The strange thing about Gov. Rick Perry’s proposed flat-tax plan is that it doesn’t really please pundits and policy wonks on either side of the political aisle.
For conservatives, the plan does not make the tax code any simpler. It leaves intact the current tax system, while allowing taxpayers to opt into a second plan with lower tax rates.
It does not wipe away tax expenditures, so unpopular with Republicans, like the mortgage-interest or charitable-donation deductions.
And, while it shifts the political conversation toward the more traditional view of the flat tax and lowers rates for rich people and corporations, it’s not an all-out consumption tax that focuses on raising revenue through purchases rather than income.
“Clearly, it’s not the ideal,” says Alan D. Viard of the American Enterprise Institute. “Most of us want to see a clear consumption tax."
Perry’s tax proposal would let people and companies still file within the current system, or they would opt into Perry’s system, in which their rates would be lowered to a “flat” 20 percent. The GOP presidential candidate also proposes raising the eligibility age for Medicare, capping all federal spending at 18 percent of the GDP, and offering a one-time repatriation tax holiday for corporations with a reduced tax rate of 5.25 percent on repatriated earnings.
For liberals, Perry's idea of a flat tax is equally unimpressive. There’s concern that a flat-tax proposal could disproportionately hurt lower- and middle-income taxpayers -- a criticism that the Texas governor has tried to combat by increasing the standard deduction for individuals and dependents to $12,500 from $5,800.
Even one of the grandfathers of the flat tax, Alvin Rabushka, says he needs more specifics on the Perry plan before he raises a glass in celebration of his favorite fiscal idea. “Perry’s plan is better than current law, but Rabuska is better than Perry,” he said by phone on Tuesday.
The Perry camp called him, Rabushka said, for a 20-minute telephone conversation and quick walk-through of his book on the flat tax, but they just talked in general principles and didn’t get into the nitty-gritty of whether Perry’s plan would be a revenue-neutral tax plan as conservatives like.
That’s a hardly a ringing endorsement from the foremost proponent of the flat tax—or from any conservative, really.
The gist of what they say is: Perry’s plan is better than what we have now but still not a perfect fit. Everyone needs more data to crunch, and it’s unclear if Perry’s plan would stay revenue neutral or actually cause the government to lose money.
Either way, capping federal spending at 18 percent of the GDP, as Perry has proposed as part of his flat-ax plan, could require serious spending cuts. Is either party ready for that?