Original Post
October 26, 2011
by Ewen MacAskill
Top thinktanks claim flat-rate plans – used by countries in 'terminal crisis' – will not benefit lower-earners
The wealthiest Americans stand to gain most from the flat tax unveiled by Republican presidential candidate Rick Perry, according to the Tax Policy Center, one of the country's leading independent tax bodies.
The thinktank inserted itself into the middle of the Republican nomination campaign last week when it concluded, after crunching the numbers, that Herman Cain's tax plan would mean increases for 84% of taxpayers.
Cain subsequently revised his flat-tax plan.
Roberton Williams, an analyst at the centre, said on Wednesday the centre had asked the Perry campaign to provide more details of its tax proposals in order to carry out a similar number-crunching exercise. The centre, which sent its first impressions to the campaign to allow its financial experts to respond, is to make its findings public.
Perry, who is trying to revive his election chances after a series of poor debate performances, revealed on Tuesday in South Carolina a plan for a flat 20% rate on income and corporate tax. Complicating the issue, he said taxpayers would have the option of remaining with the existing system or switching to his 20%.
Williams, a former staffer at the non-partisan Congressional Budget Office, which provides information to members of Congress, said: "We do not know all the details, but there are a couple to things we can conclude. The most obvious is that, as a lot of of people are able to choose, the plan will definitely lose revenue.
"The counter-argument from the [Perry] campaign is that the economy will grow rapidly. We have heard that before and it is not true. It is going to lose revenue.
"The second thing is the wealthy will make out very well. They will drop from 35% income tax to 20% … It means the wealthy will pay a lot less tax than now."
For a single person earning $30-40,000, it would make sense to remain with the current system, according to the centre. But for higher earners who are married, for example, it would be better to opt for Perry's scheme.
Perry did not say whether people could switch back and forward on an annual basis, or would have to commit to one or other scheme. He did not set out a timetable, either, for the phasing out of some existing tax exemptions he was planning to scrap.
"It is going to be hard to accomplish a balanced budget, if at all," Williams said.
The centre, which is run by the Urban Institute and the Brookings Institution, is planning next year – once the Republicans have a candidate – to provide a calculator that will allow everyone to work out whether they will pay more tax under Obama or his Republican rival.
Mark Blyth, a professor of international political economy at Brown University, said that flat taxes have been introduced sparingly round the world. "Usually when countries contemplate introducing flat taxes, it is when they are in terminal crisis. What Perry is suggesting is the US is on the same level as Estonia, Azerbaijan and Russia in the 1990s. It is amazing that is the image he wants."
Blyth added: "By definition, it is regressive."
The Citizens for Tax Justice group, in a statement, agreed, describing the plan as complicated, one that would result in massive tax cuts for the richest Americans.
"This would not make anyone's life easier on tax day — except the wealthy Americans whose investment income would be exempt from taxes under Perry's optional flat tax. These lucky taxpayers would quickly find that the optional 'flat tax' actually has two tax rates: 0% for the investment income that mostly goes to the rich, and 20% for the types of income that most of us depend on," the group said.
Citizens for Tax Justice added: "What would stop taxpayers from simply switching back and forth each year, depending on which set of rules results in lower taxes? It's unclear how Perry's plan would address this, but some previous versions of this proposal claimed to address this by forcing taxpayers to choose which system to file under and then locking them into that choice for years to come.
"They would be allowed to change their minds one time during their lives and could also change whenever their filing status changes because they become married or divorced."
Like the Tax Policy Center, it is to produce estimates of the impact on taxpayers at different income levels as details become available.
"But even the limited details available now make clear that this plan is not designed to help the working class," the group said.