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A Project of The Annenberg Public Policy Center

Perry’s Dubious Tax Promise

In his speech unveiling his proposed “flat tax” overhaul of the tax system, Rick Perry promised that “taxes will be cut across all income groups in America.” But a newly released analysis of his plan by the nonpartisan Tax Policy Center concluded that many lower-income persons and families would see their taxes go up.

In his Oct. 25 “Cut, Balance, Grow” speech, Perry said a beefed up standard deduction assured lower- and middle-class residents would see a tax break.

Perry, Oct. 25, South Carolina: We will increase the standard exemption for individuals and dependents to $12,500, meaning families in the middle on the lower end of the economic scale will have the opportunity to get ahead. Taxes will be cut across all income groups in America. The net benefit will be more money in Americans’ pockets, with greater investment in the private economy instead of the federal government.

And in a “Fox News Sunday” interview on Oct. 30, Perry assured host Chris Wallace, “Everybody gets a tax cut here. Everybody gets a tax cut here.”

But that’s not true for everyone, even though the Perry plan would result in a dramatic decrease in overall revenues, according to the Tax Policy Center analysis. The Tax Policy Center predicts that Rick Perry’s “flat tax” plan would amount to a tax cut of $570 billion in its first year after enactment, compared with current tax rates. More than half the benefits would flow to persons making more than $1 million a year.

“The Perry plan would reduce federal tax revenues dramatically,” the Tax Policy Center said in a report posted Oct. 31. “Relative to a current policy baseline, the reduction in liability would be roughly $570 billion in calendar year 2015.” And compared with “current law,” under which all the 2001 and 2003 Bush tax cuts would expire, the loss in revenue would be close to $1 trillion in 2015, a reduction of 27 percent in projected revenue.

The TPC — which uses a computer model of the tax system similar to those used by the Treasury Department and the Congressional Joint Committee on Taxation to project the likely effects of any change to the tax system — also projected that more than half the benefits of the Perry plan would flow to those making more than $1 million in 2015, compared with current policy. They would see an average tax reduction of $495,558, TPC said. The after-tax income of those $1-million-a-year families and individuals would rise an average of 23.5 percent.

Meanwhile, those in the middle (the middle one-fifth of all families and individuals) would see an average tax cut of $13, and their average effective tax rate would be unchanged.

However, many lower-income persons and families would see taxes go up. That’s because, although Perry has said he would continue the “current” income-tax system for those who prefer it, the TPC said Perry’s plan seems to allow all the Bush cuts to expire on schedule, including lower marginal rates at the bottom.

Tax Policy Center: TPC assumes that the existing tax law remains unchanged. In other words, all provisions currently scheduled to expire under current law will do so, including the annual patches to the AMT, the lower marginal rates and marriage penalty relief originally passed in 2001, the 15 percent rate on long-term capital gains and qualified dividends, and the higher amounts and increased refundability of the earned income tax credit and child tax credit. The expiration of provisions of existing law would affect those taxpayers who would otherwise see their tax liability higher under the optional flat tax system than under 2011 tax provisions

The TPC said it had made repeated efforts to clarify this point with the Perry campaign, but had received no response. However, it said the analysis performed by John Dunham Associates at the request of the Perry campaign uses a current-law baseline to estimate the revenue effect of allowing taxpayers to choose whether to stay in the existing system or opt into the alternative system. And “current law” calls for the Bush cuts to expire before 2015.

As a result, either the new Perry flat tax or the “current” tax system (once the Bush cuts expire) would mean higher taxes for many, compared with what they would pay at current rates. The TPC projected, for example, that taxes would go up for 63 percent of individuals and families earning between $40,000 and $50,000 a year, for an average increase of $248 in 2015. For those earning between $20,000 and $30,000, the tax hike would be even more painful, amounting to an average of $462 in higher federal income taxes.

— Brooks Jackson and Robert Farley