Rick Perry's flat tax plan: Would you have to do your taxes twice?
People could opt for flat tax rate of 20 percent or stick with the current tax system. The Rick Perry plan offers choice, but people might need to do two calculations to tell which is best, some say.
Republican presidential candidate Rick Perry has entered the flat tax sweepstakes.Skip to next paragraph
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Mr. Perry is hoping his 20-20 flat tax rate will resonate as widely as Herman Cain’s "9-9-9" tax plan, which features a 9 percent sales tax, 9 percent personal income tax, and 9 percent corporate income tax.
But on his way to simplifying the tax code, Perry says, he wants to let Americans choose their tax rate: A taxpayer can opt for the 20 percent flat tax – with certain deductions – or stick with whatever rate he or she is currently paying. To quote a well-known ad jingle, “have it your way.”
For people who opt for the flat tax, says Perry, filing will be as simple as mailing in a postcard, saving a collective $483 billion in costs associated with complying with the federal tax code.
On the postcard is room for deductions for home-mortgage interest, charitable giving, and state and local taxes, for those making less than $500,000 a year. At the same time, the standard individual exemption would jump from $3,600 to $12,500.
That means the 20 percent tax rate actually might be quite a bit lower, especially for people who borrowed a lot of money to buy a house, paid high property taxes, and gave a lot of money to charity.
At the same time, businesses would pay a 20 percent rate on profits, down from today's top rate of 35 percent. Multinationals would get a break in the form of a low 5.2 percent tax rate for $1.4 trillion currently parked overseas.
Some outside experts say Perry’s attempt at simplicity will have the opposite effect on taxpayers.
“It will force some to do taxes twice to see which way they come out ahead,” says Bruce Bartlett, a former domestic adviser to President Ronald Reagan and a former Treasury official in President George H.W. Bush’s administration. “It adds complexity to an already complex system.”
Some commentators ask whether taxpayers might be tempted to “game” the system by figuring out how to structure their income and deductions to maximize whatever side of the coin they want to come out on.
“You still have to use TurboTax [software] to figure out which is better,” quips Ted Gayer, a senior fellow at the Brookings Institution in Washington. “If you can jump back and forth between tax systems in different years, you might want to structure your deductions to fit the tax code.”
Even some who are not opposed to flat taxes have doubts about the Perry plan. “The reason to do a flat tax is to get rid of the sham deductions out there,” says economist Joel Naroff of Naroff Economic Advisors in Holland, Pa. “If you keep a lot of them in there, you are missing the whole point of the flat tax.”
Mr. Naroff says that once one deduction is allowed – for example, the deduction for mortgage interest – it is easier for other groups to lobby for their own deductions. “You open the door to recreate the current structure,” he says.
The way Naroff sees it, Perry is trying to prevent any group from being worse off because of his proposed tax changes. “That’s a little hokey,” he says.
Perry’s plan comes amid public distrust of politicians and their promises about taxes. According to a Clarus poll released Tuesday, 55 percent of 1,000 registered voters say Obama’s tax plan will raise their taxes and 41 percent say Cain’s 9-9-9 plan will, as well.
“Many voters don’t believe what politicians from either party tell them about raising, reforming, or cutting taxes,” says Ron Faucheux, president of Clarus. “This surprising data explains why the president is having such a hard time selling his jobs package.”