The Republican primary debates make it evident that tax reform will be front and center in the 2012 presidential campaign. This is all to the good, since therein lies the key to our three current economic problems: High unemployment, huge budget deficits and rising income inequality.
Rick Perry has proposed a flat tax with exceptions for mortgage interest payments and charitable contributions. The beauty of the flat tax is that it is progressive, providing a solution to income inequality, without having the disincentive effects of other progressive taxes. The exceptions he advocates would make it less progressive, since the primary beneficiaries are those with high incomes, who have expensive homes and make large charitable contributions.
Furthermore, once you admit any exception, other interest groups will clamor for theirs.
The flat tax's propensity to spur economic growth reduces both unemployment and the budget deficit, but what about income inequality? Warren Buffet's famous example of a billionaire facing a lower tax rate than his secretary exists because wealthy individuals derive more of their income from dividends and capital gains, which are taxed at a lower rate than ordinary income.
George W. Bush made them part of his tax cuts in order to mitigate the problem of double taxation. Corporate profits were taxed as they accrued, and again as they were paid out in the form of dividends and capital gains. A simple solution would be to tax all income at the same rate, and make a proportional reduction in the profits tax.
This would have the additional advantage of attracting foreign capital, further stimulating growth.
All in all, we can expect a positive outcome from the next election. The voice of the protectionists is muted. The only cloud on the political horizon is on the Republican side, where some are advocating a balanced budget amendment to the Constitution. If enacted, this would exacerbate the swings in the economic cycle, deepening recessions and worsening inflationary upswings.
How much simpler life would be if the budget committees did the job we pay them to do?