The revenue and GDP impact of the Perry flat tax plan — now with actual numbers!

The revenue and GDP impact of the Perry flat tax plan — now with actual numbers!

By James Pethokoukis

As I wrote in an earlier post, an outside consulting firm hired by the Rick Perry presidential campaign has analyzed the revenue and growth impacts of his flat tax plan as follows:

1. Under static scoring — assuming no growth impact from a more efficient, pro-investment tax code — the Perry Tax Plan (call it PTP-SS) would raise $4.7 trillion less than the Congressional Budget Office baseline forecast from 2014-2020. Of course, that forecast assumes all the Bush tax cuts expire, which is highly unlikely. Yet even under that scenario, revenue-to-GDP would be back to its historical average of around 18 percent of GDP by 2019. (Interestingly, income taxes as a share of the economy would be the same in 2020 as they are now, but corporate tax revenue would double despite cutting the corporate tax rate to 20 percent from 35 percent.)

2.  Under dynamic scoring, the Perry tax Plan (call it PTP-DS) would raise $1.7 trillion less than the unrealistic CBO baseline. But revenue would move above 19 percent — a historically high number — of GDP in 2019 and 2020.

3.  Under PTP-DS, the U.S. economy would be $3.5 trillion bigger in 2020 than under the CBO baseline forecast. And this gap would widen since CBO has some pretty sluggish growth forecasting moving forward. As consultants John Dunham & Associates put it:

Overall, based on the type of static analysis generally used by government tax estimators, JDA found that the tax plan would generate $2.781 trillion in federal income in 2014 – the first year that it would be assumed to go into effect and as much as $5.138 trillion by 2020. The revenues in 2020 would be equal to approximately 19.5 percent of GDP. Based on a dynamic tax analysis, revenues would be $406.8 billion higher than those currently assumed in the Congressional Budget Office’s forecasts and will equal approximately 19.5 percent of the forecast GDP, under a static analysis, revenues would be about $588.9 billion lower, and equal about 18.1 percent of GDP.
Based on the higher GDP estimates forecast by the dynamic scoring exercise, the Perry proposal will not only lead to an increase in overall economic activity and jobs, but will also lead to higher federal revenues in the long term. In fact, the analysis suggests that revenues could be as much as $406.8 billion higher than under the static model by 2020, and could be as high as 19.5 percent of GDP. The dynamic score of the proposal suggests that lower flatter taxes could generate both more revenue than the current tax code, and significantly more economic growth over time. With increasing demands on the Federal government from growing entitlements, higher pension expenses and interest on the debt, it will be necessary to increase the size of the economy – and the tax base – in order to generate significantly higher revenues.

Bottom line: If a President Perry could balance the federal budget by 2020 and cap spending at 18 percent of GDP — and if you buy the JDA analysis — the result would be a more financially stable America and a richer America than the current economic and budgetary trajectory would indicate.

http://blog.american.com/2011/10/the-revenue-and-gdp-impact-of-the-perry-flat-tax-plan-now-with-actual-numbers/