Texas Governor Rick Perry’s flat-tax fiscal plan would provide broad tax cuts to many households while retaining the existing system’s complexity.
The plan, announced today in a speech by Perry, who is seeking the 2012 Republican presidential nomination, would create a single tax rate of 20 percent for individuals. Taxpayers could choose that system or file under the existing tax code with all of its exemptions, credits and deductions, a setup that economist Jared Bernstein described as a “complicated beast” that creates parallel systems.
“The thing that makes the tax system complex is not graduated rates,” said Bernstein, a former adviser to Vice President Joseph Biden and a senior fellow at the Center on Budget and Policy Priorities in Washington, which advocates policies that help low-income families. “That’s one of the big misunderstandings of this flat-tax discussion. You can have as many rates as you want and figure out what you owe on a postcard.”
Perry, who has been lagging in the polls, said his plan would simplify tax filing, reduce tax compliance costs and encourage economic growth.
Perry’s proposal deviates from the flat-tax regime embraced by his adviser, the publisher and former presidential candidate Steve Forbes. Like the Forbes plan, Perry offers a single rate, eliminates taxes on investment income and provides exemptions for low-income taxpayers.
Perry is proposing a few twists on the flat-tax concept. By giving taxpayers a choice between the two systems, he doesn’t remove complexity from the tax system and avoids the kinds of tax increases for lower-income people that have led to criticism of rival Herman Cain’s 9-9-9 plan.
In the simpler system, Perry would retain tax breaks for mortgage interest, charitable contributions and state and local taxes for people earning less than $500,000 a year, according to an op-ed he wrote in The Wall Street Journal.
With a choice, taxpayers will gravitate to the system that provides them the most benefits.
“It just strikes me as political pandering at its worst,” said Leonard Burman, a former Treasury Department official who now teaches at Syracuse University in New York. “It doesn’t seem like a serious policy proposal.”
Low-income taxpayers, who benefit from refundable tax credits for work and children, might prefer the current system.
Perry, who has described himself at an Aug. 13 campaign event as “dismayed at the injustice” that nearly half of households don’t pay federal income taxes, wouldn’t change that number, Burman said.
Eliminates Some Taxes
Wealthy taxpayers, attracted by the lower rate and the elimination of taxes on capital gains, dividends and estates, likely would migrate to the new system.
In an interview with The New York Times and CNBC, Perry said he was unconcerned if analyses of his plan showed that high-income taxpayers would benefit.
“We went through what are the ways to really give incentives to those that are going to risk their capital to create the jobs,” he said. “Those that want to get into the class warfare and talk about, oh my goodness, there are going to be some folks here who make more money out of this, or have access to more money, I’ll let them do that.”
Asked whether he thought the U.S. shouldn’t have a progressive tax system, Perry said, “I do. I think you need to have a tax system that basically is flat, fair and simple.”
Other Republicans, including presidential candidate Newt Gingrich and House Budget Committee Chairman Paul Ryan, have offered optional tax system proposals.
Ryan’s plan didn’t allow taxpayers to make an annual choice between the systems. Instead, his proposal would require individuals to choose the current system or a simpler system within 10 years and then switch only once in their lifetimes or upon a major event such as marriage or divorce.
Perry’s plan would also cut the corporate tax rate to 20 percent from 35 percent. He would allow multinational companies to repatriate profits earned overseas at a 5.25 percent rate.
Perry said he wants to balance the federal budget by 2020 and set a spending cap of 18 percent of the gross domestic product. Those targets would require significant spending cuts, Bernstein said.
Ryan, a Wisconsin Republican, wouldn’t balance the budget until 2040.
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