Economics

The revenue and GDP impact of the Perry flat tax plan — now with actual numbers!

As I wrote in an earlier post, an outside consulting firm hired by the Rick Perry presidential campaign has analyzed the revenue and growth impacts of his flat tax plan as follows:

1. Under static scoring — assuming no growth impact from a more efficient, pro-investment tax code — the Perry Tax Plan (call it PTP-SS) would raise $4.7 trillion less than the Congressional Budget Office baseline forecast from 2014-2020. Of course, that forecast assumes all the Bush tax cuts expire, which is highly unlikely. Yet even under that scenario, revenue-to-GDP would be back to its historical average of around 18 percent of GDP by 2019. (Interestingly, income taxes as a share of the economy would be the same in 2020 as they are now, but corporate tax revenue would double despite cutting the corporate tax rate to 20 percent from 35 percent.)

2.  Under dynamic scoring, the Perry tax Plan (call it PTP-DS) would raise $1.7 trillion less than the unrealistic CBO baseline. But revenue would move above 19 percent — a historically high number — of GDP in 2019 and 2020.

3.  Under PTP-DS, the U.S. economy would be $3.5 trillion bigger in 2020 than under the CBO baseline forecast. And this gap would widen since CBO has some pretty sluggish growth forecasting moving forward. As consultants John Dunham & Associates put it:

Overall, based on the type of static analysis generally used by government tax estimators, JDA found that the tax plan would generate $2.781 trillion in federal income in 2014 – the first year that it would be assumed to go into effect and as much as $5.138 trillion by 2020. The revenues in 2020 would be equal to approximately 19.5 percent of GDP. Based on a dynamic tax analysis, revenues would be $406.8 billion higher than those currently assumed in the Congressional Budget Office’s forecasts and will equal approximately 19.5 percent of the forecast GDP, under a static analysis, revenues would be about $588.9 billion lower, and equal about 18.1 percent of GDP.

Based on the higher GDP estimates forecast by the dynamic scoring exercise, the Perry proposal will not only lead to an increase in overall economic activity and jobs, but will also lead to higher federal revenues in the long term. In fact, the analysis suggests that revenues could be as much as $406.8 billion higher than under the static model by 2020, and could be as high as 19.5 percent of GDP. The dynamic score of the proposal suggests that lower flatter taxes could generate both more revenue than the current tax code, and significantly more economic growth over time. With increasing demands on the Federal government from growing entitlements, higher pension expenses and interest on the debt, it will be necessary to increase the size of the economy – and the tax base – in order to generate significantly higher revenues.

Bottom line: If a President Perry could balance the federal budget by 2020 and cap spending at 18 percent of GDP — and if you buy the JDA analysis — the result would be a more financially stable America and a richer America than the current economic and budgetary trajectory would indicate.

11 thoughts on “The revenue and GDP impact of the Perry flat tax plan — now with actual numbers!

  1. James, I can’t believe you’re buying this tripe. These aren’t “real numbers.” These are projections based on the unknown assumptions and algorithms of a consultant paid by the Perry team. Static projections for this plan would seem rather easy. Perry’s “Plan” gives the option to use the old system or his 20% system. So, all those that currently pay less than 20% would still do so, those that pay over would pay the 20%

    How the “analysis” arrived at a revenue stream of 19% of GDP while using a maximum 20% tax rate (less standard deduction, mortgage interest, & charitable deductions) seems intuitively implausible. Why not ask them to release their scoring tables and projection assumptions – rather than just the outcome?

    That would be “real numbers”

    • Have you ever heard of Hauser’s Law? If not, you can Google it.

      It’s an empirical law that was shown to hold over the past 50 years: regardless of the marginal tax rates, tax revenues are a constant percentage of GDP, within a narrow range. As I remember, that percentage is about 18% for all revenues and about 8% for income tax revenues.

      That is, whether the top marginal rate was 90%, or 39%, or 28%, the resulting revenues were about the same. You simply got a bigger economy with the lower rates.

      It hasn’t been true since 2008, perhaps due to the unprecented growth in government spending and regulation.

      Perhaps, the Perry plan will return us to normalcy.

  2. The biggest question in here are how taxpayer behavior will change, and the second- and third-order effects of that. It sounds like the consultants did make some attempt to model this.

    Some people will be moving from the existing regime to the Perry Plan for rational reasons (that is produces a lower overall bill). Most of these people will realize these benefits because they can move their earnings out of tax shelters and into higher-return investments, not just because Uncle Sam’s bill is changing.

    Some will move simply because the cognitive investment in the current system is too high. Yes, they could do better if they knew the tax laws. In fact, they might already be doing better. But the current system is such a mess that the anxiety and confusion is creates causes people to accept a slightly higher tax bill just to get out from under it.

    Of course, a huge amount of money in this country is locked up in low-yield, highly tax-efficient investments. The transition should see big changes in equity pricing as the money moves to equalize. And the changes to the capital gains system should change how stock prices respond to shocks, since people will be able to buy and sell more freely.

    I’m a big fan of this plan, and I don’t think even the sophisticated analyses capture all the problems with our current system. Alleviating them will be a very big deal.

