Tuesday, October 25, 2011

Rick Perry: Cut, Balance & Grow

GOP Presidential Candidate Governor Rick Perry of Texas released his tax and budget plan today, entitled "Cut, Balance & Grow".  I encourage all my readers to download the PDF from Gov. Perry's website and read the full plan. I'll be citing page numbers from the document below.

The quick hit - what would this do for or to me and my family?

The first evaluation of Gov. Perry's plan I did was how it would have altered my 2010 taxes had the plan already been in force and we opted to file under his 20% flat tax with the simplified tax form. In 2010, we paid taxes with a net effective rate of 14% after all deductions, exemptions, and credits. Under the Perry plan, our taxable income would have been reduced by 41.3% and our federal tax due would have dropped by 16.7%, even with the net higher tax rate of 20% on taxable income. In real dollars and cents, this would have put just over $2,000 back in my family's wallet. On that, I have no complaints whatsoever and just from my own personal financial perspective, the plan looks good.

Nevertheless, my own personal situation does not make this a winner for the Nation. For now, I'm going to mainly analyze the tax provisions. The larger issues such as balancing the budget and entitlement reforms  deserve more attention than I can give now. So, let's look at the nuts and bolts.

Fix the Tax Code (pp. 4-10)

I have been a fan of flat income taxes since I put a "Forbes for President" bumper sticker on my car in 1996. Any plan that flattens the tax code will get my attention, and this is certainly the case with "Cut, Balance & Grow."

Ed Morrissey at Hot Air (among others) questions why Gov. Perry is making the 20% flat personal income tax optional. Since conservatives (generally) take it as a given that the existing tax code is completely broken and should be scrapped, why preserve it at all? Why not transition immediately to a flat tax across the board? I've asked those questions myself, and couldn't think of a premise that makes preserving the current code worthwhile. Perry's plan does make a great point here:
Those families or small business owners who made investment decisions years ago based upon the structure of the existing tax code will have the freedom to remain in the current system if they so choose. (p. 6)
Yes! It is logical to assume that broad tax reform will benefit all taxpayers, but any reform should not penalize those who have done what was necessary under the current system to protect their wealth from legalized governmental theft. I would institute a phase-in period after which the flat tax would be the only system; say seven years, the current statute of limitations on current tax auditing.

Ideally any flat tax proposal has no deductions; the tax is applied equally to all payers. The Perry plan preserves deductions for home mortgage interest paid, state and local taxes, and charitable contributions. I believe that the justifications listed on page 7 of the plan for preserving those deductions are reasonable and valid.
Eliminating the deduction for mortgage interest payments could potentially drive housing prices down even further, while eliminating the deduction for charitable contributions could potentially reduce private funding for non-profits that provide vital services to the less fortunate in the midst of a severe economic downturn. And because interest expenses are taxable when received by the lender, the mortgage interest deduction at the personal level maintains overall tax neutrality for the expenditure. Federal taxpayers should not be punished for tax decisions imposed on them by their state or local governments. Since families are never able to actually use the income they pay in taxes to state and local governments, it makes sense to also retain the deduction for state and local tax payments.
A good, concise explanation. Those provisions also speak to reducing and/or eliminating double-taxation - something I am 100% in favor of. The plan continues by listing a bunch of proposals I can easily get behind:
  • Eliminate tax on Social Security benefits - great deal for our seniors
  • No Federal sales tax or value-added tax - in general, I don't like consumption taxes
  • Eliminate tax on qualified dividends and long-term capital gains - dividends, the investor's share of corporate profits, are taxed once at the corporate level and should not be taxed again. Long term capital gains should be tax free as well to encourage investment and putting wealth back to work.
  • Eliminate the death tax - complete no-brainer. Earned and stored wealth should be able to be passed along to descendants without penalty.
The Perry plan exempts $12,500 per taxpayer or dependent from taxable income. A family of four earning $50,000 would pay no taxes. Hmm. While this goes a long way to supplying the tax benefit I calculated I would have had I been able to use the Perry short form for 2010, I would like to see a plan where all citizens pay some federal income tax, you know, have "skin in the game." I think the exemption as listed is a "get it passed" feature, as imposing taxes on those who are not paying under the current system is problematic politically.

On corporate taxes, Gov. Perry is absolutely correct that our current tax code is a huge weight slowing economic growth. Instituting the 20% flat corporate tax will put the United States on par with competing nations for investment and when coupled with the closing of loopholes and special-interest tax breaks will make America both business and risk-taker friendly. The Federal Government must get out of picking winners and losers in our economy by having our tax code act as a concierge system for the preferred group of the day.

Fix the Federal Regulatory System (pp. 11-13)

Kudos to the Perry team for leveraging the Gibson Guitars situation (p. 12). Everything else in this section I wholeheartedly support, particularly the sunsetting of all regulations unless specifically renewed by the Congress. Our bureaucrats should not be legislating by fiat. My one complaint with the plan in this area is found in Gov. Perry's "Full audit of every regulation passed since 2008." (p. 12) Why stop at 2008? Really, it's not like the Bush 43 Administration was regulation-friendly in lots of cases, to say nothing about the regulatory leviathan that has taken decades to impose. Here, I rely on the Declaration of Independence:
He has created a Multitude of new Offices and sent hither Swarms of Officers to harass our People and eat out their Substance.
Rolling regulations back to 2008 is only a start. Government needs to get out of the way, period. It was a problem in 1776, and that problem persists.

Preserve Social Security/Reform Medicare and Medicaid (pp. 14-18)

I haven't gotten into these sections in depth (may do so in the future) but I agree with the Governor that the retirement age should be raised and that Medicare benefits should be needs tested.

Repeal Job-Killing Legislation (p. 19)

Obamacare, Dodd-Frank, Sarbanes-Oxley all down for the count, and that's all good.

Balance the Budget (pp. 20-24)

My quick read of Gov. Perry's plan views this as embracing "Cut, Cap, and Balance" as was proposed by House conservatives during the debt-ceiling debate over the summer. Capping spending at 18% of GDP - very good. Eliminating the practice of baseline budgeting - not just very good, but very great! Eliminating bailouts - again, government should never pick winners and losers.

But, only $100 billion in cuts the first year? Really? That's all? We need to be much bolder in getting our national fiscal house in order. We're racking up new debt at about $100 billion a month or more. Cutting $100 billion at a time won't get the job done, regardless of economic growth producing new revenues.

My Conclusions

I'll have to analyze the full plan deeper to look for any gotchas, but this on its face would be a win for the American people if enacted. Governor Perry is to be commended for the plan. Will it rejuvenate his candidacy and standing among movement conservatives? Time will tell.

Does this plan put me in the Perry camp? No. Can my vote be bought for a $2,000 tax benefit? No, but it does certainly get my attention. Rick Perry's plan is plainly superior to Herman Cain's 999 Plan in my opinion, and on that, I rank Gov. Perry's value as a candidate higher than Mr. Cain.

I'm also going to have to take a closer look at Newt Gingrich's plan, which shares several elements with that of Governor Perry.

More to come...

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