Voodoo economics playbook: Gingrich goes all in
Given presidential contender Newt Gingrich’s recent surge to frontrunner status in the polls, it was only a matter of time before the Tax Policy Center dug into Gingrich’s doozy of a tax plan. Howard Gleckman’s analysis on TaxVox notes that Gingrich’s plan represents such a gargantuan tax cut for upper-income households that it will blow a hole of nearly $1 trillion in the federal budget annually (more than doubling projected budget deficits). To date, Gingrich is winning the voodoo economics derby for peddling the steepest tax cuts for top earners and the biggest deterioration in the fiscal outlook.
According to TPC, the Gingrich plan would reduce revenue in 2015 by $850 billion relative to current policy and $1.28 trillion relative to current law; it’s important to remember that the difference in revenue levels projected under current policy and current law represents the difference between an unsustainable and sustainable budget outlook in the next decade.
Like Rick Perry’s tax plan, Gingrich has proposed an optional flat income tax but at a lower rate of 15 percent (to Perry’s 20 percent) beyond personal deductions of $12,000 for filers and dependents. Optional tax schemes are always a recipe for revenue loss, and this is especially true when they offer a 20 percentage point reduction in the top marginal tax rate. Again like the Perry plan, Gingrich’s alternative income tax would preserve deductions for charitable giving and home mortgage interest (though, unlike the Perry plan, maintain the earned income tax credit and child tax credit). Like almost every one of the GOP candidates’ tax plans, Gingrich would eliminate all taxes on capital gains, dividends, and large estates and gifts. (See this TPC summary table of the GOP presidential candidates’ tax plans.)
But the real coup de grâce lies on the corporate side, where Gingrich would drop the corporate income tax rate from 35 percent to 12.5 percent, allow immediate expensing of capital investments, and eliminate all taxes on corporations’ foreign income (i.e., moving to a territorial tax system). There is much talk of reducing the top corporate income rate in exchange for eliminating business tax loopholes and broadening the tax base, but there is no base-broadening in the Gingrich plan—only base-narrowing coupled with rate reductions. Economists Thomas Piketty and Emmanuel Saez found that the decline in corporate income taxation has been a prime driver of declining progressivity in the U.S. federal tax code since the 1960s, a trend that would be greatly exacerbated by Gingrich’s tax plan.
Rather than shifting the burden of taxation from upper-income households to the middle class, the Gingrich plan would lower average tax rates across every income level. Effective tax rates would peak for households earning between $100,000 and $200,000 and then fall precipitously (see chart below). Households earning over $1 million annually would see the effective tax rate plunge to 11.9 percent—below that levied on families earning $40,000 to $50,000 a year, according to TPC. Gingrich would go all in on the failed supply-side experiment by more than quadrupling millionaires’ tax cuts from $141,000 under the Bush-era tax cuts to $748,000 (relative to current law). Relative to current tax policies, millionaires would see a tax cut of $607,000 in 2015, further reducing their tax bill by 62 percent.
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Of course, pushing massive tax cuts for the highest-income households is par for the course among this year’s GOP presidential field. Ezra Klein compares the impact on average taxes under the tax plans of Gingrich, Perry, and Herman Cain, nicely depicting the unambiguous theme of massive tax cuts at the upper-end of the earnings distribution. Yet, as President Obama noted in his speech in Osawatomie, Kan., we’ve tested the trickledown theory before and it didn’t work; the Bush-era tax cuts were an ineffective, unfair, and expensive failure that presided over the weakest economic expansion since World War II. (This economic legacy hasn’t dissuaded Gingrich from crediting himself with helping “Ronald Reagan and Jack Kemp develop supply-side economics.”)
But Gingrich’s tax plan surpasses the supply side experiments of the past and those proposed by his rivals in terms of defunding government. I somehow doubt that Gingrich’s proposed lunar mineral mining colony would pay for a fraction of these highly regressive and dear tax cuts. Not even eliminating Medicare (and its projected $688 billion expenditure for 2015) would pay for this tax proposal.