Analyzing Rick Perry’s Flat Tax Plan

One of the consummate arguments in politics is over tax policy, and the 2012 presidential election is no exception, with Rick Perry and his flat tax plan, and other Republicans coming out with their tax plans.  President Obama and the Democrats have decided to run on the “tax the rich” mantra, while the Republicans have focused on what former Reagan economic advisor Larry Kudlow says is more “pro-growth, flat-tax reform.”  Herman Cain has his 9-9-9 tax plan, Rick Perry has a flat 20% plan, and even Jon Huntsman has come out with a flatter proposal, with a top rate of 23%.

taxes

The Plan

Rick Perry’s proposal is close to the classic form of the flat tax.  A decade ago, Steve Forbes came out with a 17% flat tax proposal when he was running for president.  Today, as then, much of the new media coverage of Rick Perry’s has been negative.  But what does Rick Perry’s proposal actually do?  Here are the highlights, from the Rick Perry website:

  • Institute a flat individual rate of 20%
  • Institute a flat corporate rate of 20%
  • Allow individuals to choose between the flat tax and the current system
  • Keeps deductions for mortgage interest, charity, and state/local taxes
  • Has a generous exemption for families of $12,500 per person
  • Eliminates the tax on social security benefits
  • Eliminates the tax on dividends and long-term capital gains
  • Eliminates corporate loopholes and special interest deductions
  • Eliminates the death/estate tax
  • Reduces rate of tax on repatriation of capital

In a sense, this plan diverges from the classic flat tax plan in two areas: (1) it gives an exemption to families, which means that the poorest people won’t pay anything (which makes the proposal somewhat progressive); and (2) it keeps several of the most popular individual deductions.

The Critics

The Washington Post seems to have gone on a crusade against the Perry plan.  In an editorial on October 26, it wrote:

No sane person could defend the current tax code. But Mr. Perry’s plan would be less simple and less fair — all while raising less for the Treasury.

The Perry plan would give taxpayers a choice between the existing tax code and his flat tax. So taxpayers would end up having to make two calculations — three, if you throw in the alternative minimum tax — to determine which deal would be best. Meanwhile, Mr. Perry would retain the most popular deductions — for mortgage interest, charitable contributions and state and local taxes — in his flat rate for those making under $500,000.

So much for simpler. As for fairer, the winners under the Perry plan are clear: His flat rate, plus the elimination of taxes on investment income, would be a great bargain for the wealthiest. According to an analysis done for the New York Times by the Tax Policy Center, a married couple with two children earning $425,000 would see their tax bill cut nearly in half.

The “nonpartisan” Tax Policy Center also released also released an analysis of the economic impact of the plan, saying,

The Perry plan would reduce federal tax revenues dramatically. TPC estimates that on a static basis, the Perry plan would lower federal tax liability by $995 billion in calendar year 2015 compared with current law, roughly a 27 percent cut in total projected revenue. Relative to a current policy baseline, the reduction in liability would be roughly $570 billion in calendar year 2015. If taxpayers were required to file under the flat tax option (that is, they could not opt to remain under current tax law), revenues in 2015 would fall by about $910 billion relative to a current law baseline and by about $485 billion relative to a current policy baseline.

The Cheerleaders

There are several publications that have issued favorable reviews of the proposal.  The Cato Institute, a traditionally libertarian think tank, gave the Perry proposal a “Solid B+” in an article published on October 25 saying,

Governor Perry is proposing an optional 20 percent tax rate. Combined with a very generous allowance (it appears that a family of four would not pay tax on the first $50,000 of income), this means the income tax will be only a modest burden for households. Most important, at least from an economic perspective, the 20-percent marginal tax rate will be much more conducive to entrepreneurship and hard work, giving people more incentive to create jobs and wealth.

The American Enterprise Institute, which bills itself as a “private, nonpartisan, not-for-profit institution” (as the Tax Policy Center does), but is also (like Cato) pretty libertarian, contested the Tax Policy Center’s statement that the proposal would decrease revenue in a post on its Enterprise Blog:

As I mentioned, the Perry campaign compares its plan to the CBO baseline, which includes some $4 trillion of supposed revenue over ten years from the expiration of the Bush tax cuts. But even Obama says he wants to keep the $3 trillion in middle-class Bush tax cuts. Indeed, the CBO has an alternate baseline that includes more realistic policy assumption.

