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Rabushka plays key role in Republican flat tax

Before Texas Governor Rick Perry announced that a flat-rate tax plan would be part of his platform in his bid for the Republican presidential nomination, his campaign consulted Hoover fellow Alvin Rabushka.

Rabushka, along with Hoover fellow Robert E. Hall, popularized the flat tax idea in the early 1980s, first in an article in the Wall Street Journal and later in several books. While the flat tax has been popular internationally, having been adopted in Russia and most of Eastern Europe, it was not a national topic of debate until Herman Cain began receiving attention for his 9-9-9 tax plan.

“Herman Cain made this idea hot,” Rabushka said. “When Cain didn’t go away and because Perry started to slip, Perry jumped on board with the flat tax.”

While Rabushka is excited that Cain reignited the discussion and does see the 9-9-9 plan as a version of the flat tax, he is careful to distinguish the 9-9-9 plan from his own vision.

The 9-9-9 plan, as described by Herman Cain on his blog, is a 9 percent tax on business, a 9 percent individual income tax and a 9 percent national sales tax. On Oct. 21, in a speech in Detroit, Mich., Cain modified the tax to include an exemption from income tax for households below the poverty level.

In areas of economic hardship which are given tax exemptions, such as businesses outside of opportunity zones, Rabushka pointed out that the business tax exempts business investments, but does not exempt labor expenses. He described the business tax as essentially “a 9 percent tax on labor.”

“In effect what you’ve got is labor paying a 9 percent tax, labor again paying 9 percent on income above a poverty threshold, and then again paying 9 percent as consumers,” Rabushka said.

While Rabushka acknowledged the 9-9-9 plan as a “simpler, cleaner system,” he believes the plan disproportionately taxes labor because of its emphasis on capital investment and saving. Rabushka also pointed out that some of the additional taxes on labor would be balanced out by getting rid of existing taxes, notably the social security tax. Rabushka suspects that if Cain remains in the race, his tax plan will receive further challenges and will probably need further tweaks.

“I have read several reputable analyses of the Cain tax and it seems that advanced models are saying that it will lower revenue and increase the deficit, and that was before he added in a poverty line exception,” Rabushka said. “I would guess he will have to raise it to the 12-12-12 plan or something in that range.”

Rabushka was less able to evaluate Perry’s tax plan, despite having direct conversations with Sean Davis, an economic policy advisor for the Perry campaign. One of the major stumbling blocks to evaluating Perry’s plan is the choice the plan would offer. Under Perry’s taxation plan, citizens would be able to choose between a 20 percent flat tax system and the current system. Rabushka estimated the Perry plan to be about 75 to 80 percent in line with the Hall-Rabushka flat tax.

The revival of notable support for the flat tax in this election campaign has also revived sharp criticism of the flat tax. The flat tax is often criticized as being regressive, meaning it puts a greater burden on poor tax payers than more wealthy ones. This accusation has been leveled at both the Cain and Perry plans, even by other Republicans. Mitt Romney, who does not favor a flat tax, has spoken out against the 9-9-9 plan in recent debates, calling it a “non-starter” because “it raises taxes on middle-income families.”

Paul David, an economics professor, points out that there are many varieties of flat tax plans, and a flat tax can be progressive or regressive depending on a number of variables.

“The proposals that are attracting popularity right now are extremely regressive,” David said. “As nice as the plan sounds, it is a further step in the march towards greater inequality and greater conservation of wealth.”

While sympathetic to many of the underlying goals of flat tax plans, David is also skeptical of the long-term simplicity of any tax plan in our current economic and political environment.

“You need to understand the processes that created the complexity of the tax plan we have, otherwise it will come back,” David said. “If we woke up one day with a flat tax, there would still be people working on redefining the tax code and they would keep redefining it to give themselves the best deal.”