So Tim Pawlenty gave a big speech on taxes and the economy today. He wants to institute a two-tier income tax with rates of 10% and 25%, cut the corporate income tax to 15% and eliminate the capital gains, interest income, dividend and inheritance taxes. It was a pretty partisan speech, but that doesn't mean it was ineffective. Pawlenty (when he isn't pretending to be furious and acting out his cartoonish idea of what a "populist" sounds like) has room to be more ideological and partisan partly because of his calm affect. There is a lot to chew over, but two questions predominated.
1. What will be there distributional impact of his tax policy if there are changes to income tax deductions in order to prevent tax revenues from collapsing?
2. What will be the impact of Pawlenty's policies on federal revenues? If his plan would cause revenues to decline, that means that we would have to make even deeper cuts than those outlined in Ryan's PTP (whose tax plan budgets for revenue neutrality) or an even larger deficit. The cuts in Ryan's PTP are already politically problematic to say the least (and he might not have budgeted enough money for Medicare) so advocating even sharper cuts will be even tougher. Or we could have a sovereign default.
IF Pawlenty's plan is shown as likely to cause a sharp drop in federal revenues it would probably have some political ramifications. Obama's budget promises of 2008 were nonsense of course (remember "net budget cut") but the deficit and the public debt were a much smaller issue in 2008 and the Republicans were burdened with a President with approval ratings in the 30s. Obama's approval ratings have been solid at about the 44% range. The asymmetry of media power between the left and right will make sure that all persuadable voters will have heard that Pawlenty a) said he believed that we were in a debt crisis that required wide sacrifice and b) Pawlenty came out for a tax plan that made the deficit worse in order to cut taxes on high earners. I think Pawlenty will have two answers to this:
1. You should trust me rather than the naysayers. I'm the guy who told Iowa we can't afford ethanol subsidies. I'm the guy who went to Wall Street and told them no more bailouts. I'm the guy who went to Florida and said that the younger generation will have to work a little longer before collecting Social Security benefits and lifetime high earners will get smaller Social Security COLAS. So when I say it adds up, that means it add up.
2. Cutting taxes will boost the economy so much that it will make up for the lost revenue.
There are circumstances under which this approach could work politically. Circumstances in 2012 could be such that a majority of voters might be willing to go along with such explanations if the Republican candidate doesn't come across as fanatical, insane, or grotesquely ignorant. There are several problems with this:
1. It assumes a situation where Republicans mostly win by default.
2. Our public debt problems are real and serious.