What the Expert Says
Our expert for this interview is the CEO of MyCorporation, Deborah Sweeney. She draws on expertise gained from helping over a quarter of a million business owners file their tax returns and her professional credentialing to give us her tax law perspective on Perry's tax proposal. (Sweeney recently shared her opinion of Herman Cain's tax plan in another interview.)
Bright Hub (BH): Deborah, describe Rick Perry's tax plan for us, please.
Deborah Sweeney (DS): First, taxpayers have options. They can choose a flat tax (the proposed amount is 20 percent) or continue under the current income tax system. Mortgage deductions could still be taken by families earning less than a specified amount.
This would benefit almost 99 percent of taxpayers. In addition, these families could declare exemptions for each family member. The proposed income level for a mortgage deduction is for incomes under $500,000 and the exemption per family member is $12,500 each.
BH: Why are flat tax proposals getting so much positive press?
DS: The belief is there will be more investment in business with a flat tax. Such taxes would discourage tax breaks for individuals or corporations and limit or eliminate the power of special interest groups and career lobbyists.
BH: That sounds reasonable enough on the surface. What's the problem?
DS: The option of a choice. The tax proposal still encourages affluent individuals to practice legalized tax avoidance. These individuals are paying taxes that are much lower than the proposed twenty percent, so it just doesn't make sense they would choose to pay more.
BH: So in essence, it is a tax increase on those individuals, which would tend to stifle economic growth.
BH: In my opinion, the portion of the proposal that offers a voluntary option for individuals to choose the current system or opt for the Perry tax is a fatal flaw. What's your opinion?
DS: That's right. Approximately 42 percent pay no taxes because their incomes are at the poverty level, or they manage to evade the taxes with loopholes or tax credits. To expect these individuals to sign up willingly for any plan to charge them a tax, whether it is 9% or higher, is ludicrous. If someone does choose an alternative tax plan, it will be because it lowers their current tax rate..
BH: So, how would the Perry plan play out in the real world? How does it affect taxpayers and business owners and would it work?
DS: Here's how it shapes up:
- It will raise less revenue than the present system so there must be a plan in place to stimulate and to grow the economy and the tax base.
- It might lower taxes for some affluent individuals such as healthcare providers or attorneys.
- It generates less revenue so government spending must be cut to balance the loss in revenue. If you follow the news, you know that the Super Committee can't agree to the proposed $100 billion of needed cuts. Again, it doesn't make sense that they would agree to or could find over nine times that amount. (Perry's plan needs $900 billion in cuts to succeed.)
BH: Where would we find those spending cuts?
DS: They would have to come from the defense budget and Medicare. Raising the retirement age to 70 or higher would help but does not solve the problem.
BH: At the risk of sounding too sarcastic, those cuts sound like they will be just as popular as paying a 20% tax when your current tax rate is 0%.