Newt's flat tax would do a lot more to attract capital, spur growth and reduce compliance costs.
If we judge both leading contenders in the Republican primary, Newt Gingrich and Mitt Romney, by what they've done in life and by what they propose to do if elected, either one could be an excellent president. But when it comes to the election's core issue—restoring a healthy economy—the key is a good tax plan and the ability to implement it.
Mr. Gingrich has a significantly better plan than does Mr. Romney, and he has twice before been instrumental in implementing a successful tax plan on a national level—once when he served in
Congress as a Reagan supporter in the 1980s and again when he was President Clinton's partner as speaker of the House of Representatives in the 1990s. During both of these periods the economy prospered incredibly—in good part because of Mr. Gingrich.
Jobs and wealth are created by those who are taxed, not by those who do the taxing.
Government, by its very nature, doesn't create resources but redistributes resources. To minimize the damages taxes cause the economy, the best way for government to raise revenue is a broad-based, low-rate flat tax that provides people and businesses with the fewest incentives to avoid or otherwise not report taxable income, and the least number of places where they can escape taxation. On these counts it doesn't get any better than Mr. Gingrich's optional 15% flat tax for individuals and his 12.5% flat tax for business. Each of these taxes has been tried and tested and found to be enormously successful.
Hong Kong, where there has been a 15% flat income tax on individuals since 1947, is truly a shining city on the hill and one of the most prosperous cities in history. Ireland's 12.5% flat business income tax propelled the Emerald Isle out of two and a half centuries of poverty. Mr. Romney's tax proposals—including eliminating the death tax, reducing the corporate tax rate to 25%, and extending the current tax rates on personal income, interest, dividends and capital gains—would be an improvement over those of President Obama, but they don't have the boldness or internal integrity of Mr. Gingrich's personal and business flat taxes.
Imagine what would happen to international capital flows if the U.S. went from the second highest business tax country in the world to one of the lowest. Low taxes along with all of America's other great attributes would precipitate a flood of new investment in this country as well as a quick repatriation of American funds held abroad. We would create more jobs than you could shake a stick at. And those jobs would be productive jobs, not make-work jobs like so many of Mr. Obama's stimulus jobs.
Tax codes, in order to work well, require widespread voluntary compliance from taxpayers. And for taxpayers to voluntarily
comply with a tax code they have to believe that it is both fair and efficient.
Fairness in taxation means that people and businesses in like circumstances have similar tax burdens. A flat tax, whether on business or individuals, achieves fairness in spades. A person who makes 10 times as much as another person should pay 10 times more in taxes. It is also patently obvious that it is unfair to tax some people's income twice, three times or more after it has been earned, as is the case with the death tax.
The current administration's notion of fairness—taxing high-income earners at high rates and not taxing other income earners at all—is totally unfair. It is also anathema to prosperity and ultimately leads to the situation we have in our nation today.
In 2012, those least capable of navigating complex government-created economic environments find themselves in their worst economic circumstances in generations. And the reason minority, lesser-educated and younger members of our society are struggling so greatly is not because we have too few redistributionist, class-warfare policies but because we have too many. Overtaxing people who work and overpaying people not to work has its consequences.
On a bipartisan basis, government has enacted the very policies that have created the current extremely uneven distribution of income. And then in turn they have used the very desperation they created as their rationale for even more antibusiness and antirich policies. As my friend Jack Kemp used to say, "You can't love jobs and hate job creators." Economic growth achieved through a flat tax in conjunction with a pro-growth safety net is the only way to raise incomes of those on the bottom rungs of our economic ladder.
When it comes to economic efficiency, nothing holds a candle to a low-rate, simple flat tax. As I explained in a op-ed on this page last spring ("The 30-Cent Tax Premium," April 18), for every dollar of net income tax collected by the Internal Revenue Service, there is an additional 30¢ paid out of pocket by the taxpayers to maintain compliance with the tax code. Such inefficiency is outrageous. Mr. Gingrich's flat taxes would go a lot further toward reducing these additional expenses than would Mr. Romney's proposals.
Mr. Gingrich's tax proposal is not revenue-neutral, nor should it be. If there's one truism in fiscal policy, it's this: Wasteful spending will always rise to the level of revenues. Whether you're in Greece, Washington, D.C., or California, overspending is a prosperity
killer of the first order. Mr. Gingrich's flat tax proposals—along with his proposed balanced budget amendment—would put a quick stop to overspending and return America to fiscal soundness. No other candidate comes close to doing this.
Mr. Laffer, chairman of Laffer Associates, is co-author with Stephen Moore of "Return to Prosperity: How America Can Regain Its Economic Superpower Status" (Threshold, 2010).
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