The Battle of the Tax Reform Plans Begins

I have little respect for Flatheads – you know, the Steve Forbes and and Herman Cains of the world, people who believe Americans are so frustrated with the complexity and corruption of our tax code that they can sell an even worse version simply because there will be less math involved.   But simplification - not simplicity - I’m down with. Yesterday’s strategic leak of Tim Geithner’s “thinking” on tax reform to the New York Times marked the start of a new phase of the 2012 campaign, with Newt Romtorum promising a counter volley during the Michigan primary. Get your popcorn, wake up the kids: The Battle of the Tax Reform Plans is about to begin. It is worthwhile, then, considering how the tax reform has played in recent campaigns. First, aforementioned the Flatheads:   Steve Forbes famous “Flat Tax” – first unsheathed in his 1996 bid to buy the presidency – would keep the first $33,000 of income tax except, then levy a 17 percent tax on all other corporate and individual income (capital gains and inheritance taxes being cast onto the ash bin of history).   Rick Perry, famous for his original thinking, essentially purloined this as his own plan for his 2010 satirical campaign, with predictable results, since by anyone’s accounting, even Donald Trump’s, the Flat Tax plan puts the United States on the road to Greece.   Herman Cain, at least, put a new twist on it: 9-9-9 would have levied a 9 percent tax on business transactions, 9 percent on income, and slapped a new 9 percent federal sales tax on consumer purchases.   The bet here is that the electorate would focus on the fact that they would only be paying 9 percent of their income to the IRS, and possibly confuse the new 9 percent federal sales tax with a minor increase to the existing sales tax they pay. But that, of course, is a state tax – it’s 6.35% in Connecticut, 4% in Georgia, 6% in Idaho, etc. etc … the 9 percent is on top of the current levy, and would, in effect, mean yet another enormous transfer of the national tax burden onto the backs of people making less than 100,000 a year – let’s call them the 99.9 percent. I say, “nein, nein, nein.”   GOP primary voters, amazingly since they would have been prime targets of the hare brained scheme, seemed to be saying “ja, ja, ja!” – that is, until another bit of arithmetic intervened: 1.   One is the number of women, other than your wife, who can accuse you of sleeping with her before your campaign implodes. (This is the Clinton Principle; the number of women increases by a factor of 1 once in office, and by an additional 1 for each ten-percentage points the president’s approval ratings stand above 50 percent. That’s the Oval Office Corollary).   As anyone who knows me will tell you, I’m all about facing less math, having written my way out of school and into a host of jobs. But math is a fact of life, and love it, like it or not, America’s salvation when it comes to fiscal policy.   So let’s talk sense for a moment. We’re getting very close to the day when Democrats will have to stop pretending that the Republican Party is going to forfeit the election this time around, as much as it has seemed possible at time (like, for instance, right now). Romney still seems the likely default candidate to me, with Rick Santorum is the Catholic second coming of Barry Goldwater – sometimes interesting, always fervent and controversial, but a miserable choice for a national standard bearer.   The GOP must know that, right?   That leaves Romney v Obama. For all the talk of the need for a deficit reduction plan, a reform of the American tax code really is a prerequisite. The tax code is the fuel system of government and its lines and hoses have been spliced and redirected so many times since the last reform, the Tax Reform Act of 1986, that it has no logical fiscal, economic or philosophical consistency. It’s merely a collection of favors and blackmail payments made to lobbyists and House members in the years since Bill Bradley, then a US Senator from New Jersey, and Ronald Reagan, then a president from Hollywood, hacked through the existing mess with a machete.      The focus of Obama’s (read: Geithner’s) plans to date has been the corporate tax – the plan leaked to the Times suggests a 28 percent rate (down from 35 percent), with incentives that could drop that to 25 percent for the manufacturing sector.   This is a smart political tack for a variety of reasons. First, this will be a move even the GOP House will have trouble resisting – supported as it is by the US Chamber of Commerce and a host of other business interests. Secondly, it will highlight the pragmatic side of Obama, perhaps angering some on the left of his base, but more importantly appealing to the great American middle – the real prize in any US presidential election.   With the revelations that General Electric in 2010 not only brought ‘good things to light’ but also avoided paying a single dime of tax – all while earning whopping profits and standing as the country’s largest manufacturing company – it will not be hard to counter claims that corporate America is overtaxed. This Center for Budget and Policy Priorities chart provides added perspective:

  In fact, far from being overtaxed, corporate America is incompetently taxed, which is worse. Corporations have loopholes galore to shelter their revenues, but they also face a perverse and ever changing set of priorities and incentives that doesn’t always cause them to act in a way that is best for either business or the larger economy. (For a tremendous primer on the difference between over-taxation and over regulation – the latter being an absolute evil – see the Economist’s recent special report. You can still be in favor of financial reform or Obama’s health care plan and be shocked at the inane implementation of both. To wit: “Next year the number of federally mandated categories of illness and injury for which hospitals may claim reimbursement will rise from 18,000 to 140,000. There are nine codes relating to injuries caused by parrots, and three relating to burns from flaming water-skis.” That’s just good stuff, huh? But watch carefully over the next week. The Obama corporate tax leak provided no information on how personal income tax rates would be affected by a White House-led overhaul. We know about the Buffett rule (mostly politics, if also justice); we know the president wants the Bush tax cuts eliminate for anyone not making $1 million a year (or is it still $250,000? It is not at all clear).   But the red meat in any tax plan is how to graduate rates. At what income level do people begin paying, and at what rate? How many rate gradations will there be? Will home mortgage interest deductions survive (I say definitely yes)? Will there be a credit for sending a child to college? Incentives to give to charity? A capital gains tax hike? No real clarity from 1600 Pennsylvania Avenue (or from his neighbor, Tim, next door) on these questions.   Romney’s own plan remains inchoate, too. He wants a 25 percent corporate tax and an end to capital gains taxes of any kind for people making under $200,000. But he hasn’t explained how that prevents adding to the deficit (a bipartisan study by Congress’ the joint committee on taxation found that rates under 28 percent begin to add to the deficit).   So far, Romney’s eye is on Tea Party votes, not fiscal soundness, though he is said to be planning to put some skin on these rickety bones before Michigan votes next Tuesday.
  Santorum, for his part, would cut capital gains from 15 percent to 12, create a two-their system (10 percent for poorer folks, 28 percent for the rest) and, presumably, cut government spending with the sword of the Archangel Michael.   Athens, here we come!   Michael Moran is Director and Editor-in-Chief of Renaissance Insights, at Renaissance Capital, the emerging markets investment bank. Follow him as @TheUnraveler on Twitter, subscribe to his Facebook feed, or preorder his book, “The Reckoning: Debt, Democracy and the Future of American Power,” coming in April from Palgrave Macmillan.