A Tale of Two Tax Plans

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By Dave Smith

There is an upshot to the abundance of candidates seeking the Republican nomination for the Presidency and the multitude of debates being staged: an intense competition for supporters and media attention. Led by Herman Cain’s aggressive “9-9-9” proposal (profiled here), the other major candidates have been rolling out fairly detailed plans to simplify what nearly everyone — left, right, and center — acknowledges is a bloated, inefficient, and overly complex tax system. It is a definite positive that the question isn’t whether or not we need to reform our tax code, but how.

The two latest additions to the tax reform parade are flat tax proposals by Rick Perry and Newt Gingrich. Like 9-9-9, both seek to streamline and simplify the tax code and do so in a way that would promote capital investment and economic growth. Unfortunately, both plans are possessive of several flaws.

The Perry and Gingrich proposals have much in common. Both are voluntary; that is, neither would do away with the current byzantine code. Rather, individuals, families, and businesses could choose whether to file under one code or the other. The means, however, that the current code would stay in place, and rather than reducing the time and energy required to file a tax return, it would increase as each filer would check both systems to see which provided the lower tax rate. All those loopholes, deductions, and government-directed benefits would remain in place for those fortunate enough to be able to take advantage of them. Big businesses that can afford an array of tax accountants and lawyers would have an even bigger advantage over resource-strapped small businesses. While this would be a sort of “stimulus” plan for tax preparers, dueling tax codes would not be beneficial overall.

Both flat tax proposals retain the deductions for home ownership and charitable contributions (although Perry would phase out these deductions for high-income earners). The downside to this is that the government would continue to incentivize home purchases over renting. Particularly when viewed with the hindsight perspective of the economic problems of the past few years, does it make sense to continue to have the government direct people towards home ownership? And while maintaining the charitable deduction fits with the conservative idea that private charity is superior to government programs, removing that deduction could facilitate a lower rate. Both plans greatly increase the standard deduction for individuals – $12,500 for Perry, $12,000 for Gingrich – and both would eliminate the tax on inheritances.

The dueling plans do part ways in some areas. Perry sets the flat rate at 20%, applicable to individuals and corporations; Gingrich cuts it even further: 15% for individuals and 12.5% for corporations. Perry’s plan allows for deductibility of state and local taxes, meaning that earners in low-tax locales subsidize the government spending of those in high-tax locales, lessening the incentive for downward pressure on those high-tax regimes; Gingrich proposes to eliminate this deduction. The Perry proposal eliminates the capital gains tax on long-term investments, while Gingrich makes no distinction and eliminates the tax altogether. Perry’s tax ends the Earned Income Tax Credit and the child tax credit; Gingrich would retain them.

In dealing with businesses, under Gingrich’s plan a company could expense new equipment purchases in one year, rather than having to deal with depreciation schedules, but tax credits for research and development are eliminated. His plan doesn’t appear to address the issue of repatriated corporate business income, i.e., profits earned by businesses outside US borders that could be invested domestically if not subjected to one of the highest corporate tax rates in the world. Perry does retain the R&D tax credits, but provides a temporary low rate on repatriated past profits of 5.6%, moving towards a “territorial” tax system whereby such profits are not taxed at all unless earned domestically.

Both plans are preferable to the current US tax code in spite of their faults, and, in contrast to the Cain 9-9-9 plan, neither creates a new layer of taxation. None of the proposed plans, however, recognizes the political reality that a 0% rate on capital gains is unfeasible due to the “Buffet Rule”-type demagoguery that it would engender. By being “optional”, the Perry and Gingrich proposals would, at least initially, further complicate the tax code rather than simplify it. And, there is a question as to the “revenue neutral” status of the plans – while claiming to catalyze economic growth, with record deficits and seemingly ever-increasing national debt, a tax plan that doesn’t at least provide the same revenues in the short run as the current code is going to have a hard time generating support in Congress.

By putting out serious, detailed plans, however, Cain, Perry, and now Gingrich have created an intellectually-competitive atmosphere. Other Republican candidates — and ultimately President Obama in the general election – are now on the defensive: either propose your own alternative tax plan, or somehow try to explain support for the current unpopular, complex, inefficient system. That’s a welcome debate.

Born in the same county as Davy Crockett in East Tennessee, Dave Smith has been living in Texas for over 10 years and involved in politics in for over 15 years. He has been blogging for nearly 10 years, has contributed to Town Hall Magazine and other publications, and has been on ABC and Fox discussing election issues. He is a graduate of Tennessee Tech University with a degree in chemical engineering.