So if you compare the Perry Plan to an “alternate” CBO baseline that keeps the middle-class tax cuts over eight years (from 2014-2020)—this works out to $2.4 trillion, roughly—the Perry Plan only raises $2.3 trillion less in revenue under static scoring. And using mild dynamic assumptions that assume taxes actually influence economic growth—the Perry Plan actually increases revenue by $700 billion vs. the status quo.

So, if you assume that all the middle-class tax cuts will end as planned (that’s the CBO baseline that the Tax Policy Center is using), then yes, Rick Perry’s proposal will raise less revenue.  Also, if you assume that a more efficient code will not increase economic productivity, then yes, Rick Perry’s plan will decrease government revenue.

However, if you use the alternative CBO baseline, and assume that a more efficient tax policy will encourage economic growth in the U.S., then the Rick Perry tax plan will actually raise revenue.

The International Business Times also had some complimentary words for the Perry platform, saying, “Some components of Perry’s plan, like corporate tax cuts, will encourage economic growth and job creation, most economists say.”

The Political Line

Larry Kudlow, mentioned above, draws the political line for us:

Earlier in the campaign, Jon Huntsman came out with a flatter tax, with a top rate of 23 percent and three brackets, which is similar to a number of Republican congressional proposals that would cap the top rate for individuals and corporations at 25 percent. Now it remains up to Mitt Romney to unveil a much bolder tax-reform measure that can compete effectively for the Republican nomination.

And all these ideas would represent a complete reversal from Obama’s vision of taxing the rich and penalizing successful small-business owners. In fact, on taxes, regulations, spending, and monetary policy, the expected GOP economic platform will represent a total repudiation of Obamanomics — a stark contrast for voters.

So there it is… voters in 2012 will be able to draw a clear line between the Democrats’ policy for America and the Republicans’ policy for America.  Do we want an economic environment that punishes success and prosperity, and impedes growth and job creation?  Or do we want an economic environment that is efficient and… well… fair?

Question: Do you favor a flat tax to eliminate complexity in the tax system?  Why or why not?  You can leave your comment by clicking here.

  • http://brocmiddleton.blogspot.com/ Broc Middleton

    Perhaps your closing paragraph should look more like this…
     
    So there it is… voters in 2012 will be able to draw a clear line between the Democrats’ policy for America and the Republicans’ policy for America.  Do we want an economic environment that continues to increase the income gap? Do we want an economic plan that benefits the wealthiest more than any other group (undisputed by even Rick Perry himself)?  Do we want an economic plan that would see Warren Buffet, who makes almost all his money through capital gains and dividends, paying 0.2% in taxes? Do we want an economic plan that would have Dick Cheney paying a single digit tax rate, 6.9%? Or do we want an economic policy that is a bit more… well….fair???

    • http://bobewoldt.com Robert Ewoldt

      Ha ha…

      You’re lumping capital gains and dividends into their “income” as well, but you forget that they already paid taxes on those when they earned them the first time. Both capital gains taxes and dividend taxes are double-taxation, so the effective tax rate on them today is 15%+35% (the individual’s tax rate), which is MUCH HIGHER than what you’re using to calculate (or whatever website you got those numbers from).

      Furthermore, long term capital gains taxes cause a lot of long term investments to be unprofitable, because a person’s investment grows at a slower pace than inflation. But that person must still pay taxes on those losses, because the capital gains tax is not indexed for inflation. So, an investor has an incentive to leave that money in that investment, rather than moving it to a better investment. Eliminating the capital gains tax would allow capital to move from investments overseas to the U.S., which would create jobs here.

      The current tax structure doesn’t encourage savings and investment, which is what really creates jobs and GDP growth. The flat tax proposal will create incentive for saving and investment, which will create jobs in the U.S., and will contribute to economic growth. Economic growth in the U.S. creates more revenue for the government, which is your ultimate goal, I think. Unless, of course, your goal is to make the rich poor. Then, by
      all means, go ahead with the Democrat plan.

      The economic catastrophe which is the current tax code can only be made
      worse if we implement the “tax the rich” proposal of the Democrats.

