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Rick Perry's 'Cut, Balance and Grow' Flat Tax Plan: Big Savings, Bigger Costs

Rick Perry's 'Cut, Balance and Grow' Flat Tax Plan: Big Savings, Bigger Costs Over the past few months, Republican presidential hopefuls have unveiled one new tax plan after another. Meanwhile, Texas Governor Rick Perry has largely remained on the sidelines, focusing less on taxes than on easing environmental restrictions on oil exploration. On Tuesday, however, he entered the flat tax fray with "Cut, Balance and Grow," a startling new plan that seems destined to capture the interest of many voters. Borrowing freely from Herman Cain's 9-9-9 tax plan, the Perry proposal is designed to be more palatable to the middle class. The question is: Would "Cut, Balance and Grow" help American workers, or would it slash, topple and shrink the U.S. economy?

Cheaper by the Dozen

One selling point for Perry's plan is its incredible simplicity: It levies a 20% tax on all earners, retains deductions for mortgage interest and charitable contributions, and expands deductions for capital gains, dividends, and state and local taxes. As for dependent deductions, Perry proposes increasing them from $3,700 to $12,500. Eventually, Perry claims, his plan would phase out many of these deductions for taxpayers who make more than $500,000 per year.

Joe Rosenberg, a research associate at the Urban-Brookings Tax Policy Center, notes that the deduction changes would be especially significant: "The standard right now is an $11,600 deduction for a married couple, combined with personal exemptions of $3,100 apiece, which totals $19,000." Under the Perry plan, a married couple could get a combined exemption of $25,000. If they have children, the benefits get even better: Current tax law provides a $3,700 deduction per child, but Perry would increase that to a $12,500 deduction. In other words, a married couple with one child deducts $22,700 under the current tax schedule, but could deduct $37,500 under Perry's plan. The gains increase with each additional child.

Pick Your Plan

Some taxpayers -- notably those who rent, don't have many kids, and don't make much money -- would owe more under Perry's flat tax. His solution: He would allow taxpayers to choose to use either the old system or his new one.
"You can continue to pay taxes, as well as accountants and lawyers under the current system, or, you can file your taxes on a postcard, with deductions only for interest on a mortgage, charitable giving, and state and local tax payments," says Perry. In other words, all taxpayers would either owe the same amount of money as they do now, or less under Perry's plan.

Rosenberg points out, however, that the real benefits of Perry's plan kick in for those in higher income brackets: "The income level at which you are indifferent between the two systems is relatively high, somewhere around $75,000 for a single taxpayer and $150,000 for a couple." For the average taxpayer at the top end, however, the proposal really pays off: The highest tax bracket, 35%, works out to 14.4% after all deductions are worked in. Perry's plan reduces the tax rate for the top income bracket to 20%, while expanding many deductions, offering an added bonus to top earners. Additionally, by cutting the 15% capital gains and dividend taxes, he would slash taxes at the upper levels. In other words, under Perry's plan, Warren Buffett would owe even less.

So What's the Catch?

On the surface, Perry's plan seems to have something for everybody: Middle class taxpayers would see their tax burdens remain the same or drop, while wealthier taxpayers would get a major discount. Paired with a proposed corporate tax rate reduction to 20%, "Cut, Balance and Grow" would put a lot more money in corporate coffers.

The trouble is, Rosenberg notes, that Perry's plan is "almost certain to be a fairly large revenue reducer." The governor has accounted for this by announcing his plan to cut the federal budget to 18% of GDP, the lowest level since 1966. Given that he has pledged to retain Social Security and Medicare benefits at current levels, it seems likely that, under Perry, nearly every other part of the federal government would take a big hit. For those who rely on federally-supported programs -- like public schools, the FDA, interstate highways, and the Centers for Disease Control -- the sugary front end of Perry's plan may mask a bitter pill.

Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at @bruce1971.

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If you support a flat tax because it will make filling out taxes simpler, you need to think again. The simplicity comes from eliminating all of the deductions and credits, not from making the tax "flat." Think about how your final tax is computed from the tax tables. If you make a certain amount, you pay a tax based on the next lowest number in the tax table plus a percentage of the amount of income over that number. That's easy, and now you have a simple, progressive tax. Flat taxes by their very nature disproportionately benefit the very rich.

November 30 2011 at 1:51 PM Report abuse rate up rate down Reply

The claim that only half of the people in the country pay taxes is not correct. See http://www.dailyfinance.com/2011/11/18/what-percent-are-you-the-numbers-behind-the-tax-divide-debate/.

