When Gov. Rick Perry was told that his radical tax plan would be a huge windfall for the rich, he said, “I don’t care about that.”
How voters will react remains to be seen.
Gov. Perry proposed a flat 20 percent tax on personal and corporate income — down from top rates of 35 percent in each case. He also would repeal the taxes on dividends, estates and long term capital gains. He would maintain popular deductions for families making less than $500,000 a year and eliminate taxes on Social Security income.
Taxpayers would have the option of sticking with their present rate. The standard deduction would increase to $12,500 for individuals and their dependents, so a family of four would pay no income tax if they earned $50,000 or less.
Federal spending would be capped at 18 percent of the gross national income, allowing the budget to be balanced by 2020. Social Security would be changed to a system of individual retirement accounts eventually.
Perry put his plan together with the help of Steve Forbes, the multi-millionaire who proposed a flat tax of 17 percent when he ran for the Republican nomination in 1996 — and was soundly trounced. Forbes finds Perry’s plan “exciting.”
By the time this appears, budget experts will have run the Perry plan through their models and will be able to report how it would affect each earner group. Administration spokesmen predictably said it would shift the tax burden to the middle class.
As outlined by the governor, it almost certainly would bring in far less income and push the deficit far higher.
Gov. Perry says he doesn’t care how much richer his plan would make the rich. What he cares about, he says, is leaving dollars with the rich so they can invest them in job-creating businesses.
There is one big hole in this theory: investors don’t create businesses unless there is a market for what those businesses would produce. One of the anomalies in today’s recession is that U.S. corporations are sitting on hordes of cash, which they are not investing in expansion of their businesses or in purchasing other businesses. They are not hiring because there is no market for what additional workers would produce.
Gov. Perry believes that letting the very rich, who already control 40 percent of the nation’s wealth, get even richer would “put America back to work again” by increasing the amount of money in private hands, which would be available to expand the economy.
The way to test this theory is to discover how many jobs these “job-creators” are now creating. The current tax structure has allowed them to amass immense fortunes. It is reasonable to suppose that Warren Buffett, et al, have created all of the jobs that they thought it wise to create.
In sum, business is slow because the demand for goods and services is being met and is not rising fast enough to tempt entrepreneurs to invest.
THERE IS ANOTHER glaring weakness in the Perry plan. Capping federal spending at 18 percent of GNP would require very large reductions in federal spending. Before you burst into cheers, consider: every federal dollar “saved” is a dollar taken out of the economy. Taking dollars out of the economy reduces demand for goods and services, which kills jobs. Because tax revenues at the state and local level have dropped, state and local governments have reduced their work forces by about 400,000 in the past few years. That is one of the consequences of smaller government.
Let it also be recognized that repealing taxes on dividends, inheritances and long term capital gains are all gifts to the upper 5 percent of today’s families. The wealthy own almost all of the dividend-producing stocks that are not owned by pension plans of one variety or another. The inheritance tax today only applies to estates above $3.5 million. The Allen Countians who would pay the tax if their folks died tomorrow would fit comfortably into almost any of that cohort’s living rooms. Long-term capital gains affect those who pile up wealth in the form of stocks and real estate. That’s why they are called Mr. and Mrs. Gotrocks. It is specious to argue that they would go out and start job-creating businesses if they didn’t have to pay taxes on the gains they realized from a sale.
Mr. Perry said in answer to a direct question that he did not believe in the progressive income tax that has been in place since before World War I (when the top rate rose to over 70 percent) and was in the 70s in the Great Depression. He doesn’t think that the ability to pay should be a factor in setting tax rates.
Buy Mr. Texas and that’s what you’ll get.
— Emerson Lynn, jr.