      • http://brocmiddleton.blogspot.com/ Broc Middleton

        Bob,
         
        Actually, it’s not a double tax for people who get a majority of their income from capital gains and dividends, which many on Wall-Street do including Warren Buffet, to avoid paying the higher income tax rate. 
         
        Also, the current tax structure was not created by just Democrats or Republicans, it was created by both parties. So trying to hold democrats up as the villain doesn’t hold water.  Also, given the HUGE amount of wealth that has been gathering at in the top percent of American over the past 30 years (undisputable fact) we don’t need yet another economic policy whose biggest beneficiaries those who are already the richest Americans. 
         
        Since you seem to fully support “trickle down” economics tell me, how much more wealth has to sent to the top percent of Americans before the “trickle down” part happens? 
         
        Shouldn’t the wealthy lose the title given by Republicans as “job creators” since they aren’t actually creating jobs? 

        • http://bobewoldt.com Robert Ewoldt

          I don’t know about you, but I’ve never been given a job by a poor man. You take enough money from the rich people that employ me, and I lose my job. That’s just the way it is. If the government raises taxes 1% on a company, the company has to either cut 1% from it’s expenses, or raise its prices 1%. In a competitive environment like today, they’re more likely to cut 1% in costs, which means that the lowest-paid workers are cut (you only cut your highest producers if you have to make really large cuts; the small cuts end up costing the poorest people).

          “Trickle down,” as you call it, is happening. Warren Buffet’s investments employ thousands of people. If the government takes $1B from him, that’s at least 10,000 jobs that don’t get created.

          So, if the goal is to create jobs, you create an environment for saving and investing. If the goal is to soak the rich, then you raise taxes. What is your goal?

          • http://brocmiddleton.blogspot.com/ Broc Middleton

            Wow, Republican talking points verbatim.  If you strengthen the WORKING CLASS and MIDDLE CLASS that is what creates the DEMAND, that is what FUELS business, so while the “poor man” might not be in your interview…trust me its the 99% of America that is making it possible for us to have jobs NOT the 1%, not the wealthy “job creators”. This is why our economy is in such trouble, the working and middle class does not enough buying power to bolster demand… because the such a small percent of Americans hold such a lopsided percent of America’s wealth.

            Perhaps the wealthy and business should make adjustments like everyone else, perhaps CEO’s shouldn’t expect to be making over 2oo times what their employees make. Maybe they could keep a few employees on and even hire a few more workers in they just pulled in 100 times what their employees make.  Crazy idea I know that sacrifice not just come from the poor. 

            If your theory of the “trickle down/voodoo economics” was happening, where are the jobs? Bush Tax Cuts are in place, the wealthy “job creators” have done very well, where are the jobs?

            Republicans don’t want to job creation…well at least not until after the 2012 election.  Evidence by the House Republicans not passing job proposals but instead waste time affirming “In God we Trust” as a National motto…WHEW!!! Glad we got that straight right now, that was critical.

          • http://bobewoldt.com Robert Ewoldt

            1. Not so much Republican talking points as economist talking points. 2. The Republicans have passed about four jobs bills in the House, but the Senate has done nothing.
            3. I don’t believe that it should only the poor sacrificing, either. But your “trickle up” economics theory is the one that really hurts the poor.

          • http://bobewoldt.com Robert Ewoldt

            Here’s an interesting editorial from the CEO of Boeing about why businesses aren’t investing right now: http://online.wsj.com/article/SB10001424052970203554104577003933737463986.html?mod=djemEditorialPage_h
            He suggests three things that government could do to help business to be more comfortable investing more money:

            1. enact comprehensive, pro-growth tax reform that benefits everyone; 2. proceed with regulatory reform; and
            3. reform and restructure existing entitlement programs.

          • http://brocmiddleton.blogspot.com/ Broc Middleton

            Do you know the reason why Republicans and the wealthy push for “tax reform that benefits everyone”? Smart guys, like CEO of Boeing Jim McNerney, know that they aren’t likely to see a tax cut unless everybody else gets some sort of tax cut too.  It would be hard to pass tax cuts for just millionaires and international corporations…not sure that proposal would get much support. 
             
