Almost exactly 20 years ago, a gawky conservative renegade magazine publisher named Steve Forbes threw his hat in the ring for the 1996 GOP presidential nomination. Forbes’s run was first seen as a joke. But he wound up rocking the Republican establishment by injecting fresh and bold reform ideas into a party that had become crusty and tired.
Term limits. Medical savings accounts. Tax limitation. Personal savings accounts for Social Security. And the issue that electrified conservatives across the country: Blow up the tax system and install a low-rate flat tax. When the New Hampshire primary rolled around, the GOP politicos, the housing lobbyists, and the municipal bond traders were in a state of terror. Steve Forbes had somehow caught on. He might—God forbid—even win. The empire fought back and successfully derailed him; their man Bob Dole then got crushed in the general election.
Two decades later, the flat tax is again the rage in a presidential primary. A number of GOP candidates, including Rand Paul, Rick Perry, Ted Cruz, and Scott Walker, are looking to go flat with a radically simplified postcard tax return. Mike Huckabee wants a low flat-rate tax too, but he would use a sales tax, not an income tax—i.e., no tax return at all.
“I’ve been for the flat tax since Steve Forbes first started talking about the idea,” Cruz tells me over dinner. “It’s one of the three most important reforms to fix the economy and take power away from Washington.”
Rand Paul (who I have been informally advising on tax policy) says, “I want a flat tax that pushes the rate down as low as we can get it.” His plan could have a rate of 15 percent.
Perry knows firsthand that low tax rates are important, because Texas, of course, has no income tax at all. “It’s our great comparative advantage,” he insists, “and it helps explain why for five years we created more jobs in the Lone Star State than the rest of the nation combined. If Washington wants to create jobs for America, it should adopt the Texas tax model.”
Ripping up the 70,000-page tax code has visceral appeal to voters. I always remind this year’s crop of White House aspirants: What is the one thing—maybe the only thing—voters remember about 2012’s dismal presidential primary race? Herman Cain’s 9-9-9 plan. “The simplicity of the concept is what sprung Herman into the lead,” recalls Ohio-based economic consultant Rich Lowrie, who helped devise the plan. “People were absolutely captivated that we could really make the tax code that easy to understand—and that pro-growth.”
The new Republican party has been baptized in the iron logic of the Laffer Curve. High tax rates stifle innovation, work, investment, and American competitiveness. Our absurdly high corporate tax rate (40 percent on average) is incontrovertibly sending jobs and corporations abroad, where rates are typically half as high. Just ask Burger King, one of the latest iconic American companies to flee to a lower-tax competitor.
Laffer has been hard at it, selling this message in meetings in his Nashville office with nearly all the A-list candidates, from Jeb Bush to Ted Cruz. In his usual theatrical style, he explains that “if you raise tax rates in location A,” lifting up his left fist, “and cut tax rates in location B,” lowering his right fist, “don’t be surprised if people and businesses move from A to B.” Think of New York as A and Texas as B.
When Reagan reduced the top marginal tax rate from 70 percent to 28 percent in the 1980s, the Laffer Curve effect was indisputable. The economy exploded, tax revenues nearly doubled over the decade, and the share of income taxes paid by the rich soared from 19 to 26 percent.
Lowering tax rates has the added virtue of increasing the overall simplicity and efficiency of the tax code. We don’t want investment or spending decisions to be distorted by tax preferences. Lower rates reduce the value of inefficient loopholes, credits and deductions for everything from investing in windmills, to race horses, to bull sperm, to empty apartment buildings. Under an ideal tax code, there are no deductions whatsoever.
It’s worked before. One of the most underappreciated laws of the last half-century is the bipartisan Tax Reform Act of 1986. This public policy miracle consolidated tax rates down to two—15 and 28 percent—while clearing out hundreds of loopholes.