The Corner

Perry’s Economic Agenda

I basically agree with the editors about the tax and spending reforms that Rick Perry proposed today, but I would emphasize the parts of the plan a little differently and so probably come out a bit more supportive of it than they do. Most commentators have focused on the tax reforms Perry proposed, since those are more detailed than the rest, and since Perry highlighted them more in his speech today. But I think the most important thing about this proposal is actually its entitlement reforms—and especially the fact that Perry has endorsed a premium-support reform of Medicare, which is an absolutely essential reform if we are to have any chance of getting our long-term government finances in order.


But let’s begin at the beginning. In general terms, the Perry plan can be divided into three parts: tax reforms, spending reforms, and regulatory reforms. All three lack some specificity, of course, although for a policy proposal in the primary season I would say the plan is on the whole pretty well articulated. 


The different parts should be analyzed separately, because they vary a good bit in terms of seriousness. It’s easiest to take the regulatory reforms first, since they’re quite standard conservative proposals on that front. Nothing too creative, but all sensible and good ideas: a moratorium on pending rules, an audit of all Obama regulations, automatic sunsets for all regulations, an annual regulatory budget, and a searchable public database of all regulations (which already exists, by the way).

The tax reforms are the most detailed and comprehensive, but they are not quite what they seem. Everything other than the individual income-tax reform is pretty straightforward, and I would say pretty reasonable. The individual income-tax reform, which basically involves an optional 20% flat tax which you could choose in place of the existing income-tax system, is a way of having an easy-to-explain answer to the 9-9-9 mantra in debates, but I’m not sure it’s really a way of reforming the tax code. To begin with, an optional alternative tax is best understood as a maximum tax: You have to assume that most taxpayers would do the math to see how they would do under both options and then choose the one under which they would pay the least, so we might say that Perry’s proposal means that no one would pay more than their tax bill under a 20% rate with the reduced deductions and credits he proposes, and some people would pay less. That’s an improvement over the current code for many people (though most of them have higher incomes), and I also like the large personal exemption, which, as the editors note, would help offset the tax code’s bias against parents. But it doesn’t have many of the benefits that flat-tax proponents generally point to. Above all, it’s not flat—since some people will choose to stay in the current system. It also wouldn’t really reduce compliance costs, because, again, people would be figuring out what they’d pay under both systems—or more likely, they would enter their basic stats into Quicken or Turbotax and be told which way to file. And it could have some trouble raising the level of revenue that Perry says it will raise. The plan says that all of its tax reforms combined will yield revenue at 18% of GDP, but I suspect that is based on a pretty ambitious assumption about economic growth. A plan like this would likely help promote growth, and that’s a strong mark in its favor, but it’s hard to say how much, and it’s a safe bet that revenue would come in well below today’s levels.


That might not be a big problem if Perry proposed serious spending cuts, but on that front the picture is decidedly mixed. The plan sets out an ambitious goal of reducing federal spending to 18% of GDP starting in 2020—which, again, is roughly where Perry says total revenue would be under his plan—and balancing the budget starting in that year. It mentions a few plans (like those proposed by Senator Toomey and by the Heritage Foundation) for reaching such targets, but does not get specific about Perry’s preferred course—noting only that he would  “[work] with committed lawmakers who have put forth detailed and credible budget proposals…and eliminate the federal deficit by 2020.” We’ll need to hear more than that.


But there are some positive hints. The key to meaningful spending reductions, and the only real way to restrain the projected explosion of debt in the coming decades, is getting entitlement costs under control, and the treatment of entitlement reform in this plan is certainly a pleasant surprise. Perry suggests some sensible Social Security reforms—raising the full retirement age, instituting a “blended indexing” approach to cost-of-living increases, letting younger workers contribute some of their earnings toward personal savings accounts—while leaving current retirees and near-retirees as they are. He proposes to use the welfare reform of the 1990s as a model for Medicaid reform, giving states both more control and more responsibility. And most important—very important—he endorses a premium-support reform of Medicare.


Perry also calls for additional means-testing in Medicare and for raising the eligibility age. The former would need to be undertaken carefully (along the lines proposed by Andrew Biggs, to avoid creating a disincentive to work and save), and the latter is far less significant than it seems. The effect of reducing the eligibility age for Medicare is nothing like the effect of doing so in Social Security. Because Social Security is a cash transfer program, raising the age of eligibility gets at the youngest and therefore largest (and therefore most expensive) age cohorts in the system and so can dramatically reduce costs. But Medicare is a health-insurance system, so it spends the vast majority of its money on older people (because they are sicker). Raising the age of eligibility thus increases the average age of the entire Medicare pool while eliminating only the youngest age cohorts in the system—which, despite being the largest are actually basically the least expensive age groups. The savings involved would be pretty small, and the twisted nature of our health-care system (even now, let alone under Obamacare if it is not repealed) means that most of them would just be shifted in ways that would not really save the government much money and would not reduce health-care costs more generally.


So these secondary Medicare reforms are not all that significant. But a fundamental reform of the payment system into a premium-support model, along the general lines of the Ryan budget (or perhaps something like a reform I’ve written about here) would make a huge difference. It’s very significant that Perry has put himself on the side of such reform, which is quickly becoming the standard conservative view of the matter, and rightfully so. If Mitt Romney did the same, rather than voting present on the most significant fiscal challenge our country confronts, he could finally be taken seriously on budget issues too.


On health care beyond Medicare and Medicaid, Perry proposes to repeal Obamacare but doesn’t have much to say on what should replace it. Hopefully that will change with time—I think there are some good ideas to choose from.


On the whole, therefore, the Perry plan is most impressive on the most important fiscal problem we face: the challenge of entitlement reform. It is less so on tax reform, which is also an urgent economic and fiscal priority. It’s very good to see the Republican candidates focusing on policy and laying out proposals for reform that could help the country move beyond the failed liberal welfare state and toward a 21st-century vision of a true opportunity economy with a safety net. This should be the essence of the policy agenda for the general election, and, despite all that it still lacks, Perry’s plan shows that he understands that. That’s encouraging.

Yuval Levin is the director of social, cultural, and constitutional studies at the American Enterprise Institute and the editor of National Affairs.