At first glance, Governor Rick Perry’s plan for a federal flat tax seems way cool. Our personal income tax is a horrific, inefficient, inequitable, complex monstrosity that drives anyone without the simplest finances nuts. I’d love to stop wasting four days a year preparing my return.
Problem is, the attractions of Perry’s plan come with a big downside: We’d be ripping off our own children.
Let’s start with the benefits. The whole tax return would fit on a postcard. All I need to do is add up my income, subtract exemptions, mortgage interest, state taxes, charitable contributions, capital gains and dividends, and then multiply by 20 percent. What’s more, if my taxes calculated the new way prove higher than calculated the old way, I can opt to pay under the current system.
The plan would also broaden the tax base and could lower marginal rates, thereby improving incentives to work and save. This would be very welcome. If you combine all our tax-transfer programs, both federal and state, it turns out that almost all Americans are paying from 35 percent to 45 percent of every extra dollar earned, net of additional transfer payments received. For most Americans, the decision to postpone consumption -- meaning to save -- comes at a 20 percent cost, thanks to our taxes on capital income.
Simplicity Versus Fairness
But simplicity and improved incentives can’t substitute for fairness. In Perry’s case, the issue is fairness across generations. As opposed to Herman Cain’s 9-9-9 plan, and to my Purple Tax plan, Perry proposes no levies on added value or retail sales, both of which implicitly tax wealth. He’s also eliminating all taxes on dividends, capital gains and Social Security benefits.
Who owns wealth in this country? Who receives capital gains and dividends? Who collects Social Security benefits? The answer is the elderly, particularly the rich elderly. Unless I’m missing something, Perry’s tax will eliminate completely any tax liability that Warren Buffett faces, assuming he retires and stops earning money from working.
Generationally speaking, this shifts the unavoidable burden of paying the government’s bills. If current older folks pay less, then middle-aged, young and future generations will have to pay more. This is true even if the economy improves. Whatever oldsters don’t pay, youngsters must pay.
Governor Perry’s advisers might counter that Buffett indirectly pays corporate taxes, and that levying his dividends and capital gains at the personal level constitutes double taxation. This argument has weak legs. Corporations can locate anywhere in the world. They move abroad when corporate taxes are raised, leaving workers with fewer jobs and lower wages. Hence, the corporate income tax is really just another tax on workers, not on owners of corporations, such as Mr. Buffett.
What’s more, Perry’s proposal cuts the corporate-tax rate to 20 percent, and eliminates levies on profits earned abroad. This means Buffett can get a tax break if he keeps his company here (assuming owners do bear some of the corporate tax), or he can move his company headquarters to an offshore island and live a tax-free life. How wonderful for Buffett.
But as Buffett would be the first to shout, this is a massive generational rip-off. We can’t give a tax pass to older generations. The government’s long-term bills are astronomical. As of today, we’re facing a $211 trillion shortfall on all our future obligations. Not only do the elderly and rich need to pay higher taxes, they also need to live with slower-growing government health-care benefits.
Postwar U.S. history is marked by ever-larger redistribution from the young to the old. The government has cut taxes paid primarily by the elderly and given them much larger Social Security, Medicare and Medicaid benefits. This policy has driven down our nation’s rates of saving, net domestic investment and real wage growth. Saving pays for investment, and investment makes workers more productive. But when you take from young savers and give to old spenders (and our oldsters have the highest propensity to consume of any age group), you get what we’ve got.
Am I being too tough on Mr. Perry? After all, he’s also planning to cut back on entitlement spending, most of which goes to the elderly. Yes, but those cuts would be phased in, leaving today’s elderly unaffected. So whose benefits will be cut?
You got it -- the young’s.
(Laurence J. Kotlikoff, a professor of economics at Boston University, is a Bloomberg View columnist. The opinions expressed are his own.)
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