Radical thinking on tax from the US

Allister Heath
WHILE the Eurozone moves ever closer to the brink, the US presidential elections have suddenly become more interesting. Two of the Republican candidates – former Godfather’s Pizza CEO Herman Cain and Texas governor Rick Perry – have kick-started a major debate on tax reform and economic growth. It all started with Cain’s fascinating 9-9-9 plan: he wants to slash the federal income and corporate taxes to 9 per cent (while eliminating all loopholes) and introduce a 9 per cent federal sales tax. The poorest people (on or below the poverty line) would pay no income tax, a very sensible move. The plan – which would dramatically boost incentives to work and invest and hence growth but would increase taxes for millions – has propelled the entrepreneur into pole position in the primaries. For the time being at least, he is the front-runner to oppose Barack Obama. Cain also backs “opportunity zones” that would liberalise the poorest parts of America in a bid to boost growth and jobs. He also supports zero capital gains tax, the immediate expensing of business equipment and no payroll taxes. It is not the sort of manifesto you would ever hear from Britain’s Tory party.

Perry’s plan – which unfortunately remains too vague – would give taxpayers the choice of either a 20 per cent flat tax on income above $12,500 (the new personal allowance) or of retaining their current tax rates and rules. Lower-income taxpayers in the 10 and 15 per cent brackets would keep the current system – while those on higher incomes would switch to the flat tax. It is unclear how the maths would work out. The other danger is that rather than making the system simpler, it could actually make it more complex – but Hong Kong already successfully operates a similar system. Perry’s mistake is that he would allow those earning under $500,000 a year to keep tax breaks on mortgage interest (a break long since abolished in the UK). His other policies include cutting company tax from 35 per cent to 20 per cent. Unlike many Republicans, Perry understands that tax cuts without spending cuts would guarantee national bankruptcy. He backs a law to cap federal spending at 18 per cent of GDP, down from 23.8 per cent today (though while he has outlined some actual spending programmes he would cut, his numbers remain fuzzy). For good measure, he would also scrap the Dodd-Frank banking law, the Sarbanes-Oxley accounting laws and much else besides.

Neither plan is perfect (though both are better than the current system and its myriad loopholes); both candidates have their weaknesses and would probably be defeated by Obama. But even Mitt Romney, a lacklustre candidate who is vying with Cain for the opportunity to stand against Obama, wants to cut corporate tax from 35 per cent to 25 per cent. To their great credit, Republicans fully understand the need to boost incentives and improve the supply-side of the economy; the UK has much to learn on this front. But the US electorate increasingly wants ultra-low taxes combined with European-style levels of public spending, especially entitlements for the middle classes, a sure road to national collapse. Taxes are far too high in general across the Western world and especially in the UK – but the adoption of a sustainable lower-tax model will only become possible if we move away from our current addiction to public spending.

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