Rick Perry's Plan for Taxes and Economic Growth

Earlier today, Texas Governor and Republican presidential candidate Rick Perry announced details of his "Cut, Balance and Grow" plan for spending and tax reform. According to the op-ed penned by Perry announcing the plan, it would, “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.” Key elements of the plan include a 20 percent flat income tax (both individual and corporate) and a cap on federal spending at 18 percent of GDP.

There is a lot to this plan, including significant proposed changes to Social Security and Medicare. This blog concentrates mainly on the tax proposals in the plan.

While proponents extol the simplicity of a flat tax, the Perry plan adds several wrinkles that make it less than simple.  Perry's plan for a flat tax includes a number of caveats. First off, as proposed the plan would allow taxpayers to either stay with the current tax code, or choose Perry’s alternative. Though some would likely not bother with the burden of that step, it is hard to imagine that the many who did go through the process of calculating the comparison would choose to pay the higher level of taxes from the two choices.

Secondly, under the new flat tax system, Perry also proposes keeping various tax expenditures under the current tax code, including the mortgage interest deduction and for charitable donations.

While this new tax proposal would be much simpler on it own than the current code, it's not clear that this approach would simplify the code in its entirety with two separate systems. It is also difficult to imagine that Perry’s plan could be revenue neutral compared to what would be the case under current law if taxpayers could choose under which system they wanted to pay taxes.

In addition to the Flat Tax, components of the plan include:

• A temporary tax holiday for repatriation of foreign-held earnings at the rate of 5.25%;
• Transition to a “territorial” tax system;
• Along with a corporate rate of 20%, a phaseout of corporate tax "loopholes";
• A number of reforms to Social Security and Medicare, including allowing younger workers to open personal retirement accounts and indexing the retirement and Medicare eligibility ages to longevity increases;
• Passage of a balanced budget amendment that would freeze federal civilian hiring and salaries until budget balance is achieved, and that would rule out increased revenues as part of achieving balance;
• Elimination of the estate tax, and taxes on qualified dividends and long-term capital gains;
• Repeal of the Affordable Care Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Section 404 of the Sarbanes-Oxley Act of 2002;
• Increase the standard exemption for individuals/dependents to $12,500, and;
• Phase-out standard exemptions and other deductions for filers with annual incomes above $500,000.

Perry is to be commended for offering specific proposals for addressing the country’s growing federal debt and his ideas for spurring economic growth.

Note: This blog has been updated from its original posting.