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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Rick Perry’s MAXTAX vs. Stephen Moore’s MAXTAX



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In the latest Wall Street Journal, Rick Perry offers his tax proposal. It is an embarrassment. Though there is more to Perry’s op-ed, I’ll limit my discussion (for now) to his reform of the personal income tax: 

 

The plan starts with giving Americans a choice between a new, flat tax rate of 20% or their current income tax rate. The new flat tax preserves mortgage interest, charitable and state and local tax exemptions for families earning less than $500,000 annually, and it increases the standard deduction to $12,500 for individuals and dependents.

This simple 20% flat tax will allow Americans to file their taxes on a postcard, saving up to $483 billion in compliance costs. By eliminating the dozens of carve-outs that make the current code so incomprehensible, we will renew incentives for entrepreneurial risk-taking and investment that creates jobs, inspires Americans to work hard and forms the foundation of a strong economy. My plan also abolishes the death tax once and for all, providing needed certainty to American family farms and small businesses.

The claim regarding compliance costs is absurd, as Americans will presumably have to determine their tax liability under the current tax code and under Rick Perry’s new “flat” tax code. Unlike the Hall-Rabushka flat tax, it arbitrarily preserves various exemptions and deductions for households earning less than $500,000. 

Basically, everyone who pays less under the current tax code will choose Door No. 1 and everyone who would pay less under Rick Perry’s new alternative tax code will choose Door No. 2. Rick Perry’s proposal is not a flat tax. Rather, it is an alternative maximum tax or MAXTAX. 

Back in 1996, Stephen Moore, now a member of the Wall Street Journal editorial board, proposed a MAXTAX. Moore’s proposal was in every respect more attractive than Perry’s:

The feature that is missing from the flat tax is the right to choose. If some Americans don’t want to give up the current system, why force them to? Why not allow every taxpayer to choose between the current income tax system or an alternative post maximum tax (MAXTAX) with a flat rate of 25 percent of gross income that could be filled out on a postcard return? Only one deduction would be permitted under the MAXTAX: a credit for the payroll tax paid–7.65 percent for a salaried worker and 15.3 percent for a self-employed worker.

See that? Moore eliminated virtually all exemptions and deductions, leaving only a credit for payroll tax paid. And on top of that, his rate is considerably higher than Perry’s. Moreover, Moore doesn’t pretend that a MAXTAX would eliminate compliance costs. He only claims that it might lower than considerably, perhaps in acknowledgment of the fact that most households would have to compute their liability under both codes.

Essentially, what Perry has done is reverse the Buffett Rule. He has guaranteed that no American will ever pay more than 20 percent of her income in federal taxes. Indeed, affluent homeowners living in high-tax jurisdictions like New York city and Los Angeles earning up $499,000 will likely pay much less than that, as they’ll continue to have access to the mortgage interest, charitable and state and local tax exemptions. Under Moore’s MAXTAX, these households would be treated the same as affluent households in Houston or Palm Beach or Clinton, Iowa who for whatever reason (good sense?) choose to purchase less expensive homes. 

This plan defies credulity. One is reminded of Tim Pawlenty’s tax and spending proposals, released shortly before he dropped out of the race for the Republican presidential nomination. The difference is that Perry has managed to raise a considerable sum of money. One wonders how much of it comes from various friends and allies who have been beneficiaries of the Texas Emerging Technology Fund, and whether the Obama campaign might see fit to mention that fact if Perry does indeed secure the Republican presidential nomination. 

P.S. Some of our readers apparently believe that it is right and appropriate that affluent Manhattanites pay less in federal income taxes than affluent Houstonians earning the same amount of money in any given year. I respectfully disagree. In my view, there is no bedrock conservative principle that states that high-tax states should be rewarded for maintaining a high tax burden, particularly since this tends to facilitate the extraction of rents from immobile taxpayers.



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