After much flourishing, presidential hopeful Rick Perry finally unveiled his vision for tax reform. Called “Cut, Balance, & Grow,” Perry emphasized that the plan is long range. He stated, “My plan should not be viewed in a vacuum but in comparison to a continuation of the status quo.” He touted it as being so simple that Americans can file their income tax returns on a postcard.
Perry previously called for the scrapping of the Internal Revenue Code. Most analysts across the political spectrum agree. The current complete code is 4,000 pages, contains three million words, and weighs almost five pounds. It is complex, convoluted, and — at times — incomprehensible. It is supplemented by hundreds of regulations, administrative rulings, and pronouncements as well as judicial interpretations by all three levels of the federal court system.
Prior to unveiling “Cut, Balance, & Grow,” Perry vowed that he would replace the current tax code. Evidently, he found that he could not do so. His plan does not scrap the code. It merely adds another level of complexity, another wrinkle to an already wrinkled, decrepit, and aged body of law. And, it forces taxpayers to prepare their taxes twice in order to determine if the plan is financially beneficial to them.
Under “Cut, Balance, & Grow,” the current tax code remains intact. However, Americans are given the choice of using the old system or (and here is the new wrinkle) the option of paying a flat 20 percent tax on their wages. In essence, the plan creates another tax system. Perry seems to be unaware that the individual tax code already has another system: the Alternative Minimum Tax (“ATM”). ATM was implemented to ensure that higher income Americans pay their fair share of taxes by eliminating deductions, imposing add-backs, and adjusting taxable income. Whether ATM would continue to have that impact under Perry’s plan is uncertain. Supporters of ATM consider it as a tax equalizer.
For families earning $500,000 or less, “Cut, Balance, & Grow” allows for a flat 20 percent tax option subject to certain exemptions and deductions. By definition, a flat tax applies the same tax rate to income at every level. The current tax code is progressive — taxing higher income Americans at higher rates and lower income Americans at lower rates. Most economists agree that a flat income tax hits lower income people harder because of the built in structural benefits of our current code.
Moreover, most income for middle Americans is generated by wages. For the wealthy, investment returns (interest, dividends, stock sales) tend to make up a bigger share of their income. Investment returns (unlike wages) are not taxed under Perry’s plan. That is a big tax break for the wealthy in addition to the lower tax rate of 20 percent compared to the current top tax rate of 35percent on taxable income over $379,150.
For wealthy Americans, Perry’s “Cut, Balance, & Grow” plan with its 20 percent flat tax option is financially advantageous — provided that they hoard postcards. Most Americans will continue, however, to clunker under the present code with the familiar Form 1040 and its numerous schedules, deductions, adjustments, and credits.
