Wednesday, November 9, 2011

Perry's tax plan more viable than 9-9-9

The biggest non-sex-related* development in the Republican race in the last two debate-free weeks was Rick Perry's unveiling of his flat tax plan (.pdf). The main takeaway is that, like Herman Cain's 9-9-9 plan, it hugely decreases taxes on the wealthy. More importantly, in terms of politics, it represents a much more politically-feasible route to such giveaways than the Cain plan.

First, the numbers. Perry proposes to offer every taxpayer a choice between the current system and a flat tax of 20%. It also eliminates taxes on capital gains, the estate tax, increases personal exemptions to $12,500 per person in the household, and greatly reduces corporate taxes on profits earned overseas. It does not change the payroll tax.

Now, the math. So far as I can tell, the plan eliminates the Earned Income Tax Credit, which as previously discussed would be a disaster for the working poor. In a sane world, proposing to end an effective tool to help the poor which was instituted by Ronald Reagan would carry a political cost. In today's Republican Party, however, the problem is apparently the 47% of Americans who only pay sales, payroll, state/local and property taxes but don't pay federal income taxes, so screwing the poor is accepted party doctrine.

Where Perry's plan is politically superior to Cain's is its effects on the middle class. As previously discussed, Cain's plan would raise taxes on the average family of 4 by about $3,000 a year. For the vast majority (84%) of taxpayers, they could do the math and find that they would pay more under 9-9-9. Regardless of the arguments one might make for a tax proposal, if a vast majority of voters find it hurts them, it's probably not going to do very well at the end of the day.

Under Perry's plan, our family of 4 making $50,000 sees its federal income tax burden fall to $0, thanks to the increased personal exemption: $50,000 - 4 x $12,500 = 0 taxable income. Families making more than $50,000, their tax bill goes down under Perry's plan, except for a narrow band of people whose income is right around where the current income tax rate goes from 15% to 25%, which is $69,000 after deductions/exemptions. These people wouldn't actually see their taxes go up either, as they're allowed to choose to remain with the current plan.

For the rich, whose current income tax rate is 35%, 20% is a pretty great deal, particularly when they get to keep the mortgage interest deduction. The deduction actually phases out for incomes over $500,000, but the income tax rate savings more than make up for the phase-out. The wealthy also make a much larger percentage of their income from capital gains, the taxes on which drop from 15% to 0% under Perry's plan. They also no longer have to pay estate taxes, which only applies to estates of $5 million or more and currently tops out at 35%.

Cain's 9-9-9 plan at least attempts to be revenue-neutral (i.e., bring in as much money as the current code). Perry's plan would bring in much less revenue, exploding the deficit. Mainstream Republicans are under the impression that tax cuts for the rich are inherently revenue-neutral. They base this on the Laffer Curve, which states that there exists a level of taxation above which tax revenue will actually go down. While such a level exists, it's above the level of taxation where we currently are, so lowering tax rates will lower revenue, despite what Perry and others would have us believe.

Perry's plan would be terrible for the country, as the deficit would grow even more and force huge cuts in government programs. But, because taxes will go down on the middle class and way, way down for the rich, it is more politically palatable to voters, particularly those who put us at the wrong point on the Laffer Curve. By introducing the plan, Perry has positioned himself to potentially capitalize on an eventual Cain demise.

(*: I don't really care to comment on the particulars of the allegations against Cain. If you're interested in the story, has been the best source)


M said...

That was M, by the way. Keeping my promise to comment! The thing that sets an identity appears not to work.

tax and spend said...

Why does Newt get a second stint in the limelight when Perry crashed but not Michelle Bachmann?