Rick Perry has issued an economic plan that has a large tax cut as its centerpiece. The tax cut seems to have been designed so as to enable Perry to say that his proposal is a “flat tax” while also avoiding one of the political disadvantages of the flat tax: the fact that most versions of it would increase tax payments for many millions of people. Perry’s plan holds taxpayers harmless by letting them choose whether to file under the new 20 percent flat tax or the current system.
That flat tax would, like the current system, allow deductions for mortgage interest, charitable contributions, and state and local taxes. That last feature is disappointing: It means that under Perry’s plan, Texans would continue to subsidize the political mistakes of Illinois voters. But the flat tax is in other respects structured well. It eliminates the present system’s bias against saving. It also includes generous personal exemptions that partly offset the current bias against parents.
No detailed analysis of how much revenue the plan would raise has been done, but it seems highly likely that the number would be much lower than under the current system, and lower than Perry’s team is claiming. Governor Perry has already had to put an optimistic gloss on his proposed spending cuts to get his numbers to balance. If his revenue estimates are also too optimistic then the net effect of his proposals will be to make our already precarious budgetary position worse. The personal accounts Perry wants to introduce to Social Security will also make the budget deficit worse for many years, which is a bigger problem now than it would have been a decade ago.
But Perry’s economic plan also includes some real steps forward on spending. Perry has embraced the concept of block-granting Medicaid to the states, which now appears to be a consensus position of the party. More daringly, he says that the age of eligibility for Social Security and perhaps Medicare should be raised. He suggests that he would convert Medicare into a system of payments for senior citizens to purchase the health coverage of their choice, which if properly structured could make for a much more competitive health-care market. Having put forward a plan similar to Rep. Paul Ryan’s, Perry deserves credit for being more specific on entitlement cuts than Governor Romney: but the large tax cut and the personal accounts he advocates also mean he has a higher bar to clear.
Like Romney’s economic plan, Perry’s has nothing to say about housing or the financial industry, and not much to say about health care for young and middle-aged people. On the subjects he has chosen to tackle — taxes, spending, and regulation — Perry wants to go in the right direction: toward less of each.
But his plan reads like a second draft. He has chosen to avoid the political liabilities of a flat tax by forgoing its distinctive advantages of simplicity and low compliance costs. The hybrid tax system he would create would in no important sense be flat, and Perry seems unwilling to spell out the cuts necessary to get spending in rough balance with the amount of revenue it would collect. Republicans should try for something better.