Perry laid out his plan Tuesday in an op-ed article in the Wall Street Journal. Its centrepiece involves giving Americans a choice between their current income tax rate and a new, flat rate of 20 percent.
Doing so, of course, would almost certainly lower taxes as a whole, because most of those who paid less under the flat 20 percent rate would switch to it, while those who paid more would stick with the current system.
Cutting taxes sounds appealing. Sixty-eight percent of Americans who call themselves “very conservative” approve of a flat tax, according to a new ABC News/Washington Post poll. But at a time of growing inequality, Perry’s plan likely would do far more for the wealthy than for the middle class.
“It’s more regressive than the current system,” Ted Gayer, a tax policy expert with the Brookings Institution who served on President George W. Bush’s Council of Economic Advisers, told Yahoo News. “The burden would fall more on lower-income people.”
Most flat taxes reduce the burden on the wealthy and increase it on the middle class. But that might not be true if you raised the capital gains tax, said Eugene Steuerle, the co-director of the Tax Policy Center, in an interview with Yahoo News. The capital gains tax tends to hit high earners who have wealth to invest in the stock market.
Perry’s plan, though–like Herman Cain’s 9-9-9 plan–would scrap the capital gains tax. That’s great for people like Warren Buffett who make a lot of their income through investments. It’s also a boon for managers of private-equity funds, one of the most lucrative investment vehicles on Wall Street, because private-equity managers’ report much of their income as capital gains.
And Perry’s plan rises what Steuerle called “a huge arbitrage problem,” because wealthier taxpayers can hire lawyers and accountants who are skilled at finding ways to classify income as capital gains, thereby reducing their clients’ tax burden.
Perry’s plan also offers deductions to the flat tax rate for charitable contributions and for mortgage interest–both of which disproportionately benefit the rich.
“The people who will almost certainly take that alternative will be the rich,” Roberton Williams of the Urban Institute told Yahoo News. “People who don’t want to pay capital-gains tax, and are quite happy to see a cut in the income tax from 35 to 20 percent.”
As for the poor, many might pay a higher rate under Perry. Thanks to tax credits, many lower-income Americans don’t currently pay any federal income taxes. But Perry’s plan, it appears, would scrap those credits.
“You’ve got the same distributional problems that you do with the Cain plan, because presumably it would scrap the earned income tax credit and other refundable credits,” Bruce Bartlett, a former Treasury Department official under President George H. W. Bush, and the author of a forthcoming book on tax reform, told Yahoo News. “So you’re massively raising taxes,” for people who currently pay nothing, he said.
Perry touts the simplicity of his plan as another attribute. “This simple 20 percent flat tax will allow Americans to file their taxes on a postcard,” he writes in the Journal.
But by giving people a choice, the plan would prompt many Americans, essentially, to do their taxes twice, in order to figure out which system benefited them more. “I still run thru my Turbotax program and I compare it with this new one,” Gayer said. “So it doesn’t really simplify things.”
To avoid widening the deficit–the plan almost certainly would raise less revenue than the current system–Perry imposes a spending cap of 18 percent of GDP.
“That’s a substantial cut relative to long-term forecasts,” Gayer said, adding that it’s unlikely that it could be done without targeting the three major drivers of spending: Social Security, Medicare, and defence.