Saturday, November 05, 2011

 

Rick Perry – The Stupidest Tax Plan in the World?

Have you heard of Mitt Romney? Herman Cain? Rick Perry? Almost certainly not Jon Huntsman? Or other damp squibs for Bonfire Night (though a fanatic who wants to blow up the legislature and install a theocracy isn’t a million miles from some of the contenders)? Yes, it’s the exciting world of the US Republican Party, and after studying the race, I can announce a winner. Not of the nomination, naturally, or (I hope) against President Obama. Step forward, instead, Texas Governor Perry, whose brand new “simple” tax plan is surely the most brain-meltingly stupid in the history of the world.

The Republican Frontrunners – More Halloween Than Bonfire Night

If you’ve not been following the race for the Republican Presidential nomination, the most consistently popular contender is former Massachusetts Governor Mitt Romney; but when I say “most consistently popular”, I mean he’s been bumping along at about 25% in the polls for the last year, while several other contenders have shot up, sometimes shot past him, and then fizzled out. It’s almost as if Republicans don’t actually want their ‘front-runner’, and are looking for anyone – almost anyone at all, as long as they’re ‘more conservative’ – to replace him. Romney is relatively competent, doesn’t mess up in debates, and almost completely uninspiring: famously, he’s changed his mind on almost every policy position and then denied it (as a slew of flip-flopping attack ads are now reminding people); he’s not ideologically batshit-crazy conservative (not least in that he was, following the previous point, against most conservative positions before he was for them); his Massachusetts healthcare initiative was the model for Obamacare (the number one evil for Republicans, whose support for life ends at birth); and perhaps most of all, because he’s a Mormon, and so automatically excluded from the swivel-eyed Christianist theocracy that has captured much of the Republican Party. He also has a 59-point plan for the economy, which is at least fifty-six points longer than Republican voters are going to read. On the other hand, he has a lot of money, tends not to self-destruct, and has the support of a lot of Republican grandees who are scared to death that the grassroots will pick someone who’s as nutty as a fruitbat.

So who are the main challengers to Romney? At least until tomorrow? For the last few weeks, they’ve been the macho conservative Governor of Texas – always a happy sign – Rick Perry, and business mogul Herman Cain. Depending on whether you think being US President is more like being a state governor or being a pizza boss, you may feel one of them has more relevant experience. Governor Perry was the last candidate so far to enter the race, sparking off over the summer to zoom high over the polls until he crashed to earth with a pitiful performance in his first TV debate. And again in his second. And by the time he slightly improved for his third, everyone was watching another spectacle, the amazing high-flying business saviour with a memorable policy plan where Rick Perry has a vacuum, while at the same time untainted by any actual political experience. So Mr Cain is, at the moment, still soaring in the polls while Governor Perry has mostly fizzled out – until the last week, during which both have exploded. The press have found details of Mr Cain expensively paying off several woman in his business empire who claimed sexual harassment by him; Mr Cain has fired off in all directions, the press, the liberal elite trying to lynch him for daring to be a black Republican, feminists – all of this playing well with the Republican base – but then, most dangerously, blaming the Perry campaign, who have of course strenuously denied this. Massive intra-conservative explosions followed. So the two leading Not-Mitt-Romney candidates are currently in the middle of making Mitt Romney look much safer (and saintlier).

Call 999 For Herman Cain

There are many elements behind Herman Cain’s sudden success, but the most policy-based is his patent “999 Plan” to reform America’s tax system (and bear in mind that “999” does not have the same connotations in America of ‘Call Mr Cain an ambulance’). Unlike Mr Romney’s 59-point plan for the economy, Mr Cain’s is short, simple and memorable: strip federal taxes to a 9% corporate tax rate, a 9% personal income tax rate and a 9% national sales tax. Problems with this include that it wouldn’t raise nearly enough to cover spending (but no Republicans are going to worry about that); that it would massively slash taxes on business and the very rich, leaving 90% of the population to pick up the tab (but not many Republicans are worrying about that either); and that there isn’t currently a federal sales tax at all. This last one is where he’s being attacked by other Republicans (wild-eyed Tea-Partier Michele Bachmann, a spent firebrand from earlier in the year, suggesting it’s a 666 plan. Yes, the Christian Right are always subtle). You see, it doesn’t matter if there are huge tax cuts elsewhere, or much bigger spending cuts on top – Republicans now regard any tax increase at all as original sin. So the other contenders are running around telling every state with its own sales tax that Mr Cain wants to double their VAT on top, and every state without that HE WANTS A NEW TAX AND MUST BE THE DEVIL! Yet still, the simplicity and apparent low levels of the “999 Plan” remain looking popular in the polls. So Rick Perry, desperate to get back off the ground, belatedly tried last week to come up with a tax policy of his own, his reliance on nothing but his winning personality having come unstuck.