            So what Republicans do is call for EVERYONE to get a tax cuts (i.e. Rick Perry’s Plan).  They package it and sell it as “fair”, but what they don’t highlight is exactly what Rick Perry was faced with last week on Fox News…While there are tax cuts in his plan for ALL, which he says makes it “fair” it strongly favors the WEALTHY.  Meaning while the working class and middle class will see some cuts it’s not like the cuts the wealthy receive, the wealthy upper class will really reap the most benefit from his tax plan. Although Rick Perry doesn’t seem to mind that too much, when asked about the wealthy benefiting most from his tax plan Rick Perry said…”I don’t’ care about that” in one interview then in another interview repeats ”Everybody gets a tax cut here, everybody gets a tax cut here.”
             
            So again, we don’t need another tax plan which benefits the wealthy! We already have a growing income divide, and that income divide IS hurting our country.  This tax plan would add to the already growing divide……The candidate himself, Rick Perry, doesn’t even dispute that fact. 

          • http://bobewoldt.com Robert Ewoldt

            He really should say, “Everyone who currently pays taxes will get a tax cut here.” The fact is that over 50% of households now do not pay income taxes. So, any tax reform that’s implemented will ONLY affect the top 50% of wage earners. So technically, you’re right. Tax reform will ONLY help the rich people. That’s because the rest of the people don’t pay taxes.
            But because you’re TECHNICALLY right blurs the question. You say that this tax reform will only help the rich, which it will, BUT ONLY BECAUSE IT’S ONLY THE RICH WHO PAY THE TAXES.

            What Democrats continually fail to realize (and it’s been evident again and again, including in this conversation) is that we have a spending problem in this country, not a revenue problem. I really doubt that we would ever be able to raise taxes enough to raise ANY more revenue. Or, if we raised more revenue, it would be either (a) temporary, or (b) insignificant. We’ve seen throughout the last 100 years that there’s a natural cap on the revenues the government can raise.

            But there’s not a immediate cap on the spending that the government can do. But, what we see happening in Greece, Italy, Portugal, etc., is that there is a long-term cap on government spending. And that cap is a heck of a lot harder to hit, and we’re headed right for it.
            On Mon, Nov 7, 2011 at 8:45 AM, Disqus <

          • http://brocmiddleton.blogspot.com/ Broc Middleton

             There is a reason why only 50% of American families pay taxes, and I’ll give you a hint it’s not just the tax code.  It’s the growing numbers of families that live at or around the poverty line, in case you aren’t familiar with what exactly that means, poverty in America is defined as a family of FOUR living on less than $20,000. So how many are living in poverty? 14.3% of America, that about the population of California!   Why are so many struggling? There is NO ONE ANSWER to that question but the fact remains that about 43 MILLION people live in poverty in America and their numbers are growing.  I know this number doesn’t cover the 50% of America that doesn’t pay federal taxes however it gives some context to your argument that “the rest of the people don’t pay taxes.” Perhaps before asking those in our country who are already struggling to pay more taxes (they already pay federal income tax, state income tax, Social security taxes, medicare taxes, and local taxes) we should ask those who live pretty comfortably to sacrifice some. 
             

            Yet another Republican talking point “we don’t have a revenue problem, we have a spending problem”. Although I agree with this Republican talking point partially, what does this talking point reference?  The debt and deficit, there are two solutions to that problem.  Lower your spending and make more money. But before we do that, lets get real, the problem is our budget deficit, not the debt.  The debt is money we have already spent, everyone is to blame nothing we can do about that.  BUT, if we fix our DEFICIT our debt will take care of itself.  Republicans want to focus on one solution to the deficit instead of two, just lowering spending.  Let me use the Republican example of a common American household.  Now every American family has to sit down and balance their budget, so if they don’t have enough money to meet their responsibilities they look at TWO solutions: 1.) Cut stuff out they don’t NEED 2.) Try and make some extra money via overtime, 2nd job etc.  

          • http://bobewoldt.com Robert Ewoldt

            Let me further your analogy of the American family. The current analogy is of a family that has an annual income of $55,000 per year, and is spending $96,500 per year, and they currently have credit card debt of $366,000 (see analysis here: http://www.daveramsey.com/article/federal-budget-vs-household-budget-how-do-they-compare/lifeandmoney_economy/rdcg_text3/ ).

