Perry's Tax Plan: Flat Tax Heaven or Hell?

Personal Finance, finances
Perry's Tax Plan: Flat Tax Heaven or Hell?
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If you are here, why do you want to go there (higher taxes)?

It’s a funny thing about politics…just when you think it couldn’t possibly get any sillier, it does. A good example is Rick Perry’s proposed tax plan and its fatal flaw that insults the intelligence of the American taxpayer.

While I think Perry is fine debater who thinks well on his feet, I’d love the chance to ask him one question.

“Mr. Perry, how can you expect me to swallow the fantasy that the portion of Americans who currently pay no taxes—about 42% at last count—are going to beat down the IRS doors and demand to voluntarily start paying a 20% tax?”

I’m sorry, Mr. Perry, but I can’t imagine that if they are currently getting by with paying no taxes and mooching off the hard paying taxpayers like me that they will be excited about giving up their gravy train and joining the ranks of those of us who have paid taxes all their life.

I filed my first income tax return at age 17, and while I’m not going to reveal my age, the one I’ll file in 2012 will be number 41. (Oops!) Yes, I’ve spent my life working hard, paying my taxes and believing in that American dream. I saved for retirement (another fantasy, which I’ll address in another article), and watched in dismay as boons to well-heeled lobbyists and special interests group increasingly held more political clout with you and other politicians than I did.

Okay, I’ve said my piece (for now). I’m not a tax law expert, but I’ve interviewed someone who is. Let’s analyze Perry’s tax plan from her point of view and see if it is a keeper or just another half-baked idea.

What the Expert Says

Tax proposals - door number 1 or number 2

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.

Let’s spend and grow this baby!

BH: So in essence, it is a tax increase on those individuals, which would tend to stifle economic growth.

DS: Yes.

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%.

DS: Yes!

It’s Just My Opinion

Don’t touch my sweetheart deals!

This is just my opinion and it’s worth every penny you paid for it. On the surface, Perry’s proposal is another one of those political ploys that looks good and provides lots of sound bites for the propaganda machinery. Since he trotted his plan out shortly after Herman Cain’s plan gained so much attention and approval, it seems clear it was a desperate attempt to shore up his falling approval rating and keep himself in the race as a viable presidential candidate.

In reading the supporting documentation Sweeney provided us, it seems clear there are several well-known experts who have mixed opinions about whether the plan can work. Here’s a sampling of their remarks.

William McBride, Tax Foundation economist, says “small business owners still seem better off under the ‘9-9-9’ system.” The 9-9-9 system referred to here is the one proposed by presidential candidate Herman Cain.

Joseph Rosenberg, research associate for the Urban Institute, notes, “Currently, the entire income is taxed at the individual level, and under these new plans it would be taxed much more so at the business level. The tax-induced incentives would be constant across businesses regardless of their industry and classification.”

Daniel Shaviro, professor of taxation at NYU School of Law, said “Everyone will still want to run the numbers to find out which of the two options work best for them – especially small businesses, which would be even more likely to prefer the current income tax and its low-income brackets.”

Doe Perry want a unicorn in every pot?

Edward Kleinbard, USC School of Law professor, is a harsh critic of the plan and stated Perry “…might as well decree a unicorn in everyone’s backyard as part of his economic policy.”

Kleinbard hits on what I consider the other fatal flaw in the plan. Politicians can’t agree on $100 billion in cuts. It’s ludicrous and insulting to American taxpayers to believe that Perry will be able to wave his magic wand and get them to agree on over nine times as much—$900 billion—and then pass those cuts into law.

You only have to turn on the television or radio or review the press coverage of some of the former “debt debates” to understand that there is not going to be any political agreement to reduce spending from the current administration. Obama has likened his administration to a car and that is actually a good analogy. The liberal foot is on the gas pedal of spending and has it shoved to the floor. The vehicle isn’t going to stop…until it crashes or drives off a cliff.

Preaching to the Choir

Statue of Liberty: Let freedom ring for we, the people!

The only way to turn the economy around and get folks back to work is to stop out-of-control government spending. While we probably do need some tax code reform, I’m afraid that’s just another smoke screen used to camouflage the real issue just as healthcare reform was a hoax.

Folks, we aren’t in a struggle for better healthcare, revised tax codes, or any of the other popular political talking points. The battle is for power.

Whether it will continue to reside in the hands of a few (the elite liberals who feel they know what’s best for the rest of us ignorant peasants) or whether the American people will take back that power for themselves is up to each individual.

We do still have power, so don’t believe their lies. Tom Periello is no longer a member of Congress, and I helped oust him from office. You can help, too. Shake off your apathy and feelings of powerlessness. Write, fax, email, phone and hound your representatives. It is easy to find their contact information on the Internet so don’t make excuses. Make your voice heard. Take our house—the White House—back and restore the power to where it rightly belongs with we, the people.

That’s My Opinion - What’s Yours?

Thank you for taking the time to read my opinion; however, I’m very open-minded and interested in yours as well. Please use the comments section to give me your feedback, and don’t be afraid to disagree with my point of view. Fortunately, one of the benefits of living in our great country is we can express our opinions freely and agree to disagree when necessary. I’m waiting to hear from you!

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