Gingrich’s Disastrous Tax Plan

Much attention has been paid to Herman Cain’s ridiculous 9-9-9 tax plan (now reformulated by Michele Bachmann as the ‘win win win” plan) and to Rick Perry’s absurd voluntary tax idea, but Newt Gingrich’s plan has received little notice. Until now. The Tax Policy Center has done an analysis and — surprise! — his plan would transfer huge amounts of money to the richest Americans and explode the debt even further.

GOP Presidential candidate Newt Gingrich is proposing a massive tax cut aimed at the highest earning American households. Gingrich’s plan would add about $1 trillion to the federal deficit in a single year. And while most of the nation’s lowest income families would get no benefit from these tax cuts, the top 0.1 percent (who make an average of more than $8 million) would get about a quarter of the windfall, according to new estimates by my colleagues at the Tax Policy Center.

The Gingrich plan, which has gotten relatively little attention, gives taxpayers a choice. It is similar to the proposal offered by Texas Governor Rick Perry, only even more generous. Taxpayers could stick with today’s revenue code– Gingrich would permanently extend the Bush/Obama tax cuts. Or they could pay under an alternative system based on a flat 15 percent tax rate regardless of income. Capital gains, dividends, and interest income would be tax-free. The Alternative Minimum Tax would be abolished. Nearly all deductions and credits would be eliminated, except for the earned income, child, and foreign tax credits and the deductions for mortgage interest and charitable gifts. All taxpayers would get a $12,000 per-person exemption…

In 2015, when TPC figures all of the changes would be fully effective, 70 percent of all households would get a tax cut compared to what they’d pay if today’s rules were extended. Everyone in the top 0.1 percent would be better off than under 2011 rates and they’d get an average tax cut of $1.9 million.

Among those in the bottom 20 percent, only about one-quarter would be better off under the Gingrich plan. Overall, low-income households would get an average tax cut of $63.

Of course, because taxpayers have a choice between today’s rules and Gingrich’s new tax code, nobody would be worse off (TPC assumes everybody makes the right choice although surely some people won’t).

However, this largess doesn’t come cheap. In just the single year of 2015, Gingrich’s plan would increase the deficit by about $850 billion. Remember, while we are used to seeing numbers such as this describing the 10-year revenue loss of some tax plan, this is just the one-year cost. It is half again as generous as Perry, who would add merely $570 billion to the deficit.

Compared to the current law world where the 2001-2010 tax cuts have expired, taxpayers across-the-board do even better. Nearly 82 percent would get a tax cut. About 45 percent of the lowest-earners, and 98 percent of middle-income households come out ahead. For those roughly 130,000 lucky duckies in the top 0.1 percent, the windfall is eye popping. They’d get an average tax cut of $2.3 million. And their total federal tax bill would plunge from 38 percent of their income to barely 10 percent.

Because the plan is so much more generous when compared to current law, the overall cost of the Gingrich plan is even greater. He’d reduce revenues in 2015 by nearly $1.3 trillion, or 35 percent of federal taxes that year. Talk about starving the beast!

And remember, these are the people who claim to be the fiscally responsible ones.

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  • raven

    The US national debt is now at 99% of GDP. This is right at the edge of No Return. It can go higher but not by much.

    We either fix the budget problems now or get so far behind that it never happens. This is BTW, not complicated. Most economists could come up with a coherent plan, increase taxes and decrease spending very carefully and futreload it so we don’t kill our now fragile economy.

    FWIW, studies have shown that there is little correlation between tax rates and national prosperity. The 15 highest taxed countries are also mostly the 15 most prosperous countries.

    It all started to go south when Bush cut taxes and increased spending wildly. We don’t need to try that again.

  • dingojack

    Raven – I believe that during the Second World War the US debt was over 100% of GDP (140%?). But I don’t know how much of that was what kind of debt.

    Ask Micheal Heath (just don’t mention Ray-gun).

