Rick Perry’s Not Really Flat Flat Tax Plan
Rick Perry's tax plan isn't very impressive.
After sticking his foot in his mouth on CNBC, Rick Perry kicked off what he clearly hopes will be a re-invigoration of his campaign by introducing an economic plan that includes a tax plan that his campaign is describing as a “flat tax,” but which really isn’t when you look at the details.
Rick Perry, whose presidential campaign to date has largely focused on his accomplishments as Texas governor, expanded his scope Tuesday in South Carolina, where he formally unveiled a flat tax proposal designed to stimulate the economy and cut taxes.
The Perry plan, unveiled at an Upstate plastics company, comes at a time when Perry is rebooting his campaign after nosediving in the polls and losing ground to candidates like Herman Cain, whose 9-9-9 tax proposal has captured widespread attention.
The Texas governor’s plan, dubbed “Cut, Balance and Grow,” would allow taxpayers to choose between the current system and a 20 percent flat tax on their income. The new tax system, he said, would allow people to dispense with the hiring of experts each spring to help prepare their tax forms.
“Each individual taxpayer will have a choice: you can continue to pay taxes, as well as accountants and lawyers under the current system,” he said. “Or, you can file your taxes on a postcard, with deductions only for interest on a mortgage, charitable giving, and state and local tax payments.”
Not once during the 24-minute address in Gray Court did Perry cite his decade-long record as Texas governor. Instead he reiterated his five-point Social Security plan — an idea similar to former President George W. Bush’s failed second-term proposal for personal retirement accounts — and his Medicare proposal, which would raise the eligibility age and adjust benefits based on income.
“If we don’t act, in 25 years benefits will be slashed 23 percent overnight,” he said. “Protecting Social Security benefits begins with protecting the solvency of the fund, and stopping all current borrowing from the fund, just as we have done with the highway trust fund.”
Perry avoided mentioning GOP front-runner Mitt Romney by name, but he took a shot at the former Massachusetts governor’s 59-point economic proposal by suggesting it is more conventional that what he is proposing.
“My plan does not trim around the edges,” he said. “And it does not bow down to the established interests. But it is the kind of bold reform needed to jolt this economy out of its doldrums, and renew American prosperity. Those who oppose it will wrap themselves in the cloak of the status quo.”
Perry described the plan in a Wall Street Journal Op-Ed:
The plan starts with giving Americans a choice between a new, flat tax rate of 20% or their current income tax rate. The new flat tax preserves mortgage interest, charitable and state and local tax exemptions for families earning less than $500,000 annually, and it increases the standard deduction to $12,500 for individuals and dependents.
This simple 20% flat tax will allow Americans to file their taxes on a postcard, saving up to $483 billion in compliance costs. By eliminating the dozens of carve-outs that make the current code so incomprehensible, we will renew incentives for entrepreneurial risk-taking and investment that creates jobs, inspires Americans to work hard and forms the foundation of a strong economy. My plan also abolishes the death tax once and for all, providing needed certainty to American family farms and small businesses.
My plan restores American competitiveness in the global marketplace and provides strong incentives for U.S.-based employers to build new factories and create thousands of jobs here at home.
First, we will lower the corporate tax rate to 20%—dropping it from the second highest in the developed world to a rate on par with our global competitors. Second, we will encourage the swift repatriation of some of the $1.4 trillion estimated to be parked overseas by temporarily lowering the rate to 5.25%. And third, we will transition to a “territorial tax system”—as seen in Hong Kong and France, for example—that only taxes in-country income.
The mind-boggling complexity of the current tax code helps large corporations with lawyers and accountants devise the best tax-avoidance strategies money can buy. That is why Cut, Balance and Grow also phases out corporate loopholes and special-interest tax breaks to provide a level playing field for employers of all sizes.
To help older Americans, we will eliminate the tax on Social Security benefits, boosting the incomes of 17 million current beneficiaries who see their benefits taxed if they continue to work and earn income in addition to Social Security earnings.
The plan also calls for the sun-setting of many Federal regulations, and a requirement that new regulations be approved by Congress.
In some corners, the reaction to Perry’s plan has been pretty positive. Both Grover Norquist and The Club For Growth have issued positive statements about the plan, for example. National Review’s Kevin Williamson is similarly positive. Williamson’s NRO colleague Reihan Salam is decidedly less impressed and focuses his criticism on what has to be the oddest part of Perry’s plan, the fact that it is essentially optional:
Essentially, what Perry has done is reverse the Buffett Rule. He has guaranteed that no American will ever pay more than 20 percent of her income in federal taxes. Indeed, affluent homeowners living in high-tax jurisdictions like New York city and Los Angeles earning up $499,000 will likely pay much less than that, as they’ll continue to have access to the mortgage interest, charitable and state and local tax exemptions. Under Moore’s MAXTAX, these households would be treated the same as affluent households in Houston or Palm Beach or Clinton, Iowa who for whatever reason (good sense?) choose to purchase less expensive homes.
This plan defies credulity. One is reminded of Tim Pawlenty’s tax and spending proposals, released shortly before he dropped out of the race for the Republican presidential nomination. The difference is that Perry has managed to raise a considerable sum of money. One wonders how much of it comes from various friends and allies who have been beneficiaries of the Texas Emerging Technology Fund, and whether the Obama campaign might see fit to mention that fact if Perry does indeed secure the Republican presidential nomination.
