Original Post
October 20,2011
by Jay Fitzgerald
Corporations and individuals supporting a simpler ``flat tax'' system had better be careful what they wish for. They may find that it simply costs them more.
Replacing the nation's complicated tax code with a single flat rate has again moved to the forefront of political debate as three Republican presidential candidates - Herman Cain, Rick Perry, and Newt Gingrich - have made such proposals the economic centerpieces of their campaigns.
While most economists and tax specialists agree these proposals would simplify the tax system, they add that many working families and corporations would end up paying more. Corporations may be in for the biggest shock. They could lose a number of very attractive tax deductions, credits, and other provisions that currently drive down tax bills.
The net result: higher corporate taxes.
``There are going to be big winners and big losers,'' said Martin Sullivan, an economist and editor at Tax Analysts, a nonprofit organization that specializes in tax issues. ``Some people and companies that currently don't pay taxes are going to get hit. They're going to start paying more in taxes.''
The idea of simplifying the current US tax code - by slashing taxes to one flat rate for everyone - has been around for a while. California Governor Jerry Brown, a Democrat, proposed a flat tax when he ran for president in 1992. Magazine publisher Steve Forbes, who ran for president in 1996 and 2000, famously made the flat tax his main campaign issue when he sought the GOP presidential nomination.
Neither Brown nor Forbes won the party nomination, and most other flat-tax proposals have ended up going nowhere as well once they hit Congress.
As with earlier plans, this latest round of flat tax proposals would lower the highest tax-rate brackets and eliminate numerous deductions, write-offs, and other special provisions stuffed in the nation's cumbersome and convoluted tax code.
Economists and tax accountants say these proposals share another feature common to flat tax systems: They tend to mostly benefit the rich, who would see their taxes substantially lowered, while some poor and working-class people would be hit with tax increases as they get bumped into a higher, one-size-fits-all tax rate
Perhaps the best known of the recent flat tax proposals is Cain's 9-9-9 plan. The former pizza chain executive has proposed a 9 percent individual tax, 9 percent business tax, and 9 percent national sales tax.
By slashing the top individual and corporate tax rates to 9 percent from 35 percent and imposing a new national sales tax, the wealthiest Americans - the top 1 percent of incomes - could average a $210,000 a year tax decrease, according to the nonprofit Citizens for Tax Justice in Washington. About 60 percent of taxpayers could end up paying an average of $2,000 more, the group estimates.
Cain has fired back that his tax-code plan has been unfairly analyzed and that it protects those living below the poverty level.
Nearly half of Americans currently pay no federal income taxes, due largely to various exemptions and credits, said Roberton Williams, a senior fellow at the Urban-Brookings Tax Policy Center in Washington. About half are poor. The other half includes Americans of all incomes taking advantage of deductions, credits, and loopholes, Williams said.
Some critics of the current tax code say it's not right that so many Americans pay no federal income taxes at all. Everyone should pay at least something, they argue.
Adding a national sales tax - there is none now - would ensure that everyone pays. ``Without question, more people will be paying taxes with a national sales tax in place,'' Williams said of Cain's 9-9-9 plan.
The tax proposals by Perry, the governor of Texas, and Gingrich, a former US House speaker, are hybrid plans that each contend would mean no tax hikes. Both plans would allow taxpayers to keep using the current system if they determine it would be cheaper than a flat tax.
But individuals and corporations alike could opt to file under a flat tax rate - 20 percent under Perry's plan.
Perry's plan would preserve deductions for mortgage interest, charitable giving, and state and sales taxes. The standard exemption would rise about $3,000 to $12,500.
Gingrich's plan calls for reducing the corporate rate to 12.5 percent, down from its current high of 35 percent. Like Perry, Gingrich would give individual taxpayers a choice: File under the current system or pay a flat tax of 15 percent, whichever is cheaper.
By giving taxpayers the option of sticking with the current system, Perry and Gingrich can argue their plan won't raise taxes on anyone.
But if some filers want to avoid the long form and file a simple flat tax, they could end up paying more.
Under Perry's flat tax, for instance, an individual earning $43,000 a year would see annual taxes increase by about $500, according to the Tax Policy Center. In contrast, someone earning more than $149,000 would see taxes fall by nearly $6,000 a year.
As for business, only larger corporations are supposed to pay federal income taxes at rates as high as 35 percent.
But about two-thirds of these corporations pay no taxes after taking advantage of numerous tax exemptions, deductions, and write-down provisions, Williams said.
A flat tax would mean some corporations won't be able to avoid taxes, assuming their deductions are eliminated, he said.
Most economists and tax specialists agree the tax code needs to be simplified to make it more fair, and hopefully spur economic growth.
``It would eliminate uncertainty and needless complexity,'' said Daniel Massucci, a certified public accountant at Massucci & Associates in Connecticut.
But, he added, people should not fool themselves into thinking everyone will be happy under a flat tax.
``Some people's taxes will go up,'' he said. ``Some people's taxes will go down.''