    🙂 Dingo

  • Randomfactor

    This is BTW, not complicated

    [T]here is always a well-known solution to every human problem — neat, plausible, and wrong. –H.L. Mencken

  • Michael Heath

    raven writes:

    It all started to go south when Bush cut taxes and increased spending wildly. We don’t need to try that again.

    That’s true only when it comes to Bush’s lack of fiscal discipline. We need to also consider some fundamental weaknesses which started in the 1970s that both parties avoided dealing with which led to an economy that was unable to sufficiently grow in the up portions of the business cycle, and where the labor market was getting fundamentally weaker. We should never forget the easiest way for any large entity to solve past debt issues is to grow their way out, same for large businesses as it is for governments. We also observe that each recession since the 1970s led to a longer labor market recovery where the 2000s was the worst decade ever for job growth even prior to the advent of the 2007 recession.

    Liberals shouldn’t forget this because moderates [mistakenly] joined with conservatives in either avoiding or obstructing the type of labor market reform required given the rise of the global economy whereas liberals argued for increased investment to mitigate the rise of the global economy and a freer trade model. For example, Bob Reich argued as Cabinet Secretary early in Clinton’s tenure that we needed to react to NAFTA with far more education and job retraining investment versus Clinton, Bob Rubin, and Larry Summers joining with conservatives to instead focus on deficit reduction. While they solved the deficit, it was only temporary precisely because those actions led to less future growth. (Bush never stood a chance of having the surpluses forecasted by the CBO when he took office because the CBO used historical assumptions that were no longer true in a far more productive and competitive environment we found ourselves in during the 2000s.)

    President W. Bush deserves even more condemnation the moderates in the 1990s because he had the benefit of hindsight yet did nothing, thinking the economy wasn’t something he could effect much until Hank Paulson forced him to act like a president when the financial melt-down hit in the Autumn of 2008. And then Bush merely followed what Paulson directed him to do, with no cognizance on the root causes of what happened and his contributions to those root cause failures.

  • dingojack

    Yes Michael but what of the 1940’s and 1950’s, when there was high debt? How did America reduce the debt whilst encouarging growth?

    Curiously, Dingo

  • raven

    President W. Bush deserves even more condemnation the moderates in the 1990s because he had the benefit of hindsight yet did nothing,

    Darth Cheney once said, “deficits don’t matter.” Got that wrong. They should chisel this on his tombstone.

  • D. C. Sessions

    I don’t see how anyone at all in the top 1% would pay a dime, actually. Very few of them make their money as employees anyway, and most of those who do could form a consulting company and take their income as tax-free dividends.

    Warren Buffet is complaining now of paying a lower rate than his secretary, but under this scheme he’d be paying less, period.

  • acroyear

    “How did America reduce the debt whilst encouraging growth?”

    Simple: kept the top tax bracket at war-time numbers and spent a heck of a lot (but not everything) on things that actually fed the middle class (military spending is but one), and encouraged a *massive* increase in interstate commerce by making shipping much cheaper through the interstate highway system (which also encouraged a restoration of 1920s-style tourism but to far more people than ever before).

    Some of the rest of the growth was simply what it was and all the feds had to do was stay out of it. mass tv media has a large impact on general sales and a “keeping up with the jones’s” attitude that prevails even to today, along with a “gotta buy this year’s model” on everything besides just cars. Internal manufacturing, marketing American-made products not because they might be better (or even just “American”) but because they were the only thing available, the beginnings of low-cost corporate farming (dropping food prices back down to manageable levels) as people who returned from the drama of the wars (WW2 and Korea) were less interested in running their farms than before so they started selling out, etc etc.

    It was simply a boom time, so the states could pay for themselves under sales and property taxes so they didn’t have to go to the Feds for handouts (outside of the highway money) to cover their debts, thus the Feds had more money to actually spend on federal projects as well as paying off the debts of the wars and FDR’s legacy.

