Tim Pawlenty’s “Better Deal”

On Tuesday, Tim Pawlenty announced his “Better Deal” for the American economy. The plan may be appetizing to Conservative voters and contains many ideas that even moderates should be able to latch on to.

Pawlenty starts by proposing a basic re-write of the tax code – corporate, business, individual, investment .. all of it.

For businesses, his plan modifies the corporate tax rate from 35% to 15%, end tax loopholes, eliminate subsidies, and allows small and medium businesses to take advantage of the corporate tax rate.

The plan also changes the individual income tax mess into a – not-quite-flat – two tiered system:

• Individuals making $50,000 or more will be taxed at 25%
• Individuals making less than $50,000 will pay a 10% tax on income

It does not appear that Tim Pawlenty’s plan gets rid of individual tax deductions as one part of his contains the phrase, “Married couples making $50,000  or lower will have an effective 0% tax rate”. This indicates that there is either a third bracket for that demographic or there is a credit that when two people apply it would equal up to $5,000 – thereby cancelling out the up to $5,000 in taxes they would owe on incomes of that size. With a 25% tax rate at $50,000 I would imagine there would have to be some deductions as a married couple making $100,000 would be required to pay $25,000 in income taxes. That would certainly be an increase as that demographic currently has an effective income tax rate much lower than that.

The “Better Deal” also seeks to spur investment by eliminating capital gains, dividend, and the so-called “death” or estate tax. Encouraging Americans to save more would make it much easier to be less-dependent upon the government for periods of unemployment or upon retirement.

Pawlenty’s plan also addresses the nearly insurmountable debt that the federal government has taken on. He would push for a balanced budget amendment that caps federal spending at 18% of GDP. Should Congress still fail to balance the budget, the proposed amendment would also grant the President the power to impound up to 5% of Federal spending and freeze spending at current levels until the budget is balanced.

To try and shrink the size of government, the proposed plan would implement the Lean Six Sigma process – used in large companies to streamline processes and reduce wasteful effort – with the promise of saving federal agencies of up to 20%.

Gov. Pawlenty also proposed several initiatives to remove obstacles from businesses. Much of it seems centered on trade agreements with South Korea, Columbia, Panama, and others. But, it also seeks to limit the mandate of the Federal Reserve to focus only on price stability.

One aspect to his plan that is almost certainly in response to the attempt of the current administration to use regulations to skirt Congress is that it requires the sunsetting of all federal regulations unless Congress explicitly re-authorizes them.

There are many promising aspects of Pawlenty’s plan. The approach is probably the safest way to approach entitlement reform. Force it to happen without actually talking about it. The proposed changes, if ever enacted, would certainly cause severe cuts to something – something big.