Over at The Enterprise Blog, Andrew Biggs points out, correctly, that since Perry’s plan creates a new flat tax system and maintains the existing tax code, it ends up making tax compliance more expensive and more complicated:
To know which tax code to file under you need to do your taxes under both, undermining the simplicity of the flat tax. One of the reasons compliance costs are so high today is that there can be such a reward for figuring out strategies to minimize your taxes; it’s not clear that Perry’s flat tax fixes this problem. And finally, if people have the option of filing under the current tax code then all the economic distortions embedded in it will remain, at least for that significant portion of the population who would do better under current law than the flat tax. A person may say to himself, “I can pay lower taxes than under the flat tax plan so long as I [insert governmentally imposed distortion here].” Marginal tax rates for high earners would be lower, reducing economic distortions, but it’s unclear where you’ll make up the revenue if low and middle earners get to file under current law where they pay next to nothing.
This is perhaps the biggest flaw with Perry’s plan in my view. If you want to remake the tax system to make tax rates flat, or at least flatter, then why not do that instead of creating an entirely separate part of the tax code and forcing taxpayers to choose between the new system and the old system? For the average middle class taxpayer, it’s likely not going to be a big deal, but for anyone who is self-employed, owns a small business that gets passed through on via Schedule C, or has a high number of deductions or credits, you are requiring them to determine their tax liability under two different systems, thus increasing compliance costs. To the extent that simplification is a goal, and it should be, this is the wrong way to go about it.
A further problem with Perry’s plan is the fact that it preserves a large number of deductions and, thanks to the “optional” nature of the plan, it preserves all the distorting deductions and crony capitalism that exists in the current tax code. One of the perverse things this does is give taxpayers the incentive to engage in activity that makes them eligible for as many “old system” deductions as possibly in order to minimize their tax liability as much as possible. Additionally, even in its flat tax version, the plan maintains for most taxpayers the charitable, state and local tax, and mortgage interest deductions. Aside from the fact that they are politically popular, or at least supported by powerful lobbying groups, there is no economic reason to preserve these deductions, which is why I tend to prefer plans similar to the one proposed by Jon Huntsman, which eliminates these deductions while simultaneously lowering rates.
The other problem in Perry’s plan comes on the spending side. Without giving very many specifics, Perry said in the op-ed that he would reduce spending and reform entitlements:
We should start moving toward fiscal responsibility by capping federal spending at 18% of our gross domestic product, banning earmarks and future bailouts, and passing a Balanced Budget Amendment to the Constitution. My plan freezes federal civilian hiring and salaries until the budget is balanced. And to fix the regulatory excess of the Obama administration and its predecessors, my plan puts an immediate moratorium on pending federal regulations and provides a full audit of all regulations passed since 2008 to determine their need, impact and effect on job creation.
ObamaCare, Dodd-Frank and Section 404 of Sarbanes-Oxley must be quickly repealed and, if necessary, replaced by market-oriented, common-sense measures.
America must also once and for all face up to entitlement reform. To preserve benefits for current and near-term Social Security beneficiaries, my plan permanently stops politicians from raiding the program’s trust fund. Congressional IOUs are no substitute for workers’ Social Security payments. We should use the federal Highway Trust Fund as a model for protecting the integrity of a pay-as-you-go system.
Cut, Balance and Grow also gives younger workers the option to own their Social Security contributions through personal retirement accounts that Washington politicians can never raid. Because young workers will own their contributions, they will be free to seek a market rate of return if they choose, and to leave their retirement savings to their dependents when they die.
Jennifer Rubin isn’t impressed:
What is missing is the how . How do we get to these figures?
He offers scant specifics: “My plan freezes federal civilian hiring and salaries until the budget is balanced.” That’s not going to do the trick. Moreover, he is silent on whether defense cuts should be included, perhaps the most critical question facing the supercommittee. Perhaps he will provide more details later. But simply to say “we’ll balance the budget” is a dodge. The real work and courage come in spelling out the means by which we get there.
On entitlement reform, Perry dodges all tough issues. He is silent on Medicare. He is silent on Medicaid. Let’s hope that is all in the speech. And on Social Security he puts out this silliness: “Congressional IOUs are no substitute for workers’ Social Security payments. We should use the federal Highway Trust Fund as a model for protecting the integrity of a pay-as-you-go system.” Al Gore called this a “lock box.” It’s an accounting gimmick, not a plan for restoring fiscal soundness. Moreover, using the Highway Trust Fund is a blunder of the firstorder. That fund is bankrupt and relies on raiding the general fund. (This sort of error suggests that Perry paid little attention to the spending side of things.)
Then he offers this: “Cut, Balance and Grow also gives younger workers the option to own their Social Security contributions through personal retirement accounts that Washington politicians can never raid. Because young workers will own their contributions, they will be free to seek a market rate of return if they choose, and to leave their retirement savings to their dependents when they die.” Huh? What about fixing the current system? On that he takes a complete pass. (Mitt Romney has suggested two avenues for reform: indexing according to income and raising the retirement age.)
Rubin’s criticisms are largely correct. It’s probably not fair to expect a Presidential candidate to come up with a budget as detailed as the one that a President submits to Congress every year. However, one should at least expect that a candidate who says that they will work to keep Federal Spending at or below 18% of GDP to provide something more than tired slogans that don’t really answer the fundamental questions that Congress is trying to deal with as we speak. Perry’s refusal to address either Medicare or Medicaid may be understandable from a political point of view, but it leaves a massive, gaping hole in his plan that any one of his opponents could drive a truck through if they wished. His Social Security plan, on the other hand, adopts ideas that seem to have no realistic chance of ever becoming law regardless of whatever merit they might have.When it comes to the spending side of his plan, score Perry with a complete swing-and-miss.
The question for Perry is whether this plan will be the spark he needs to revive his campaign. That’s something we’ll only know as time passes, of course, but with the plan being criticized from both the left and the right, and his opponents as likely to focus attention on the flaws, real or perceived, in “20/20” as they did on 9-9-9, I’m not at all certain that it will.