    It was the ultimate in maintaining *demand*-side economics, and it worked. Today demand-side barely would work as so many products under “demand” aren’t made in America anymore, and supply-side obviously doesn’t work as the big corporations continue their layoffs in spite of the tax breaks and the rich don’t buy anything with their huge savings, continuing the mess we’re in.

  • acroyear

    BTW, the US continued to grow the debt during that time. They just accounted for it all differently that allowed the war bonds and pre-war t-bills to be paid off while they borrowed elsewhere at lower interest rates. They were also continuing to support Europe throughout the early 50s and by the time Europe was on its feet (Britain had stopped most rationing by ’54), that meant more money being spent there could be diverted back to the nation or to paying off the older debts.

  • ‘Tis Himself. Bah! Humbug even!

    This is something I posted a couple of years ago on another blog. While a few of the details have changed, the overall statements about the economy are still true. I apologize for posting a TL;DR post but I think it’s germane.

    The most important promises used to justify capitalism are that your children will have a better life than you do, and in John Kennedy’s famous words, “a rising tide lifts all boats,” meaning everyone benefits from the accumulation of capital. These promises ring hollow in a period in which the relative position of the working people of the United States is declining and its ruling class is able to appropriate an increasing share of the national income. This pattern of accumulation and appropriation has become evident to many Americans and this awareness is beginning to affect political consciousness.

    Today, people worry that their children will not enjoy the same standard of living that they have. They know that the benefits of growth are going overwhelmingly to the wealthy and not to working people. The statistics support such an understanding. For a quarter of a century, from 1980 to 2004, while US gross domestic product per person rose by almost two-thirds, the wages of the average worker fell after adjusting for inflation. Over the three decades from 1972 to 2001, the wages and salaries of even those Americans at the 90th percentile (those doing better than 90 percent of their fellow citizens) experienced income gains of only 1% a year on average. Those at the 99.9th percentile saw their income rise by 181 percent over these years (to an income averaging almost $1.7 million). Those at the 99.99th percentile had income growth of 497%.

    From an economic standpoint what has happened is that the link between productivity and wages has been broken. No longer does economic growth mean increases in the real earnings for the working class as their productivity rises. This was evident through Clinton’s last term when between 1997 and 2001 the top 10% of US earners received 49% of the growth in real wages and salaries; indeed, the top 1% got 24% of the total while the bottom half of workers received less than 13%. This trend is of longer duration. Based on a somewhat different calculation the share of income going to the top .1% quadrupled between 1970 and 1998 at the expense of working-class earners.

    Inequality was growing in most of the rest of the world too; but the US led among the richer nations; and unlike most others that offset market inequality though government intervention, the US has not done so. For working people the issues are not simply the stagnation of real wages and growing inequality but the worsening insecurity that permeates many aspects of their lives as labor market conditions change and government abrogates more and more elements of the social contract.

    Despite globalization, manufacturing output is not declining in the US. It’s been expanding, growing faster than the rest of the economy in recent years. It’s manufacturing employment that is shrinking.

    It’s at its lowest level in more than half a century. Between 2001 and the spring of 2006 worker hourly productivity rose by 24% so fewer workers are needed to produce more output. But output has not been rising as fast as in the past. This is not only because of greater global competition but also slower global growth in demand. If demand had increased at levels seen during the early post–Second World War era, millions of additional jobs would have been created in manufacturing for US workers. Manufacturing jobs are especially important for those with the least education. Men with less than a high school education saw their wages fall in the 1980s in real terms by 20%. From 1979 to 1992 real yearly wages for male high school dropouts fell by over 23% while high school graduates with no additional education experienced a fall in real wages of 17%. There was a large expansion of temporary and part-time work.

    Every three months 7% of all jobs are destroyed and roughly the same number are created. In a typical year a quarter of all jobs disappear. The Bureau of Labor Statistics tells us that in 1983, men between the age of 45 and 54 held jobs on average for 12.8 years but by 2004 for only 9.7 years. Jobs are now less secure for white-collar workers as well as in blue-collar occupations.

