Rick Perry's Tax Plan Opens 'Intriguing' Debate

By Deanna C. White
 
Texas Gov. and Republican presidential candidate Rick Perry entered the tax reform fray recently when he made good on his debate promise to "bump plans" with fellow candidate Herman Cain's 9-9-9 tax proposal by introducing his own "Cut, Balance and Grow" economic stimulus plan.
 
The plan offers dramatic provisions that would eviscerate federal regulations, privatize social security accounts, and balance the federal budget through deep cuts in federal spending.
 
But the aspect of the plan that seems to be drawing the most interest, particularly in public accounting circles, is the proposal to replace the current tax code with an optional 20 percent flat tax for individuals and corporations.
 
"My Cut, Balance and Grow plan reorders the way they do business in Washington by reinventing the tax code and restoring our nation to fiscal health through balanced budgets and entitlement reform," Gov. Perry said, at the South Carolina announcement of the plan. "Central to my plan is giving every American the option of throwing out the three million words of the current tax code and the costs of complying with that code in order to pay a 20 percent flat tax on their income."
 
The fulcrum of the plan is Perry's proposal to offer individual taxpayers two choices when they file their returns. They would either chose a new, 20 percent flat income tax rate, or they could continue to pay under the current tax system.
 
Perry said the 20 percent flat tax rate will "cut taxes across all income groups" and lower tax compliance costs because of the simplified filing system. Tax returns for flat rate filers would be reduced to the size of a postcard, he said.
 
In addition to the new 20 percent flat tax rate, Perry's tax plan would:
 
  • Preserve deductions for mortgage interest, charity, and state and local taxes for families earning $500,000 or less.
  • Includes a $12,500 standard deduction for individuals and dependents.
  • Phase out standard exemptions and deductions for filers with annual incomes above $500,000.
  • Eliminate taxes on social security benefits, dividends, and capital gains.
  • Eliminate the death tax.
  • Reduce the corporate income tax rate to 20 percent, the average corporate rate among developed nations, replacing the current combined corporate tax rate of 39.2 percent, (currently the second highest in the developed world).
  • Implement a transition to a territorial tax system, so "companies aren't taxed a second time when income is moved back to the United States," and
  • Establish a temporary, one-time reduced tax rate of 5.25 percent on repatriated earnings.
 
The Perry camp says the plan does not include a federal sales tax or value-added tax.
 
Larry Evans, CPA, tax partner, tax technical resource leader, for Eide Bailly LLP in Oklahoma City, OK, said whether one loves or hates the Cut, Balance and Grow plan, there is little doubt it is an "intriguing" and entirely unique plan that has raised a "healthy discussion" about tax reform and entitlements.
 
"This discussion of flat tax has brought along emotion from both sides of the issue," Evans said, noting many blogs are ablaze with talk of Cain and Perry's proposals. "The state of the economy has made people realize something has to change somewhere, but the unfortunate thing is we seem to be divided into two camps: those paying tax and those not paying tax. That's where the debate comes in."
 
Historically, conservative economists have argued a flat tax would promote economic growth by putting more discretionary income into the hands of the wealthy – income that would trickle-down to the rest of the economy in terms of job creation, investment, and spending.
 
Many liberals and moderates, however, rail against the flat tax as a windfall for the rich, arguing there is no proof their savings actually benefit the rest of the economy.
 
But Evans cautions people against a having a kneejerk reaction to simply fall into one of those two disparate and often antagonistic tax camps – especially when examining the Perry plan.
 
"If you see this plan and think 'well they got a benefit and I didn't' that's a very shortsighted way of looking at it," Evans said. "We have to look at it in terms of how it helps the overall economy – how it helps get this country back on its feet and put people back to work."
 
Although he says the Perry proposal still lacks some critical detail, in particular whether there would be any modifications to the existing tax code, Evans says he sees some "very nice things that could happen in this plan."
 
"I have never seen the option of offering a flat tax and a traditional tax, a Column A or a Column B, at this level of completeness before, and that's what's interesting to me," Evans said. "Whether this could ever be passed in full I have no way of knowing, but it opens up a discussion on tax reform and that's the key. We need some momentum for change."
 
Evans said he believes there is some veracity in the theory that reducing the tax rate to 20 percent for upper income filers could put more money into play, stimulating the overall economy and job growth.
 
"There is no doubt someone who is currently paying a 36 percent tax rate would benefit from the change, but this plan also allows people who are currently paying less than 20 percent to keep their current tax rate so they will not be damaged by this plan," he said.
 
The real question, Evans said, is whether the money saved by wealthier filers would re-circulate back into the system to create jobs and stimulate the economy.
 
"We should examine whether the dollars saved would be used to bring the middle and lower classes up and benefit the overall economy," he said. "If the country is on the mend I don't know that that's a bad deal. We need to look at the overall picture."
 
The elimination of the minimum tax and the tax on social security would also benefit a significant number of people at most income levels, he said.
 
Evans does have some reservations with the Perry plan, however. First, he questions anyone who claims simplifying the tax code is a simple process.
 
"Simplifying the tax code is an easy comment to make, but it's much more difficult in the application process because of spatial interests, because of dollars turning into lobbying and the like," he said. "It's how the tax code has evolved into what it is."
 
From the CPA angle, Evans also disputes Perry's claim that his new tax plan will eliminate today's burdensome compliance system. "You'll never get rid of all the compliance. Tax preparers will still have to calculate the regular tax to compare with the 20 percent flat rate," he said.
 
But ultimately, Evans cautions, no tax reform plan will have an impact on the economy unless it's allowed to take root.
 
Unless a tax reform plan is allowed to stay in place for a while, and the government resists the urge to tamper with the tax code, Evans believes, tax payers will continue to wade in a sea of uncertainty – uncertainty that will ultimately squelch any hope of stimulating the economy.
 
"We have to make decisions on the tax code with the best information we have right now and then leave them in place instead of changing them every two years," Evans said. "Somewhere along the way we have to make the government understand there needs to be some consistency in this, and Congress is where it has to start."
 
 

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