Perry's free lunch flat tax

At first glance, Perry's plan like an attempt to be all things to all people—big tax cuts combined with a promise to balance the budget with– this being campaign season—huge unspecified cuts in spending.

Richard Shiro/AP
Republican Presidential candidate, Texas Gov. Rick Perry speaks in Gray Court, S.C. The flat tax is making a comeback among Republican presidential candidates. Most of the contenders _Mitt Romney's an exception _ offer a variation of the tax plan under which everyone pays the same rate. But a flat tax faces tough opposition in Congress because it tends to favor the rich at the expense of others.

There is lots we still don’t know about GOP presidential hopeful Rick Perry’s tax and budget plan. But I am pretty sure of one thing: The proposal he released would result in a massive tax cut and, combined with his vow to balance the federal budget by 2020, implies huge reductions in federal spending. Perry, however, doesn’t provide much detail about how he’d cut that spending.

Perry, whose campaign has been foundering, has put all his policy chips behind what seems to be a remarkable free-lunch-for-all plan. An old boss of mine used to measure political candidates against what he called his pander-meter. For GOP primary voters, this one rates a 10–with a bullet.

Perry would cut individual income tax rates to 20 percent. While he appears to eliminate many individual tax breaks, such as the earned income credit, he’d preserve three of the most popular– deductions for mortgage interest, charitable gifts, and state and local taxes—for people making $500,000 or less. Plus, all taxpayers would get a $12,500 standard deduction or personal exemption (it isn’t clear which) for themselves and their dependents. And he’d repeal the individual tax on capital gains and dividends. And he’d eliminate the estate tax.

If all this isn’t generous enough, you’d be allowed to stick with the current tax system if it turns out to be a better deal than Perry’s plan. This optional feature, which would allow taxpayer to choose how much tax they’d owe and further drain Treasury revenues. In effect, nobody would owe more tax than they do today but millions of households would pay less.

We don’t yet know how frequently you’d get to make this election. Would it be each year, every 10 years, or just once in your life? The more often you can switch, the more money the Treasury loses and the more complicated your tax prep would be. On the other hand, you ‘d maximize your tax savings.

The Texas governor would be very generous to businesses as well. He’d not only cut the corporate rate to 20 percent from today’s top rate of 35 percent, but he’d also temporarily cut the rate to 5.25 percent for overseas earnings companies return to the U.S. He’d also shift to a territorial system–where only domestic earnings would be subject to U.S. tax. Business tax breaks would be “phased out over time.”

All this largess would likely cost Treasury big bucks. The Tax Policy Center does not yet have enough detail to model Perry’s plan, but for a rough sense of how much revenue such an optional tax system would generate, take a look at a similar idea offered in 2010 by House Budget Committee chairman Paul Ryan (R-WI). TPC estimated his proposal would have reduced federal revenues to about 16.5 percent of Gross Domestic Product, dramatically below today’s 23 percent.

That’s less than the 18 percent spending target Perry envisions for 2020 and far below the 23 percent the Congressional Budget Office projects the federal government would spend in 2020 under current law. Thus, to balance the budget in that year, Perry would require very big spending cuts. However, he didn’t specify many in the plan he released today. For instance, while he suggested he’d cut future Medicare growth, he laid out only a series of reform “options” without really committing to any of them.

Keep in mind that Ryan’s plan was different in many key details. For example, it had 2 rates—10 percent and 25 percent– compared to Perry single 20 percent rate. It would have eliminated all deductions while Perry would keep a few important ones. And Ryan would have replaced the entire corporate income tax with an 8.5 percent business consumption tax while Perry would retain the existing system with lower rates.

TPC doesn’t yet know enough about Perry’s plan to model it. But at least at first glance it looks like an attempt to be all things to all people—big tax cuts combined with a promise to balance the budget with– this being campaign season—huge unspecified cuts in spending.

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