    The layoffs have been in big companies, which tend to pay better and to offer benefits. It is not of course that things were great in the 1980s. During that decade, 13% of Americans between 40 and 50 years of age spent at least one year living in poverty, but by the 1990s, 36% did. Mobility has also declined. Social mobility is not as likely in the US as in Germany, for example.

    The true cost of job loss must be measured not just in money as economists do in their calculations. For many people there is a spiral pattern in which layoffs lead to not only financial insecurity but to feelings of powerlessness and hopelessness, depression, sleepless nights, headaches, chronic stomach aches, and fatigue which can cause lasting harm.

    Even after getting work some people have trouble talking to the boss and dealing with job demands. The damage done by job loss, even the threat of job loss, along with the worries about how people will live after they are no longer able to work, or if they have a serious illness how they can pay for the doctor and a hospital stay, produce anxieties that permeate working-class existence. There is a rise in escapist pursuits as the economy produces greater uncertainty; the growth of gambling addiction is one example. By the start of the 2000s, Americans were spending more on gambling than on theme parks, video games, spectator sports, and movie tickets. The most desperate tend to risk the most. Households with incomes under $10,000 a year spend three times as much on lottery tickets as those with incomes of more than $50,000. There is, however, an important psychological disconnect between harsh economic realities, escapist avenues, and the ideological interpretation most working people adopt to preserve their sense of worth and well-being. Credit card debt ensnares a large part of the working class. In 2004, 1.6 million people filed for personal bankruptcy, twice the number of a decade earlier, and half of those filed after a major medical expenditure. Other prominent causes of debt were divorce and job loss.

    On the whole, life grows ever more insecure for working people. Capital’s share of all corporate income is the highest and the compensation of employees is the lowest that they have been in twenty-five years. Moreover, capital income is more concentrated than it has ever been. As the profit share went up, the CEO’s share of both the total wage bill and of corporate profits dramatically increased. By the mid-1990s CEO pay was about 5% of corporate profits. In 2003 their share was 10% of all profits. The percentage available for labor’s share decreased.

    In the 2006 holiday season the top 20 Wall Street firms together paid out an estimated $36 to $44 billion to their employees. The bulk of it went to those masters of the universe who were restructuring employment prospects for US workers and extorting concessions from workers to finance debt. From 2000 to 2006, all 93 million American production and nonsupervisory workers had real earnings increases of less than half of the combined bonuses awarded by the top 20 Wall Street firms for just one year.

    These are disturbing developments to many Americans, but have they shaken the powerful hold of individualism on people’s psyches?

    Hundreds of national polls confirm that Americans express optimism regarding their own life chances and those of their children. They are reluctant to describe their own circumstances in negative terms even as they tell interviewers that “people like them” are doing poorly. While they say that education and hard work will help people get ahead they also report anxiety about outsourcing, plants closing, permanent jobs being replaced with part-time and contingent work, the lack of career opportunities, and fear that if they lose their job they will only be able to get one with lower pay and no benefits. Americans are frustrated that their incomes are not keeping up with the cost of living and that they are being squeezed. They’re critical of corporate greed and dishonesty. They want the government to call these corporations, especially pharmaceutical and oil companies, to account. They’re worried that things will not get better. But they are not, in great numbers, hostile to the system. They express faith in the American Dream and continue to believe that individuals can overcome obstacles. A majority envy the rich and famous.

    Data are from Lawrence Mishel, Jared Bernstein, and Sylvia Allegretto, The State of Working America, 2006-2007 (Ithaca: Cornell University Press, 2007).

  • raven

    Today, people worry that their children will not enjoy the same standard of living that they have.

    This is already true. Young people are struggling a lot more than the boomers did.

    From a recent newspaper article. Wealth gap between young, old widest ever. “The median net worth for the younger-age households was $3,662, down by 68% from a quarter-century ago,”

  • Michael Heath

    I watched Fareed Zakaria interview Jon Huntsman last evening, the broadcast was a previous Sunday.

