Tuesday, October 25, 2011

The Flathead Mill

So Rick Perry has jumped on the flat tax bandwagon, no doubt influenced by his most recent endorser, Steve Forbes:

Perry will propose a 20 percent flat tax rate for income taxpayers. But taxpayers will be allowed to stay under current rates if they choose.

It wasn't enough that Herman Cain's "Nein! Nein! Nein!" plan was soundly ridiculed by everyone from the National Review to any number of economists. Perry had to double down on teh stoopid.

“On Tuesday I will announce my ‘Cut, Balance and Grow’ plan to scrap the current tax code, lower and simplify tax rates, cut spending and balance the federal budget, reform entitlements, and grow jobs and economic opportunity. The plan starts with giving Americans a choice between a new, flat tax rate of 20% or their current income tax rate. The new flat tax preserves mortgage interest, charitable and state and local tax exemptions for families earning less than $500,000 annually, and it increases the standard deduction to $12,500 for individuals and dependents. This simple 20% flat tax will allow Americans to file their taxes on a postcard, saving up to $483 billion in compliance costs. By eliminating the dozens of carve-outs that make the current code so incomprehensible, we will renew incentives for entrepreneurial risk-taking and investment that creates jobs, inspires Americans to work hard and forms the foundation of a strong economy. My plan also abolishes the death tax once and for all, providing needed certainty to American family farms and small businesses.”

Perry continues, “We will lower the corporate tax rate to 20%—dropping it from the second highest in the developed world to a rate on par with our global competitors. Second, we will encourage the swift repatriation of some of the $1.4 trillion estimated to be parked overseas by temporarily lowering the rate to 5.25%. And third, we will transition to a “territorial tax system”—as seen in Hong Kong and France, for example—that only taxes in-country income. … Cut, Balance and Grow also phases out corporate loopholes and special-interest tax breaks to provide a level playing field for employers of all sizes. To help older Americans, we will eliminate the tax on Social Security benefits, boosting the incomes of 17 million current beneficiaries who see their benefits taxed if they continue to work and earn income in addition to Social Security earnings. We will eliminate the tax on qualified dividends and long-term capital gains to free up the billions of dollars Americans are sitting on to avoid taxes on the gain.”

Perry will also propose raising the Social Security retirement age.

Now, in fairness to Perry, there's some interesting wrinkles to his tax plan. For example, the Alternative Minimum tax was devised way back in the 1960s as a way to force the rich to pay their fair share of taxes (funny how often that pops up in American economic history.) It was never indexed for inflation, meaning that any hikes in the floor income level were done manually, such that now, if you live in a high tax state, own a home and have a couple of kids with both parents working, you likely are affected by the AMT. It really needs to be re-indexed at least, or eliminated altogether.

But here's the thing: a flat tax that maintains mortgage interest deductions, charitable contributions, and state and local tax deductions is not a flat tax any longer if those deductions are income-dependent.

In effect, all Perry is doing is lowering the top rate of taxation...WHILE RAISING THE BOTTOM RATE FROM 15% to 20%!

Plus, he's eliminating the Earned Income credit for low-wage workers, education and dependent care credits, which will force millions of people to pay more in taxes, those least able to afford to.

All while cutting taxes for the wealthiest among us.

I term this an Epic Fail.