The Republican debate a week and a half ago might well have laid the charges for the big explosion between Cain and Perry this week. Mr Cain, formerly so self-assured, looked distinctly rattled when his sudden front-runner status brought all the attacks that his previous also-ran rank hadn’t, stuck spouting that any criticism of his catchy gimmick was “comparing apples and oranges” (yes, Herman, we know your new sales tax will increase the price of fruit). But with Michele Bachmann hinting in her subtle way that he may be the antichrist, the attack that turned my stomach wasn’t the ridiculous one from the extremist (well, one of them) but the snake-oil slick from the please-can-I-be-the-frontrunner-again Governor: “Herman, I love you, brother, but…” Oh, Perry, please. Does anyone actually fall for that schtick? It’s a simple stratagem: get right behind your beloved brother; stab him in the back with praise for his naivety; unveil your own boldly unrealistic tax plan and hoover up all your beloved brother’s votes! And it was at the last point, of course, that Rick Perry’s own plan blew up in his face.

The Problem With Tax Plans

There’s only one sort of new tax plan that’s ever a brilliant, total success. That’s when you announce it from in government at a time of high growth, and with luck that means any losers will be lifted naturally and don’t notice it. This hardly ever happens, and pretending that it does goes some way to explain why, for at least the last thirty years, UK governments have been living beyond their real means.

Any tax plan – any at all – that you come up with in opposition will be open to one of two attacks (and usually both). The first of these is invariably true, and the more you try to avoid it, the more the second will become true as a result.

Anyone involved in British politics can remember tax disasters both by government and opposition parties. I was a member of the Liberal Democrats’ Federal Policy Committee for many years, and tax proposals were always the policies were got to discuss last – usually after a Treasury Spokesperson had been dragged kicking and screaming into the room with bloodcurdling vows that the Party’s democratic policy-making process wouldn’t change a single penny of their grand design – and usually with the aid of numbered papers to be collected in at the end of the meeting. Because nothing can be more unpopular than taxing people more.

Tax has long been a particular problem for the Liberal Democrats for two simple reasons: for nearly two decades, we’ve been the only party that’s had all its policies costed so that election manifestos add up; and we’ve aimed to make the tax system fairer, which means those at the bottom paying less and those at the top paying more. Put those together, and what do you get? That some people are going to lose money, and that we’re going to tell them about it. Which is why, even though all our tax proposals for as long as you can remember have had far more gainers than losers, all the shrieking attention is usually on who’s going to pay more. Liberal Democrats plan to raise income tax thresholds so that the vast majority of low and medium earners will be better off, we said at the last election (and are now delivering in government). Of course, if you have to pay extra tax on the worth of your house above a couple of million pounds, that’s going to hit the very, very poorest, who haven’t a widow’s crotchet to rub together in their two million pound mansion! If you’re getting masses of cash from capital gains that Labour taxed at a much lower rate than ordinary working income and suddenly that rate rises to something almost fair, that’s going to destroy business, because how can bosses be expected to pay anything like the share that their employees do! And so on, as you probably remember. Or, most famously, Charles Kennedy came a cropper trying to explain how our council tax replacement plans stacked up in 2005 – change it to ability to pay and, corks, it turns out the people who are able to pay would have to. What is the world coming to? Even the council tax itself, replacing the poll tax, the most unpopular tax in living memory, was only swallowed because central government whopped in a massive subsidy with it (taking local government more under its control as it did so).

And so, used to running my beady eyes along the small print that tax planners hope you won’t notice, Herman Cain’s plan is… Well, laughable. It’s impossible to take seriously, and it would never have stood up for five seconds in a Liberal Democrat Policy Committee meeting. It doesn’t bring in nearly enough money to pay for the taxes it would replace. It gives a massive, massive tax cut to the very richest. And it brings in a great big additional tax hike that permanently increases prices for everyone else (remember the crappy VAT rise here? Under the “999 Plan”, it would have been nearly four times bigger). There are, though, three relatively good things to say about it. First, it would slightly simplify the Byzantine US tax system, and that’s a good thing. Second, it looks good on a leaflet, bollocks though it is to anyone who has a clue. And third… Third, it’s nowhere near as dumb as Rick Perry’s alternative.

Rick Perry’s Tax Plan – The Massively More Complicated Side of Simple

Mesmerised by the simplicity and popularity of the “999 Plan”, Rick Perry sat down with his crayons and, only months later and weeks after he’d already blown his best chance at the Republican nomination, he came up with his own “simplification” of the tax code. It’s a 20% flat tax.

