Texas governor Rick Perry, who hopes to secure the Republican Party’s presidential nomination for next year’s election, unveiled a comprehensive tax reform proposal on Tuesday that would allow Americans to pay a 20 percent flat tax rate on their income without abolishing the current tax regime.
Perry, whose popularity plummeted after he disappointed in several of the televised debates with his fellow contenders, is certain to appeal to the conservative base of his party with his tax overhaul. It would virtually eliminate taxes on capital gains and dividends which inhibit investment and lower America’s corporate tax rate from 35 percent, which is among the highest in the developed world, to 20 percent.
Personal income would be taxed at a similar rate although deductions for charitable donations, local taxes and mortgage interest would remain in place for incomes under $500,000. Furthermore, Perry’s plan offers a standard deduction of $12,500 per household member so a family or four earning $50,000 per year would have zero tax liability.
The Texan’s proposal is more radical than Mitt Romney’s, the former Massachussetts governor who is regarded as his foremost rival in the nomination contest.
Romney would cut corporate taxes to 25 percent and has promised a “fundamental redesign” of the tax code but would keep personal income rates as they are in the short term. He would also eliminate the capital gains tax but only for incomes under $200,000. For richer Americans, who are the main source of capital investment, such a cut would be meaningless.
Former Utah governor Jon Huntsman has also proposed to lower the corporate tax rate to 25 percent and would reduce the existing income brackets to 8, 14 and 23 percent — without allowing for deductions at all.
The mortgage interest deduction in particular is hugely market distortive and contributed to the housing bubble that preceded the 2007 financial crisis by enabling Americans to purchase homes which they could not actually afford.
Perry’s plan could help him win back Republican primary voters who are now leaning toward Herman Cain, the former businessman whose “9-9-9” tax plan is popular with voters but less so with conservative activists and tax lobbyists who fear that future Congresses might be tempted to raise the rates.
Cain, who was also a Kansas City Federal Reserve Bank chairman, advocates a reduction of the corporate and personal income tax rates to 9 percent as well as the creation of a nationwide sales tax.
Independent analyses have suggested that Cain’s plan would fall some $400 billion short of the $2.16 trillion the federal government takes in under the existing tax code — which is approximately a trillion dollars less than what Washington spends this year. Cain has yet to put out a plan for deficit reduction.
The fiscal impact of Perry’s plan is more difficult to estimate because it would allow people to continue to be taxed under the current regime. As such, the roughly 50 percent of households who pay no income taxes right now have little incentive to move to the flat tax. Top incomes would profit disproportionately by contrast.
Democrats have criticized Herman Cain’s plan because it, too, would reduce taxes dramatically for high-income earners with little benefit to middle-class Americans.
To offset the drop in revenue that will likely result from implementing a flat tax, Perry favors a balanced budget amendment to enforce fiscal discipline and wants to cap federal spending at 18 percent of gross domestic product. The governor would reduce nondefense outlays by $100 billion during his first year in office with cuts to the Department of Energy and by eliminating the nationalized mortgage agencies Fannie Mae and Freddie Mac.