Wednesday, June 8, 2011

The problem with Pawlenty's flat tax proposal

As I said in my last post, I think Tim Pawlenty's economic proposals yesterday were largely in the right direction.

My biggest problem with the way he would reform the tax code is that it is not bold enough. Pawlenty would replace the current tax code, in which there are six rates, with two: 10% and 25%. For those individuals who make $50,000 and families that make $100,00 and below, they would be taxed 10%. Those above would be taxed at 25%.

Newt calls for one rate: 15%. The advantage of one single rate is that when politicians come calling for more tax revenue so they can spend more money, everyone knows that they will have to chip in. Currently, liberals can go to some voters and say, "Don't worry, that new program will be paid for when we raise taxes on that guy over there, not you." That would not be possible if there was just one rate.

But even then, Pawlenty proposed good policy. But it should not be how conservatives start the tax reform debate. By having an opening position of two rates, once negotiations start in Congress -- where, almost inevitably, the plan will have to be watered down -- it could soon turn into, say, four rates. Which is not much better than what we have now.

With Newt's single rate reform, even if there are not enough votes for it -- read: too many Democrats in the Senate -- and it had to be changed to get enough votes, the "compromise" could be to have two rates. Which is a lot better than the current mess.

So while Pawlenty's plan would be a good ending point, it is not a good strategic beginniing point.

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