Governor Perry’s tax plan attacks the following problems head on:
–the tax code is too simple
–rich people need more after-tax income
–there’s too much retirement security in America
–multinationals aren’t creating enough jobs abroad.
How does how he meet these goals?
Under the Gov.’s plan, you can choose to pay taxes either under the current system or pay a 20% flat tax.
By adding a new tax code to live astride the current one, it adds much complexity to an already too complex system.
Now, as I’ve argued before, the idea that one rate=simplicity is just false. Under this plan, you still have most of the exemptions, deductions, and credits that create the complexity in the code. And, since you can choose which system to file under, you get to go through the joy of figuring out your tax bill…TWICE! (Three times if you count the Alternative Minimum Tax.)
Let me be crystal clear about this. We could have a system with a hundred different rates that you pay on all your income from any source. Under this system, you’d look up your income in a table and figure out what you owe. It would take less than a minute. In fact, the IRS could probably do it for you.
Or we could have a system with one rate that kept all the myriad income definitions, credits, exemptions, loopholes, etc. of the current system. That’s where things get complicated.
Now, it’s obvious that under this plan, people will compare their tax bills under the different regimes and choose the one that lowers their payments. That means Gov Perry either collects less revenue and faces larger budget deficits or has to get the missing revenue elsewhere.
Since, under his new plan, rates are lower at the top (20% vs 35%), and he exempts cap gains and dividends, new revenue will have to come for the middle class (deductions protect the poor). Of course, this means you can’t really let people choose anymore, so either there’s no internal logic here or we lose revenue.
As Kevin Drum observes:
“…you sort of have to admire Perry’s gimmick of allowing everyone to choose between his plan and the existing income tax. You can almost imagine the conversation: one of his advisors points out that no matter how careful you are, someone will pay more under the new plan. Probably people with low incomes, and you just know the librul media will have a field day with that. “It’s regressive! Rick Perry hates the poor!” It’ll be a nightmare.
But Perry has a brainstorm! Give everyone a choice! This means that not one single person will pay more under his plan, because they can always choose the old system if they want.”
It is perhaps with this in mind that Gov Perry says he wants to freeze spending at 18% of GDP. The average since 1969 is about 21%. Does anyone outside of the R base think that with our demographics and pressure from health care costs, not to mention climate, income disparity, bubbles and busts, public debt, external threats, and who knows what else, we can have the government we need with a significantly smaller share of revenues?
That there is one of them rhetorical questions.
There are other problems too—the plan undermines Social Security and incentivizes American firms to invest abroad.
Gov Perry proposes that we let young people opt out of Social Security, thus breaking the intergenerational contract, eliminating pay-as-you-go, and—consistent with his position on Soc Sec—undermining the last guaranteed pension retirees can rely upon.
Then there’s the corporate stuff—repatriation and transition to territorial. The former lets multinationals bring home deferred earnings at a 5% (!) rate; the latter ends their obligation to pay US taxes on foreign earnings (currently, they’re supposed to pay the US the difference between what they paid where they earned the profits and what they owe here). Both will incentivise American firms to expand their overseas operations.
If the itches here are: taxes are too simple, rich people don’t have enough money, seniors have too much retirement security, and multinationals are not creating enough jobs abroad, Gov Perry just scratched them all.
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