    To me Mr. Huntsman demonstrates far more intelligence than any of the other GOP candidates. That’s a low bar where I don’t know him well enough to grade him to a normative standard. He also appears emotionally intelligent and well-informed on most issues whereas every single one of his competitors seem to have remedial skills and knowledge in both regards – including Romney. I was also impressed with Mr. Huntsman’s willingness and demonstrated intellectual honesty to properly frame every single argument he made – with one unfortunate exception.

    Mr. Zakaria hound-dogged Huntsman to answer his question on whether he would except a 10:1 ratio in spending cuts relative to tax increases to improve our federal budget performance. Mr. Zakaria also rightly framed his question in light of the fact tax revenues are at a 60-some year low relative to GDP. Mr. Huntsman refused to answer the question even after Zakaria explicitly noted he refused to answer the question. Instead Huntsman made an implicit argument for supply-side economics arguing we need to cut the corporate tax rate (not sure if he wanted to do the same with personal rates) and get rid of all tax dodges and cut spending all to supposedly improve growth rates. Zakaria smartly asked if that included the home interest deduction which Huntsman surprisingly noted it did.

    Mr. Huntsman failed to articulate whether his rate cut and simplification scheme would increase revenues without a need for increased growth while Zakaria failed to follow-up with that obvious follow-up question (since it still avoids Zakaria’s initial related question).

    I conclude that Mr. Huntsman would be amenable to the credible policies offered by previous Republicans in a bygone era. However he exists in this era where he too concludes that no Republican can win a primary and perhaps federal office as a Republican conceding we need increased revenues from increased effective rates. I’m through betting that a seemingly sane candidate will take the sane route after he’s succeeded at navigating the maze of the crazies. So even though I think he might make a good president regarding many of the factors I use to gauge candidates, his position on economics, his recent failure in character in denying the source of climate change and its sufficiently understood threat, and the threat a conservative poses in terms of his judicial nominations has me disqualifying him from consideration.

  • Michael Heath


    Yes Michael but what of the 1940′s and 1950′s, when there was high debt? How did America reduce the debt whilst encouarging growth?

    Curiously, Dingo

    U.S. fiscal policy starting previous to that period had us investing big-time, which continued into the 1950s when the age of the consumer began to take-off which if it’s favored too much, suppresses overall growth (this is becoming China’s new challenge). FDR’s recessionary policies paid a tremendous dividend long after he died.

    That period validates my argument that the best way to reduce debt is to first prioritize growth and then prioritize fiscal discipline. Though one must also be concerned about the percentage of the federal budget allocated to paying interest on the debt.

    In addition the growth rates we enjoyed back then were partly caused by the demand to rebuild post-WWII developed economies in Asia and Japan coupled to their not having the wherewithal to compete with us because of the destruction along with their not having the manufacturing capabilities we had [Which was an attribute we enjoyed that made Stalin most envious of us and cautious when dealing with us. We could crank out far more tanks, aircraft, and ships than they could) and he knew it.]

    Another factor is the wisdom of the investments and expenditures which created the debt. This is where we can begin to assert George W. Bush and 2000s-ear Republicans are the most incompetent in U.S. History. Their spendthrift ways were in areas which do not promote growth but in fact in some areas, like subsidizing energy companies, suppress economic growth and overall jobs even though that industry is growing. The kind of debt conservatives and liberals took on in California up through the 1960s are perfect examples of prudent investments in the future. The debt we accrued during WWII provided big returns whereas Bush and the GOP generated debt only puts contractionary pressures on our economy.

  • Michael Heath

    D.C. Sessions:

    I don’t see how anyone at all in the top 1% would pay a dime, actually. Very few of them make their money as employees anyway, and most of those who do could form a consulting company and take their income as tax-free dividends.

    I don’t believe that’s true, which is why the effective rate for the top 1% is hovers around the AMT rate: Doctors, lawyers, and corporate execs have substantial amounts of their gains realized as income. Guys like Buffet and hedge fund managers who are taxed mostly on their capital gains and dividends are mostly anomalies. I think we should change how we describe gains from income to capture their work effort as income like it’s done for the rest of us.

