Time for the Flat Tax?

Herman Cain has his 9-9-9 plan (now changed to 9-0-9); Mitt Romney has his 59 point economic plan; now Republican presidential candidate Rick Perry will outline his flat tax proposal to the nation on Tuesday. CNBC reporter Larry Kudlow had a chance to preview it, as did other economists.

Would it be a boon to the economy? Would it help create jobs and slash the deficit vs. the other plans? The economists like what they see.

On Kudlow’s WABC radio show yesterday, he discussed, with fellow economists James Glassman and David Malpass, the virtues of the flat tax vs. 9-0-9. They agreed that with the Cain plan there would be a compliance problem with a high national and state sales tax approaching 20% in some states (like Tennessee). In addition, a national sales tax would mean the 16th amendment would have to be repealed. The unintended consequences to the American taxpayer could be immense. For instance, under Nixon, many applauded the wage controls he instituted. But when wage and price controls followed, it was damaging.

The flat tax, by contrast, “works every time,” according to Glassman. “Countries in Europe that have taken to it are better off. If countries like Greece prohibited the VAT tax and went to a flat one, you’d solve their problems,” he says. “All the money that has been hidden elsewhere would be put back into Greece.”

Steve Forbes, a former presidential candidate and flat tax proponent, joined Kudlow to discuss it. “Perry’s people are still putting the final touches on it,” Forbes said. “It has generous exemptions for adults and children, the corporate rate and personal rate will be slashed, and Social Security won’t be taxed. It’s a huge step in the right direction for simplifying the code, one the American people will be able to understand.”

Forbes touted three results a flat tax would bring about. “First, it reduces the price of risk taking, productivity rate and success by having a low marginal risk. Secondly, it vastly releases brain power for other purposes. The IRS says we spend 6.5 billion hours in tax returns at a cost of about $483 billion, with more than $200 spent per person. And third, it reduces political corruption through lobbying the tax code. A flat tax would be taxed once and only once at the source.”

Later Forbes joined a forum on David Asman’s Fox Business show to talk more about the benefits of the flat tax.

He noted that 25 countries have gone to a flat tax, including Russia, Estonia and Lithuania. In Hong Kong, the tax rate has been put at 15%.

Publisher Rich Karlgaard said that “at the 15-20% range you get the most revenue with the least amount of damage to prosperity and that’s the magic place you want to be because the economy grows fastest at that rate.” National editor Mike Ozanian said “after the marginal rates were lowered in the 80s, the top 10% of earners paid a higher percentage of overall taxes to the U.S. Treasury.You won’t have corporations setting up phony offshore trusts to hide revenue. It’s going to simplify things. It will generate more revenue.”

Elizabeth MacDonald of Fox Business chimed in “we’re stuck with a tax code that makes War and Peace read like a church pamphlet.” Perry has promised a code that is simple enough for even Treasury Secretary Tim Geithner to do. Unlike Cain’s plan, it does not add another layer of taxation to our already tax heavy code.

Will the flat tax hurt the poor? Forbes said that the first $37,000 earned is exempt from any taxation in Perry’s plan.

Can it really cut out special interest lobbying? Forbes says yes. “You remove a huge source of power. The power to tax is the power to destroy and the power to bestow favors. Since 1986, the tax code has been amended 14,000 times (to insert special benefits to groups). This beast has got to be killed, drive a stake through the beast, bury it and never let it rise again.”

Ozanian added “If you’re worried about government spending, the flat tax helps here, too, because right now 47% of Americans pay no income tax, so anything the government proposes is free. In other words, more government spending and borrowing, they automatically vote for it because they’re not taxed on it.”

Kudlow had mentioned that the whole tax issue “is really a battle over whether we punish or reward success.” Forbes pointed to Steve Jobs. “The thing Obama doesn’t understand that success means other people’s success. Steve Jobs’ success meant millions of other people found success, too.”

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