A tax reform fairy tale

Tax reform proposals are the political equivalent of science fiction: entertaining but imaginary. No tax proposal ever passes through Congress unscathed. There are too many interests that believe their survival depends on tax preferences — hence the tax code’s immutable tendency to accumulate complexities as a ship collects barnacles.

Still, presidential candidates’ tax proposals are useful windows into their philosophies. Should income taxes on the wealthy go up or down? Should income from investments be taxed at a different rate than income from labor? And should “tax reform,� a goal everyone embraces, be used as a tool to shrink the federal government or to increase revenues?

This year’s GOP presidential candidates have offered three markedly different approaches to the issue — a reflection, in effect, of three distinct temperaments. One, from Mitt Romney, is cautious and incremental. A second, from Herman Cain, is radical and impulsive. A third, from Rick Perry, is in-between: a plan that proclaims itself radical but turns out, on closer inspection, to be a mix of radical rhetoric and pragmatic calculation.

Romney’s proposal came first, in September, when he tried to establish himself as the most serious GOP candidate by issuing a 160-page, 59-point economic program. Romney’s plan would essentially maintain the current system, including the tax cuts enacted under President George W. Bush, but would eliminate capital gains taxes — taxes oninvestments and savings income — for taxpayers with adjusted gross incomes below $200,000. Eventually, Romney said, he’d seek “a conservative overhaul of the tax system that includes lower and flatter rates.� Other candidates, vying for support from the tea party, have offered plans that would remake the system entirely. The most eye-catching comes from Herman Cain, the former pizza magnate, who has trumpeted a “9-9-9� plan: a 9% income tax, a 9% corporate tax and a 9% national sales tax. When voters noticed that the burden would fall disproportionately on low-income families, Cain cheerfully offered to exempt the poor from income tax — and made no real attempt to calculate the impact of that change on the federal budget, as if the numbers didn’t really matter.

Almost unnoticed has been Cain’s ultimate goal: to eliminate income tax entirely and replace it with a federal sales tax of 23% or more. That’s a utopian proposal that has been rattling around conservative circles for years, but it’s got a long road to travel before voters — not to mention retailers — will support it.

Finally, last week, came Rick Perry, with a cluttered version of the perennial flat tax idea. Perry’s plan offers taxpayers a choice: Either stick with your current tax rate, or opt for a 20% flat tax. But unlike most flat tax proponents, Perry has no regard for simplicity. His plan would keep deductions for mortgage interest, charitable contributions and state and local taxes. It would exempt Social Security benefits from taxation. Worst of all, it would force many taxpayers to calculate their taxes twice, to find out which system is cheaper. Still, as a purely political exercise, it has something for everyone — especially the wealthy, who would see their taxes go down.

For all their differences, these plans have premises in common. They approach taxation not so much as a way to pay for the necessary functions of government, but (in Romney’s words) as “an instrument for promoting economic growth.� They share the bedrock conservative faith that lower taxes are a better way to stimulate economic activity than direct government intervention.

They all reject President Obama’s argument that the Bush tax cuts went too far and that, to reduce the federal deficit, taxes should be raised on households making more than $250,000 a year. Instead, they all reduce federal revenue — unless the miracle of supply-side economics happens and increases revenue through greater prosperity.

They all include new tax cuts for the wealthy — Perry and Cain by reducing tax rates, Romney by eliminating the estate tax.

They would all eliminate taxes on capital gains — although Romney would extend that tax cut only to taxpayers who make less than $200,000 a year, a break point that makes him look uncomfortably like Obama. (The former Massachusetts governor explained this apparent apostasy by saying the rich “are doing just fine,� and “the very poor have a safety net.� “The people in the middle … are the people who need a break,� he said.)

Perhaps most important, they all see their tax proposals as serving a much larger aim: to cut federal government spending.

Romney says he would seek an immediately cut of $20 billion in federal spending and would aim to reduce federal spending to 20% of gross domestic product, down from the current level of about 24%. Perry, in another feat of one-upmanship, says he would seek immediate cuts of $100 billion and reduce spending to 18% of GDP, a cut of about one-fourth. (It hasn’t been that low since the boom years of 2000 and 2001 — before recessions, tax cuts and baby boomer retirements.) Cain hasn’t offered a specific target, but he’s left little doubt where his heart lies. “Government must get off our backs, out of our pockets and out of the way,� he says. “Nothing should be off the table.�

Where would they impose these spending cuts? For the most part, they haven’t said. But there are only two places in the federal budget that are big enough to enable cuts that large. One is defense spending — but Romney, Perry and Cain have all said they don’t want to cut there. That leaves “entitlements� — Medicare, Medicaid and Social Security. What the candidates would do to reduce the cost of those programs may be the most important issue in this campaign. But that’s a subject for another column.

[email protected]