  3. NOTE TO THE UNINFORMED: Perry is governor over one of the worlds strongest economies (15th last I read) and it is booming. Of course it’s a magnet for illegals – hell it’s a magnet for everyone based upon relocation numbers both national and international. He’s been chosen to head the Republican Governors association. Eagle Scout (non-trivial distinction), actual military aviator (non-trivial distinction), leader of the strongest free-market conservative state (non-trivial distinction), comes from verrry humble background (NOT another silver spooning East Coast elitist). WHY does everyone keep propping up these neo-liberal Republican elitist bastards who can’t even stick to a position – not just one . . . ANY position. Hell, at least Romney waits a couple of days beforetripping and then flipping, Cain did it in a matter of hours. Just like that liberal congresswoman who said we should suspend elections! . . . just kidding. Well, Rick Perry isn’t kidding – this election is NON-TRIVIAL and he’s the man. Period. Look who the libs, the Rep elite, the literatti (MSM) etc. are rooting for and propping up – Romney. So ya’ll keep focusing on silly style over substance issues – see how that works out.

  4. further note: once you remove world economies that are stagnant, in full retraction (U.S., UK, Russia, etc) and the ones who are state owned and operated (China), and limit the list to leading GROWTH economies, Texas is behind only India, Brazil, Germany (maybe), Australia (?). The list gets real short. You may not like Rick Perry for some reason and i have my disagreements (unlike the Paul/Palin sycophants), but you better take him seriously and give him credit. This is a marathon not a sprint – politics is littered with the drying bones of candidates who took this countryboy for granted. I suggest it will be again – he’s just getting started.

  5. The problem with allowing people to choose the old tax plan is the 47% of filers who pay no federal tax and/or get money back on their return (ie income redistribution). That is nonsense and one of the big reasons the country is in such a the mess currently. Everyone should pay the same rate on all income, no deductions, adjustments, married, single, childless or 12 kids. All income taxed at the same rate. America needs to move back to everyone created equal and all income taxes should be equal.

  6. Some of the commenters appear not to have actually read the entire plan as posted on Perry’s site. People may choose the current tax system, HOWEVER, his plan calls for the deductions in the current plan to BE PHASED OUT. That means over time more and more people will switch over to his flat-tax plan, as the deductions in the existing code that favored them are removed.

  7. This ain’t Perry’s:

    1. All persons residing in the U.S. shall come together in households for the purpose of reporting all income from any source, each item to be identified by payer’s and payee’s tax number, and for receipt of federal and state benefits. Members of a household need not be related, need not reside together, and a household may consist of as few as one person. The federal government shall collect no taxes other than provided in this act. (This taxes all persons equally, including those outside traditional families, and makes the total cost of government visible to all).
    2. Each year congress shall set by legislation a “minimum wage” and a “tax rate”, which in turn will be applied to the previous year’s reported incomes to determine the maximum expenditures of the federal government. (These basic parameters require annual review for tuning them to correct misassumptions and changing circumstances, and to counter economic fluctuations while providing a pay-down of the debt over an extended period of time.)
    3. The following income shall not be subject to taxation:
    • An amount equal to a year’s earnings (2000 hours) at the minimum wage rate, for each adult (age 20-65) member of the household, decreasing 10% per year to 50% at age 15, and increasing 10% per year to 150% at age 70. (Family of two adults and two young children would receive exemptions of 100% + 100% + 50% + 50% = 300% minimum wage, or $46,500.00 at a minimum wage of $7.75; If that’s the least someone should work for, why should it be taken from them?)
    • All payments for what is classified as necessary health care for all members of the household including medical care, any pharmaceuticals prescribed by a recognized health care professional, vision and hearing aids, and membership fees for health-enhancing entities such as gyms or other exercise facilities. Health care insurance premiums may be deducted but not health care expense paid for by such insurance. (This provides health care assistance, both in paying insurance premiums and in paying that not covered. All costs are shared through tax deductions as an offset, but the individual now sees and shares the cost of each element of his health care, a serious deficiency in existing programs)
    • All educational expenses including day care for young children or legally incompetent persons, that portion of state and local taxes identified as spent on education, that portion of parochial school tuition, fees and other expenses identified as going for non-sectarian education, tuition, fees and educational materials for private school education at any level. (This provides both a continuation of the public school system along with the freedom to pursue a better outcome for one’s offspring through any of the alternatives.)
    • All income saved into an identified account from which investments may be made. All withdrawals from this account for the benefit of any member of the household shall be reported as income to that member. (This allows providing for one’s retirement and encourages investment as opposed to channeling the money through high overhead government systems. Since charitable contributions are not for the benefit of any member, they would be exempt from taxes, and no government agency is required to decide what is a charity; any group not returning anything of value to a member may receive funds tax free, including political campaigns).
    These deductions encourage growth of the tax base, thus growth of the government’s ability to pay for its responsibilities, by fostering health care, education and investment, all of which contribute to growth of income, taxable to support legitimate government purposes, by reducing the cost of these services by an amount equal to their cost times the tax rate.
    4. The “tax rate” shall be applied to any income over and above the deductions listed above, regardless of amount. (It seeks the elusive concept of fairness by taxing at the same rate all “discretionary” income.)
    5. For households whose deductions exceed total income, the Federal Government shall make payment equal to the tax rate multiplied by the shortfall in income, as shall municipalities and states. (This replaces the patchwork of entitlement programs, and helps tp assure “domestic tranquility” as required by the Constitution.)
    6. There shall be no federal tax on corporations or other business entities. (This tax is paid for, and hidden from, those who pay it when purchasing of the products and services of corporations; it brings back profits of corporations now held overseas and makes American-made products more competitive on the world market.)
    7. At the request, by legislation duly enacted by a municipality having greater than 100,000 inhabitants or a state, a surtax may be imposed on citizens of that municipality or state which shall be applied in the same manner as this tax. (This assures sufficient revenues for all levels of government and, where adopted in lieu of sales tax, will eliminate the regressive nature of such taxes)

    So..study it; the more you look the more you’ll like

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