Nov. 1 (Bloomberg) -- About 41 percent of U.S. households would see their taxes increase under the optional 20 percent flat tax proposed by Texas Governor Rick Perry and an equal number would receive a tax cut, according to a nonpartisan analysis.
The findings from the Tax Policy Center released yesterday are the first independent analysis of Perry’s plan, which the Republican presidential candidate detailed last week. The proposals would let taxpayers choose between the current tax system and his simpler approach with a single 20 percent rate and no taxes on capital gains or dividends.
That approach would suggest that no one would lose under the Perry plan. The center’s contrary finding stems from Perry’s proposal to let the Bush-era tax cuts expire at the end of 2012, making the choice he offers between the two tax systems a decision between tax increases for many households.
In 2015, compared with current tax policy, 40.8 percent of U.S. households would pay higher taxes under Perry’s plan and 40.5 percent of households would pay less, according to the center’s analysis. The size of the tax cuts outweighs the size of the tax increases, and Perry would need to make significant spending cuts to meet his goal of balancing the federal budget by 2020.
Less Progressive System
The current top tax rate is 35 percent, and about 46 percent of households aren’t paying federal income tax this year. As a result, reducing tax rates, eliminating taxation of investment income and ending tax benefits for the middle class combine to make the tax system less progressive.
Under Perry’s proposal, 98 percent of people making more than $500,000 a year would receive tax cuts averaging $512,733, compared with what they are making today, boosting their after-tax incomes by 23.5 percent.
In contrast, 52.6 percent of people making between $50,000 and $75,000 a year would face a tax increase averaging $907 and 46.1 percent of people in that group would get tax cuts averaging $1,620, according to the analysis.
“Our presumption is that Perry wants everybody to move to his plan,” said Roberton Williams, a senior fellow at the center. The Tax Policy Center is formed by two Washington research groups, the Brookings Institution and the Urban Institute.
Catherine Frazier, a Perry campaign spokeswoman, didn’t dispute the Tax Policy Center’s findings yesterday.
“This study confirms what Governor Perry has said from the beginning, that American taxpayers in all income groups will be better off under his tax plan,” she said in an e-mailed response. “By implementing a 20 percent flat tax rate, we will free the private sector’s capital to invest and create jobs.”
The analysis shows that Perry’s plan would violate the so-called “Buffett Rule” promoted by President Barack Obama to make sure that high-income taxpayers don’t pay lower rates than middle-income families do. The top 1 percent of taxpayers would have an average federal tax rate of 15.7 percent under Perry’s plan, compared with an 18.5 percent tax rate for those between the 60th and 80th percentiles.
Perry announced his tax plan Oct. 25 in South Carolina and pitched it as a catalyst for economic growth.
“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.”
Individuals would choose between the current tax code and a simpler system. In the flat-tax system, each person would receive a $12,500 exemption before the 20 percent rate would kick in. Capital gains and dividends that currently qualify for lower rates wouldn’t be taxed, and neither would Social Security benefits. Households with income of less than $500,000 a year could still deduct mortgage interest payments, state and local taxes and charitable contributions.
Perry rival Herman Cain said yesterday that Perry’s proposal would make the tax system “more complicated.”
‘Flat Tax Light’
“I call Governor Perry’s plan ‘flat tax light,’” he said at the American Enterprise Institute in Washington. “He keeps in some of the favorite” tax benefits “to basically try to reduce criticism. I’m not interested in a plan that’s going to reduce criticism. I’m interested in a plan that’s going to solve the problem.”
Cain has proposed scrapping much of the current tax code and replacing it with a 9 percent national sales tax and 9 percent levies on businesses and on individual income.
The Tax Policy Center said on Oct. 18 that the 9-9-9 plan would cut taxes for almost 95 percent of taxpayers with annual cash income exceeding $1 million while 95 percent of those with cash income between $30,000 and $40,000 would face a larger tax bill than they currently pay. This analysis presumes the 2001 and 2003 tax cuts would be permanently extended. Cain’s campaign has criticized that analysis for ignoring poverty programs that are part of 9-9-9.
Perry also proposes to eliminate the estate tax and repeal the tax increases contained in the 2010 health-care law.
The corporate tax rate would drop to 20 percent and business tax breaks would be eliminated. Perry also would adopt a territorial tax system that exempts the foreign profits of U.S.-based multinational corporations.
Perry’s plan would cut federal revenue by 27 percent -- or $995 billion -- in 2015, compared with allowing current law to continue, according to the study. His plan would cut federal revenue by $570 billion if the Bush-era tax cuts are extended instead of being allowed to expire after 2012, the center said.
Allowing the tax cuts to end would push the top income tax rate to 39.6 percent and remove the expanded child tax credit and other benefits Congress passed in 2001 and 2003 and extended last year.
Perry also has called for a balanced budget amendment to the Constitution and for revenue and spending levels of 18 percent of gross domestic product in 2020. That would require cutting spending from the current level of 24.1 percent of GDP.
To contact the reporter on this story: Richard Rubin in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Mark Silva at email@example.com