It turns out that only about 6% of the adult population really doesn't pay in anything to the Federal government, and these are unemployed, the disabled, or students.

November 30 2011 at 1:46 PM Report abuse rate up rate down Reply

I find it both funny and extremely hippocritical when liberals keep saying that the rich need to pay there fair share,they never talk about how almost half of the workers pay nothing ,and actually receive a handout every year in the form of tax credits and exemptions.But still they scream and whine when the discussion comes up for them to pay even a little.I made $48,000 last year and payed no taxes after I received my tax refund,I admit I got a great deal,but I know that,a lot of people dont,they expect it!!!

November 02 2011 at 3:39 PM Report abuse rate up rate down Reply

The most regressive tax of all is the one that hides the tax cost in our goods and services because we can't forgive those costs on exports or generate the revenue needed to run our economy from imports like we do from Made In America. Tax the rich and because they own the Made In America production and distribution channels it comes back to consumers in the form of higher costs. Those higher costs make Made In America less competitive around the world and that folks is why we have the unemployment we do today. Face the fact that you pay 100% of the cost so it's just a matter of which way you want to cover the cost. Do you want more opportunity in the private sector? If the answer is yes then you want a consumption tax system. If you want more opportunity from government then you want to pretend it won't cost you anything if the rich pay more. Those are liberal Democrats and in the end their approach will make America a second class country. Folks, you don't get rich sitting on your butt waiting on the government to help you so if you want more opportunity you want less government. Change the system and there will be more opportunity than there are qualified folks to fill the job opportunities and your wages will increase. Try the fairtax.org on for size and confirm the truth about taxes. What America needs is a bigger economic pie in place of the net sum zero thinkers that are destroying America.

November 02 2011 at 10:33 AM Report abuse rate up rate down Reply

I have a Better Idea.
Every Dollar I achieve is "Income taxed" @ about 18%, How much of a mutiny would you get from GE, Warren Buffet or Bank of America, if you asked them to contribute 5% of their Gross Revenues? None of them pays so much as 1% of what they're paid. My losses aren't deductible from my income, neither should Speculatio­n be. Until every flowing Dollar is taxed equally, our Government will continue to listen only to the people that have at their disposal untaxed assets replicatin­g with government protection­. The only Fair Tax would be one that taxes every flowing Dollar equally, regardless of owner of volume produced. No need for a CPA, How much did you receive in payments, this year? Multiply that by an equal percentage and our Government is supported with all it's excesses and the 99% will be paying their Fair Share A 5% Rate, would probably cover it all, including the Food Stamps and Military Infrastructure..

November 01 2011 at 9:00 PM Report abuse rate up rate down Reply

A flat tax would bring in more money and be more fair.............if they cut the loopholes and foolish exemptions. They would have more money than the Dems could spend.................well maybe not.

November 01 2011 at 7:58 PM Report abuse rate up rate down Reply

Why do those politicians think that fiddling with taxes will just magically make our economy rebound once again? We pay taxes more or less, so what?? It is the economy , stupid or even the energy, stupid!! We waste too much energy, stupid! SAve energy for the unemployed who will need it .. or energy prices will soar ! stupid!

November 01 2011 at 1:26 PM Report abuse rate up rate down Reply

Another tax plan to benefit high income earners and the wealthy from the regressive Republican party...

November 01 2011 at 7:09 AM Report abuse rate up rate down Reply

Most people favor a flat tax so we can discard those dam papers stored in about millions of households or transferred to disks at a costly way. Irs requires folks to keep those darn records seems forever. eCONOMIST AND FINANCE EXPERTS AGREE FLAT TAX IS WAY TO GO BUT I THINK CONGRESS MAN AND SENATORS MUST BE TAX LAWYERS OR ACCOUTANTS. vOTE TEEM OUT AND SIMPLYFY TAXES. Thata what americans want .

October 31 2011 at 10:31 PM Report abuse rate up rate down Reply

The reason that Perry's (and Cain's) plan is promoted is that they both expect that "simple" is the best way to hornswaggle the taxpayer into thinking it''s not just another program to bail out the rich and impose inequality on the rest of us. There's never enough of a gulf between the rich and everyone else to suit Republicans; it's the way they've always felt, and ever will. Think horse and sparrow economics.

October 31 2011 at 1:27 PM Report abuse rate up rate down Reply