The flat tax is such a popular idea in conservative circles that Texas Governor Rick Perry is trying to revive his presidential primary campaign by proposing one.
Except for the flat tax part.
It turns out Perry’s plan isn’t flat, doesn’t eliminate the current tax code, as many conservative elites claim to want, and would likely blow a huge hole in the federal budget.Perry’s plan doesn’t scrap existing tax law altogether, but rather creates a new, parallel tax code that taxes individual and corporate income at 20 percent. Investment income would go untaxed. Every tax payer would have a choice between staying in the current system, or transferring over to the new one. But as Michael Linden, a tax expert at the liberal Center for American Progress, points out, the new, simpler, alternative code would constitute a tax increase for most Americans and a huge tax cut for wealthy Americans, creating incentives for a small well-to-do sliver of the country to make the switch, and for everyone else to stay put.
“When people hear ‘flat tax’ they think that there’s one rate that applies to all income — no deductions, no graduated rates. Your income is what it is and you pay the same rate,” Linden said.
That’s not what Perry’s plan does.
“For most people who don’t have big capital gains and dividend income, they’re going to say in the current system,” Linden explained. “It’s not a flat tax.”
Ironically, neither is the new, optional code Perry proposes.
“For very wealthy people who do have big capital gains and dividends — they’ll take the new one, but even that’s not really a flat tax. It’s 20 percent on ordinary income and zero percent on investment income.”
There’s another way to think about Perry’s vision, that helps explain why it would likely starve the government of revenue and either explode the deficit or require massive cuts in federal programs like Medicare, Medicaid and national defense.
Above some income level, Perry’s plan will constitute a tax cut, and those people will take advantage of the Perry option. But if most of the country remains in the current tax code, and the people who benefit from the Perry option switch over and get a major tax cut, simple arithmetic suggests the result would be a significant loss of revenue.
“The wealthy will end up benefitting from a very simple tax code, and they’re going to end up paying really low rates,” Linden said. “Of the richest 400 taxpayers, fully 66 percent of their total adjusted gross income came from capital gains and another seven percent came from dividends. So basically for the very wealthy you’re going to save nearly 75 percent of income from taxation. It’s just a massive tax cut for very wealthy.”
Howard Gleckman of the Tax Policy Center offered nearly identical analysis.
“There is lots we still don’t know about GOP presidential hopeful Rick Perry’s tax and budget plan,” he wrote. “But I am pretty sure of one thing: The proposal he released today would result in a massive tax cut and, combined with his vow to balance the federal budget by 2020, implies huge reductions in federal spending. Perry, however, doesn’t provide much detail about how he’d cut that spending.”
Perry claims his plan would raise 18 percent of GDP in revenue — the same amount by which he claims to want to cut federal spending. But the tax code we have right now only raises about that amount of revenue when the economy is healthy. Camp Perry claims his plan will create so much economic growth that it’ll make up the difference. But there’s no evidence that for this argument.
“If what you’re basically doing is making no changes to the current code, but giving some people massive tax cuts, you can’t raise 18 percent of GDP growth in revenue,” Linden says.
And as far as how Perry plan to reduce federal spending to 18 percent of GDP — a 50 year low — he doesn’t say.
“The Paul Ryan budget doesn’t get below 18 percent of GDP until 2040,” Linden says. “Perry says he’s going to do it by 2020 and he doesn’t say how.”