Perry’s New Web Ad Is Out, And An Idea For His Coming Tax Plan

It will be interesting to see how big an impact these Michael Bay-style ads will make in the campaign. They’re definitely powerful and fun to watch.

Quicken the heart rate a little, they do.

The thing is, Perry’s energy plan really is good stuff. It’s a far more realistic and doable idea than Cain’s 9-9-9 plan; outside of Cain there are scant few people who think it’s a good idea to get the federal government into the sales tax business. But Perry will have to sell it; the lefty media will call it nothing more than a re-hash of Drill Here, Drill Now and somehow that will be a bad thing.

Drill Here, Drill Now was a winner in 2008 when it first came on the scene; it was too bad the GOP had a ridiculous, foolish old man with a putrid record on energy as its nominee and he was poorly suited to ride energy to the White House – when you’ve spent your whole Senate career opposing drilling in ANWR out of personal pique with Ted Stevens, for example, it’s a bit difficult to all of a sudden champion domestic energy.

Meantime you’ve got electricity prices higher than ever – in June, the national average was 10.37 cents per kilowatt hour, despite an economy in the toilet (in June 2007, when the economy was doing well, the average was 9.45 cents). Jack electric rates up 10 percent and you’ll find it’s a devastating effect on American manufacturing, not to mention it will sap disposable household income and move that out of the productive economy.

And while this is going on we are now exporting more coal to China than ever before. The Chinese are using far more coal than any country in the world, and because of that they’ve got a competitive advantage because their energy costs are less than ours.

If you want to talk about getting the economy going, the key word is competitiveness. America’s economy is not competitive with the people on the planet who are serious about getting rich. Our energy policy is a joke and our corporate tax rate is the highest in the world.

Perry is showing that he’s an adult when it comes to energy – far more so than either of his main GOP rivals. Mitt Romney still believes in anthropogenic global warming, which should disqualify him as the Republican nominee, and while Cain does recognize the importance of domestic energy production he hasn’t put forth a plan even remotely as detailed as the one Perry is currently touting.

What Perry needs to do as he continues putting out his economic program is address the tax issue. Cain’s 9-9-9 plan has some cache’ largely because of the first two “9’s” – flat, low taxes with less deductions – address the public’s demand for tax reform and tax simplification and the GOP electorate’s desire for a broader and less redistributive tax system.

Of course, as Peter Schiff notes, Cain’s plan actually contains a fourth “9” – because while Cain says the burden on lower-income workers from a 9-percent federal sales tax will be offset by doing away with the payroll tax, what he’s actually doing on the corporate side is to do away with writing off wages and salaries against corporate income and that actually creates a hidden 9 percent payroll tax. Schiff explains further, in what is actually a friendly column about the economic effects of 9-9-9…

Cain would replace the current system of income and payroll taxes with a 9% flat-rate personal income tax, a 9% corporate tax, and a 9% national sales tax. Great idea. Such a system would unburden businesses, provide a tax cut for most Americans, and shift taxation to consumption and away from income generation. This is exactly what our economy needs. But unlike our current corporate tax system, the plan eliminates the deductibility of wages and salaries from corporate income. The net effect is the creation of a brand new 9% tax on wages. When this fourth 9 falls from Cain’s sleeve, many of his opponents will likely accuse him of cheating.

Perry can build on the positive parts of 9-9-9 while tossing the lousy parts.

What would be a lot more workable would be to embrace something like a 20 percent individual flat tax which applies to the first $5,000 of earnings (in other words, everybody has to pay at least $1,000 a year in income taxes) and then builds an exemption for the next $25,000 or so – or perhaps more depending on how many dependents are in the taxpayer’s household. That way we no longer have the problem of 47 percent of the public not paying any taxes, but rates are extremely low for most Americans.

Let’s do some numbers.

Let’s say that we’ll tax the first $5,000 in income at 20 percent, generating $1,000 in income tax from everybody who works. Then we’ll give a $25,000 exemption, plus $5,000 for each dependent.

The median American household income in 2009 was right at $50,000 a year with an average of 2.6 people in that household. That would mean an average of 1.6 dependents per breadwinner, so that would mean the average exemption would be $33,000 – the original $25,000 exemption, plus $8,000 for 1.6 dependents.

And that would mean we’re taxing that median $50,000 in household income $3,400 – which is 20 percent of $17,000 in taxable income. At $3,400 of 50K a year, you’re paying 6.8 percent in income taxes with no deductions.

SmartMoney.com has a pretty good tax calculator which you can use to assess current rates, and for a head of household with $50,000 in taxable income the tax bill is $7,268, or 14.54 percent. Except that few people actually pay that rate. Let’s remember that the effective tax rate with all the deductions thrown in (based on 2008 figures) is just 2.59 percent for the bottom 50 percent of taxpayers and 6.75 percent for taxpayers ranking from the second 25 percent.

Eliminating deductions and having a lower rate is at least revenue neutral.

Are we taxing poor people more with a flat tax? Well, we’re taxing them $1,000 – so that’s more. But there are practically zero compliance costs, so middle class folks would obviously like this system.

Will the rich? Probably not. Without deductions you’re going to pay 20 percent of everything you make in income (though if we got rid of the capital gains tax there wouldn’t be any taxes on investors’ ability to create jobs, and the Warren Buffet types would cry their eyes dry with crocodile tears), so that money you’d spend on your lawyer and your accountant in trying to hide from the IRS would probably be spent trying to make good investments.

China has no capital gains tax. China is a communist country, and they have no capital gains tax. We have a capital gains tax. Don’t tell me we need to have one.

We WANT rich people to invest their money. When they invest it, jobs get created and the middle class grows. When they hang on to it, or invest it in tax dodges, or invest it overseas, the middle class gets squat.

And by having a 20 percent income tax with no deductions together with a zero percent capital gains tax, you incentivize rich folks to invest as much of their money as possible into our economic growth. Or to structure their compensation packages as much as possible to favor variable and performance-based pay, which is a good idea for all kinds of reasons.

If this wouldn’t generate more tax revenue, it would be a surprise. You get more money on the bottom end – the size of the household you’d have to have in order for that $1,000 in minimum taxes to go below the 2.59 percent in effective tax rate the bottom 50 percent currently pays would be extremely rare – and a whole lot more on the top. And you’re doing so while greatly incentivizing savings and investment which would grow the economy.

But most of all, you’re no longer picking winners and losers in the economy. The federal government can get out of the housing industry altogether under this tax plan; which it should, considering that federal meddling has thoroughly destroyed the industry with its current policies. Folks can take out a mortgage on a house if they want, and with effective tax rates a lot lower for the middle class the take-home pay to do so will still be there, but no longer will they be incentivized to buy more house than they need to (which was a big piece of why the housing bubble was built in the first place).

A plan like this just makes a lot more sense than 9-9-9. If Perry would marry something like this to his already-strong energy strategy, his comeback in the polls would be quite likely indeed.

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