"Hope" is how the blogger and law professor Glenn Reynolds introduced Paul Ryan's tax plan of a 25% top corporate and individual income tax rate to his readers at the Instapundit blog. The Wall Street Journal has an editorial that gushingly describes the plan as "the most serious attempt to reform government in a generation." Sure, 25% would be better than the 35% top rate that now applies to both corporate and individual income. But maybe it's time to dial back the enthusiasm just a bit.
Start with the corporate tax rate. At 25%, a federal rate would be twice that of Ireland, which has a 12.5% rate. It'd be 51.5% higher than the 16.5% top federal corporate tax rate that applies in Canada. It'd be 13.6% higher than the 22% top federal rate in South Korea, and 31.6% higher than the 19% top rate that applies in Hungary, Poland, and the Czech Republic. It'd be almost three times the top federal tax rate in Switzerland, which is 8.5%. Twenty-five percent is the corporate tax rate in Communist China, which isn't exactly a model for what Americans should emulate in terms of the size of government. All these statistics are from the Tax Foundation.
As a practical matter, a 25% rate isn't going to be low enough to bring back the revenue from companies that, as a recent "60 Minutes" piece reported, are moving businesses to Switzerland and Ireland so they can pay those lower rates.
And as a political and philosophical matter, is this really the message that Republican conservatives in the House of Representatives want to be sending? The best we can do for a corporate tax rate proposal is a rate that's higher than Canada's and than a lot of European countries?
The 25% top corporate rate proposal is even out of touch with one of the intellectual powerhouses behind the Reagan supply-side tax-cutting revolution, Nobel Laureate economist Robert Mundell. At a recent conference sponsored by the Manhattan Institute for Policy Research, the Wall Street Journal, and the Ronald Reagan Presidential Foundation, Professor Mundell recommended that America's corporate tax rate be cut to 20% or 15%.
No one wants to make the perfect the enemy of the good, or of the better. Again, 25% would be better than 35%. But given the tendency of Democrats and Republican "moderates" to use any conservative tax proposal as a starting point for negotiating upward, there's a strong case for conservative Republicans to start off lower, even if only as a bargaining position.
On individual tax rates, again, 25% is lower than the 35% top rate that now applies to earned income. But it's higher than the 19% flat tax that the Hoover Institution's Robert Hall and Alvin Rabushka proposed on the editorial page of the Wall Street Journal in 1981. You could say America has more debt to pay off now than it did then, but on the other hand, we had a Cold War military buildup to pay for then, which we don't now. It's higher than the 17% flat tax that Steve Forbes campaigned on, and higher than the 14% flat tax proposed by John C. Goodman and Boston University economist Laurence Kotlikoff. It's even higher than the top individual rate of 23% floated by the bipartisan deficit reduction commission co-chaired by President Clinton's chief of staff Erskine Bowles, a Democrat.
And, remember, the 25% would just be the federal income tax rate. While Mr. Ryan has some proposals for reforming Medicare and Social Security, wage earners would still face, on top of the income tax, payroll taxes of 6.2% (up to a cap of $106,800) for Social Security (reduced to 4.2% just for 2011) and 1.45% for Medicare. Employers pay the same tax, but most economists consider the burden to be passed along to the employee in the form of lower wages, and if a person is self-employed they pay both the employee's half and the employer's half. All of which is a long way of saying there's 15.3% of payroll taxes on top of that 25% income taxes, bringing the potential total federal tax up to somewhere in the neighborhood of 40%.
On top of that, there are state income taxes, which in some states can be pretty steep. In California, for example, a 9.3% income tax bracket kicks in for singles earning more than about $47,000 a year. Massachusetts has a 5.3% state income tax. New York taxes income above $20,000 a year at at least 6.85%, with an additional income tax that applies to New York City residents. And local property taxes can run into the several thousands of dollars, which can mean additional percentages of income paid in tax by homeowners. Mr. Ryan doesn't say much about ending the deductability of state and local taxes at the federal level, but most plans to lower federal income tax rates have that as an element.
With the Ryan 25% rate as a foundation, Americans could still end up paying about half their incomes to government of one kind or another by the time they are done paying income, payroll, and state and local taxes. And again, Democrats and "moderate" Republicans are likely to take Mr. Ryan's 25% individual income tax proposal, just like his corporate tax rate, as a starting point for negotiating upward.
I don't mean this as a personal attack on Mr. Ryan, who seems energetic and intent on tackling substantive issues that a lot of politicians would prefer to avoid, and whose plan is an improvement over both the status quo and over anything President Obama is proposing. But proponents of lower taxes and limited government may want to hold the champagne toasts.