Original Post
October 25, 2011
by Bernie Becker
To some, Rick Perry’s new flat-tax proposal is a bold step that will give the economy a well-needed jolt.
But to others, the Texas governor and GOP presidential candidate is offering an alternative that will not only bring in significantly less revenue than the current tax system.
It’s also far from a guarantee, these analysts say, that Perry’s flat tax would make life easier for many taxpayers.
Perry unveiled his new economic proposal – which also proposes entitlement changes and rolling back government regulations – in South Carolina on Tuesday.
On the tax side, Perry’s proposal has broad differences with the 9-9-9 plan pushed by Herman Cain, his rival for the GOP nomination. But the plan also swerves away from flat tax proposals previously offered by Steve Forbes, the magazine publisher and 1996 presidential candidate who endorsed Perry recently.
The Texas governor, unlike Forbes 15 years ago, would make the flat tax optional, allowing taxpayers to choose whether they want to stay with the current system. The candidate’s flat-tax rate would also be 20 percent, while Forbes wanted to implement a 17 percent rate. The Perry proposal would additionally still feature deductions for mortgage interest, charitable contributions and state and local taxes. Like the Forbes plan, it features a large standard exemption as well – $12,500 for an individual and each of his or her dependents.
Because taxpayers will be able to choose their system, the governor may be insulated from the sort of criticism that Cain has gotten for his plan, which installs a 9 percent national sales tax and levies individual and corporate income at the same rate.
According to the Urban-Brookings Tax Policy Center, the 9-9-9 plan would amount to a tax hike for 84 percent of households.
Under the Perry plan, many low-income taxpayers could choose to remain under the current regime, which offers refundable tax credits like the Earned Income Tax Credit.
Wealthier taxpayers, on the other hand, would almost certainly pay less under the flat tax structure, given that the current top individual rate is 35 percent and that the plan also scraps taxes on long-term capital gains.
“This looks like a sizable tax cut for most Americans, except for the 42 percent who currently pay no income tax. And they wouldn’t have to pay any more.” said Scott Hodge, president of the conservative-tilting Tax Foundation.
But Perry’s rollout also appeared to open him up to the charge that, despite his campaign’s claims to the contrary, the plan does not necessarily simplify the filing process for many taxpayers.
Roberton Williams of the Tax Policy Center declared that it likely wouldn’t be immediately apparent to many middle-class taxpayers whether they were better off under the flat tax.
The proposal also doesn’t specify whether taxpayers would be allowed to freely switch back-and-forth between the current system and the flat tax over the years.
“If you believe in the flat tax, you should just do it," Williams said. "And if you’re worried about low-income families, there are other ways to help them.”
Analysts have also declared that, in an era of soaring deficits, the plan would almost certainly bring in less revenue, at least in its early years.
“How could it not?” asked a release from the liberal Citizens for Tax Justice. “If taxpayers are offered an alternative way to file, we assume they will choose this alternative only if it lowers their tax bills. The result will be, inevitably, a loss of revenue.”
Perry also proposes to slash the top corporate tax rate to 20 percent, down from its current 35 percent, and move to a so-called territorial system, which would essentially only tax corporations on profits made within the U.S.
To ease that transition, Perry also proposes temporarily allowing multinationals to bring offshore profits home at a 5.25 percent rate.
The Tax Foundation’s Hodge said the governor’s corporate tax proposals would also likely lose revenue, at least at first.
The Treasury Department, in 2007, said that eliminating a wide array of tax credits and deductions would still only pay to get the corporate rate down to about 28 percent – well above Perry’s preferred rate.
But Hodge also said that Perry’s proposal would spark economic growth and make American companies more competitive in the global marketplace – making it, in his mind, well worth the trade-off.
“I’m generally reluctant to say that tax cuts pay for themselves,” Hodge said. “But this is about as close as you’re going to get.”
But Williams, a senior fellow at the Tax Policy Center, said that, while the plan might help the economy grow in the long-term, he couldn’t say how quickly that might occur.
“This would allow corporations to keep more money. But they’re not short of money right now,” said Williams, noting reports that businesses and banks were already sitting on piles of cash.