Saying Texas Gov. Rick Perry’s presidential candidacy is foundering, liberal MSNBC commentator Rachel Maddow said on her Oct. 25, 2011, show that Perry’s flat-tax plan has dire implications.
Mentioning Republican hopeful Herman Cain’s tax plan, Maddow added: "So, tanking Rick Perry has now come up with his own version of a flat tax that accomplishes the same goal of huge tax cuts for rich people and big tax hikes for everyone else."
Big cuts for the rich, hikes for everyone else?
Earlier, PolitiFact rated False a Cain claim that his plan, replacing the progressive income tax with three flat taxes including a 9 percent personal income tax, would not raise taxes on those who make the least. To the contrary, the independent Tax Policy Center concluded that Cain’s plan would cut taxes for many of the wealthiest taxpayers while increasing taxes for the poorest.
At a glance, Perry’s proposal, which has a flat 20 percent personal income tax, would seem similarly likely to sock low-income Americans. Yet Perry would permits taxpayers to stick with the current tax system — enabling him to argue that a tax increase would not be forced on anyone. Current personal income tax rates range from 10 percent to 35 percent, with those who earn the most expected to pay the most.
Perry’s plan calls for a standard deduction of $12,500 per individual and dependent in a household and preserves deductions for mortgage interest, state and local taxes and charitable donations. He also proposes to eliminate taxes on estates, certain dividends and capital gains, as well as Social Security benefits. He also wants to cut the corporate tax rate to 20 percent.
"You can continue to pay your taxes, as well as the accountants and the lawyers, under the current tax system," Perry said at a South Carolina stop before he held up a postcard. "Or you can file your taxes on this postcard."
His speech included this claim: "Taxes will be cut across all income groups in America."
When we sought backup from MSNBC for Maddow’s claim, spokeswoman Lauren Skowronski pointed out news accounts calling Perry’s plan more regressive than the current income tax for reasons including the end to progressive tax rates. Also, she noted, Perry’s plan would eliminate the child care tax credit and the earned income tax credit, which enables low-to-moderate income tax filers to receive tax refunds. She passed along a comment to Yahoo News by Bruce Bartlett, a U.S. Treasury official in President George H.W. Bush’s administration, saying the removal of the refundable credits means "you’re massively raising taxes" for people who now pay nothing.
Bartlett said in a Nov. 1, 2011, opinion article, posted online by the New York Times, the refundable "credits give many people a negative tax rate. That is, they pay no income taxes but still get a Treasury refund. Going from a negative rate to zero would mean a tax increase for such people."
Skowronski pointed out an Oct. 25, 2011, Times’ blog post mentioning the loss of the earned-income tax credit. Citing a preliminary look at Perry’s plan by an expert for the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution, the post said that generally, the "highest-income households (at the 99th percentile in income) in every structure of family analyzed always benefit from opting into the Perry plan.The poorest households, on the other hand, do not."
We wondered, though, about the crux of Maddow’s claim. Which taxpayers would get huge cuts and who, if anyone, would see big increases?
In a telephone interview, the policy center’s analyst, Roberton Williams, said the wealthy would enjoy big tax cuts under the plan because the 20 percent income-tax rate would require less from them than the current maximum rate. Also, he noted, exempting capital gains and dividends from the income tax would help wealthier taxpayers. Capital gains and dividend income are currently subject to rates of up to 15 percent.
"These are substantial cuts," he said.
However, he told us, the notion that everyone but the wealthy would face a big hike is incorrect since the plan allows taxpayers to continue under the current tax system.
The center later posted a detailed analysis of Perry’s plan. We realize that Maddow could not have had this analysis when she aired her claim. However, mindful that her provided backup information didn’t fully support her statement and MSNBC had referred to the center’s preliminary analysis, we figured it was OK to delve into the detailed look.
That analysis, posted Oct. 31, 2011, says that compared to current tax law, Perry’s plan would deliver a tax cut in 2015 of an average $267 to about 25 percent of the nation’s poorest 20 percent of households, with annual earnings up to $19,342. About 45 percent of the next-poorest quintile of households, earning up to $39,862, would get a cut averaging $695.
Williams said the center’s definition of current law presumes that tax cuts put in place since 2001 under Presidents George W. Bush and Barack Obama will expire after next year, which will happen unless lawmakers intervene.
Compared to current law, Williams said, Americans earning more would fare better under Perry’s plan. At least three in four households earning $69,074 or more would experience a tax cut, averaging $1,722, with 94 percent or more earning $119,546 or more seeing cuts averaging $3,872 to $34,928, according to the center’s analysis.
The very wealthiest 0.1 percent of households, earning more than $2.87 million a year, would get average tax cuts of more than $1.9 million, the analysis says.
We asked MSNBC and Perry’s campaign for their responses.
In reply, Skowronski pointed out another part of the center’s analysis showing that compared to current policy -- that is, assuming most tax reductions put into place under Bush and Obama would not expire at the end of 2012 -- Perry’s plan would result in tax increases, on average, across the nation’s lowest 40 percent of earners. Then again, the chart indicates that 19 percent of the poorest taxpayers and 27 percent of the next-poorest quintile of earners would get a tax cut under Perry’s plan.
Perry spokeswoman Catherine Frazier replied by email that Perry’s plan was devised assuming current tax law, not current policy. "We are operating under reality, not making assumptions of what may or may not happen in the future," Frazier said. And, she said, when "compared to current law, Americans of all income groups are better off under the governor's tax plan."
The center’s analysis shows ways that such a conclusion holds up, including increases after-tax income and reductions in tax rates--on average--for households at each quintile of income. On average, the poorest taxpayers would see a $66 cut in taxes while wealthier households would see greater decreases topping out at $34,004 for the wealthiest 20 percent of households, the analysis says.
The center’s Williams summed up this who-wins/who-loses aspect by telling us that not everybody would be better off under Perry’s plan, but "every (income) group is better off" mainly because those who do not gain from paying the proposed 20 percent flat tax can continue paying the existing income tax.
All in all, too, the rich would make out very well. He’d be happy to be rich anyway, Williams said, but under Perry’s plan, "I really want to be rich."
Nearly all of the nation’s wealthiest residents would see tax cuts if Perry’s plan became law, in keeping with Maddow’s claim. Will they be huge? That’s an eye-of-the-beholder question, but some could be sizable by any definition.
Some other Americans--including 45 percent of residents earning $19,343 to $39,862--also would see tax cuts, a projection that does not support the claim that the plan means big tax increases for everyone but the wealthy. Perry’s plan allows every taxpayer to continue under the current system. No one would pay more unless he or she chooses the flat tax against their financial self-interest.
Maddow’s statement, leaving the incorrect impression that Perry’s tax plan hugely benefits the rich while everyone else pays more, rates Mostly False.
UPDATE, 1:20 p.m., Nov. 4, 2011: We’ve amended this article to correct our initial recap of some of the Tax Policy Center’s average tax-cut forecasts for some taxpayers under Rick Perry’s tax plan. These changes do not affect the rating.