Is Real Tax Reform Even Possible in 2012?

Herman Cain, Rick Perry unveil aggressive strategies

This is a rush transcript from "Journal Editorial Report," October 22, 2011. This copy may not be in its final form and may be updated.

PAUL GIGOT, HOST: This week on the "Journal Editorial Report", from Herman Cain's 9-9-9 plan to Rick Perry flat tax proposal, is real tax reform finally possible?

Plus, with many "Occupy Wall Street" protesters demanding relief from students loans debt, we'll take a look at what could be the next big taxpayer bailout.

All that, and the death of Muammar Qaddafi, is it a vindication of Obama's policy of leading from behind?

(BEGIN VIDEO CLIP)

REP. MICHELE BACHMAN, R-MINN., PRESIDENTIAL CANDIDATE: If we give Congress a nine percent sales tax, how long will it take a liberal president and a liberal Congress to run that up to maybe 90 percent?

GOV. RICK PERRY, R-TEXAS, PRESIDENTIAL CANDIDATE: Go to New Hampshire where they don't have a sales tax and you're fixing to give them one. They're not interested in 9-9-9.

FORMER GOV. MITT ROMNEY, R-MASS., PRESIDENTIAL CANDIDATE: It's not going to be getting bushel basket that has apples and oranges in it because I'm going to pay both taxes.

HERMAN CAIN, FORMER GODFATHER'S PIZZA CEO & PRESIDENTIAL CANDIDATE: No, no. I'm not --

(CROSSTALK)

ROMNEY: And the people in Nevada don't want to pay more taxes.

FORMER SEN. RICK SANTORUM, R-PA., PRESIDENTIAL CANDIDATE: Reports are now out that 84 percent more Americans would pay more taxes under his plan.

(END VIDEO CLIP)

GIGOT: Welcome to the "Journal Editorial Report." I'm Paul Gigot.

Those were Herman Cain's rivals ganging up on the businessman in this week's Republican presidential debate, and attacking his 9-9-9 proposal as a tax increase waiting to happen. This, as Texas Governor Rick Perry gets set to release his own flat tax plan next week. So is real tax reform finally possible or does the Cain treatment await any candidate looking to overhaul the current tax system?

Joining the panel this week, Wall Street Journal, assistant editorial page editor, James Freeman; columnist, Mary Anastasia O'Grady; and Washington columnist, Kim Strassel.

Mary, those candidates piled on Herman Cain. All of them, every one of them opposed it. But Art Laffer, the economist, supported it in our pages this week. Who is right?

MARY ANASTASIA O'GRADY, COLUMNIST: First of all, I think that Herman Cain obviously got attacked because he's spiking in the polls, people are worried about him, and this is the cornerstone of his campaign right now. It has a lot of good spiritual initiatives.

(LAUGHTER)

In other words, it's --

(LAUGHTER)

-- you know, it raises the issue of how complicated the tax code is. It attempts to simplify it, broaden the base, hose are all good things.

GIGOT: Think it would help economically?

O'GRADY: The problem with this code, this idea, I think, even though it says that it uncomplicates the code, look at the big debate about how complicated it is. Nobody seems to know exactly what it is. You have a corporate income tax where you have -- you pay taxes, but you're not allowed to subtract out wages. It's called a net profits tax, but apparently you pay it even if you don't have a profit so --

GIGOT: Elements of perhaps a Value-Added Tax?

O'GRADY: Yes. I think it's too complicated. And it has the other problem that some people will pay more taxes. That's going to be a political problem.

GIGOT: James, that's true of any tax reform plan, some people will pay more and some will pay less because you're adjusting obviously for the loopholes and preferences that have been created. That's the entire point.

(CROSSTALK)

JAMES FREEMAN, ASSISTANT EDITORIAL PAGE EDITOR: Yes, for the large part, that's inevitable.

GIGOT: We want a more efficient, fairer, simpler tax.

FREEMAN: I think what Mr. Cain is going to say, probably is already saying, and what Mr. Perry is going to say next week is, look, we're cutting out hundreds of billions of dollars every year in tax compliance costs. We're cutting out perhaps billions of hours of people figuring out their tax returns. I think you would get some economic benefits out of the Cain plan. You worry about, does it create the architecture to raise taxes later, but you --

GIGOT: What do you mean by that?