  • abear

    The headlines should read;

    “Mittens Newtered! Master Debater Gingrich Clinches Nomination With New Tax Plan!

  • grendelsfather

    raven @ #1:

    FWIW, studies have shown that there is little correlation between tax rates and national prosperity. The 15 highest taxed countries are also mostly the 15 most prosperous countries.

    If that is really true, then it DOES show a very strong correlation between tax rates and national prosperity – just not in the direction Republicans want.

  • D. C. Sessions

    Doctors, lawyers, and corporate execs have substantial amounts of their gains realized as income.Doctors, lawyers, and corporate execs have substantial amounts of their gains realized as income.

    Only because it’s not worth rigging up a shelter. Many if not most doctors and lawyers already run LLCs, so the main difference is between setting up a corporation (which may pay small-corporate rates, or not under some of the proposed changes) and an S corp. I haven’t seen any of the current POG proposals drill down that deep, but considering how hard they work for “small businesses” like Bechtel, I’d bet on a total tax exemption for S corporations operating as dividend-payers.

  • grendelsfather, if you knew anything you’d know that the USA can’t (and doesn’t need to) learn lessons from the experiences of any other country. Do you know what other countries are full of? Foreigners. If they wanted to be listened to they should’ve been Americans!

    American Exceptionalism has expanded to include even failing to learn from the lessons of the USA’s own past (and present). I mean, just look at the queue of Serious People (and Morality Scolds) rushing to repeat 1937 (or fighting to maintain, say, abstinence-only sex-ed in the face of all the evidence).

  • D. C. Sessions

    American Exceptionalism has expanded to include even failing to learn from the lessons of the USA’s own past (and present).

    That’s not true. There’s lots to learn from America’s past.

    For instance, 1937 shows the disastrous consequences of deficit spending, going off the gold standard, and how Keynsian so-called “stimulus” can wreck an economy.

  • D. C. Sessions, obviously. It took until the Reagan administration for the country to dig out of Democrat party policies (Eisenhower was a water-floriding pinko and didn’t tip over nearly enough Central and South American countries from democratic rule, and Nixon would have dug out but his hippy punching was cut off when the DNC burgled themselves and blamed it on him).

  • The Very Reverend Battleaxe of Knowledge

    For instance, 1937 shows the disastrous consequences of deficit spending, going off the gold standard, and how Keynsian so-called “stimulus” can wreck an economy.

    Good thing the war came along and saw the exact same policies work like a charm. Couldn’t be that the stimulus was finally big enough—no, it’s that War Magic™ that enriches everything it touches.

  • eric

    [Under Newt’s plan] Capital gains, dividends, and interest income would be tax-free.

    Right there is the scam. Hey Newt – if you really support a flat tax, make all sources of income equal.

    Or – dare I suggest it – use tax policy to encourage the behavior you want? If you want people working, tax work less than you tax investment. Taxing work more than you tax investment will drive people to stop working and, instead, try and make money via the stock market.

  • jamessweet

    FWIW, studies have shown that there is little correlation between tax rates and national prosperity.

    This can not be repeated enough. It’s not prime facie implausible that tax cuts for the rich (oh, sorry, I mean “job creators”) might stimulate the economy. If we think about it, we can come up with a lot of problems with that argument, but it’s not absurd on it’s face.

    It just happens to be dead wrong, as we now know from the data.

  • d cwilson

    Darth Cheney once said, “deficits don’t matter.” Got that wrong. They should chisel this on his tombstone.

    You forgot the addendum to Cheney’s statement: “But only when republicans are in power”.

    What Cheney meant was that there is no political downside for republicans to run up a deficit, because when they’re in the White House, republicans don’t give a shit about it and democrats are too tarred with the “tax and spend liberal” label to be able to successfully exploit the issue.

    As for what should be chiseled on his tombstone, I would recommend “Warmongering Profiteer”, but to each his own.

  • slc1