ANALYSIS: Three Things You Need To Know About Rick Perry’s Tax Plan

Our guest blogger is Michael Linden, director of tax and budget policy at the Center for American Progress Action Fund.

Yesterday, 2012 GOP presidential candidate Rick Perry released an outline of his tax and budget proposals. In brief, Perry would allow people to opt in to a 20 percent tax rate, with no deductions except for mortgage interest, charitable donations, state, and local taxes and a standard exemption. Perry’s alternative tax would also entirely exempt capital gains and dividends from taxation.

Perry is touting this as a simple, flat, and fiscally responsible tax system. But none of those things are true. What Perry is actually proposing is a separate tax system for rich people, but absolutely no reforms for anyone else. Here are the three things you need to know about Perry’s tax and budget plan.

1. It’s not simple: Perry complains loudly that the current tax code is too complicated. He points out that the code contains over 3 million words! So how many of those words would Perry’s reforms eliminate? Not a one. That’s because, for all the talk of simplification, Perry’s plan doesn’t reform the tax code, it just adds a second layer on top of the existing system. Under the Perry tax code, most Americans will actually have to do their taxes twice: first under the old system, and then again under Perry’s, then they’ll pay under whichever one results in a lower tax bill. That means no one will get a tax increase, but it also means that Perry’s claim of radical simplification is complete nonsense.

2. It wouldn’t come close to balancing the budget: Perry calls for a balanced budget amendment to the U.S. constitution, but doesn’t appear to have done the math on his own plan to see if what he’s proposed would fit the bill. On the spending side, Perry says that he’d cap all federal spending at 18 percent of GDP, a level of spending the U.S. hasn’t had since 1960. Just as a point of comparison, the House Republican budget — the one that slashes Medicaid, abolishes Medicare as we know it, guts food stamps and child care, and dramatically curtails investments in education, transportation, scientific research — doesn’t even get spending down close to 18 percent of GDP until 2040. And, of course, Perry doesn’t say what he’d cut to get there.

But even if he did, it still wouldn’t be enough. That’s because his tax plan is sure to raise far less than 18 percent of GDP, and you don’t even need a complicated tax model to understand why. Perry’s plan is to let people choose between the current tax code and Perry’s new 20 percent rate. Of course, people will choose the one that produces the lower tax bill. Under normal economic conditions, the current tax code only generates about 18 percent of GDP in revenue. So unless Perry’s alternative 20 percent rate wouldn’t give anyone a tax cut, then his plan will lose revenue.

3. It would deliver a huge tax cut to the very wealthy: Perry’s plan to exempt capital gains and dividends from any taxation means that most extremely wealthy people — who get most of their income from those sources — will be able to get away with extremely low tax rates. In 2007, for example, nearly 75 percent of the income among the wealthiest 400 taxpayers came from capital gains and dividends. Even if they paid Perry’s 20 percent rate on every penny of the rest of their income, they’d still end up with an overall effective tax rate of just 5 percent — lower than what someone making between $50,000 and $75,000 currently pays. For the average taxpayer in this illustrious group, that would amount to a tax cut of about $40 million. Of course, the rest of American households, the ones without massive investment income, won’t benefit at all from Perry’s new alternative tax code for rich people.