Like many other presidential candidates, Texas Governor Rick Perry proposes massive tax cuts for the richest Americans, but he proposes to do so in the most complicated way possible. His plan would have taxpayers calculate their taxes twice — once under the existing rules, and again under an optional 20 percent “flat tax,” to see which would be a better deal.
This would not make anyone’s life easier on tax day — except the wealthy Americans whose investment income would be exempt from taxes under Perry’s optional flat tax. These lucky taxpayers would quickly find that the optional “flat tax” actually has two tax rates: zero percent for the investment income that mostly goes to the rich and 20 percent for the types of income that most of us depend on.
It’s also clear that the individual tax under Perry’s plan would lose a huge amount of revenue compared to the existing personal income tax. How could it not? If taxpayers are offered an alternative way to file, we assume they will choose this alternative only if it lowers their tax bills. The result will be, inevitably, a loss of revenue. If taxpayers truly preferred a simple tax over a lower tax, they could choose simplification right now by giving up the various adjustments, deductions and credits that lower their tax bills but make filing more complicated. We doubt many choose this.
Most plans to exempt investment income from taxes and shift towards a consumption tax result in tax increases for the poor. (This would be the result of the “flat tax” proposed by Senator Arlen Specter for several years and the “9-9-9” plan proposed by Herman Cain.) However, in recent years, Presidential candidate John McCain, House Budget Chairman Paul Ryan and other GOP leaders have tried to limit the terrible optics involved in raising taxes on the poor by making their regressive tax plans “optional.” This means that wealthy taxpayers with investment income would usually choose the alternative tax that exempts this income, while most ordinary people earning wages would end up sticking with the current rules.
What would stop taxpayers from simply switching back and forth each year, depending on which set of rules results in lower taxes? It’s unclear how Perry’s plan would address this, but some previous versions of this proposal claimed to address this by forcing taxpayers to choose which system to file under and then locking them into that choice for years to come. They would be allowed to change their minds one time during their lives and could also change whenever their filing status changes because they become married or divorced. For this reason, we have long thought of these proposals as a Divorce Lawyers Jobs Creation Act.
As more details of the plan become available, Citizens for Tax Justice will estimate its impacts on taxpayers at different income levels and its impact on revenue. But even the limited details available now make clear that this plan is not designed to help the working class.
Photos via Gage Skidmore Creative Commons Attribution License 2.0