Jan. 26 (Bloomberg) -- Newt Gingrich, unexpectedly, has become a serious contender for the Republican presidential nomination. He won the South Carolina primary and is now the front-runner in some polls nationally. He has been debating well, shaking off criticism of his personal life and doing his best to bolster his reputation as an ideas man.
Regrettably, on economics, where the country could use some fresh thinking, his ideas are a mixture of the alarming, the implausible and the banal.
On monetary policy, the former House speaker has called for a more transparent Federal Reserve, which we applaud. But he has also spoken ominously about creating a presidential “Gold Commission” that would “look at the whole concept of how do we get back to hard money.” And he insists that Representative Ron Paul, the author of “End the Fed” and a rival for the nomination, “has been right for 25 years” when it comes to central banking, something that would surprise most economists.
On taxes, Gingrich is at his most specific and most cynical. He would make the Bush tax cuts permanent. He would reduce the corporate-income tax rate to 12.5 percent from 35 percent and allow companies to write off most new equipment. He would eliminate taxes on estates, dividends, interest income and capital gains; give everyone a new personal deduction of $12,000; and institute a “flat tax” of 15 percent. Who could argue with such streamlined munificence?
A Few Flaws
Well, we could. For starters, this is a strange kind of flat tax. First, it would be optional, meaning you could stick with the current system if it was to your benefit. So it’s hard to see how this would simplify things; presumably, people would need to calculate their taxes twice to find out which would be the most advantageous system. Second, it would preserve deductions for charitable giving and mortgage interest, as well as the earned-income tax credit and the child tax credit. So it’s even harder to see how he’d pay for it all.
And -- surprise! -- the plan is astonishingly expensive: The nonpartisan Tax Policy Center estimates that in 2015 alone it would reduce government revenue by $1.3 trillion compared with current law, or by about 35 percent. (The Gingrich campaign responds that this analysis doesn’t adequately account for increased economic growth.)
The plan is also quite generous to the rich: According to the center, the top 0.1 percent of taxpayers would receive an average cut of $2.3 million relative to current law. And because the plan eliminates taxes on capital gains and dividends, huge benefits would accrue to those who make most of their money from investments rather than wages.
Mitt Romney was roughly correct, in other words, when he said at the Republican debate on Jan. 23 that under Gingrich’s plan, “I’d have paid no taxes in the last two years.” The American people might be surprised to hear that from someone who earned more than $40 million in that period.
All this might make some sense if Gingrich had specified vast areas of government that he would like to cut. But he hasn’t. His campaign website says he would balance the budget “by growing the economy, controlling spending, implementing money saving reforms, and replacing destructive policies and regulatory agencies with new approaches.”
This sounds suspiciously like more of the same big-government conservatism to us -- paid for, inevitably, by deficits when the promised economic growth doesn’t materialize.
True, Gingrich endorses a few of the ambitious regulatory reforms favored by Republicans, such as repealing the Dodd-Frank financial-regulation overhaul, the 2002 Sarbanes-Oxley corporate-accounting reforms and President Barack Obama’s health-care law. He adds a few wrinkles of his own, such as replacing the Environmental Protection Agency with something called the Environmental Solutions Agency, “modernizing” the Food and Drug Administration, “liberating the poor from the trap of the Welfare Empire,” and encouraging competition in health care.
But the idea that these reforms would make up for his colossal tax cuts, or would so stimulate growth that federal coffers would soon be overflowing with unexpected new revenue, isn’t terribly convincing.
We’d love it if everyone could make huge fortunes, pay negligible taxes and watch as the government magically performed its duties for free. But in real life, if Gingrich intends to gut one-third of government revenue -- and still plans to honor our debts, mount a national defense, pay promised benefits and so on -- he’ll need to do a much more convincing job of explaining where the cuts come from.
In Gingrich’s economic plan, then, the devil is right where you’d expect him to be.
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