            I agree with you that there are two ways to solve a budget problem for the American family, but in the current scenario, it’s more like a family in which both parents already have two jobs, so they can’t work any more than they already are.

            Yes, they could get a third job, perhaps, and sleep 4 hours instead of 8, but that comes with the consequence of not being able to drive a car without killing someone, and not being able to take vacation, and not eating well, and dying early.

            And, on top of that, having a third job won’t bring in NEARLY enough revenue to plug the $41,500 annual deficit, much less pay down on their debt.

            Similarly, the U.S. can’t raise revenues, because raising them will not bring in NEARLY enough revenue to close the deficit, will NOT allow us to pay down our debt, and will handcuff our economy so that we’ll be on our
            way to being a third-world country.

            It’s ludicrous to think that we can get out of this problem by “raising
            revenues.” The Republican “talking point” about this being a spending
            problem, not a revenue problem, is absolutely true. I don’t see why
            Democrats don’t see it. Maybe because they don’t WANT to see it.

          • http://brocmiddleton.blogspot.com/ Broc Middleton

            Hey, regarding the capital gains tax, which I know we completely disagree.  You want it eliminated, I want it raised. What you think about a lowering of the capital gains tax rate, however then implementing a “transaction tax” in some way.  http://www.bloomberg.com/news/2011-11-01/lawmakers-to-propose-transaction-tax-for-financial-firms-modeled-on-europe.html

          • http://bobewoldt.com Robert Ewoldt

            Even the Obama administration opposes a financial transaction tax. It’s kind of like the Durbin debit card fee that was passed by Congress earlier. You cap the amount that a bank can charge for their debit card transactions, so they pass on the cost to the consumers in another way. They’re not just going to eat the tax; they’re going to maintain their profitability level, at the expense of the consumer. Similarly, if the government imposes this “financial transaction tax” on banks, they’re not going to take that money out of their portion of the profits. They will pass that tax on to the consumers.

            It’s like the Democrats have never taken an economics class in their lives!

          • http://brocmiddleton.blogspot.com/ Broc Middleton

            I didn’t think you would like the idea, but I thought I would ask in the spirit of compromise. 

          • http://bobewoldt.com Robert Ewoldt

            The idea is to raise more government revenue, right? These hidden taxes that one imposes on the consumers hurt everyone a little bit. This isn’t a “let’s tax the rich corporations” deal. Yes, as far as government revenue-raising ideas, it’s fine, I suppose. But it’s these kinds of hidden taxes that are holding back our economy. If the government is straight-forward in the taxes it collects, instead of trying to hide a trillion little taxes to raise enough revenue, then our economy would run a whole lot more smoothly.

            Why are YOU in favor of this tax?

  • http://brocmiddleton.blogspot.com/ Broc Middleton

    Bob – Why are YOU in favor of this tax? (reference transaction tax)
    First I have not research this “transaction tax” at all so I do not know too much about it, however what I thought it might do was address the problem of mega- traders and investment firms making hundreds if not thousands of transactions an hour which feeds into market volatility and instability. Plus the proposed “transaction tax” is so small that average “joe-day trader” wouldn’t be hurt by this in any real sense. 

    • http://bobewoldt.com Robert Ewoldt

      Who do you think that these big institutional investors are making those transactions for? They’re making them for pension funds, and individual mutual fund investors. I don’t know if you invest or not, but every year, investors get a disclosure notice about how much the fund that they’re invested in is charging them for managing it. It’s usually between 0.1%-2% or so. These big investment firms will NOT let this new transaction tax lower their bottom line. No, it will be charged to the pension fund or the invididual investors, and it will raise the management fee on those funds from 0.1% to 0.5%, or from 1% to 1.5%.

      It’s not the institutional investors that will suffer from this new tax. It’s not the “Joe day trader” that will suffer (primarily). The people who will end up paying this tax are the pensioners and the “working class” and the “middle class.” But they won’t really know it, so who really cares, right? No one really reads those disclosure forms, right? So, what they know won’t hurt them, right?

