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Rick Perry's Tax Plan Fails Simplicity Test, Deemed More Complicated Than Current Code

First Posted: 10/25/2011 9:04 pm Updated: 12/25/2011 4:12 am

WASHINGTON -- Rick Perry sought -- with his flat tax proposal Tuesday -- to catch the same "simplify-the-tax-code" wave that fellow Republican presidential candidate Herman Cain has been riding.

But as the dust settled and Perry's plan came into clearer view, a consensus was emerging among policy analysts -- conservatives included -- that the Texas governor's plan would make taxpaying more complicated for many Americans, not less so.

"Governor Perry's new proposal for an optional pro-growth tax code will do little for our economy while increasing the complexity of the tax code," wrote Alex Brill, a research fellow at the American Enterprise Institute and former economic adviser on the House Ways and Means Committee.

Perry's plan would create, Brill said, "yet another tax code."

That's because instead of proposing a straight flat tax, Perry made it optional. That means that for taxpayers questioning whether they would be better off in Perry's new system or in the existing structure, they would have to fill out the current tax forms and the new ones to determine which one is better for them. And unless their income and assets remained the same year to year, that would likely be a recurring scenario.

"Certainly for the people in the mid-range trying to decide what should I do, it doesn't simplify their tax calculation, because they have to do the old tax and the new one," said Roberton Williams, a senior tax policy analyst at the Urban Institute.

Cain, the former Godfather's Pizza CEO, has caught fire with the Republican primary electorate in part because his 999 plan is so simple, and conservatives are hungry for a much simpler tax code. But streamlining the code is more complicated than it sounds, even before politics enters the equation. Cain has found as much. Approval of his plan has fallen as conservatives have absorbed the argument that it would create a consumption tax on top of the existing income tax structure that could be raised much higher than nine percent over time.

Perry likely decided to make his flat 20 percent rate optional because it allows him to say that lower-income Americans who are paying less than 20 percent, or nothing at all, can continue to do so. Flat tax proponents have long been hampered by the difficult political reality that lowering rates and broadening the base means increasing taxes on middle- and low-income Americans. Perry was trying to avoid this trap.

But in so doing, he created another set of problems. The optional system would add complexity for many taxpayers, but it would also create two other significant budgetary quandaries. It would add to the already enormous budget deficit in the short term. That would make getting to a balanced budget over the long term that much more difficult and painful.

Perry's plan would add to the deficit because it would not, like a pure flat tax, increase the number of taxpayers.

"Marginal tax rates for high earners would be lower, reducing economic distortions, but it's unclear where you'll make up the revenue if low and middle earners get to file under current law where they pay next to nothing," wrote Andrew Biggs, a former deputy commissioner of the Social Security Administration, now at the American Enterprise Institute.

Williams put it this way: "The fact that he's giving people a choice between what they're paying now and something else means that revenues have to go down. They can't go up."

Williams pointed out that despite Perry's tough talk -- "I consider what we're doing bold," he said in a TV interview -- the Republican presidential candidate was actually giving everybody what they wanted, displeasing no one, and postponing details about the difficult choices on spending cuts that it would entail.

"Everybody gets the piece of cake they've got and some people will get a bigger piece. Nobody can complain," Williams said. "Nobody loses the piece of cake he's got. That means overall you need more cake."

More cake would be combination of huge spending cuts and economic growth.

Peter Morici, a University of Maryland economics professor, estimated that the federal budget would have to be cut by $800 billion a year, each year over 10 years, to achieve balance. In fact, it might be closer to $1 trillion every year in cuts, which is almost the same amount that the super committee in Congress is trying to cut over a 10-year period.

Perry also announced Tuesday that he wants to bring federal spending down to 18 percent of gross domestic product. GDP is roughly $15 trillion this year. Bringing spending to 18 percent of $15 trillion would mean cutting it down to about $2.7 trillion a year. The government, however, spent $3.6 trillion in the 2011 fiscal year, according to the Congressional Budget Office. That's a $900 billion difference.

That's where growth comes in. Perry and the supporters of his plan argue that letting the wealthy keep more of their own money would mean increased economic expansion, more jobs and greater tax receipts as a result.

The impact of spending cuts on economic growth is, of course, the topic of intense debate. Supporters of Perry's plan pointed out a Monday Wall Street Journal op-ed by Martin Feldstein, a Harvard professor who chaired the Council of Economic Advisers under President Ronald Reagan. Feldstein's study of tax receipts found that tax cuts for high-wage earners had a significant positive impact on economic growth. But overall, Feldstein found that tax cuts made up for only 60 percent or so of the revenue lost.

So even if the amount of cuts a year needed to get to a balanced budget fell to $350 billion or so, that would still be a daunting task, and Perry has given no details about how he would accomplish it.

Perry, during an afternoon press conference in South Carolina, promised to do so, at some point.

"We'll be releasing a report on how we get that done," Perry said.

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