“No Man’s life liberty or property is safe while the legislature is in session”.

- attributed to NY State Judge Gideon Tucker

Thursday, October 27, 2011

Rick Perry's Tax Plan & Tax Reform Scoring

GOP presidential candidate Rick Perry unveiled his tax reform plan earlier this week to mixed reviews.

Conservatives and Republicans appreciate that, regardless of how Perry's plan differs from Herman Cain's, two candidates are now "all in" on promising to send rather substantial tax code reform plans to Congress, should they defeat Wonderboy next November.

Perry's plan, unsurprisingly, is far more timid than Cain's. First, Perry would allow filers to choose which of two approaches- his new postcard-style tax form, or the current 1040, to use. This will not reduce IRS staff and taxpayer effort but, rather, increase it. Much like filing joint or separate, giving taxpayers a choice typically means they must calculate their tax liabilities under both methods. I don't know whether Perry's plan allows the choice each year, or whether, once in the new system, they can't return- pun intended- to the old approach.

Beyond that, the plan lowers tax rates, removes some preference items, but leaves others intact.

It's more complicated than Cain's plan, but at least it's a nod in the direction of doing something more than tinker with only rates.

Of course pundits immediately jumped all over Perry for the 'cost' of the plan. That is, observers are quick to cite one or another of several little-known, presumably-independent think tanks which have ostensibly estimated how much tax revenue the proposal will generate, versus existing revenue collections.

There's a problem with that, however. And a recent Wall Street Journal editorial by Martin Feldstein highlighted it. Depending upon the baseline data used, and assumptions generated from them, new tax rate plans have significantly different impacts on revenue collection.

Feldstein noted how his own analysis of post-1986 tax reform returns demonstrated real behavior change by taxpayers. And, thus how vital it is that dynamic scoring be used for analyzing new tax reform plans. Such scoring, of course, is subject to assumptions regarding how taxpayer behavior will change in response to rate and other changes, i.e., the coefficients which govern how much more money may be earned, and taxed, when rates decline, and vice-versa.

Do any of my readers know which think tanks scored Cain's or Perry's plan? I don't as I sit writing this post. Even if I did, I can't say I'm familiar with the specific methods any of them employ. Do they use dynamic scoring?

Since the CBO, unbelievably, still won't use dynamic scoring, it's unlikely any of the think tanks do, either.

Which is why I basically ignore their claims, and the claims of the candidates based upon the think tank evaluations. Unless, of course, the candidate or the think tank come forward with specific details on the scoring of the tax reform plan.

But here's another angle on these GOP tax reform plans.

Why don't the candidates emphasize that their reforms are what they would propose, but they understand that Congress must actually pass the final legislation. Therefore, they expect Congress to change their plan, and, thus, the scoring will change, too. So there's really little point in getting all excited about the revenue-neutrality scoring of any reform plan that is destined to be changed anyway.

For example, Cain's 9-9-9 plan would almost certainly have an income-level exemption for its sales tax. Who knows what would be done to Perry's more complicated plan?

So why don't these candidates wise up and just acknowledge that their proposals indicate their intentions, but they don't honestly expect the plans to pass Congress unchanged.

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