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Perry's flat tax: What to watch out for

Remember, our biggest problem is pretax鈥搄obs, income, wages, inequality. And despite rhetoric to the contrary, we can鈥檛 solve that through tax reform.

Went on the Larry Kudlow show to talk about Gov Perry鈥檚 flat tax idea鈥擨 mean, you can鈥檛 call it a proposal yet because鈥�um鈥�there ain鈥檛 one yet (will post clip when it鈥檚 available). But the dude (Perry) is still getting a lift in the media from saying he鈥檚 got a plan. For those who found it just too darn complicated to keep track of all those 9鈥檚 in the other tax plan we鈥檝e been hearing a lot about, this one will simplify it down to one number.

Some issues to keep in mind as this and other such plans come out:

鈥揗ost flat tax plans are basically consumption taxes that share a basic equity problem: compared to what we have today, they tend to shift the tax burden to middle and lower income families鈥�it might not look as regressive as 9-9-9, but unless you start carving out low-income folks, it won鈥檛 look a lot better.

鈥揙nce you start offsetting the regressivity by carving out different income groups or consumption goods (like food or housing) you a) complicate the thing so it鈥檚 not as simple as advertised, and b) lower your base so you鈥檒l have to raise the single, flat rate. The Fair Tax from a few years ago was a version of this, and with a very broad base (they excluded the poor but included everything households bought) they were setting it at around 25%. Larry K, who鈥檇 been on a call with the Perry folks, suggested that the income exemption would stretch up to the middle class, which gives Gov Perry good optics against Cain, but means he鈥檒l need a higher rate for revenue neutrality. (Though I suspect we鈥檒l get a low rate, low revenues, and a bunch of 鈥渄ynamic scoring鈥� rhetoric about how this simple, low rate will magically raise all the revs we need.)

鈥揟he whole tax reform thing is really overplayed. Yes, there are gross complexities and inefficiencies in the current system鈥攁nd btw, such complications can easily be replicated in any , including a flat tax. Our best move would be to simplify our current system鈥攇et rid of loopholes (e.g., deferral of foreign earnings), distortions (favoring of debt financing, special rates for unearned income, some of the large tax expenditures like the mortgage interest deduction), and we鈥檇 be fine.

Remember, our biggest problem is pretax鈥搄obs, income, wages, inequality. And despite rhetoric to the contrary, we can鈥檛 solve that through tax reform (though with plans like 9-9-9, we can make it worse).

This excitement bubble re Gov Perry鈥檚 flat tax is just a variant of the 鈥渨here鈥檚 our white knight?鈥� syndrome that鈥檚 been characteristic or the R鈥檚 search for a candidate. It may provide a sugar high for a fraction of a news cycle, but there鈥檚 not likely to be a lot of 鈥渢here鈥� there.