Rick Perry’s campaign has responded at length to five questions I posed earlier this week about his tax reform plan. Here’s responses from Perry campaign spokesman Sean Davis—edited for length and in italics—with my own comments following.
Perry campaign: The purpose of this bold tax proposal is to give the economy the jumpstart it needs to get people back to work. The flat tax system has been designed to raise total federal revenues equal to 18 percent of GDP, the 50-year historical average for tax revenue in the U.S. Gov. Perry is confident that the economic growth that results from this plan will generate the necessary revenue to balance the budget by 2020.
My remarks: Republicans have made this argument for decades, urging the Congressional Budget Office to factor in future economic growth they say will result from tax cuts when the office estimates the cost of a bill, rather than simply count the tax cuts as lost revenue. Problem is, even when the CBO experimented with using so-called dynamic scoring to calculate the cost of the Bush tax cuts in 2003, the cuts still didn’t pay for themselves. So in the end, Perry would still have to find a way to pay for the tax breaks for the wealthy upfront or the cuts would increase the deficit.
2) How will new people entering the system be taxed?
Perry campaign: Individuals have the freedom to move into the proposed flat tax system whenever they choose, but once they are within the flat tax system they will remain there – there won’t be any hopping back and forth.
My remarks: This is interesting, because it essentially locks people into the new flat tax system if they decide to join —presumably even if their income fluctuates. So say you’re a wealthy individual and you calculate that you’d pay less in taxes if you chose the 20 percent flat tax. But if you lose your high-paying job and your income suddenly plummets, you won’t be shifted down to a lower tax bracket--you’ll still be pay the 20 percent rate. In other words, you’d be stuck being taxed at a higher rate, even if your income changes. That flat tax could provide more revenue, but it could increase a household’s taxes over time.
3) What kinds of corporate income will be taxed?
Perry campaign: The corporate income tax reform proposal will tax corporate income minus capital expenditures and R&D expenditures. Normal businesses expenses that corporations recognize on their financial statements will continue to be deductible.
My remarks: The capital-expenditure write-off would be another boon to businesses--and another way that Perry’s plan loses government revenue that will either have to be offset or risk increasing the deficit. In exchange for a lower 20 percent corporate tax rate, Perry’s plan vows to eliminate corporate giveaways and loopholes. This change is certainly a tax break, but it would also benefit businesses across the board. Last year, Obama proposed a similar, onetime capital expenditures tax write-off for businesses, which was estimated to cost $200 billion in lost revenues. (Though the loss over 10 years would be $30 billion, “since businesses would eventually deduct the depreciated value of the equipment in any case,” as the New York Times points out. Roberton Williams, senior fellow at the Tax Policy Center, says: “It sounds like they’d let corporations take virtually all of their current deductions and then some. In particular, allowing them to deduct capital expenditures would mean expensing all investment, which is better than current depreciation rule”
4) Will tax exemptions for multinationals send more jobs overseas?
Perry campaign: When combined with a lower corporate tax rate, transitioning to a territorial system of taxation would make the U.S. far more competitive with other countries, increasing economic growth and creating more jobs for American workers. A 5.25% reduced rate will be applied to any foreign earnings parked overseas prior to the territorial transition. According to economists on the left and right like Laura Tyson and Doug Holtz-Eakin, these reforms will make America far more competitive, increase economic growth, and create millions of jobs.
My remarks: This is essentially the “rising tide will lift all boats” theory of economic development. It’s akin to the arguments in favor of free trade: By lowering barriers for U.S. multinationals operating overseas, these companies will flourish on the whole and bolster their operations domestically — and hire more workers.
5) Is this [plan] a roundabout way of privatizing Social Security?
Perry campaign: Young workers deserve the opportunity to have ownership of their Social Security contributions, to seek a market rate of return if they so choose, and to leave their retirement savings to their dependents when they die. When individual Americans have ownership of their Social Security contributions, their benefits cannot be held hostage or used as bargaining chips by Washington politicians who cannot figure how to pass a budget or keep the government running.
My remarks.: So, yes, it’s a step toward privatization. Perry seems to trust individual, private accounts invested in the private market better than the public Social Security system. Under his plan, it appears that younger workers would still have to pay the payroll tax by default but could defer part of that amount into private accounts. If many workers chose to do so, it could defund the current Social Security program, so it’s not clear how long the public system would last.