(CROSSTALK)

FREEMAN: As Michele Bachmann said it that clip we played, what if Congress runs that sales tax from 9 to 20. What if we end up getting high income tax, which we have now, and high sales tax nationally? that's a problem. Initially, if you actually enacted it, just like what I expect to be the Perry plan, you have a lower rate, you have some simplicity versus the current system, you get more economic growth.

O'GRADY: But why go to that problem when you go just go to the flat tax?

GIGOT: Without introducing that sales tax.

O'GRADY: Yes. And which is basically a consumption tax also. You take your income, you subtract out your investments and you pay tax on what's left. It's so much cleaner, simpler, not, -- you know, doesn't run the risk that James is describing.

GIGOT: Kim, let's get you in here. You've got Jon Huntsman and Newt Gingrich also proposing tax cuts in rates. Jon Huntsman a major tax reform, bringing the top rate down to, I think, 23, 25 percent. What -- does this mean that among Republicans, at least, reforming the tax code is part of a new consensus and it's going to be part of whatever new president's agenda, if a Republican is elected?

KIM STRASSEL, WASHINGTON COLUMNIST: Yes, I mean, I think you have to give Herman Cain credit for that, because there's probably no question that when Rick Perry puts out a flat tax, part was motivated by looking at success of Herman Cain, the enthusiasm people out there had for this idea - - just some sort of reform, in the polls, and so he's now putting out his flat tax. And as you said, what this does done is put focus on the fact that we have a lot of interesting tax proposals. You've got Newt Gingrich proposing an optional 14 percent flat tax. The Huntsman plan not only lowers the rates, but consolidates the brackets. If there's only three (ph), gets rid of credits and deductions. There's a lot of interesting thinking.

Interestingly, the one timid person at the party is the guy that everybody says is the frontrunner, Mitt Romney, who has not proposed anything very dramatic and he is going to have to see if he can keep up with the rest of the pack.

GIGOT: What about Mitt Romney's plan? He says he's going to cut taxes only for those people -- capital gains taxes and dividend taxes, only for people who make less than $250,000 or $200,000 a year, depending if you're a couple or single.

STRASSEL: Yes, I get it confused with the Obama tax plan all the time.

(LAUGHTER)

Because it's so similar. I mean, Mitt Romney has a problem in that he wants to go after the rich. And that's a problem for the Republican base. And it's also a problem economically, because even if you collected all of this money from the rich, you wouldn't solve our deficit problem and you would probably hamper growth because these are the people with the money to invest.

GIGOT: James, this suggests to me we're going to see in the Republican primary -- particularly Rick Perry comes out with a flat tax, like Steve Forbes' flat tax from several years back with a top rate of 15, 17 or 20, whatever it is. That means you'll have to take out the deductions for state and local tax, or take out the deductions or reduce it dramatically from home ownership, maybe or maybe not he'll include removing the deductions for charitable contributions, but a lot of these deductions have got to go. That means you're setting up a big debate over --

(CROSSTALK)

FREEMAN: That's right. You see Mr. Romney already -- and Mr. Romney and the forces of the status quo already attacking the idea some favored deductions are going away. Remember, the rates are coming down. And the point you mentioned, which people always hit the flat tax with, what if this person we found in Iowa is going to pay another $100 a year? What they have to remember is, yes, but they're not going to have to pay $200 to H&R block or somebody to tell them what they owe.

GIGOT: And if the economy is growing more rapidly then everybody benefits. And that is the ultimate --

(CROSSTALK)

GIGOT: -- in addition to -- but, Kim, what do you think -- how do you think that this debate is going to go? Is tax reform going to be the central issue in the primaries from here on out?

STRASSEL: I think we're going to get an idea of just how serious the candidates are. You talked about the possibility of this happening in Washington. If you want to see that happen, you have to have a candidate who does make this the center piece of their campaign, not just in the primary, but the general election, if they become the nominee. And you also have to see Republican in Congress take it up as well and use it to win some Senate and House seats, too. Because given the complaints you're going to see -- we were just talking about regressivity and all of this, you're going to have a big public movement to make it happen.

