Rick Perry and what he means by a ‘flat tax:’ An explainer

at 04:37 PM ET, 10/19/2011

In a speech next week, Texas Gov. Rick Perry plans to call for a “flat tax.” The presidential candidate said Wednesday that his plan would be “flatter and fairer” than the ones proposed by his rivals. 

Perry clearly felt the need to respond to former Godfather Pizza CEO Herman Cain’s 9-9-9 plan with a bold tax proposal of his own. But a flat tax, an idea kicking around for years, is unlikely to see the light of day.


LAS VEGAS, NV - OCTOBER 18: Texas Gov. Rick Perry speaks during the Republican presidential debate airing on CNN, October 18, 2011 in Las Vegas, Nevada. (Ethan Miller - GETTY IMAGES)

What is a flat tax? Just what it sounds like: One tax rate for all Americans. Right now income taxes are progressive — the rate increases with each income bracket. A flat tax would be proportional — if you made more, you would still pay more, but at the same rate.

The flat tax has been a dream of conservative Republicans for decades, occasionally springing up in presidential campaigns. Businessman Steve Forbes ran on the idea in both 1996 and 2000. California Gov. Jerry Brown (D) actually floated a modified flat-tax in the 1992 Democratic primary (It fell flat.) But Perry is the most viable presidential candidate to advocate for the idea.

Flat-tax advocates tout its simplicity: an end to complicated forms, itemized deductions, credits and loopholes. No deductions, no brackets. There would be no estate tax, capital gains tax, or dividends tax.

Most flat tax plans still have a couple deductions, however. For individuals, there’s a deduction based on family size. For businesses, there’s a deduction for wages and other costs.

After those deductions, everyone would pay the same rate. Daniel Mitchell of the conservative CATO Institute suggests that rate should be 17 percent. (That was also Forbes’ number.) Flat tax systems generally don’t apply to payroll taxes for Social Security, so those taxes would still exist.

Supporters of a flat tax see the current progressive income tax system as inherently unfair. They also argue that many wealthy people already game the system with complicated tax schemes — why not cut out the bureaucracy by creating a system that can’t be gamed?

Opponents argue that the progressive tax is needed to offset regressive taxes elsewhere in the system — for example, payroll taxes and sales taxes, which hit lower-income earners harder. They add that deductions, while confusing, help encourage positive behavior like saving and charitable donations.

Critics also say that a flat tax, by eliminating mortgage deductions for homeowners, would have a major negative effect on the housing market.

The major knock against a flat tax is that it would drastically decrease government revenue. When then-House Majority Leader Dick Armey (R-Texas) proposed a flat tax in 1994, Clinton Treasury Secretary Robert Rubin estimated that the plan would cost the government $180 billion in revenue. To raise enough revenue to match government receipts, a flat tax would have to be unpalatably high.

Of course, for many conservatives, a drastically smaller government is a feature, not a bug. They say the lost revenue will be balanced out, because high-earning people and businesses would produce more without the burden of punitive taxes.

However, lower taxes have not been shown to boost the economy in the long-term. In 1998, the Brookings Institute’s William Gale estimated in 1998 that a flat tax would slow the economy.

About two dozen foreign countries have a flat-tax, mostly in the former Soviet bloc. Given all the other changes in these countries over the past two decades, it’s hard to pin down the effect of such a policy.

A related idea is the “FairTax” — replacing all taxes with a 23 percent national sales tax. Former Arkansas governor Mike Huckabee embraced this idea in the 2008 presidential campaign, and Perry himself supported it in his recent book.

However, unless the 16th amendment was repealed (something Perry was open to, but has backed away from) and the government’s ability to levy income taxes eliminated, the sales tax could be combined with more taxes. That’s why many flat-tax advocates are wary of the idea.

Cain’s 9-9-9 plan is also a form of flat tax — one income tax, one sales tax and one business transactions tax, all at the same rate. Eventually, Cain wants the system to shift to a FairTax.

The bottom-line is that a flat tax has come up multiple times and never gone very far. Perry’s proposal — just like Cain’s — will likely suffer the same fate.

 
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