(Bloomberg News) Texas Governor Rick Perry's 20 percent flat-tax plan avoids one the pitfalls of similar single-rate proposals by protecting any filers from a guaranteed tax increase. In the process, it retains some tax complexity and ensures federal revenue collections will fall.
The Republican presidential candidate's plan would create a $12,500 per-person exemption with only a few other deductions, offering a boon to high-income taxpayers who would face lower rates and no longer pay taxes on investment income. People could choose that regime or continue to file under the current code.
Perry's tax plan is part of his broader "cut, balance and grow" economic proposal that calls for balancing the U.S. budget by 2020 and capping spending at 18 percent of the gross domestic product, down from 24.1 percent for 2011. In a speech yesterday in South Carolina, Perry called for shrinking entitlement programs such as Medicare and Medicaid and adopting a balanced budget amendment to the Constitution.
"It's very aggressive," said Pete Sepp, executive vice president of the National Taxpayers Union, a small-government group in Washington. "The fact that Perry has come out forcefully for a balanced budget amendment as well as an 18 percent of GDP spending cap is a good sign."
Perry's 18 percent and balanced budget targets would require him to cut government spending by far more than the plan drafted by Representative Paul Ryan and passed by the House in April, which would delay reaching balance until 2040.
Tax, Program Cuts
Saving money from Medicare or Social Security between now and 2020 would likely require affecting current retirees or people who are going to enter the programs soon as the retirement of the baby-boom generation places additional strain on the programs. Democrats have been campaigning against the Ryan plan, which delayed changing Medicare into a voucher-based system until the next decade.
In 2020, the year in which Perry wants to balance the federal budget, the Ryan budget would have a deficit of $405 billion. Perry made his budget-balancing task even bigger by arguing yesterday against "arbitrary cuts" to defense spending and saying that the defense budget should be based on what it costs to keep the country secure.
Further, it would be even more difficult to reach a balanced budget under Perry's plan than in Ryan's because Perry's proposed tax cuts are deeper. Ryan's House-passed budget called for top rates of 25 percent for individuals and corporations and wouldn't eliminate taxes on capital gains and dividends, as Perry's simplified plan does.
Perry, who has been lagging in the polls of the Republican race, said his plan would simplify tax filing, reduce tax compliance costs and unleash economic growth.
"It's important to get our taxes under control and have a tax system that is fair, that is simple, that is flat," he said at a news conference in Columbia, South Carolina. "I mean, how many people in America would rather have the old tax system in place and the lawyers and the accountants and the costs?"