By Richard Rubin - Oct 26, 2011 12:18 AM GMT+0700
Texas Governor Rick Perry’s flat-tax fiscal plan would provide broad tax cuts to households that embrace it while retaining the existing system’s complexity as a choice for others.
The plan, announced today in a speech in South Carolina by the Republican presidential candidate, would create a single tax rate of 20 percent for individuals and a $12,500 per-person exemption. Taxpayers could choose that system or file under the existing tax code with all of its exemptions, credits and deductions, a setup that economist Jared Bernstein described as a “complicated beast” that creates parallel systems.
“The thing that makes the tax system complex is not graduated rates,” said Bernstein, a former adviser to Vice President Joseph Biden and a senior fellow at the Center on Budget and Policy Priorities in Washington, which advocates policies that help low-income families. “That’s one of the big misunderstandings of this flat-tax discussion. You can have as many rates as you want and figure out what you owe on a postcard.”
Perry, who has been lagging in the polls of the Republican race, said his plan would simplify tax filing, reduce tax compliance costs and unleash economic growth.
“It reorders the way they do business in Washington by reinventing the tax code,” Perry said in his speech, where he displayed a postcard-sized tax return.
Flat-Tax Deviation
Perry’s proposal deviates from the flat-tax regime embraced by his adviser, the publisher and former presidential candidate Steve Forbes. Like the Forbes plan, Perry offers a single rate, eliminates taxes on investment income and provides exemptions for low-income taxpayers.
Still, Perry is proposing a few twists on the flat-tax concept. By giving taxpayers a choice between the systems, he doesn’t remove complexity from the tax system and avoids the kinds of tax increases for lower-income people that have led to criticism of rival Herman Cain’s plan for 9 percent income, business and sales taxes.
In the simpler system Perry proposes, he would retain tax breaks for mortgage interest, charitable contributions and state and local taxes for people earning less than $500,000 a year.
No ‘Fear’ Reform
“He’s just taken the fear out of tax reform,” said Grover Norquist, president of Americans for Tax Reform, a small- government group in Washington.
Such efforts usually involve “a bunch of politicians in D.C.” making changes that leave a taxpayer fearing that “I don’t know, but I fear I’m going to get screwed,” he said.
With the choice offered by Perry, taxpayers will gravitate to the system that gives them the most benefits, Norquist said. Perry’s proposal doesn’t punish people who have organized their financial lives around tax breaks such as the mortgage interest deduction or the earned income tax credit, he said.
“It just strikes me as political pandering at its worst,” said Leonard Burman, a former Treasury Department official who now teaches at Syracuse University in New York. “It doesn’t seem like a serious policy proposal.”
Low-income taxpayers, who benefit from refundable tax credits for work and children that generate benefits in excess of their tax liability, might prefer the current system.
Perry, who has described himself as “dismayed at the injustice” that nearly half of households don’t pay federal income taxes, wouldn’t change that number with his plan, Burman said.
Eliminates Some Taxes
Wealthy taxpayers, attracted by the lower rate and the elimination of taxes on capital gains, dividends and estates, likely would migrate to the new system. The top rate on wage income is now 35 percent, and the top tax rate on most long-term capital gains in 15 percent.
In an interview with the New York Times and CNBC, Perry said he was unconcerned if analyses of his plan showed that high-income taxpayers would benefit.
“We went through what are the ways to really give incentives to those that are going to risk their capital to create the jobs,” he said. “Those that want to get into the class warfare and talk about, oh my goodness, there are going to be some folks here who make more money out of this, or have access to more money, I’ll let them do that.”
Asked whether he thought the U.S. shouldn’t have a progressive tax system, Perry said, “I do. I think you need to have a tax system that basically is flat, fair and simple.”
Other Plans
Other Republicans, including presidential candidate Newt Gingrich and House Budget Committee Chairman Paul Ryan of Wisconsin, have offered optional tax system proposals.
Ryan’s plan wouldn’t allow taxpayers to make an annual choice between the systems. Instead, his proposal would require individuals to choose the current system or a simpler system within 10 years and then switch only once in their lifetimes or upon a major event such as marriage or divorce.
Former Massachusetts Governor Mitt Romney, who polls show is vying with Cain for frontrunner status in the nomination contest, wants to extend expiring income tax cuts, eliminate the estate tax and eliminate taxes on investment income for people making less than $200,000. Romney’s plan also would cut the corporate tax rate to 25 percent from 35 percent.
Perry’s plan would cut the corporate tax rate to 20 percent from 35 percent and eliminate corporate tax breaks. He would allow multinational companies to repatriate profits earned overseas at a 5.25 percent rate.
Budget Target
He said he wants to balance the federal budget by 2020 and set a spending cap of 18 percent of the gross domestic product. Ryan’s plan wouldn’t balance the budget until 2040.
Perry’s targets would require significantly lower spending, and he outlined cuts at the Department of Education and the Environmental Protection Agency, along with reductions in spending on Medicare and Medicaid.
Norquist said Perry’s 18 percent goal would improve on the record of the George W. Bush administration, which cut taxes and not spending.
“There was no North Star for what they were trying to do,” Norquist said. “This tells you what the goal is, what we’re trying to do. It’s huge. Just thinking that way changes the world.”
To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net
To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net
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