GIGOT: OK, Kim, thanks.

When we come back, the Wall Street protests continue. Among their demands, student loan forgiveness. With defaults on the rise, are we looking at the next big taxpayer bailout?

(COMMERCIAL BREAK)

GIGOT: As the "Occupy Wall Street" demonstrations continued for a fifth week, many of the protesters are calling on creditors to forgive student loan debt. It may not be a realistic goal but the problem is real. The amount of student loans taken out exceeded $100 billion for the first time last year. And total unpaid student loan debt is expected to exceed $1 trillion by the end of 2011. Americans now owe more on student loans than credit cards, and the default rate is rising. So could taxpayers soon be on the hook?

We're back with James Freeman. And joining us, opinionjournal.com editor, James Taranto.

These are huge numbers, James, over $1 trillion in total debt. How big a problem is this?

JAMES TARANTO, EDITOR, OPINIONJOURNAL.COM: It's a big problem. And another interesting number is the amount of outstanding student loan debt has doubled in the past five years during this dismal economy. When you think about it, it makes sense. What do young people do when they can't get jobs? They park themselves in school and try to get another credential in hopes of improving their employment prospects later. But, as a result of this, they end up going into the workplace with much more debt. Hopefully, the economy will improve so they'll be able to get jobs. But this looks to me like another debt bubble, very much like the housing bubble.

GIGOT: In real terms, borrowing has gone up roughly double in the last five years or so.

FREEMAN: Yes, it's a --

(CROSSTALK)

FREEMAN: The reason that people think of it as the new subprime, one of the reasons is that this is a -- when it's coming from the government, a student loan is that rare loan that doesn't matter what your credit score is, your credit history, really, your ability to repay. And I think people --

(CROSSTALK)

GIGOT: You mean that you can get a student loan no matter what your economic circumstances are?

FREEMAN: Yes. Now, the answer, if someone was defending the program and being honest, they might say, well, don't worry about it, because this is a debt that these kids can't escape even through bankruptcy. So --

(CROSSTALK)

GIGOT: Is that right?

FREEMAN: So we'll hound them forever. It's half right. That doesn't mean that the taxpayers don't lose. They've now come out with income- dependent payment options, income contingent. If the kids aren't making money and just downtown Wall Street, they don't have to pay back the loans.

GIGOT: But that makes it difficult if you're just out of school for the first 10 years of your life, and you're not making a lot of money anyway. What you want to do is you want to be building assets so you can do things like prepare for the first child or prepare to buy that house.

TARANTO: Right, but a college degree is sold as an investment, just the way houses are. You're investing in your future. I don't blame these kids for being upset about this. But I think their anger is misdirected. Look, if you buy a car and it turns out to be a lemon, you don't blame the bank that lends you the money to buy the car.

GIGOT: A couple of years ago, the federal government intervened and made sure that from now on, the Department of Education generates all student loans. It used to be a lot done by banks. No longer. What --

FREEMAN: That's right.

GIGOT: What effect has that had on taxpayers?

FREEMAN: That means we own the risk. And it's about a trillion dollars coming on to the federal balance sheet. Again, we talked about how these times are tough loans for students to escape. But --

(CROSSTALK)

GIGOT: But they were on the hook for guarantees even before this, does it matter if it's now on balance sheet?

FREEMAN: It matters somewhat because what they used to do is guarantee almost all of it. Now the taxpayer is 100 percent on the hook.

(LAUGHTER)

GIGOT: We're all in, baby.

(LAUGHTER)

FREEMAN: So we are all in on this. And there is an education bubble, because I think college has been sold, and the higher education generally, as always a good thing, no matter the cost. Sort of like people thought during the housing bubble. And you have to realize, as Glenn Reynolds told us on our "Opinion Journal" web show this week, there's a difference in value in the marketplace, whether you have an engineering degree or gender studies degree. And if you've gone that latter root -- and this may be some of the "Occupy Wall Street" people -- you come out of school, you've got a lot of debt and not an immediately marketable skill, you're in trouble.

