All these flattish tax proposals include an elimination of the capital gains tax and the estate tax. But I don’t recall anyone specifying what the flattish taxes would apply to (not that there’s any specificity to begin with). Would they be applied to all sources of income or limited to wages? If they’re really throwing out the existing tax code, and the new flattish code applies to all sources of income, wouldn’t that mean there be an increase in taxes on capital gains.
The details provided by Herman Cain and Rick Perry’s campaigns of their candidates’ flat tax proposals — that is, the 9 percent flat income tax that forms one part of Cain’s “9-9-9” plan and the optional 20 percent flat tax that Perry proposed this week — are sketchy, but seem to indicate that neither would tax investment income at all. Perry’s plan specifies that it would eliminate the taxation of long-term capital gains and dividends, and sure enough, the sample tax return the campaign provides includes a deduction for capital gains and dividends.
Cain’s plan, meanwhile, “features zero tax on capital gains and repatriated profits.” Its treatment of other investment income is less clear. Cain’s Web site explains that the “9-9-9” plan “eliminates double taxation of dividends,” but its more detailed description of the plan states, “income that is saved would be taxed, but the returns from that saving would be free of tax.” Dividends from investments in stocks could arguably qualify as “returns from saving,” so there seems to be a contradiction here.
In any case, both Perry and Cain’s plans fall heavily on wage income rather than investment income. On the one hand, this increases their resemblance to consumption taxes, with all the advantages that come with that. But cutting taxes on investment income is regressive, and some experts say that claims that such cuts spur economic growth are exaggerated.