media from saying he’s got a plan. For those who found it just too darn complicated to keep track of all those 9’s in the other tax plan we’ve been hearing a lot about, this one will simplify it down to one number.

Some issues to keep in mind as this and other such plans come out:

–Most flat tax plans are basically consumption taxes that share a basic equity problem: compared to what we have today, they tend to shift the tax burden to middle and lower income families…it might not look as regressive as 9-9-9, but unless you start carving out low-income folks, it won’t look a lot better.

–Once you start offsetting the regressivity by carving out different income groups or consumption goods (like food or housing) you a) complicate the thing so it’s not as simple as advertised, and b) lower your base so you’ll have to raise the single, flat rate. The Fair Tax from a few years ago was a version of this, and with a very broad base (they excluded the poor but included everything households bought) they were setting it at around 25%. Larry K, who’d been on a call with the Perry folks, suggested that the income exemption would stretch up to the middle class, which gives Gov Perry good optics against Cain, but means he’ll need a higher rate for revenue neutrality. (Though I suspect we’ll get a low rate, low revenues, and a bunch of “dynamic scoring” rhetoric about how this simple, low rate will magically raise all the revs we need.)

–The whole tax reform thing is really overplayed. Yes, there are gross complexities and inefficiencies in the current system—and btw, such complications can easily be replicated in any other system, including a flat tax. Our best move would be to simplify our current system—get rid of loopholes (e.g., deferral of foreign earnings), distortions (favoring of debt financing, special rates for unearned income, some of the large tax expenditures like the mortgage interest deduction), and we’d be fine.

Remember, our biggest problem is pretax–jobs, income, wages, inequality. And despite rhetoric to the contrary, we can’t solve that through tax reform (though with plans like 9-9-9, we can make it worse).

This excitement bubble re Gov Perry’s flat tax is just a variant of the “where’s our white knight?” syndrome that’s been characteristic or the R’s search for a candidate. It may provide a sugar high for a fraction of a news cycle, but there’s not likely to be a lot of “there” there.