Rick Perry's flat tax plan is a political gamble

AP News
Posted: Oct 21, 2011 2:19 PM
Rick Perry's flat tax plan is a political gamble

Texas Gov. Rick Perry's call for a flat income tax rate will tie his Republican presidential campaign to a contentious issue that excites many conservatives but has repeatedly failed to win the embrace of mainstream America.

Perry, struggling to get his campaign back on track, will unveil "a blockbuster" plan designed to simplify the federal tax code and lower the rate that many people pay on income and investments, said Steve Forbes, a longtime flat-tax advocate who is advising the campaign.

"People's mouths will water" when they see the details, said Forbes, a wealthy businessman who sought the GOP presidential nomination in 1996 and 2000.

Liberal groups quickly criticized Perry's idea, saying it would raise taxes on lower- and middle-income Americans while giving breaks to the wealthiest.

Perry campaign aides offered no details of the plan Thursday. They acknowledged, however, that Forbes is a key adviser for the plan, which Perry will unfold next week.

The flat tax has an uneasy history in U.S. politics. Numerous Republicans and some Democrats hail its simplicity. But they have never managed to win enough support to enact it.

While many variations exist, the main idea is to replace the current stair-step range of income tax rates with one rate, paid by everyone. Advocates typically call for eliminating some or all of the existing tax deductions, such as those allowed for mortgage interest payments, gifts to charity and some medical costs.

Forbes said in a phone interview Thursday that he expects Perry to propose "a clean sweep" of such deductions.

"I think the public receptivity has grown enormously," Forbes said of the flat tax. The current tax code "has gotten even junkier, and the economy is obviously not doing well, so people are in the mood for something drastic," he said.

Forbes said Perry's plan will differ from Herman Cain's so-called 9-9-9 plan because it will not call for a national sales tax. Cain, whose presidential bid has prospered lately, wants a 9 percent flat tax on personal and corporate income, as well as a 9 percent national sales tax.

Perry said this week his plan will be "flatter and fairer" than Cain's.

Criticisms of a flat tax focus on its full or partial elimination of the progressive nature of the current tax code. In a progressive system, higher earners pay higher tax rates on their income.

Under a pure flat tax, with no exemptions or deductions, someone who earns $200,000 a year would pay exactly 10 times the amount of tax paid by someone who earns $20,000 a year. All income would be subject to one flat rate.

Under a progressive system, even if there were no exemptions or deductions to help poorer people, the $200,000 earner would pay more than 10 times the amount of tax paid by the $20,000 earner. That's because he pays higher rates on the upper portions of his income.

Supporters of progressive income tax systems say the feature is important to social fairness because other taxes tend to be regressive. For instance, a 5 percent state sales tax hits lower-income people proportionately harder than high earners because they must spend a larger portion of their income on necessities. That leaves them less able to save, invest or otherwise protect their income from the sales tax.

Payroll taxes, gasoline levies and other taxes also tend to be regressive because they essentially are flat.

A flat income tax "is inherently a shift of taxes off the wealthy and onto the middle class," said Michael Ettlinger of the Democratic-leaning Center for American Progress. When prominent politicians propose a flat tax, "there's often an initial episode of popularity," he said. "But then people understand the shift from the wealthy to the middle class," and support wanes, he said.

Forbes proposed a 17 percent flat rate in his presidential campaigns, which gained modest traction. He finished fourth in the 1996 Iowa caucus and New Hampshire primary. In 2000 he finished second in Iowa, 11 percentage points behind George W. Bush. He finished a distant third in New Hampshire.

It's not clear what tax rate Perry will propose. Forbes said Thursday that some amount of lower income will be exempt for everyone, and some breaks will be given to parents of young children.

Such features will make Perry's plan less regressive than a pure flat tax system. But the impact probably will be slight, said Chuck Marr, federal tax policy director for the liberal Center on Budget and Policy Priorities.

"If it's revenue-neutral, a flat tax imposes a large increase on middle-class people, and a tax decrease for wealthy people," Marr said.

Perry touts his record of cutting taxes, and Republican strategists expect his proposal to be revenue-neutral, or better, in the sense that the tax burden on Americans would stay level or fall if all other conditions remained unchanged. Forbes said Perry's plan would generate greater revenue only because it would spur economic growth and investment, a frequent claim of tax-cut advocates.

Perry's tax gambit may force a more definitive response from former Massachusetts Gov. Mitt Romney, his chief rival for the GOP nomination. Romney has given mixed signals over the years about a flat tax system, sometimes praising it in concept but criticizing details offered by politicians.

In 1996, Romney bought a $50,000 newspaper ad in Boston saying Forbes' flat tax would primarily benefit the rich. He called it "a bad idea for the Republican Party."

Campaigning Thursday in Iowa, Romney said a flat income tax has "positive features" but it should not be allowed to "raise taxes on middle-income Americans."