      Let’s just create a thousand new “hidden taxes” that the poor dumb people won’t see, and therefore they won’t raise a ruckus. That’s the mentality of the Democratic party. We’ll tell them (the poor dumb people) how we just “stuck it to the big banks” by passing a financial transaction tax, and they’ll continue to give us money and vote for us. We win. They lose. And they thank us for it!
      On Mon, Nov 7, 2011 at 11:04 AM, Disqus <

  • http://brocmiddleton.blogspot.com/ Broc Middleton

    Bob… The current analogy is of a family that has an annual income of $55,000 per year, and is spending $96,500 per year, and they currently have credit card debt of $366,000
     
    Yes I have seen that analogy before and its just as asinine now as the first time I saw it.  So if this family’s income has an income of $55,000,  they spend $96.500, and have credit card debt of $366,000, then why are creditors still lending them money? Obviously so one still feels they have the ability to pay off all this debt or they wouldn’t still be able to get credit.  So since they are still seen has a “good investment” perhaps they don’t need to sell their own kidney on the black market or do porn quite yet and ruin everything they have worked for to pay back all the debt right now.  Instead this family should work to purposely and deliberately to turn things around over the long term…There I started a STUPID analogy and I ended the STUPID analogy. 
     
     
    Bob… It’s ludicrous to think that we can get out of this problem by “raising revenues.” The Republican “talking point” about this being a spending problem, not a revenue problem, is absolutely true. I don’t see why Democrats don’t see it. Maybe because they don’t WANT to see it.”
     
    You are doing exactly what Republican’s in Congress do, you are trying to frame the argument in a way that portrays Democrats as doing NOTHING in regards to spending cuts and only wanting increased revenues.  This is simply not true; President Obama and other Democrats have been pushing a “balanced approached” meaning a combination of spending cuts AND increased revenues, however because Republicans have been so entrenched against any revenues that the focus has been placed there and not the spending cuts.  It is so frustrating to watch pundits use that line that “you can’t raise enough revenues to close the deficit.” No one is trying to close the entire deficit with increased revenue but Democrats are trying to limit the amount of spending cuts to necessary/critical programs by instead increasing revenues.
     

    • http://bobewoldt.com Robert Ewoldt

      Broc, it’s not an asinine analogy; it’s perfectly realistic. And you’re right to ask why people will still lend to the U.S. The answer is: they won’t for very much longer. We’re seeing this in Greece, Italy and Portugal already. A nation’s debt gets to the point, just like in a household, where lenders will not lend to them anymore. They get to the point where they can’t raise revenues any higher. We’re approaching that point. We can’t raise revenues any more. We won’t be able to borrow for much longer. We HAVE to cut our spending if the country is to stay out of bankruptcy.

      • http://brocmiddleton.blogspot.com/ Broc Middleton

        Bob,
        WHOA! WHOA! The sky is not falling; we need jobs, jobs and more jobs. Of course we disagree on what the BEST way to create jobs those jobs is, but there is no need to get all cryptic about America’s future. With a jobs plan, some tax reform and entitlement change America will be just fine.  Our current situation is not really as dire as many make it out to be IF ACTION IS TAKEN. Right now we are spending about 24%-25% of GDP which is historically high and our revenues are at about 15% of GDP, which is historically pretty low.  So right now our deficit looks HUGE, because revenues are down and spending is up.  I mean it’s a 9%-10% deficit gap, what are we going to do (sarcasm) ! Republicans have used this deficit explosion to push for a complete overall to spending on all levels this is a dramatic step, an over reaction, and is not required to fix the problem (But they will use it anyway for political reasons because Republicans believe government should be smaller and will use this budget crisis to choke the funding to government programs they find unnecessary…if you can’t fund a program it goes away).  IF both sides can get out of their ideological trenches then we will be just fine.  Republicans need to let go of the “no new revenues/Grover Norquiest stance because revenues do need to be increased, your claim that we “can’t generate more revenues” is incorrect. In 2010 federal revenues brought in about 15% of GDP which is lower than normal (average being 18%) due to the terrible job market and economy, along with increased spending, the deficit has exploded which as led to very heated debate.  This increased spending is why Democrats need to let go of the “hand off my entitlements” stance.  Entitlements can be altered responsibly to save money without risk to current seniors while still maintaining the integrity of the programs.  So let’s see, we can bring in more revenues to a maximum of about 21% of GDP which means even with our current spending at about 24%-25% of GDP, that budget gap doesn’t look so large anymore, 5% of GDP not so bad.  It is not nearly as bad as advertized IF Republicans and Democrats stop with the brinksmanship and act like a responsible legislative body.  Does spending need to come down from its current level of 24-25% to around 19%-20%…Yes it does but it is a very fixable problem that doesn’t require dramatics or over-reactions.  America is not Greece.  Could America be Greece YEARS down the road if the math doesn’t change? Of course, but I don’t see that happening. 

