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Dr Peter Morici:: Seeking to jump start his
flagging campaign and establish his pro-growth and fiscal responsibility
credentials, Governor Rick Perry is unveiling a tax plan that will not jump
start the economy and is fiscally irresponsible.
In a nutshell, Mr. Perry would give taxpayers a choice between filing under the
current income tax system - - with all its flaws - - and an alternative flat tax 20%
system. Under the latter, families could maintain their mortgage deductions if
they earn less than $500,000, which is about 99% of taxpayers, and could declare
exemptions of $12,500 for each family member.
It seems appealing - - a simplified tax system, fewer IRS agents, and so forth. But
the plan falls short in two important respects - - it won’t encourage many better
investment decisions and foster growth, and it will spin the federal deficit
permanently into the stratosphere.
The whole purpose of a flat tax is to encourage individuals and corporations to
invest more in sound business opportunities, instead of prospecting for tax
breaks by buying homes bigger than they need or spending on government hobby
horse projects like solar panels. However, the Perry plan by giving tax payers
the option of filing under the old system will encourage the wealthy and
near-wealthy to continue prospecting for loopholes and credits - - most of those
folks don’t pay 20% now, so don’t count on them to volunteer for Mr. Perry’s
True, well-off face a higher alternative minimum tax of 26 to 28%, but the
wealthy have lots of tricks, provided by the tax code, for postponing or
avoiding realizing income altogether. Ditto corporations like GE that hardly
pays tax at all.
About 42% of individuals pay no income taxes right now—and those folks are not
likely to op for Mr. Perry’s 20% plan, and those that do will only choose if
they can pay less. Hence, the Perry plan must raise considerably less revenue
than the present system, unless it can boost economic growth and the tax base.
It won’t increase the base, though it might provide a bit of Keynesian stimulus
through even lower taxes for some upper-middle class folks who get most of their
income from wages or professional services (doctors, lawyers and talk show
personalities) but not in a brick and mortar business but are caught by the
alternative minimum - - but as I recall Mr. Perry has declared Keynesian
economics is dead. To get the growth Mr. Perry claims, he will have to raise old
Lord Keynes from the dead. Having seen the consequences of the Clinton and Obama
post-crisis tax holidays, I am skeptical about such powers.
With less revenue in hand, Mr. Perry proposes slashing government spending to
18% of GDP - - that would require $900bn in annual spending cuts, when the
Congress is having trouble agreeing on an additional $100bn.
Such cuts are possible by increasing the retirement age to 70 and slashing
Medicare and Medicare spending and gutting the defense budget.
If Mr. Perry wants to slash taxes fine but let’s go to a real flat tax and tell
Americans how he is going to tame the monster that ate Washington—escalating
health care spending—and rationalize social security and defense spending.
Republicans need a responsible standard bearer after President Obama has
recklessly spent the country broke with little more to show than 9%+
After examining Mr. Perry for the job, all I can say is next applicant please.
Rick Perry's Economic Plan: CNBC's John Harwood has the details on presidential hopeful Rick Perry's spending plan. Perry says hard decisions will need to be made in order to get the US economy back on track:
Professor, Robert H. Smith School of Business, University of Maryland,