Four of the top Republican candidates for president have called for a flat individual income tax. Herman Cain, Newt Gingrich, Rick Perry, and Mitt Romney, the GOP front runners for the 2012 presidential election, have all put forth tax reform plans that include some form of flat income tax. Their tax reform plans range from Perry’s declared support of an optional 20 percent flat tax to Romney’s original opposition but currently vague approval of such a tax.
A flat tax — so named because it sets one tax rate for all income groups while eliminating all or many of the present deductions — would simplify the current tax structure. For example, Cain’s 999 plan (later modified to 909) would impose three flat taxes: a nine percent business tax, a nine percent individual tax, and a nine percent national sales tax. Such a tax structure is easy to apply. It is simple multiplication. As touted by Perry, Americans could indeed file their individual tax returns on a postcard.
The critics of a flat tax claim, however, that it imposes a greater tax burden on poorer Americans since they are taxed at the same rate as wealthier Americans, use a greater percentage of their earnings for necessities, and have less sheltered investment income. For example, the Tax Policy Center, a nonpartisan joint venture of the Urban Institute and Brookings Institution, found that Cain’s 999 plan would result in a tax increase for 84 percent of American households. The center further found that taxes for the wealthy under the 999 plan would drop considerably. It projected that in 2013 — the first year that 999 could be enacted — 95 percent of Americans making $1 million or more would get a tax cut that averaged $487,300.
The supporters of a flat income tax claim that any tax increase is offset by its advantages. According to these supporters, cutting taxes on the wealthy spurs employment, investment, and economic growth. Perry provided such a justification for the 20 percent optional flat tax contained in his “Cut, Balance & Grow” plan. In an interview with CNBC, Perry dismissed the millions in tax cuts that his 20 percent flat tax would provide to the wealthy because “we want those people at the top to be investing in this country.” Whether the wealthy would actually use those tax dollars to accelerate the economy or merely pocket them for inheritance by their descendants is, of course, open to question.
Regardless, the immediate adverse impact of a flat income tax on middle Americans cannot be denied. Under Perry’s opt in plan, an unmarried executive earning $42,000 with no dependents and none of the allowed deductions (i.e., mortgage interest, charitable contributions, state and local taxes, and dividends and capital gains) pays $5,900 in taxes. Currently, this executive (again, with no such allowed deductions) pays $4,460. That is an added tax burden of $1,440 for this middle income American. Compare this tax burden to the tax break to a higher income American. This same unmarried executive earning $500,000 would pay $100,000 under Perry’s plan. Under the current system, this executive pays $152,314. That is a tax cut of $52,314 for this upper income American. Moreover, under Perry’s plan, since dividends and capital gains are not included in taxable income — these income sources are specifically subtracted from the calculation of taxable income in his specimen postcard return at www.rickperry.org/content/uploads/2011/10/sample-tax-return.pdf — this executive can pocket all investment earnings tax free as well as reinvest them, again, tax free.
A flat tax has its function in our overall tax structure. Connecticut has a flat 6.35 percent tax on sales and certain services. That fact being acknowledged, a tax increase for middle income Americans versus a tax decrease for upper income Americans is neither wanted nor warranted.