        • http://bobewoldt.com Robert Ewoldt

          Broc, I agree with you on most of what you’re saying here. However, let me flesh out my statement that “we can’t generate more revenues” that you took exception to:

          Historically, federal revenues have NEVER been above 20%, no matter what the tax rates were. There was one exception when revenues were 23%, which was in 1944 and 1945, which was when World War II was ending, when the top tax bracket was 94% and a bottom bracket of 23%, and that could have just been the economy regulating to new higher taxes. Furthermore, federal tax revenues have averaged around 18-19%.

          So, if you get about 19% federal revenues when your tax rates are at 94%, and you get about 19% federal revenues when your tax rates are at 35%, and you get about 19% federal revenues when your tax rates are around 28% (as they were in the last part of the 1980s), then I begin to wonder if there’s not a natural cap to federal revenues. When we say, “Hey, we’re never going to raise more than 19% of GDP in federal revenue,” that frees you up to say, “OK, at what rates does GDP grow the fastest?”

          You begin to ask a different question. So, rather than “How do we raise government revenues using tax rates?”, we ask the question, “How do we raise GDP growth?” This is the fundamental question. And I think that you hit on the solution when you say we need jobs, we need jobs, we need jobs. When we get the economy moving, then GDP will grow faster, and federal
          revenues will increase.

          How do we get the economy moving again? Well, we make an environment in
          which businesses that are already here can thrive, and an environment to
          which businesses that aren’t here will want to come. It goes back to that
          Jim McNerney article that I sent you earlier.

          So, when economists say that Rick Perry’s flat tax plan will make the
          economy run more efficiently, and will be more attractive to businesses, I
          say that’s good for the economy. If it’s good for the economy, let’s do it!

          Also, if we’re never going to raise more than 19% of GDP in federal
          revenues, then we really ought to not be spending more than 19% of GDP in
          federal revenues, because that’s what leads to us becoming Greece.

          Lastly, I do have to take issue with one thing that you said. Don’t sniff
          at 5% of GDP. That’s a huge number. Right now, that’s about about $800B.
          To put that in perspective, the Super Committee is tasked with cutting
          $1.2 trillion from a 10-year budget. So to say that there’s an $800B
          deficit gap in the ANNUAL budget, that’s a huge deal, and not easy to deal
          with. But if we don’t deal with it, we will end up being Greece in a
          couple of years… probably around the time that my parents are retiring
          (or, at least, trying to).

          • http://brocmiddleton.blogspot.com/ Broc Middleton

            Bob,
             
            You shouldn’t say NEVER in all caps and in the following sentence say when the thing you said never happens actually happened… Sorry I just found that kinda funny. However, directly to your point of a mystically cap for revenues being around 19% of GDP; the CBO has stated under current law that federal revenues will rise to 21% of GDP by 2020 BUT (with a BIG BUT) that is contingent on letting ALL the Bush tax cuts expire as scheduled. 
             
            CBO: Trends in Federal Tax Revenues and Rates….“Under current law, revenues will rise significantly from their recent low relative to GDP as the economy recovers from the recession and the tax reductions enacted in 2001, 2003, and 2009 expire. The Congressional Budget Office (CBO) projects that under current law, federal revenues will reach 21 percent of GDP in fiscal year 2020, just above their peak share of 10 years ago.”  http://www.cbo.gov/doc.cfm?index=11976
             
            Also just a quick side note regarding the tax rates around the time of WWII, that is what government is supposed to do in regards to war funding.  Raise taxes to pay for the expense, if Americans don’t care enough to pay for the war in question then we shouldn’t be going to war in my opinion.  This issue is apart of the reason for the exploding national debt when American went to war in two countries (Afghanistan and Iraq) and then cut taxes…financially, what did we expect to happen? 
             
