Perry Tax Plan Makes Little to No Sense

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- Seeking to jumpstart his flagging campaign and establish his pro-growth and fiscal responsibility credentials, Governor Rick Perry is unveiling a tax plan that will not jumpstart the economy and is fiscally irresponsible.

In a nutshell, Mr. Perry would give taxpayers a choice between filing under the current income tax system -- with all its flaws -- and an alternative flat tax 20% system. Under the latter, families could maintain their mortgage deductions if they earn less than $500,000, which is about 99% of taxpayers, and could declare exemptions of $12,500 for each family member.
Texas Gov. Rick Perry

It seems appealing -- a simplified tax system, fewer IRS agents, and so forth. But the plan falls short in two important respects -- it won't encourage many better investment decisions and foster growth, and it will spin the federal deficit permanently into the stratosphere.

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Wealthy Unaffected

The whole purpose of a flat tax is to encourage individuals and corporations to invest more in sound business opportunities, instead of prospecting for tax breaks by buying homes bigger than they need or spending on government hobby horse projects like solar panels. However, by giving taxpayers the option of filing under the old system, the Perry plan will encourage the wealthy and near-wealthy to continue prospecting for loopholes and credits -- most of those folks don't pay 20% now, so don't count on them to volunteer.

True, the well-off face a higher alternative minimum tax of 26% to 28%, but the wealthy have lots of tricks, provided by the tax code, for postponing or avoiding realizing income altogether. Ditto corporations like GE that hardly pays tax at all.

About 42% of individuals pay no income taxes right now -- and those folks are also not likely to opt for Mr. Perry's 20% plan. In general, those that choose the Perry idea will do so only if it means they can pay less. Hence, the Perry plan will raise considerably less revenue than the present system, unless it can boost economic growth and the tax base.

It won't increase the base, though it might provide a bit of Keynesian stimulus through even lower taxes for some upper-middle class folks - those who get most of their income from wages or professional services (doctors, lawyers and talk-show personalities) and are caught by the alternative minimum. As I recall Perry has declared Keynesian economics is dead; to get the growth Perry claims, he will have to resurrect old Lord Keynes. Having seen the consequences of the Clinton and Obama post-crisis tax holidays, I am skeptical about such powers.

With less revenue in hand, Perry proposes slashing government spending to 18% of GDP -- that would require $900 billion in annual spending cuts, when the Congress is having trouble agreeing on an additional $100 billion.

Such cuts are possible by increasing the retirement age to 70 and slashing Medicare and Medicare spending and gutting the defense budget.

If Mr. Perry wants to slash taxes fine but let's go to a real flat tax and tell Americans how he is going to tame the monster that ate Washington -- escalating health care spending -- and rationalize social security and defense spending.

Republicans need a responsible standard bearer after President Obama has recklessly spent the country broke with little more to show than 9-plus percent unemployment.

After examining Mr. Perry for the job, all I can say is next applicant please.

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Professor Peter Morici, of the Robert H. Smith School of Business at the University of Maryland, is a recognized expert on economic policy and international economics. Prior to joining the university, he served as director of the Office of Economics at the U.S. International Trade Commission. He is the author of 18 books and monographs and has published widely in leading public policy and business journals, including the Harvard Business Review and Foreign Policy. Morici has lectured and offered executive programs at more than 100 institutions, including Columbia University, the Harvard Business School and Oxford University. His views are frequently featured on CNN, CBS, BBC, FOX, ABC, CNBC, NPR, NPB and national broadcast networks around the world.

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