Give Herman Cain’s 9-9-9 plan at least this much credit – it has finally focused Republican presidential candidates enough to get their economic policies on the table. The days of Gardasil vaccines (Perry problem) and changes from one book edition to another (Romney problem) are receding in the rear-view mirror. Even Rep. Paul Ryan commented during a conference call this week that the GOP debate has entered a “positive phase” with “bold solutions” coming to the fore.
Since Cain’s surprise crescendo in the polls, most of the GOP presidential rivals have produced their own plans for tax reform, which have a certain quality in common. To some extent, they all claim to flatten the American tax code. Rick Perry’s plan sets a flat rate of 20 percent for both corporate and personal income tax; Newt Gingrich takes it down to 15 percent for personal filers and 12.5 percent for corporations. Even Mitt Romney, who has criticized flat-tax proposals in the past, says his plan “flattens” taxes.
Have we reached a conservative consensus on the virtues of a flat tax? And if so, can conservatives make the sale if Republicans win control of Washington in 2012? There may not be much room for optimism on either question.
First, there does not appear to be a consensus on the definition of a flat tax system. The godfather of the flat tax, Steve Forbes, proposed in 1996 a single rate on all income above an exemption level, with no deductions and no taxes on capital gains, interest, or dividends. Forbes defended those exclusions by pointing out that gains from these transactions came after the application of the federal corporate tax and that his plan blocked double taxation.
Both Romney and Gingrich attacked that idea at the time, although Gingrich’s new plan eliminates capital-gains taxes. Gingrich retains the earned income tax credit and child tax credit, designed to buffer the tax burden on lower-income households. Perry’s flat tax retains the payroll tax, eliminated in both the Gingrich and Cain plans, but Perry and Gingrich retain the mortgage-interest deduction. All three “flat” plans keep the charitable-contribution deduction, too. And don’t forget that Cain’s 9-9-9 plan is a transitional phase to the Fair Tax system.
So none of these plans are flat in the pure, Forbesian sense, although even Forbes himself isn’t pure these days; he helped write the Perry plan. Both Perry and Gingrich also choose to make their flat systems optional, which means extending the existing code for a significant period of time. The reason for all of these variations is to make tax reform more palatable to voters, of course. The impulse to keep deductions and an option to choose the existing system speaks to the lack of confidence that Republicans have in the consensus for tax reform – or at least reform that takes the flat-rate direction.
They have good reason to worry. Polls show Americans worrying more about income inequality, a predictable outcome in a difficult economic climate. Small wonder that the Republican candidates want to hedge their bets on comprehensive tax reform in more than one way. In this context, going to voters and asking them to endorse a system where they pay the same rate as a wealthy family on income is not going to be an easy sell, which makes the messenger just as important as the plan itself.
A flat personal income tax may end up being too tough to sell, but Republicans might do better in selling a flat corporate tax as the main feature of comprehensive reform. Taxpayers like their own deductions and exemptions, but they despise corporate carve-outs, and not without cause. Although the U.S. has the highest explicit corporate tax rate among free-market nations, we have a corporate tax code filled with loopholes that confers benefits on politically connected companies and imposes competitive disadvantages on the rest. A poorly researched claim by The New York Times that General Electric had no tax liability in 2010 overshadowed the accurate report that GE claimed $3.2 billion in tax credits for the year on a total net income of less than $12 billion, which highlighted the inequality in the corporate tax code.
Too often, larger corporations successfully lobby for tax exemptions and carve-outs that put smaller businesses at a competitive disadvantage. This contributes to the income gap, reduces competition, and ultimately creates economic stagnation. Unfortunately, it also contributes to incumbent job security in Washington. Rep. Ryan explained how tax reform got killed in the early part of the last decade while Republicans controlled Congress, under pressure from the “tax-expenditure lobby,” which Ryan also called “the gauntlet.” When the corporate lobby sensed that their ability to get politicians to manipulate the tax code might be in danger, they quickly used their leverage to end the threat.
If Republicans put corporate-tax code reform at the center of their platform, they might be able to take a “flatter” personal income tax along for the ride. If they feature that as a means to clean up Washington and address the problems of natural wealth distribution, they could end up attracting both Tea Party and some Occupy grassroots to their banner in 2012. The only question would then be whether Republicans in 2013 will stand up to the gauntlet and produce real reform.