January 19, 2012

The GPA of the GOP: Do taxes matter?

This op-ed was published in the Washington Examiner on Jan. 19, 2012.

Heading into Saturday’s South Carolina GOP primary, it is worth taking note of the perplexing disparity between what voters claim as their No. 1 issue (the economy) and how they have implicitly voted on tax policy.

The key drivers of a strong U.S. economy are consumer spending, industry investment, the export/import ratio, and government spending.

Tax policy, for better or for worse, affects each one of these. Yet the tax reform proposals that have been put on the table by GOP presidential candidates appear to matter very little to voters.

This year’s GOP presidential caucuses in Iowa yielded the following results:

1. Mitt Romney (25 percent)

2. Rick Santorum (25 percent)

3. Ron Paul (21 percent)

In the Tax Foundation’s Presidential Candidate Tax Plan Report Card, Mitt Romney, Rick Santorum, and Ron Paul received grades of C-, D+ and B-, respectively.

If the GOP were taking three college classes, this would result in a 1.9 grade-point average. The Iowa GPA is helped most by the corporate tax rate cut to 15 percent proposed by Paul. Still, a 1.9 would put the student on academic probation at most institutions.

The situation didn’t look much better for the GOP in the New Hampshire primary. The state’s top three vote-getters were:

1. Mitt Romney (39 percent)

2. Ron Paul (23 percent)

3. Jon Huntsman (17 percent)

On the report card, these three candidates’ tax plans received a C-, B- and B+, respectively. The GOP student in this scenario would have achieved a 3.0 GPA.

However, if one weights the grades according to the percentage of votes the candidates received, the results are largely driven downward by the C- and B- of Romney and Paul.

Using this methodology to account for the higher variance of results in New Hampshire, the GOP student sees its GPA sharply decline to a 2.3. Likewise, if the current poll standings in South Carolina hold up, the student will have produced a 2.2 GPA.

What’s mystifying about these results is not who the most popular candidates are. It is the underlying disparity between what voters claim is their No. 1 issue, the economy, and their willingness to accept timid tax plans that would keep the complexity and litany of tax preferences in the tax code.

GOP voters certainly have the right to choose their preferred candidate for any reason they wish: treatment of social issues, eventual electability, or even looks.

But if the party, like the rest of the country, wants an economic turnaround, taxes must play a major role. In that vein, many may wish to read economist Will McBride’s “How to Judge a Tax Plan,” in which he delineates the criteria that make certain tax reforms are good, satisfactory or harmful.

In his guide, McBride says cutting individual tax rates, thereby reducing the progressivity of the current code, is essential. “High personal income taxes are second only to corporate income taxes in their harmful effects on long-term economic growth.”

He’s definitely onto something here, as America is already saddled with the most progressive tax system in the industrialized world.

In addition, McBride suggests that cutting rates on capital gains and dividends taxes, as well as the estate tax, is essential. The ideal elimination of such taxes would have the beneficial effect of ending the double, triple and quadruple taxation of earnings. Doing so would also incentivize investment, therefore boosting economic growth.

It is certainly true that a number of college dropouts have gone on to do great things — in some cases boost U.S. gross domestic product almost single-handedly (Bill Gates, Steve Jobs, Mark Zuckerberg, etc.).

But the U.S. cannot afford a sophomoric tax plan with a GPA that would place the country on academic probation. It needs one that would make the Dean’s List.

David S. Logan is an economist with the Tax Foundation.