Though originally billed as a flat tax, Rick Perry’s plan is anything but simple: it preserves the current tax code and Social Security system while allowing people to opt out of both into parallel system. As such, there are some big questions about how Perry’s plan would work in practice — and about who would stand to benefit the most.
Perry’s plan allows individuals to either keep their current tax rate, including deductions, or chose a 20 percent flat tax instead. But Perry’s alternative would only stand to benefit wealthier Americans, so upper-income individuals would be inclined to chose the 20 percent rate, while lower-income folks would chose to keep what they have. The plan also eliminates the estate tax, the capital gains tax and other taxes on the wealthy. In the end, it would amount to “a huge tax cut for the wealthy,” according to Roberton Williams, senior fellow at the Tax Policy Center. “If you’re a rich guy, what’s not to like?”
The problem is that such a system would also significantly shrink the revenue base through these big giveaways to higher-income earners, and Perry hasn’t given any indication of how it would be paid for. If it’s through spending cuts, that could force middle-income earners to bear some of the burden of tax cuts for the wealthy, argues Jared Bernstein, former economic policy adviser to Vice President Joe Biden. “All we know is that initially, it will be a big revenue loser,” Williams concludes.
2) How will new people entering the system be taxed?
By preserving the status quo, Perry’s tax plan wouldn’t raise anyone’s taxes, in contrast to Herman Cain’s 9-9-9 plan. But it’s unclear what would happen to new people entering the tax system. Would they be forced to use the new flat rate, or would they have the option of using the current tax code? Without such clarity, “we can’t say what it would do over time,” Williams explains. If Perry transitions new people into the parallel 20/20 system, that would help address the plan’s revenue problem. But it would also effectively raise the tax rate for future Americans.
3) What kinds of corporate income will be taxed?
Perry has also promised to lower the corporate tax to 20 percent — down from the current average of 35 percent — while phasing out corporate loopholes tax breaks. But one big benefit that corporations receive under the current tax code is that not all of their gross profits are subject to being taxed — there are many provisions in the tax code that allow such money to be written off. Such provisions are certainly tax advantages for corporations, but it’s unclear whether Perry would eliminate those as well as part of his promise to eliminate corporate tax giveaways.
4) Will tax exemptions for multinationals send more jobs overseas?
Perry promises a temporary repatriation holiday for corporations to bring overseas profits home, but perhaps more significantly, he wants to introduce a “territorial” tax system that only taxes in-country income — a big incentive for corporations to always keep some portions of their earnings overseas. Such changes could boost multinationals to expand, but it also could encourage them to expand overseas than domestically, warns Bernstein. “It’s a huge incentive for investment and job creation overseas, and the question would be the impact on job creation here.”
5) Is this a roundabout way of privatizing Social Security?
Perry has also promised to let “current and near-term” Social Security beneficiaries to keep their benefits but would let younger workers opt out of the current system entirely into “personal retirement accounts.” It’s unclear exactly how those personal accounts would work and if and how participants would be rewarded for making contributions to those accounts. but liberal economists warn that it could undermine the finances of Social Security if younger workers chose to opt out and don’t pay the payroll tax, ultimately leading to the demise of the current system and a transition to privatization. “Once you break the intergenerational connections with program, you’re heading pretty quickly to the privatization route,” Bernstein concludes. That would depend partly on whether younger workers really would prefer personal accounts--and higher current wages--to the defined, guaranteed pension in the current system. But Perry may have left the door open for that to happen while preserving the current system for 2012 voters.