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The Perry Tax -- A More Confused Trojan Horse

By       Message Larry Butler     Permalink
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Bus Stop at Fatz Cafe
(Image by Rick Perry)
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flat income tax system has been the subject of a number of proposals over the years.   Jack Kemp and Dick Armey, over twenty years ago, and Steve Forbes more recently, suggested the scrapping of the existing structure in favor of a simple single-rate code.   These proposals have been generally viewed as less progressive than the existing tax system, in part reflecting their origins -- they have been crafted by those sympathetic to the interests of business and wealth.

Now Texas Governor Rick Perry, with assistance from Steve Forbes, has joined the fight with a specific and quantifiable proposal for tax reform.   But his plan isn't really for a flat tax: many popular deductions are retained, and although he advocates scrapping the existing system in its entirety, his proposal provides for its indefinite continuation as an option at the election of the taxpayer.   His willingness to keep a modified version of the existing system is surprising, but its effects are predictable.   The following analysis is my own, and is based upon information released by the census bureau, the IRS, and the Perry camp.

Perry's proposal isn't all bad; some taxpayers would clearly benefit.   Corporations stand gain the most, with a reduction of the maximum marginal tax from 35% to 20%, and even deeper cuts as an incentive to repatriate accumulated earnings stashed offshore.   Last year corporations actually paid about 11% of taxable earnings, and if we assume that the cuts will be proportional, the new effective rate will be something well under six percent.   This rate is significantly less than the 9% individuals paid last year.   A significant milestone will have been achieved by neoconservative plutocrats when actual individual income tax rates exceed those of US corporations.

Some individuals would benefit as well.   Taxpayers in the upper quintile -- those families earning an average of $258,000) -- would benefit from a lower top tax rate, and a significant portion of their income would be excluded from taxation as well.   Last year, the upper fifth of individual taxpayers actually paid 14.1% of their adjusted gross income in taxes.   With the elimination of tax on dividends and capital gains, and a reduction in the bracket, the actual tax rate is likely to come down to just over 10%.   This is the bracket in which dividend and capital gain income is concentrated, so we would expect to see the greatest tax reductions at the top.

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Who picks up the tab from the tax reductions given by Perry's plan to corporations and high-income taxpayers?   The answer, predictably, is - everybody else!

Middle income taxpayers are likely to see a small increase in their tax bill.   Earners in the fourth quintile with a family income of $93,000 paid 6% of their income in taxes last year; under the Perry flat tax, this is likely to increase to about 8.5%, so most taxpayers in this quintile are likely to elect filing their returns under the old system as long as they can.   A more modest tax increase will result from the elimination of deductions for college expenses, healthcare costs, and other programs -- but make no mistake; an increase it will be.

Earners in the middle fifth with a family income of $63,000 paid 3% of their income in taxes last year; under the Perry flat tax, this would more than double to 6.8%, so taxpayers in this quintile are likely to stick with the old tax system as well.   Even so, a modest increase will result from the loss of deductions.   Yes, middle income taxpayers will pay more under the Perry plan.

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An interesting picture emerges when analyzing the effect of proposed changes on the lowest two-fifths of the taxpaying population.   First, it is clear that the existing system of taxation is a mixture of incentives and charity for low income taxpayers in the form of tax credits for childcare, earned income, and more.   Even if you believe as I do that these programs need to be moved out of the tax code, they provide a starting point for comparison with any proposed systematic re-vamp.

Specifically, earners in the bottom fifth with a family income of $18,500 paid a tax rate of minus 6.6% -- that's right, negative six percent.   If, under the Perry plan the rate goes to zero, there is still a tax increase to get there!   This picture for earners in the second quintile with a family income of $41,000 paid a tax rate of minus 0.8%, again negative, and the Perry plan would collect about 1.9%.   Although it is clear that the bottom two-fifths would benefit from keeping all the features of the existing system, the Perry plan will not allow for the continuation of all the programs that make it so attractive.

So who wins with the Perry proposal?   Only corporations and the highest-income taxpayers.   The majority of the rest will be forced to stick with a more expensive version of the existing tax code, and the country will have to continue to foot the bill resulting from its complexity and even many of its loopholes.   Never before has a plan done so much for so few, so badly, and at the expense of everybody else!

Another issue with the Perry proposal is that it does a poor job of funding the expenses of the federal government.   Individual income tax receipts in 2010 would have declined from $996 billion to about $930 billion, and corporate income tax receipts would have declined from $222 billion to about $115 billion.   Figure in reduced revenues from inheritance taxes, and an already budget-busting deficit of over $1.5 trillion would have been increased by more than $190 billion.   This represents an additional hidden cost that is spread out over the country and the economy irrespective of income or wealth; it is, in effect, a further redistribution of wealth from poor and middle class taxpayers to the wealthy and the corporations they control.

Any proposal that favors preferential tax treatment of one kind of income over another is outrageous and offensive.   Over the past three decades, progressives have sat idly by while capital gains and dividends have been taxed at reduced rates in comparison to earnings from labor.   Seldom is the logic challenged for this inequity.   How can we have so quietly fallen for the argument that capital is somehow sacred, and that earnings from wealth are due special treatment?

Many fellow progressives have called a flat tax structure a fraud in and of itself, citing regressivity -- at least by comparison to the existing system.   I disagree.   The economy and simplicity of a flat tax are attractive, and such a structure need not be regressive.   The key to a progressive flat tax lies in a generous, uniform, and indexed standard income exclusion that is available equally to everybody.   Allow me to present my 48/24 plan, in the imperative:   Tax all income from any source above $48,000 at a rate of 24%, allowing no other deductions, exemptions, incentives, or loopholes.   Include corporate GAAP income as well, reduced by the amount of dividends paid to shareholders.

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Yep, that would be the entire income tax code.   Annual tax revenue would increase by more than $300 billion, an additional $300 billion would be captured from those presently evading taxes in today's complex system, and another $150 billion in costs of collection and audits would be saved.   Working and middle class people would benefit from lower income taxes.   Corporations would benefit by being able to deduct dividends, and the wealthy would benefit from much higher payout ratios in their equity portfolios.   The ultra-simplicity of the system would create a business and economic environment with the kind of vitality we haven't seen in decades.

If you want a real economic renaissance in the US , put this proposal on the table along with some reasonable spending cuts.   It would level the playing field between rich and poor, corporation and individual, Democrat and Republican.   It would stimulate the economy by placing after-tax income in the hands of those most likely to spend it.   And it would usher in a new age of prosperity in the US , unencumbered by the interference of tax rewards and penalties in the exercise of our personal freedoms.

 

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Years ago I made a decision to commit to a life of business management. After thirty five years as a small business consultant, CFO, and university educator specializing in quantitative business and economic modeling, everything changed. A (more...)
 

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