I haven’t had a chance to read (or see) Tim Pawlenty’s speech, but I’ve been impressed with the reported details: sharp cuts in government expenditures, sharply lower tax rates on corporations, greatly simplified personal income tax, with only two rates, 10 and 25 percent, and most deductions eliminated. This is an aggressive pro-growth agenda not just a fiscal root canal, balance-the-budget-and-forget-everything-else agenda. Ronald Reagan would be proud. Whoever the Republican candidate is, he or she should be inserting the word growth into every sentence he utters.

But Pawlenty also called for eliminating taxes on capital gains and dividends. In economic theory this is a good idea. Taxing capital gains discourages seeking capital gains, which is wealth creation. And dividends are paid out of corporate profits, which are already taxed at the corporate level, and so taxing them amounts to double taxation.

But these ideas are politically toxic because they are so easily demogogued. Just consider: Henry Bigbucks has never done a lick of work in his life, unless you count running his money-losing racing stable and seeking the America’s Cup work. Because his grandfather founded National Widget Corporation and left him ten million shares of its stock, he’ll never have to work. And yet under Pawlenty’s tax proposal, he’ll never pay a dime in taxes. How would Pawlenty handle that when Obama brings it up in one of the debates in the fall of 2012?  Not well, I bet.

In a perfect world, the corporate income tax would be abolished. (It was only suggested by President Taft as a stop-gap measure until the personal income tax amendment could be ratified, which came to pass in 1913.) Instead the tax obligation on corporate profits should simply flow through to the stockholders. So that if National Widget had a profit of $5.00 a share, Henry Bigbucks would owe the taxes on his $50,000,000 share of the profits. The corporation would send him the equivalent of a Form 1099, saying, in effect, “you earned $50,000,000 in profits last year and we have withheld $12,500,000 to pay the taxes.” Mr. Bigbucks would then file a tax return like the rest of us. This scheme would have the enormous additional virtue of making corporations concerned only with pre-tax profits, which are a measure of wealth creation, not with after-tax profits, which are largely a matter of lobbying success in Washington. K Street would be deserted.

As for capital gains, indexing them for inflation would make sure that the tax on them applies only to real capital gains, not the illusion of them caused by a depreciating dollar. And not taxing capital gains that are reinvested in other securities (i.e. exactly what happens now inside a 401K account) would also be a good idea. Henry Bigbucks would then only owe capital gains when he sold some shares of National Widget in order to buy a new yacht in his unending quest to bring the America’s Cup back home to the New York Yacht Club.