Governor Rick Perry of Texas has announced a plan, which he outlines in today’s Wall Street Journal, to replace the corrupt and inefficient internal revenue code with a flat tax. Let’s review his proposal, using the principles of good tax policy as a benchmark.

1. Does the plan have a low, flat rate to minimize penalties on productive behavior?

Governor Perry is proposing an optional 20 percent tax rate. Combined with a very generous allowance (it appears that a family of four would not pay tax on the first $50,000 of income), this means the income tax will be only a modest burden for households. Most important, at least from an economic perspective, the 20-percent marginal tax rate will be much more conducive to entrepreneurship and hard work, giving people more incentive to create jobs and wealth.

2. Does the plan eliminate double taxation so there is no longer a tax bias against saving and investment?

The Perry flat tax gets rid of the death tax, the capital gains tax, and the double tax on dividends. This would significantly reduce the discriminatory and punitive treatment of income that is saved and invested (see this chart to understand why this is a serious problem in the current tax code). Since all economic theories – even socialism and Marxism – agree that capital formation is key for long-run growth and higher living standards, addressing the tax bias against saving and investment is one of the best features of Perry’s plan.

3. Does the plan get rid of deductions, preferences, exemptions, preferences, deductions, loopholes, credits, shelters, and other provisions that distort economic behavior?

A pure flat tax does not include any preferences or penalties. The goal is to leave people alone so they make decisions based on what makes economic sense rather than what reduces their tax liability. Unfortunately, this is one area where the Perry flat tax falls a bit short. His plan gets rid of lots of special favors in the tax code, but it would retain deductions (for those earning less than $500,000 yearly) for charitable contributions, home mortgage interest, and state and local taxes.

As a long-time advocate of a pure flat tax, I’m not happy that Perry has deviated from the ideal approach. But the perfect should not be the enemy of the very good. If implemented, his plan would dramatically boost economic performance and improve competitiveness.

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If you tried to buy a homeowners’ insurance policy for much more than the actual value of your home, no one would sell it to you.  The reason is that having such a policy would enable one to prosper financially were the home somehow to be destroyed.  This creates for you, what is called a “moral hazard“.   You have a significant financial incentive to do something wrong.  It is anathema for the insurance industry designed to protect against risk to enable such a risk.

So what if you were a government bureaucrat in possession of the power to help a business to prosper financially by doing something wrong?  Imagine if you had the power to wave your pen and deliver one million new clients to a purveyor of a particular product.  Some might say you have a moral hazard.   Just as insurance companies have a duty not to create that risk, so do those in charge of taxpayer funds.

In New York, some public employees concerned about side effects, and their civil liberties, are protesting because Dr. Richard Daines, New York State health commissioner has mandated that they receive the h1n1 vaccines or be fired.   Did the Governor order this?  No, an unelected bureaucrat essentially placed the order with the vaccine manufacturers.

In Missouri, prior to 2002, all mandated vaccines were voted into law by Legislators.  In that year, the appointed Director of the Department of Health added to the list of mandated vaccines, a compound against Chicken Pox.  With one stroke of the pen, a single bureaucrat created a demand for fresh orders for hundreds of thousands of doses of the vaccine, annually.  One can speculate about the profit in those orders.

In Texas, Governor Perry, usually a solid conservative got loopy over the Gardasil fervor and mandated that girls in his State receive the controversial vaccine against a sexually transmitted disease.   Girls as young as nine years old now have the State forcing upon them conversations about promiscuity and sexually transmitted disease.

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