Flat Taxes Are Big in the Former USSR: Have They Worked?

How do the candidates’ proposals compare?

Cain and Perry’s tax proposals aren’t quite like the ones enacted in Eastern Europe. Former Tax Policy Center Director Len Burman has a helpful FAQ that clarifies this issue:

Yes, so-called “flat taxes” are common on Eastern Europe and Russia, but they’re flat rate income taxes. They include capital income, such as interest, dividends, rents, and royalties in the base as well as wage income. Because high-income taxpayers receive most of the capital income, this makes those flat taxes more progressive than the flat tax periodically proposed in the U.S. (For example, it was the centerpiece of Steve Forbes’ presidential bid. Forbes just endorsed Perry.)

Cain, Newt, Perry: Who's the flatest taxer of them all?

Both Gingrich and Perry are proposing an optional flat income tax — Gingrich’s at 15%, Perry’s at 20 — that would allow you to choose between paying the flat rate or paying according to the current system. Creating a two-tiered tax system, Åslund pointed out, wouldn’t exactly simplify the tax code. Perry’s proposed income tax also isn’t totally flat, because it wouldn’t touch some types of income — for instance, investment income.

Cain’s tax plan is flatter — he’s proposing a 9% personal tax, a 9% business tax and a 9% federal sales tax to make up for the decreased revenue. Under current tax law, sales taxes are already levied by the states [PDF], with local taxes coming on top of that. Cain’s plan also would eliminate the Social Security and Medicare payroll taxes. (Cain has expressed interest in privatizing Social Security, and endorsed Paul Ryan’s plan to privatize Medicare.)

It’s also worth noting that sending in tax returns on postcards, as Gingrich and Perry have pledged to make possible, could cause a new set of problems.

“In tax affairs, what you want is precision in terms of defining what’s income or what the tax base is and so forth. You can’t do it on a postcard,” Hufbauer said. Leaving out the details, he cautioned, would leave room for poor administration or tax evasion.

What a flat tax would do in the U.S.

Experts say we probably wouldn’t see any immediate spike in personal income-tax revenue if the U.S. were to adopt a flat income tax. Instead, they say, the candidates’ plans probably would lead to plummeting revenue for the first several years.

“Any growth effects, even in the best of circumstances, that’s a five-year proposition,” Hufbauer said. “And how much growth is a matter of debate.”

Analyses from the nonpartisan Tax Policy Center project that Cain and Perry’s plans would both lead to decreased revenue; the center hasn’t yet scrutinized Gingrich’s plan. Of the other two, Perry’s plan would have a greater impact on government coffers, cutting projected revenue by about 27% by 2015.

The Tax Policy Center also concluded that Perry and Cain’s plans would mean an increased tax burden on middle- and low-income families. Cain has since modified his plan so those below the poverty line would be exempt from the individual tax. A Tax Policy Center researcher told The Washington Post that poor families would still see a tax increase under the plan, albeit a smaller one.

The Gingrich and Perry plans also include some exemptions and deductions that would make them less regressive. Gingrich’s plan would allot everyone a $12,000 personal deduction, and count charitable donations and home ownership as tax-deductible; Perry’s includes a $12,500 personal deduction, and deductions for “charitable contributions, mortgage interest, state and local taxes, and Social Security benefits.”

Originally published 8 Nov.  2011, 1:12 p.m.

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