Gov. Rick Perry’s proposed tax-reform plan is not merely “loco”. As they say in Texas, it’s muy loco.
In the first place, it creates two tax structures that would co-exist side by side — the current system and a flat 20-percent system. Taxpayers would be able to choose which system they prefer to pay taxes under.
Perry’s proposed flat-tax system includes a standard deduction of $12,500 a person. It retains the mortgage-interest deduction for all those earning less than $500,000. It includes deductions for charity and for state and local taxes.
So pretend that you’re a family of five with an income of $88,500, roughly twice the median household income. You pay $15,000 a year in mortgage interest, make $2,000 a year in charitable contributions and pay $9,000 in state and local taxes. Under Perry’s plan, you would pay not a penny in federal income taxes. This, from a man who has been going around the country complaining that too many Americans pay no income taxes (even though most of them do pay significant payroll taxes.)
Let’s give this mythical family a windfall of $11,500 in capital gains income, just to bring the total up to $100,000. Bottom line: No income tax owed.
In addition, no taxes would be charged on Social Security benefits. Or on dividends. Or on long-term capital gains. Or on estates. In fact, the combination of a 20 percent flat rate and the abolishment of capital gains taxes and dividend taxes would mean immense tax breaks for wealthy Americans amounting to hundreds of thousands or millions of dollars.
Perry also proposes to cap federal spending at 18 percent of gross domestic product. Although I haven’t seen a revenue analysis yet, I have grave doubts whether, with all of his promised tax cuts, his proposal would produce even that level of revenue.
But in the overall spirit of his plan, let’s just pretend, shall we?
Reducing spending to 18 percent of GDP would require $900 billion in cuts from the current budget. To give you an idea what that would mean, one way to achieve savings on that scale would be to eliminate Medicare entirely.
Plus cut Social Security by 55 percent.
Or abolish Medicare AND cut defense by 50 percent.
Or abolish Medicare AND abolish the departments of agriculture, commerce, education, energy, homeland security, housing and urban development and interior.
The whole thing, in other words, is wildly unrealistic. Conservative economist Milton Friedman used to warn that there is no such thing as a free lunch, but Perry is promising Americans a free breakfast, lunch and six-course catered dinner served on the finest china, with tiramasu for dessert and Godiva chocolates on your pillow for bedtime.
Perry is apparently gambling that in a Republican primary, that won’t matter much. Are his opponents going to attack him for cutting taxes too much? Are they going to attack him for cutting spending too much?
His calculation seems to be that no, they won’t, and if they do, all the better.
– Jay Bookman