Internet stocks weren’t the only thing that experienced a bubble in the 1990s. So did the idea of replacing America’s progressive income tax with a flat tax. By the middle of the decade, it was the Big Idea among conservative Republicans with a wonkish bent and an eye on higher office: Steve Forbes, Phil Gramm, and Dick Armey all had plans. Even some Democrats, like Richard Gephardt, tried to jump on the bandwagon. But the same criticisms made of Herman Cain’s 9-9-9 tax plan—that it’s regressive and doesn’t raise enough revenue—popped the flat tax bubble by decade’s end (plus the booming economy made big policy changes seem unnecessary) and little was heard about the idea during the 2000s. But it looks like Rick Perry is about to make the flat tax a core element of his presidential campaign. Here are the pros, as I see them:
1. Conservatives will love it. Key thought leaders like the Wall Street Journal editorial page, Steve Forbes, and CNBC’s Larry Kudlow are huge flat tax fans. And while conservatives are split about the Fair Tax and 9-9-9, the people who like the boldness of those plans should have no problem with a flat tax.
2. Many economists will like it. These folks disagree about a lot, but the idea of a tax code that has low rates, few exemptions, and eliminates the bias against investment should earn rave reviews. Economists like consumption taxes as pro-growth, and most flat tax plans are built off the famous Hall-Rabushka flat consumption tax.
3. It gives Perry something to talk about other than energy. The lack of an economic plan has been a huge disadvantage for Team Perry. Without one, he’s been forced to limit himself to speaking in vague generalities, attacking other candidates’ plans, and chattering endlessly about oil, which reinforces the notion that he doesn’t know much other than Texas issues.
4. It presents Romney with a big problem. Ripping Perry’s flat tax as regressive would alienate conservatives and make him sound even more moderate/liberal than when he attacked Perry on Social Security. And Romney himself lacks a big tax reform plan, only hinting that he would change things along the lines recommended by the Bowles-Simpson commission. Romney’s best case is that a flat tax is impractical and would never pass Congress.
5. It gives Perry a good zinger. Perry now says he wants “to make the tax code so simple that even Timothy Geithner can file his taxes on time.”
And here is the big con:
Perry’s flat tax will be attacked as regressive and a deficit disaster. The devil will be in the details. How high will the rate be? What income levels will be exempted? Will there be any deductions or credits such as for mortgage interest, children, or charitable giving? Will the super-rich pay lower taxes? Perry better know the ins and outs of the plan a lot more thoroughly than Cain apparently knows his. For instance, critics are already pointing to static-analysis studies from the ’90s that showed flat tax plans would have been huge revenue losers if implemented. Perry will need to make the case, which Cain hasn’t, that his plan will create a lot more economic growth to make up for any distributional issues. Remember these two words: dynamic scoring.
This tax plan should force GOP voters to give Perry another look, and give the governor a second chance to introduce himself to them. He needs to make the most of the relaunch because it may well be his final opportunity to make his case.