Taxes

Rick Perry’s Not-Really-All-That-Flat Tax


The 20 percent flat tax proposal Rick Perry unveiled on Oct. 25 scratches the Republican itch for a cleaner Internal Revenue Code stripped of special breaks, tiered rates, and endless complexity. It will also do something else, which Perry doesn’t highlight—deliver huge tax cuts to the rich and raise less revenue overall, making it much harder to achieve the already difficult task of balancing the federal budget.

Perry’s plan is a flashback to the signature issue of Steve Forbes, the wealthy magazine publisher who campaigned for President in 1996 and 2000. Perry has taken on Forbes as an adviser and even adopted his favorite trope, the notion that flat taxes are so simple they can be filed on a postcard. Forbes’s drive faltered after opponents criticized his 17 percent tax for shifting the burden to middle-income families and away from people like Forbes himself.

Why has the flat tax made a comeback after all these years? Blame Presidents George W. Bush and Barack Obama, who talked repeatedly about simplifying the tax code and then made it more complicated. Simplicity ranks high with voters, and Perry is trying to capitalize on that. “My plan does not trim around the edges,” he said at his South Carolina announcement. “Our tax system is like buying cars,” says Scott A. Hodge, president of the Tax Foundation, a Washington group that favors a simpler and more transparent tax code. “Everybody goes in and pays a different price, based on what they’re able to negotiate. And he’s offering the CarMax (KMX) version of taxation.”

Trouble is, many Americans view fairness very differently from the way flat-taxers do; they think the rich should pay a greater share of their income in taxes than the middle class does. And there are strong constituencies for each tax break in the current code. “The initial reaction for Forbes was positive, just like the initial reaction to Herman Cain is positive,” says Bill Archer, a former Republican representative from Texas who chaired the Ways and Means Committee from 1995 to 2001. “People are concerned about the complexities in the code and understandably and justifiably so. Then when the details began to surface, some of the glow leaves.”

Perry’s plan would tax people of all incomes at a rate of 20 percent with a $12,500 per-person exemption. Yet it isn’t entirely “flat,” in that different kinds of income aren’t treated alike. Perry would also preserve tax breaks for home mortgage interest, charitable contributions, and state and local taxes for people earning less than $500,000 a year.

Taxpayers could choose to remain in the current system with all of its breaks and higher rates. That option prevents people from paying more than they do now, but it guarantees that the government will bring in fewer tax dollars than it gets today. It also means that people would have to calculate their taxes under both systems to see which would be better for them—which is itself taxing.

An early analysis by the Tax Policy Center of the Urban Institute and the Brookings Institution estimates that for a typical married couple, with two children, earning $136,000 a year, federal taxes under the Perry plan would be 17 percent lower than under the current system. Taxes for a family of four earning $425,000 a year would be 49 percent lower, according to the Tax Policy Center’s analysis. A family of four earning $31,000 would be worse off under the Perry plan and would therefore likely opt to stick with the current tax code, the Tax Policy Center concludes.

Perry’s tax plan is part of his broader “cut, balance, and grow” economic proposal that calls for balancing the U.S. budget by 2020 and capping spending at 18 percent of gross domestic product, down from 24.1 percent for 2011.

Believers in small government like Perry’s plan because it will require cuts. “It’s very aggressive,” says Pete Sepp, executive vice-president of the National Taxpayers Union in Alexandria, Va. “The fact that Perry has come out forcefully for a balanced budget amendment as well as an 18 percent of GDP spending cap is a good sign.”

The kinds of budget cuts Perry’s plan would require are far more ambitious than even those contemplated by House Budget Committee Chairman Paul Ryan. In 2020, the year in which Perry wants to balance the federal budget, the Ryan budget would still have a deficit of $405 billion. Perry made his budget-balancing task even greater by arguing against “arbitrary cuts” to defense spending.

“It just strikes me as political pandering at its worst,” says Leonard Burman, a former Treasury Dept. official who now teaches at Syracuse University in New York. “It doesn’t seem like a serious policy proposal.”

In theory, a flat tax raises revenue with the least possible distortion of economic incentives by broadening the tax base and lowering rates. Perry’s plan isn’t precisely what economists have in mind. But Dick Armey, a former GOP congressman who is chairman of FreedomWorks, a Tea Party-aligned group, believes that some kind of flat tax will ultimately prevail. The 71-year-old Texan repeats what he’s been saying for nearly 20 years. “This thing,” Armey says, “will be passed into law when America beats Washington.”

The bottom line: Under Perry’s plan, a family earning $136,000 would see taxes cut by 17 percent. A family making $425,00 would reduce its taxes 49 percent.

Rubin is a reporter for Bloomberg News in Washington.
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Coy is Bloomberg Businessweek's economics editor. His Twitter handle is @petercoy.

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