GIGOT: All of this is sold to us in the name of making college more affordable. Has it done that?

TARANTO: No, because what happens is when the government subsidizes a good in order to encourage more widespread consumption of it, it creates an artificial demand. Simple economics, that drives prices up.

GIGOT: So the schools have been raising tuition right along with the increases in subsidies for education?

TARANTO: Of course, and it's a money machine for these colleges and universities.

GIGOT: What's the solution here, James, briefly?

FREEMAN: Well, you've got to get the government out. It's not just the loans. The Obama administration --

(CROSSTALK)

GIGOT: The government out of education. You mean not guaranteeing any loans, not making any loans?

FREEMAN: You want to get them out of that business and out of the subsidy business. Because President Obama takes great pride in the fact that he's doubled the funding for Pell Grants. Just free money, not loans.

(CROSSTALK)

FREEMAN: -- that kids have to pay back. But the same thing applies. Tuition has risen faster than even health care over the last several decades and that is because the government is creating this artificial demand.

GIGOT: I think you're right. But I have to say, the chances of that happening, the government getting out of college loans, are about as likely as the government getting out of the housing business.

Still ahead, the death of Muammar Qaddafi, is it a vindication of the Obama administration's policy of leading from behind?

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

PRESIDENT BARACK OBAMA: Today belongs to the people of Libya. This is a moment for them to remember all those who suffered and were lost under Qaddafi and look forward to the promise of a new day.

(END VIDEO CLIP)

GIGOT: That was President Obama on Thursday, reacting to the death of Dictator Muammar Qaddafi and calling it a momentous day in the history of Libya. But is it also a vindication of the administration's often- criticized policy of leading from behind?

Let's ask Wall Street Journal foreign affairs columnist, Bret Stephens, and editorial board member, Matt Kaminski.

No question, a victory for the people of Libya, Matt. But is it also a victory for the U.S. interest?

MATT KAMINSKI, EDITORIAL BOARD MEMBER: Absolutely. First of all, it's a victory also for the U.S. military. It didn't get enough notice but the U.S. military led the bombing campaign that turned the tide in the civil war. It was said that the Europeans were out front but, in fact, we provided all the drones, provided the mid-air refueling tankers. When the Europeans ran out of predator bombs by day four of the campaign, we quietly supplied them, so we really made this happen militarily. President Obama didn't take that lead politically. I think that cost us. But overall, this has been a great success. it would have been terrible if had been allowed to stayed in power both for Libya but also for Tunisia, Egypt and the rest of the Middle East.

(CROSSTALK)

GIGOT: On this point, I just want to -- that whether or not his political restraint cost us. Elaborate on that.

BRET STEPHENS, FOREIGN AFFAIRS COLUMNIST: Well, look, this was a campaign that should have taken two weeks. Instead it took seven months. The result was a tremendous loss of lives. The result was the near collapse of NATO. People forget that the British and the French, the primary -- our primary NATO allies practically ran out of bombs the first couple weeks of the war. NATO nearly fell apart over the campaign. And Qaddafi stayed in power much longer than he needed to. And a lot of Libyan lives were lost as a result. This was a weak regime that could have been toppled in week two.

GIGOT: But the administration argues that had the president led from the front, if you will, had the United States said Qaddafi must go and we're going to do it, you never would have got the United Nations behind it. You never would have got the Arab League behind it. You never would have got the rest of the world behind it and we would have been back where we are --

STEPHENS: As a matter of fact, the Arab League was backing this action by the time the United States became -- became involved. Look, the question is, are you interested in -- is your idea of victory being creating an international consensus or is it getting rid of this blood- minded dictator, who has terrorized his people for 42 years and set an example for the rest of the Arab world?

GIGOT: But we got the win anyway and he is gone now. And isn't it -- I mean, you're right. It took longer.

STEPHENS: We got the win. I'm glad President Obama did it. It's unfortunate that so many Republican contenders for the presidency oppose this. Was it done well? Not particularly well. Should it be a model for how we should act? I don't think so.

