Rick Perry’s Harebrained Tax Plan

In mid-September, Rick Perry led Herman Cain, 32% to 4% (according to RealClearPolitics.com). Soon after, Cain unveiled his outlandish 9-9-9 plan that changed the game: today, Perry trails Cain, 11% to 25%.

But Rick Perry will not go quietly. To try to counter Cain’s momentum, Perry saw Cain’s bet and raised him with his own radical tax plan.

Perry’s tax plan would be a flat tax of 20%, except that it would allow deductions for mortgage interest, charitable contributions, and state and local taxes. And it would be optional — you could pay taxes according to the existing tax code if you so desired.

Perry’s plan, like Cain’s, is fatally flawed. Let’s examine what a “good” simplification of the tax code would look like, and compare it to Mr. Perry’s.

• A smart tax plan should broaden the base by eliminating deductions. This allows for a lower rate, and it reduces the distortions that come with deductions and credits. While Perry’s flat tax would cut some important deductions (most notably the deduction for employer sponsored health insurance), it would retain most of the other big ones — the deductions for mortgage interest, charitable gifts, and state and local taxes. Keeping these large deductions greatly reduces the appeal of a flat tax.
• In this environment of huge deficits, a reasonable tax policy must at least be revenue neutral. However, because Perry’s plan is optional, it will by construction reduce tax revenue: poorer individuals will typically keep the existing code (paying the same as presently), while the wealthy will switch to the flat tax (and pay much less than currently). And because his flat tax keeps many of the biggest deductions, this effective tax cut for the wealthy would be huge. All told, his tax plan would cost at least $1.7 trillion over 10 years.
• Any smart tax reform should reduce compliance costs. For the wealthy, whose tax bill would be clearly lower under the flat tax, Perry’s plan would certainly do that. But for everyone else, compliance would be just as costly. Take a middle-class individual as an example: they are likely to have a similar tax obligation under the flat tax and the current tax code. To determine which one is better for them, they would still need to go through the arduous process associated with the current tax code. Lastly, poorer individuals would generally not choose the flat tax, so this policy could not reduce their tax preparation burden.

In other words, Perry combines the worst of all worlds. He offers a large tax cut to the wealthy while offering little to the poor, he maintains many distortive tax deductions, and he does not actually make the process of tax preparation any simpler.