The tax plans from Rick Perry and Herman Cain would make millionaires vastly richer while raising taxes on the middle class. It's voodoo economics gift-wrapped for rich voters.
Republican presidential candidates are falling over themselves promising to cut your taxes. Well, probably not your taxes. Somebody else's taxes. Somebody rich.
First there was Herman Cain's 9-9-9 plan, which would replace all of our current taxes with a 9 percent national sales tax, a 9 percent "business tax" and a 9 percent tax on income. Now Rick Perry says that his 20 percent "flat tax" is even better. Meanwhile, Michele Bachmann says Perry stole her idea. But let's be clear: These are massive tax cuts for the rich, not for most of us.
The Cain 9-9-9 plan is breathtaking. The poorest Americans would see their effective tax rate increase from about 5 percent to 18 percent. The typical household would pay $4,000 more than today. But the top 0.1 percent would get an average tax cut of $1.4 million and would pay an effective tax rate of 18 percent--lower than any other income group. That a plan so insane could be proposed by a leading presidential candidate just shows how crazy our political system has become. Although Perry's flat tax preserves the tax code for most families, he offers a special tax cut for the rich. A retired couple making $700,000 would be $75,000 richer under his plan. (To see a very tall graphical representation of Perry and Cain's tax plans, see Derek Thompson's charts.)
Poll after poll says that most Americans want to raise taxes on the rich. In one recent survey, more than two-thirds of respondents -- and even a majority of Republicans! -- favored higher taxes on households making more than $250,000 per year. Why are people who want to be elected president proposing the exact opposite of what the people want?
The most charitable answer is that they think lower taxes are good for the country. Reducing taxes on the rich would make them work harder, save more, and promote economic growth. This is the theory George H.W. Bush once called "voodoo economics," and 30 years later, it's still voodoo.
TAXES AND GROWTH: THE NON-RELATIONSHIP
There is no historical relationship between marginal income tax rates and economic growth. In the 40 years after World War II ended, the top rate ranged from 50 percent to 91 percent. Meanwhile, the economy averaged 3.5 percent growth. In the last 20 years, when the top rate ranged from 28 percent to 44 percent, GDP growth averaged 2.6 percent. Even after excluding the recent recession, growth averaged 3.0 percent.
This shouldn't be surprising. Marginal tax rates do not impact people's propensity to work that much. Empirical studies show that, for most workers, the effect of income tax rates on labor supply is small or nil. Lower taxes do seem to increase workforce participation for married women--but that effect is unlikely to apply to the super-rich favored by Cain and Perry. Higher income tax rates do produce modest decreases in taxable income, but mainly because higher-income taxpayers work harder to avoid taxes, which is welfare-destroying. (See Saez, Slemrod, and Giertz 2010, forthcoming in the JEL.)
What about taxes on investment income, which George W. Bush reduced to 15 percent and Cain and Perry want to reduce to zero? Again, it's not clear these taxes have any impact on economic growth. Since 1947, GDP growth has averaged 3.0 percent in high-tax years (top capital gains rate over 25 percent) and 2.7 percent in low-tax years (top capital gains below 25 percent).