Assessing the Perry Flat Tax

November 2, 2011

Texas Governor and presidential candidate Rick Perry has unveiled his plan to replace the current U.S. income tax system with a flat tax for both individuals and corporations.  Here are the basic components of Perry's tax system:

  • With an optional 20 percent flat income tax for individuals, taxpayers may opt out of the current tax system and into this alternative, which maintains traditional deductions for those making up to $500,000 per year and consolidates the standard deduction and personal exemption into a $12,500 exemption per person in the family.
  • It would eliminate the taxes on qualified dividends, long-term capital gains and the estate tax.
  • The plan reduces the corporate income tax rate to 20 percent while cutting some tax provisions.
  • It transitions corporate income from abroad to a territorial tax system, whereby companies may repatriate foreign earnings for a lower tax rate of 5.25 percent.

Most of these provisions are designed to spur economic growth and increase the ability of the United States to compete internationally as a viable location for business investment. 

  • By eliminating the long term capital gains tax, Perry hopes to increase Americans' incentives to save and invest.
  • The reduction in the corporate tax would bring America's effective rate in line with the average OECD country and China, at about 25 percent.
  • Finally, the territorial tax system would encourage U.S. firms to reinvest their foreign income in the United States as opposed to keeping it abroad in order to avoid tax liabilities.

Just as this proposal will likely bring benefits to economic growth, the impact on the tax liability of typical American families seems similarly favorable.  No taxpayer would see a net increase in the percentage of their income that is paid in taxes, while almost all would see a cut. 

Critics point out, however, that all of these benefits cannot be realized without a substantial cost: lost revenues.  Perry's plan is far from revenue-neutral.  And while increased economic output may help to make up some of the revenue losses, deep cuts in federal spending will be necessary if he is to follow through with moves toward balancing the budget.

Source: Scott A. Hodge, "Assessing the Perry Flat Tax," Tax Foundation, October 25, 2011.

For text:

http://taxfoundation.org/blog/show/27717.html

 

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