GIGOT: Matt, is it a model?

KAMINSKI: It's -- I mean, every war is different. I think the problem here became that it became a problem domestically here in the U.S. You had backlash in Congress, obviously among the Republican candidates. Also, people didn't know why we were there. You have to sell your war, when you go and engage overseas.

GIGOT: And your argument that's partly because the president didn't want to appear to be leading. He didn't want to stand up and take the lead and make the case. But also, wasn't there some real Republican opportunism here in --

(CROSSTALK)

KAMINSKI: Absolutely.

GIGOT: The opposition, with a Democrat in the White House?

KAMINSKI: There was posturing, in the late spring, by Michele Bachmann, Jon Huntsman and Newt Gingrich. And they all look very foolish right now, I think. I would give more credit to President Obama than -- here. But we should note that he did not want to do this initially. They were reluctant to move in. And they were pushed by the Europeans and by the Arab League and changed their mind in late March.

GIGOT: And let's give credit to Secretary of State Hillary Clinton and U.N. Ambassador Susan Rice, pushed of whom internally did push the president finally to intervene --

(CROSSTALK)

STEPHENS: For humanitarian reasons. But we actually had strategic interests in Libya. We have a strategic interest in showing, if you're an anti-American dictator, your days are number. There's an example that's being set here in Libya of what might happen with, say, the Assad regime in Syria, where we also have an interest in seeing that regime go.

GIGOT: What will Assad take from this?

STEPHENS: Assad will probably take from this the need to ratchet up repression, because he sees in Muammar Qaddafi a harbinger of where his future may lie. But it also might be an opportunity for us to start providing real support for the opposition movements in Syria, which are beginning to coalesce as a single political -- political organization. They've had meeting in Turkey. They're becoming more organized, in some cases, more violent. But, do we have an interest in seeing Iran's principal client in the Arab world collapse? We do.

GIGOT: Briefly, any chance of getting the same kind of coalition together to topple Assad as happened against Qaddafi?

KAMINSKI: I think so at some point. I think Turkey is losing patience with Assad. It's completely turned, and they were very close. The Europeans have interests in Syria. I'm not saying we should do the same thing, but the message to Assad is, choose a comfortable exile, because the Qaddafi end is not a very good one.

GIGOT: It's ignominious (ph).

We have to take a break. When we come back, our "Hits and Misses" of the week.

(COMMERCIAL BREAK)

GIGOT: Time now for "Hits and Misses" of the week -- Mary?

O'GRADY: This is a hit for Ohio County Sheriff Matt Lutz, who gave the order to shoot and kill 50 exotic animals that escaped from a game preserve in Ohio. Nobody wants to see beautiful animals like lions, bears -- there were 18 Bengal tigers -- destroyed, but I think that the sheriff made the good decision because these are cute and cuddly to look at from afar, but they can turn you into a spam sandwich quickly.

GIGOT: OK, Kim?

STRASSEL: A miss to a coalition of U.S. solar panel manufacturers that are now asking the government to slap a billion dollars worth of import duties on Chinese rivals. Let me see if I get this right. The Obama administration spends hundreds of millions on subsidies and loans and grants for a solar industry. When the price of these products collapses and Solyndra goes bankrupt now our complaint is to come back and say the Chinese subsidized their guys even more, and start a trade war? Welcome to the world of green energy.

GIGOT: OK, James?

TARANTO: A miss to Miss Nan Kerry (ph), an 18-year-old "Occupy Wall Street" protester, who told the New York Post this week, quote, "Stealing is our biggest problem at the moment." She said her own $5,500 computer was stolen. Why? Because she left it in a public place, filled with people who are demanding the redistribution of wealth. Imagine that?

(LAUGHTER)

I hope that Miss Kerry (ph) learned a lesson as valuable as it was costly.

GIGOT: Did you get away with your wallet intact when you were down there?

(LAUGHTER)

TARANTO: I did. I guarded it.

(LAUGHTER)

GIGOT: All right, that's it for this week's edition of the "Journal Editorial Report." Thanks to my panel and to all of you for watching.

I'm Paul Gigot. We hope to see you right here next week.

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