December 13, 2011
Former House Speaker Newt Gingrich, the frontrunner du jour in the Republican presidential race, has raised the stakes in the flat tax sweepstakes by offering a bonanza for wealthier Americans while draining the Treasury of a staggering amount of revenue.
Businessman Herman Cain backed a flat income tax as part of his 9-9-9 plan. But adding a national sales tax had all the appeal of pineapple on pizza for many “very conservative” Americans, who back flat taxes 68 to 28 percent, according to an October ABC News/Washington Post poll.
Texas Gov. Rick Perry also caught the flat tax fever that was pioneered as a losing proposition by media mogul Steve Forbes in his losing bids for the Republican presidential nomination in the 1996 and 2000 primary races. Perry says his version would be optional, with a proposed 20 percent rate designed to cap federal spending at 18 percent of gross domestic product, down from its current 23.8 percent level.
But a new analysis by the Tax Policy Center showed that Gingrich’s plan, which would set an optional flat tax rate at 15 percent while maintaining numerous tax deductions and exclusions, would trump them all. It would reduce federal revenue by $1.28 trillion or 35 percent in 2015 (assuming expiration of all the Bush-era tax cuts), shrinking the federal government tax take to about 13 percent of GDP, which would be its lowest level since the year the U.S. entered World War II.
In other words, if Grover Norquist’s goal of drowning the federal government in a bathtub is your goal, or blowing a huge hole in the federal budget, then the Gingrich tax plan is for you. “The Gingrich plan would by necessity result in much lower spending,” said the Urban Institute’s Roberton Williams, who analyzed the plan for the Tax Policy Center. “His plan would reduce revenues by 25 percent beyond what Perry proposed. And Cain’s was basically revenue neutral.”
While former frontrunner Mitt Romney has attempted to portray Gingrich as a secret liberal, Gingrich has a proven knack for appealing to conservatives who dominate the early Republican primaries, especially the Iowa caucuses that are just three weeks away. His plan hits most of their hot buttons.
It would give most of its tax relief to better-off Americans in the upper middle class and above. It would repeal the alternative minimum tax, which hits high-income earners, even as it preserved the home mortgage and charitable tax deductions, which go disproportionately to the well off.
The Gingrich plan would also totally exempt from taxation long-term capital gains, dividends and interest, which would provide a permanent tax holiday for those Americans who earn most of their income from revenue-generating stocks and bonds, including many retirees. Besides the well-to-do, that would be a huge boost for the retirement incomes of the half of the Baby Boom generation with substantial savings in their 401(k) plans, since they will most likely be converting them to dividend- and interest-bearing investments. The other half of the baby boom generation without substantial savings, on the other hand, would not benefit from the plan since the current tax rate on Social Security earnings already is 15 percent.
Flat tax advocates cheered Gingrich’s plan. “A flatter tax system is where the winds of tax reform are moving,” said an enthusiastic Scott Hodge, president of the Tax Foundation. “The binding theme we are seeing in all of these plans—Bowles- Simpson, Wyden-Coates, Dave Camp, Rick Perry, 9-9-9, and now Gingrich—is a move toward a flatter base with fewer deductions, exemptions, and loopholes and lower rates.” (He was referring to plans proposed by the Bowles-Simpson presidential fiscal commission, Sens. Ron Wyden, D-Ore., and Daniel Coats Jr., R-Ind., and House Ways and Means Committee Chairman Dave Camp, R-Mich.)
How well this approach will sell in the general election, should Gingrich or another flat tax advocate get the nod, remains to be seen. The same ABC News/Washington Post poll that found enthusiasm for the flat tax among conservative voters showed the American people narrowly opposed the entire concept by a 47 percent to 48 percent margin. That was almost the identical response to a similar question asked in the mid-1990s.
An NBC poll conducted in 2005, shortly after President George W. Bush proposed major changes in the nation’s Social Security system, found just 39 percent of Americans in favor of a flat tax while 55 percent favored the current tax system. About 6 percent were uncertain.
But average Americans are not the targets of the Gingrich plan. It’s designed to outflank other Republican candidates in appealing to flat tax true believers and those favoring massive cuts in government spending.
“The Gingrich plan every step of the way is more aggressive in giving revenue away,” Williams said. “Gingrich is Perry on steroids.”