             
            Regarding getting the economy moving again, I think we are both in agreement that tax reform needs to be done.  Eliminate a large portion (almost ALL) of the deductions and loopholes, and lower the tax rates (now we disagree whether it should be for a net increase of revenues, so lets just compromise on revenue NEUTRAL for now). However I do NOT support a flat tax, I support a progressive tax plan.  As you know in a progressive tax plan at each tax level a new tax rate applies but the higher tax rate only applies to that money which made over the limit. It is not as if a person making $250,000 has all there income taxed at 33% only the income from 212,300 to 250,000 is tax at 33%.  This is a VERY IMPORTANT point to make because it shows that the progressive tax rate is already fair because everyone’s income is taxed the same.  If I make $50,000 a year, that $50,000 gets taxed at the SAME RATE as someone making $250,000. 
             
             
            • the income between $0 and $17,000 is taxed at 10 percent; • the income between $17,000 and $69,000 is taxed at 15 percent; • the income between $69,000 and $139,350 is taxed at 25 percent; • the income between $139,350 and $212,300 is taxed at 28 percent; • the income between $212,300 and $379,150 is taxed at 33 percent; • the income above $379,150 is taxed at 35 percent. 
            http://www.politifact.com/truth-o-meter/statements/2011/aug/18/warren-buffett/warren-buffett-says-super-rich-pay-lower-taxes-oth/
             
            Additionally, I don’t find a progressive tax rate unfair at all considering it is those in the highest tax brackets which have seen the most benefit from our economic system over that past 30 years.  Its those people in the top 10% and top 1% that have seen there incomes boom, while incomes for the working and middle class have flat lined or declined. So, since they have seen the most benefit I don’t see it unfair that they pay more than those who have not seen as much economic prosperity. 
             
             
            To the 5% of GDP which you have taken issue with yes $800B is A LOT of money, but as I said before it is fixable with cooperation and bipartisanship. Now you stated the Super Committee was charged with finding $1.2T of savings from a ten year budget, and while yes that number is technically true the real target number is $4.0T.  Not just because of a list of over 100 Congress-people that have signed a letter urging the Super Committee to go big in the area of $4.0T, but more importantly other credit rating agencies (like Standards and Poor’s) are waiting to see if the Super Committee was able to get a deal agreed to that would set America on a fiscal plan for the future, because if not more credit downgrades are likely to occur.  So while the MINIMAL charge was $1.2T, the Super Committee needs to really do much more than that to be truly successfully. 
             

          • http://bobewoldt.com Robert Ewoldt

            Sorry… hyperbole. The point is that federal revenues exceeding 20% of GDP is pretty much a pipe dream (historically).

          • http://brocmiddleton.blogspot.com/ Broc Middleton

            It gave me a chuckle…

          • http://bobewoldt.com Robert Ewoldt

            Yes, I agree that the Super Committee should be focusing on more that $1.2T, but even if they find $4T of results, that’s only halfway to the $800B/year that’s needed to get rid of the deficit ($4T over ten years is $400B per year)! Yikes! So, even with a “grand bargain,” we still need to cut. And it’s looking like the Super Committee won’t even be able to agree on $1.2T.

          • http://brocmiddleton.blogspot.com/ Broc Middleton

            I agree with your math, but the $4.0T deal would slow the bleeding, so to speak. Additionally it would calm the markets, give the private sector SOME stability going forward, boost confidence in America globally (showing Washington DC isn’t totally broken), and be a great example of compromise and bipartisanship having great benefits, which should led to more compromise and bipartisanship…(fingers crossed)

          • http://brocmiddleton.blogspot.com/ Broc Middleton

            Well, It looks like its time for Rick Perry and his tax plan to head back to Texas, he run is over after that 3 parts of government gaffe.

          • http://bobewoldt.com Robert Ewoldt

            It might be premature to say that. I read an article on Salon.com (a very left-leaning website, in case you don’t read it) that said that his crisis management of that gaffe was the best they’d seen since Bill Clinton did something similar in 1992. I wouldn’t write off Perry just yet.

  • http://www.richmantra.com/ Rahul Pandey

    This is a very nice blog…

    • http://bobewoldt.com Robert Ewoldt

      Thanks!