In its favour, the good thing about a flat tax is that it’s simple (and the simpler a tax system is, the harder it is to dodge). Remember that.

OK, first problem. A flat tax. These are beloved of conservatives because they sound fair, but actually mean – by demolishing a progressive tax code in which you pay a larger share the more you earn – that, if you’re bringing in the same amount of money overall, the wealthiest get a massive tax cut and everyone else gets a massive tax rise. Still, ‘everyone should be treated the same’ has a ring to it – compare it to the Liberal Democrat ‘(almost) everyone gets the same increase in what they can hang onto before they pay any tax’, and they sound much the same. They’re actually almost exact opposites. Everyone paying the same percentage means the lowest earners get very little actual money and the richest get a fortune; everyone being able to keep the same actual money makes a great difference to the lowest earners and is barely noticed by the richest. And in this case, it would be a 20% flat tax on personal and corporate income but, here’s a thing, not on investments – Rick Perry would abolish the various wealth taxes altogether (great if you’re a mega-rich investor. Shame if you’re an ordinary Jo who has to pick up the shortfall).

But still, the one good thing in theory about a flat tax is that it’s simple, even if it’s not fair.

So, a flat tax is regressive. But it also has a lot of losers, if you’re going to set it at a rate that actually brings in the same amount as the various different rates currently do. And Rick Perry is a Twenty-first Century Republican running for the Presidential nomination in an ultra-conservative Tea Party atmosphere: increasing taxes, even on ordinary people, is unforgiveable evil. So he has a pathological fear (not least having seen his own attacks on Herman Cain’s extra sales tax) of people who’d lose out.

The answer is simple. Forget economic facts, and just set your tax rate well below what anyone could object to – 20%. This isn’t just below the rate at which he’d balance the books (in the UK, a flat tax would have to be at least 40%; even in the US, 20% is absurd, and that’s for current spending, ignoring the trillions of dollars of debts). This is ludicrously below the rate at which he’d balance the books. The technical term for it is ‘totally made up’. But, phew, never mind reality: it’s passed the first part of the ‘Republicans won’t call you Satan’ test, which is the most important one.

Yet even a 20% rate would mean not just cutting the rate for the richest in half, but increasing tax on the lowest earners – so, to his credit (and, under this plan, the US Government would need to run up a lot of credit), as well as the conservative dream of giving billionaires more billions, he’s followed the Liberal Democrat idea of a steep increase in tax thresholds to benefit low and middle earners. Of course, this would mean that a tax rate that already wouldn’t bring in anywhere near enough money would bring in much, much less than that. But so what? It’s only pretend, after all, not revenue-neutral or a plausible plan for government.

And, you still remember, it might not pay for what you’re actually spending, so you can’t begin to reduce your deficit (which Governor Perry’s promised to do, but that’s too absurd a claim even to start on), and that means you can’t even think about paying off your debts, but on the bright side, at least a flat tax should be simple.

But then Governor Perry hit on another problem. Because the US tax system is so complicated – almost as much as the UK’s after a decade of Gordon Brown knitting it – that it’s not just the headline tax rate that determines how much people pay. There are exceptions, and exemptions, and allowances. People get money back, or don’t pay it, or circle it around a bit, if they’re paying mortgages, or charitable donations, investments and so on. Now, Governor Perry’s plan wants to get rid of all tax on wealthy investments, so that’s nice and simple for the very rich, but ordinary people still have mortgages, and those poor billionaires might even have several. And if a flat tax is a proper, straightforward, simple flat tax that simplifies the tax code into one simple rate – remember, the big advantage is how simple it is – then suddenly people might have to pay more on all those sorts of things. People… might… have to… pay… more…‽‽ Oh, Governor Perry! Say it ain’t so (or be damned forever)! So he had another bright idea. All those exceptions, and exemptions, and allowances? They can stay.

Oh. Well… Um, the thing is, it might still need thousands of pages of tax code, oh dear, sorry, and lawyers, and accountants, and Congresspeople putting in loopholes, but at least the rate of the flat tax is still simple. That’s one thing. At least you know you only need pay at one rate. Er, that is it, isn’t it?

Unfortunately, at that point Governor Perry’s advisors found one more problem. It turns out that even with a tax rate so low that no-one can believe it, and a much bigger threshold, and keeping all the allowances and exemptions – even then, they found that there would still be losers. A lot of losers. Mostly from those pesky low-and-middle-earners. So what to do?

Because Governor Perry had told them that simplicity is nice, but the one thing that his tax plan must never, never, ever have is losers. Because he doesn’t have a teaspoon the political courage of a Liberal Democrat, not even one person should have to pay more, and only then would he be anointed the true [made-up] Republican messiah.

