The Results Are In

Rick Perry's tax reform plan has inspired a lot of discussion in the past week, but it left people wondering how much revenue it would raise. He recently had a consulting firm run the numbers on his plan using both static and dynamic analyses. Here we will focus more on the static numbers. In a perfect world dynamic scoring would be the way to go, but there remains too much disagreement on how best to do it. And the analysis memo doesn't give enough insight into its methodology for us to judge.

First, let's re-list the major pieces of Perry's tax plan. Perry would create a new semi-flat tax of 20 percent on individual and corporate income -- "semi-flat" because he would retain a handful of exemptions and deductions. On the individual side, people making less than $500,000 would enjoy a sizeable standard deduction, and they would also still be able to take deductions for mortgage interest, state and local taxes paid, and charitable contributions. In addition, capital gains and dividends taxes would be eliminated, along with the estate tax. Taxpayers could choose between paying under this system or stick with the current system, but it seems that once they choose a system, they can't switch to the other one, though that is unclear.

On the corporate side, businesses would be able to deduct R&D expenditures and capital investments. For already-purchased capital equipment that has not yet been depreciated, it would receive a five-year depreciation starting in 2014. Perry would also switch to a territorial tax system and allow companies to repatriate earnings in 2014 at a tax rate of only 5.25 percent.

The static estimate, which takes into account taxpayer behavioral responses but not macroeconomic effects, shows that the plan would raise $4.7 trillion less revenue than current law from 2014-2020, or $1.6 trillion less revenue than current policy (tax cuts and AMT patches extended).

According to the analysis, as a percent of GDP, Perry's plan raises less than 17 percent of GDP through 2018; in 2019 and 2020, the plan raises about 18 percent of GDP due to a surge of corporate tax revenue in 2019. Presumably, this is because the stopgap five-year depreciation for already-made capital purchases would run out by then.

In short, using the static estimate, Rick Perry's tax reform would raise less revenue than a tax-cuts-extended baseline.