November 2011

The Battle for the GOP Presidential Nomination is Bringing Tax Reform Front and Center

By John Hendrickson

Most, if not all, of the Republican presidential candidates seeking the party’s nomination have released or will soon release their economic plans, which will also contain policy recommendations for reforming the nation’s tax code. Larry Kudlow, a columnist and former Reagan administration official, recently wrote that “inside the Republican contest, the policy pendulum is swinging toward a pro-growth agenda.”[1] “With Herman Cain’s 9-9-9 tax plan and the announcement of a Steve Forbes-type flat tax from Governor Rick Perry, the GOP flat-tax reform competition is dominating the headline news,” wrote Kudlow.[2]

Steve Forbes, who ran for the GOP presidential nomination in 1996 and in 2000 campaigning on the flat tax, recently wrote that “the nightmare on Main Street — the federal income tax code — is ending, which is fantastic news for our beleaguered economy.”[3] “Dramatically simplifying this monstrosity would unleash a powerful wave of prosperity and job creation,” noted Forbes.[4]  Although the GOP presidential nomination is offering different economic plans by the various contenders; it reflects the urgent need for tax reform in a troubled economy.

Economic growth is still very slow and unemployment remains at 9.1 percent. Businesses are not hiring because of the uncertainty in economic, spending, tax, and regulatory policy. President Barack Obama’s policies, including his American Jobs Act — which is a replay of his previous policy — have failed to reduce unemployment, or even achieve a level of economic growth that will lead to economic expansion and job creation. In addition, rhetoric offered by President Obama and by other Democrats have not encouraged business leaders, but rather added to the growing sense of uncertainty over the Huey Long-style populist, anti-business rhetoric.

“While Obama stumps for huge tax hikes — on incomes of $200,000 to the millionaire and billionaire level — and demoralizes business and entrepreneurs with his populist attacks on success and risk-taking, the GOP is fast coming up with a much better idea,” argued Kudlow.[5] In other words Republicans are starting to campaign on a return to Reagan-style conservatism, which is not only a message of limited government, but also of economic growth.

The federal tax code, which is only part of the overall economic problem, needs to be reformed by creating a simpler and fair tax structure that encourages economic growth, entrepreneurship, and business expansion. As an example, the United States has one of the highest corporate- income-tax rates at 35 percent, which discourages business in an ever increasingly globalized economy. Policymakers should lower the corporate tax rate to 25 percent, or even consider replacing the tax with another source of government revenue.

Steve Forbes, in an article about the complexity of the federal tax code, recently said:

To put things in perspective: Lincoln’s Gettysburg Address, which defined the character of the American nation, is only 272 words; the Declaration of Independence, 1,500 words; the Constitution with all its amendments, 7, 200 words; and the Bible, which took centuries to put together, 773,000 words. The federal tax code and all its attendant rules and regulations — almost 10 million words and rising.[6]

The leviathan nature of the federal tax code is a root cause of the economic problems that the nation suffers from today, and historically, reducing tax rates has led to periods of economic growth. In the 20th century Presidents Warren G. Harding, Calvin Coolidge, John F. Kennedy, Ronald Reagan, and George W. Bush achieved significant tax reductions, which led to periods of economic growth and prosperity.

Although each of the Republican presidential contenders for the nomination offers different economic and tax-reform policies, they all agree on the urgency to implement significant tax reform. Herman Cain’s 9-9-9 plan, which calls for a 9 percent income tax rate, a 9 percent national sales tax, and a 9 percent corporate tax rate, has led to a national debate over the necessity of overhauling the current tax structure. Achieving any tax reform will be a difficult endeavor, just as with reducing federal spending, tax reform must be a front and center issue. Nevertheless, it is refreshing to see the Republican candidates championing and debating sound economic ideas such as the flat tax. “Cain’s 9-9-9 isn’t perfect. But it embodies key growth incentives along with simplification. Perry’s plan is likely to feature a single tax rate that resembles Forbes’ 17 percent flat tax for individuals and corporations,” noted Kudlow.[7]

The benefits of implementing a flat tax policy, as Forbes wrote:

The flat tax would junk the current code and replace it with a single rate that would apply to all incomes after generous deductions. There would be no tax on your savings and there would be no death tax — you should be allowed to leave the world unmolested by the IRS. The business profit tax would be slashed — all of those poisonous loopholes would be eliminated. You could do your tax return on a single sheet of paper. Under the plan I introduced in the 1990s, for instance, a family of four would have paid no federal income tax on their first $36,000 of income and only 17 cents on the dollar above that level. The flat tax would stimulate risk taking and productivity. Combined with a stable dollar, it would usher in a great economic boom.[8]

And as Kudlow argued:

Add to that widespread agreement among the GOP contenders for strict spending limitations; a regulatory rollback; an unleashing of America’s oil and gas shale revolution; and the likelihood that a Republican president will stop the Federal Reserve from devaluing the dollar and flooding the financial system with an overload of new money. All of the GOP front-runners would replace [Federal Reserve Chairman] Ben Bernanke, and at least Cain and Perry have hinted at re-linking the dollar to gold.[9]

As Kudlow noted it will also take not only reforming the tax code, but reducing spending, eliminating unnecessary regulations, repealing the Patient Protection and Affordable Care Act, and working towards a sound-dollar monetary policy to bring about economic recovery and job creation. “And all of these policies mark a return to Reaganesque principles that rejuvenated free-market capitalism thirty years ago and could ignite an economic-growth surge once again — even amidst all of today’s doom and gloom,” stated Kudlow.[10]

John R. Hendrickson is a Research Analyst at Public Interest Institute. 

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation.  They are brought to you in the interest of a better-informed citizenry.

[1] Lawrence Kudlow, “GOP Pendulum Now Swinging Toward Growth,” Investor’s Business Daily, October 21, 2011, <http://www.investors.com/NewsAndAnalysis/Article/589009/201110211900/GOP-Pendulum-Now-Swinging-Toward-Growth.htm> accessed on October 24, 2011.

[2] Ibid.

[3] Steve Forbes, “Feeling Flat,” New York Post, October 23, 2011, <http://www.nypost.com/p/news/opinion/opedcolumnists/feeling_flat_9DTkeKEYf3TbVpICZyNlhK> accessed on October 24, 2011.

[4] Ibid.

[5] Kudlow.

[6] Forbes.

[7] Kudlow.

[8] Forbes.

[9] Kudlow.

[10] Ibid.