Texas Gov. Rick Perry’s tax proposal would create a new, simplified, semi-flat system for paying federal income tax. But it would also leave the old, complex, non-flat tax system in place. Americans would be allowed to choose which system they will use to pay their taxes.
Perry believes the decision will be a no-brainer. “Each individual taxpayer will have a choice,” he said when he introduced his plan in South Carolina this week. “You can continue to pay your taxes as well as the accountants and the lawyers under the current tax system that we got, or you can file your taxes on this postcard, with the deductions on there for interest on your mortgage, your charitable giving, your state and local taxes, and then deduct those and send it in.”
But taxpayers won’t necessarily flock to the new system. They will look at both, do a little math, and choose the system under which they will pay less taxes. And the problem for Perry’s policy aides is they don’t really know how many Americans will go with the new and how many will stay with the old.
“All we can look at is anecdotal evidence from places like Hong Kong,” says Perry policy director Deirdre Delisi, pointing to an example of a new, optional system. “We believe that based on what we’ve seen in other places, there will be a very significant initial take-up.”
It’s true that a significant number of Americans would switch to the new system, because they would pay less taxes under Perry’s flat 20 percent rate. But a “significant” number might not mean a majority of Americans, because millions of people will have a money incentive to stick with the old tax system. First, there are those Americans who not only do not pay any federal income taxes but also receive transfer payments from the federal government in the form of the Earned Income Tax Credit, child credits, and other payments. Perry would end those payments for those who enter the new system. But he would continue making those payments for those who remain in the old system. Why would anyone who is currently receiving those payments opt into a system under which they won’t receive them?
Then there are the Americans who don’t receive transfer payments but whose current federal income tax bill is $0. Perry’s large personal exemption, $12,500, would likely also reduce their bill to $0 under the new system, but there would be no money advantage for them to switch. Whether they would do so for the simplicity or for some other reason is not clear; for many, their taxes aren’t all that complicated under the current system.
Finally, there are the Americans who pay federal income tax under the current system but would pay more under the Perry system. That appears to be a relatively small group, but it does include, for example, single earners who make as much as $43,000 a year, according to an analysis of the Perry plan by the Urban Institute-Brookings Institution Tax Policy Center.
Put those groups together, and some conservative policy wonks believe as many as half, and perhaps even more, of tax filers will stick with the old system. That could play havoc with some of the Perry team’s projections for the new proposal, because they are based on the assumption that everyone will enter the new system. Whatever the take-up rate, it seems safe to say that won’t happen. Indeed, the reason for offering the option to stay with the old system, says Deirdre Delisi, is that “some people have organized their lives around the current tax plan.” They won’t change to a new system if they have to pay to do so.
Delisi’s comment hints at a dilemma facing not just Perry but anyone who tries to reform the current tax code. The Perry plan would make things better for the minority of taxpayers who pay the vast majority of federal income taxes. But the current system is constructed in a way that a majority of people either don’t pay any federal income taxes, or receive refundable tax credits, or pay a fairly small amount. That majority wields a lot of political power, and it would take an extremely brave presidential candidate to advocate making them pay more. The result is a hybrid proposal under which the system might remain just as complicated as it is today.
