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POLITICAL CONNECTIONS

Flat Tax 2.0

Can Rick Perry sell the idea any more persuasively than Steve Forbes did? If not, he could be in trouble.

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Pushing a flat tax: Steve Forbes in 1995.(AP Photo/Jack Ainsworth)

The last time a Republican presidential candidate proposed the sort of flat tax that Texas Gov. Rick Perry unveiled this week, the only thing it flattened was his own campaign.

In 1996, magazine publisher Steve Forbes centered his bid for the GOP nomination on a proposal to replace the progressive income tax with a 17 percent single-rate flat tax that erased all deductions and eliminated taxes on all investment income such as capital gains and interest. The idea launched Forbes’s unlikely campaign—and then swiftly deflated it. Perry has clearly shaped his proposal to blunt the political vulnerabilities that hobbled Forbes (who endorsed the Texas governor this week). But in the process, Perry has created some new targets for both the GOP primary and the general election, if he gets that far.

 

Early in the 1996 race, Forbes rocketed to the top of the GOP field behind a self-financed barrage of ads touting the flat tax. But he lost altitude almost as fast when rivals, led by Bob Dole and Lamar Alexander, perforated his plan.

In one raucous Iowa debate, Alexander derided Forbes’s plan as “a truly nutty idea” that would crater the real-estate market and starve charities (by eliminating the mortgage and charitable deductions) while exploding the federal budget deficit. Around that time, a private citizen named Mitt Romney (two years off a failed Senate challenge to Edward Kennedy) bought full-page newspaper ads likewise denouncing Forbes’s plan as “a tax cut for fat cats” because it taxed wages at 17 percent while exempting investment income. Dole then delivered the decisive final blow in New Hampshire, running powerful television ads in which then-Gov. Stephen Merrill, a Republican, charged that Forbes’s plan “increases the deficit and raises our taxes.” Ironically, among the key players in the Dole campaign that shredded the Forbes proposal were David Carney, now Perry’s chief strategist, and Nelson Warfield and Tony Fabrizio, whom he hired this week as senior advisers.

The concerted counterattack undermined the flat tax, even among Republicans. A CNN/Time poll in mid-January 1996 found that although nearly three-fifths of Republicans supported the basic concept of a flat tax, larger percentages opposed eliminating the mortgage and charitable deductions or any tax proposal that increased the federal deficit. Forbes sank with his plan. “When it developed a leak, there was nothing else to support the Forbes candidacy,” says veteran New Hampshire GOP strategist Tom Rath, who backed Alexander then and is with Romney now.

 

Forbes’s failure has shaped Perry’s Flat Tax 2.0. While critics charged that the Forbes approach would raise taxes on the middle class, Perry says that his plan will cut taxes for all earners. And while opponents ripped Forbes’s plan for eliminating the popular deductions for mortgage interest, charitable contributions, and state and local taxes, Perry’s proposal would preserve them for taxpayers earning less than $500,000 annually. Perry would also let taxpayers at any income level choose whether to file under the flat-tax system or the existing one. Carney believes that Perry’s plan will wear better than Forbes’s mostly because of that feature. “It gives people the choice and that is very attractive,” Carney says.

But these fixes carry a price. To maintain more deductions, Perry must tax income at a higher rate (20 percent) than Forbes would have. And requiring people to calculate whether they would save more under the new or old system hardly promotes the simplicity that a flat tax is supposed to provide.

Cutting taxes for everyone also obviously means bigger revenue losses: An analysis conducted for Perry’s campaign concluded that the plan, absent any “dynamic” scoring that assumes faster economic growth, would reduce federal income-tax receipts by $906 billion annually by 2020. (George W. Bush’s tax cuts, for perspective, cost $400 billion annually.) After such a revenue loss, Perry could fulfill his pledge to balance the budget only by reducing federal spending as a share of the economy to its lowest level since 1966—not coincidentally the year Medicare began.

While demanding such spending cuts, Perry’s plan would provide astronomical benefits to the wealthiest taxpayers by reducing their top rate from 35 to 20 percent and eliminating taxes on investment income and estates. And because Perry’s plan provides big write-offs for corporate investment while exempting personal investment income, it remains vulnerable to Romney’s charge from 1996—that it shifts the tax burden from financial capital to labor.

 

After Perry’s stumbles, his team is betting that this proposal will help him recapture GOP primary voters looking to retrench Washington more radically than Romney has proposed. “This is a bolder plan,” Carney justifiably insists. But even longtime supply-side theorist Jeff Bell, the research director for Ronald Reagan’s first presidential campaign, predicts that it will be “very difficult to sustain” support for such a large tax cut amid record deficits. If Perry reaches the general election, his plan inevitably would fuel populist Democratic arguments about inequality. How his Flat Tax 2.0 plays in the Republican primary may depend on whether Romney 2.0 reprises the similarly class-conscious indictment he leveled against the idea in 1996. 

This article appears in the October 29, 2011 edition of National Journal Magazine.

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