Rick Perry touts his new economic plan as a job creator and economic kickstarter – but tax experts are split on whether his plan would help or hinder small businesses.
On Tuesday, the Republican presidential hopeful announced his tax reform package, which would most noteably let Americans choose to keep their current tax rates or adopt a flat 20 percent levy. Perry outlined his proposal in both an op-ed published in The Wall Street Journal and a speech delivered Tuesday in South Carolina.
The Texas governor said his plan would “lower and simplify tax rates, cut spending and balance the federal budget, reform entitlements, and grow jobs and economic opportunity.”
But what would the new tax plan mean for small businesses?
We spoke to several tax experts who weighed in on Perry’s proposal and its potential ramifications for business owners. Some called it a plausible solution, others called it overly ambitious, and one even dubbed it ”macroeconomic magical thinking.”
Perhaps the only thing we didn’t hear was a consensus.
• William McBride, Tax Foundation economist, said the plan would “dramatically simplify” small business owners’ lives by making it much easier to figure out how much they owe and by dropping the top personal income tax rate (under which most small businesses file, including S-corporations, partnerships and sole proprietorships) from 35 percent to 20 percent. He also noted that the plan would eliminate taxes on foreign income and thus “help firms of all sizes that conduct business abroad.”
McBride said Perry’s plan also holds at least one advantage over GOP frontrunner Herman Cain’s now famous “9-9-9” flat tax plan. Unlike Cain’s plan, Perry’s would allow employers to deduct from their taxes the wages and compensation they pay their employees. Still, Cain’s relatively low 9-percent rates (even with labor taxed twice, 18 percent comes in below Perry’s 20 percent rate), McBride says “small business owners still seem better off under the ‘9-9-9’ system.”
• Joseph Rosenberg, Urban Institute research associate, explained that the flat tax would shift where income is taxed. “Currently, the entire income is taxed at the individual level, and under these new plans it would be taxed much more so at the business level,” he said.
Rosenberg said the flat tax plan would also level the playing field for all sizes and types of businesses across all industries by simplifying the tax-filing process (large firms, for instance, can generally afford the legal and accounting advice required to ensure compliance better than small firms). “The tax-induced incentives would be constant across businesses regardless of their industry and classification,” he said.
• Daniel Shaviro, NYU School of Law professor of taxation downplayed the simplicity of Perry’s plan, noting that “everyone will still want to run the numbers to find out which of the two options work best for them – especially small businesses, which would be even more likely to prefer the current income tax and its low-income brackets.”
Shaviro also said individuals who own small firms shouldn’t get overly excited about Perry’s proposed elimination of the “double-tax” on dividends at both the company and shareholder level, as that “won’t affect small companies near as much as will publicly traded companies.”
• Edward Kleinbard, USC School of Law professor, took an even stronger stance against the new plan, which he said fails to simplify the current tax code for employers and would likely mean the federal government would take in less. That’s because people could choose which tax regime to follow. “By definition, the Perry plan would reduce or hold harmless the tax burden for all individuals, which will lose huge amounts of revenue for the government,” he said. “But small business owners and everyone else will still have to go through the same process as before to learn their current burden and then compare it to the flat rate. That actually makes the code slightly more complicated.”
Kleinbard also pointed out that the individuals who stand to benefit most are the most affluent Americans, for whom 20 percent represents a large reduction in their income tax burden. “That’s not most small businesses,” he said. “Most small businesses do not generate multimillion-dollar incomes for their owners.” Ultimately, he said, the plan simply isn’t feasible in our current economy, adding that Perry “might as well decree a unicorn in everyone’s backyard as part of his economic policy.”
“There’s no clear plan for how spending can be cut to make up for the loss in [federal] revenue,” Kleinbard said. “It’s what I call macroeconomic magical thinking.”
For more information on the details of Perry’s economic plan, see The Post’s full coverage of Tuesday’s announcement.