So his tax plan has one more idea to make it a brilliant, total success.

And that is…

If you don’t do better under the new tax system, you can file under the old one instead.

And that was the point at which Rick Perry became the undoubted winner of the Mr Shit-For-Brains-Maddest-Tax-Plan-Of-All-Time Award.

The one advantage – the one big reward that even a redistributionist like me can agree on – to a flat tax is that the sodding thing is flat. It’s simple.

Under Rick Perry’s plan, not only would the rich get a massive tax cut (and a more massive one through the genuinely flat 0% investments rate), not only would you still have to calculate all the same exemptions and extras that you do today, but you would have to do all your taxes twice. Just to check which version comes out best.

This is the only “flat tax” proposal in history which increases bureaucracy, increases complexity, and increases the time it takes to fill out your tax returns. All for the sake of a simple headline. Governor Perry appears to have confused simple with “simple”.

Rick Perry’s promise when setting out his tax plan was that Americans would be able to fill out their tax returns on a postcard.

Only if their writing is as small as his own microscopic brain.


The Other One

Incidentally, there’s one Republican in the race who has a solidly successful and fiscally conservative record as a governor, has been an ambassador, has no flip-flops, has his own tax plan and can string three words together without tripping over them. Unfortunately for the health of the Republican Party, Jon Huntsman is bumping along at the margin of error of nothing, so you can safely assume the sane sort of conservatism isn’t getting a look-in this year. Mainstream in every way save being a Mormon (ironically the least anti-gay candidate despite that), he might do well in a proper election, but by Republicans, for Republicans, he’s toast. He believes in science and climate change, he has a grasp of economics, he doesn’t pander to Christianist conservatism, he speaks Mandarin Chinese… He may as well be on a different planet to Planet Republican. Though as the ‘not nutty’ candidate he may have blown it himself by lacking the balls to stand apart from the pack at crucial moments of decision (putting his hand up with all the rest to the economic insanity of refusing deficit reduction by even one part tax rise to ten spending cuts; staying silent as the Republican audience booed a gay soldier). So I don’t spare him that much sympathy.



Update after the next GOP debate, night of 9th November: It turns out that I was badly underestimating Rick Perry’s problem with numbers. If only he hadn’t scrapped Education (arithmetic) and Commerce (numbers) first, he might have been able to count to three.

It surely can’t be long now before he withdraws from running for President of the United States of… of… Oops! I was sure there was a third word…

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Comments:
Huntsman's also a Captain Beefheart fan, which makes me wonder how he ended up in the Republican party at all...
 
Probably generational - when conservative could mean fiscal conservative, rather than frothing theocrat. Or perhaps he's just a/ very wealthy and b/ in the most Republican state in the union...?
 
Alan,

Great post on the republican tax plans.

Herman Cain’s ‘999’ plan and even Rick Perry’s flat rate tax are not new ideas. I first came across flat tax while living in the States during the eighties and nineties. Milton Friedman worked up a flat rate tax proposal coupled with a minimum income guarantee for the Reagan administration. Reagan liked the flat tax idea but not the Universal citizen’s income part. Freidman, rightly, disassociated himself from plans to introduce a flat tax without the guaranteed minimum income for all US residents.

I first began to take the proposals seriously during the course of the California governor’s, Jerry Brown, campaign for the democratic presidential nomination in the early nineties. His tax reform proposals had been worked up by the economist Arthur Laffer (of the Laffer curve) and consisted of a 13% flat rate income tax and 13% VAT. The plans raised the effective tax on corporations and eliminated various loopholes much beloved by the super-wealthy.

I agree with your assessment that a flat rate tax in the UK would, under the current system, need to be around 40% (See ). However, I do believe that combining income tax and national insurance can be effectively achieved (and not just because former Chancellor Norman Lamont is implacably oppossed to the concept). Flat rate tax schemes have been implemented in modern economies in Russia and some of the Baltic States, so real life working models do exist.

The issues in the UK are, as you rightly point-out, as much (if not more so) issues of political pragmatism than economic efficiency. A flat rate tax coupled with a guaranteed minimum income (that replaces the current personal allowance set to rise to 10,000 by the end of the parliament and perhaps 12,500 thereafter); supplemented at least in part with a Land Value Tax or Mansion tax scheme could be a politically acceptable solution. Such a solution might be designed to simultaneously deal with the problem of disincentives for higher income earners and a more equitable distribution of both the overall tax burden and accumulated wealth.

When I have a bit of free time over Christmas, I will put some figures on the back of my Christmas card envelopes and throw them out for evaluation by LibDems on this blog. In the meantime Alan, keep us updated with the Zany ideas that undoubtedly will surface as the campaign for the Republican Party presidential nomination continues.
 
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