Flat tax renews fight on ‘trickle-down economics’

Repub­li­can pres­i­den­tial can­di­date, busi­ness­man Her­man Cain speaks in Des Moines, Iowa. The flat tax is mak­ing a come­back among Repub­li­can pres­i­den­tial can­di­dates. Most of the con­tenders, Mitt Romney’s an excep­tion , offer a vari­a­tion of the tax plan under which every­one pays the same rate. But a flat tax faces tough oppo­si­tion in Con­gress because it tends to favor the rich at the expense of oth­ers. (AP Photo/Nati Harnik, File)

STEPHEN OHLEMACHER

The Asso­ci­ated Press

WASHINGTON (AP) — The flat tax is mak­ing a come­back among Repub­li­can pres­i­den­tial can­di­dates. But it faces tough oppo­si­tion in Con­gress because it tends to favor the rich at the expense of other tax­pay­ers, renew­ing an old debate about “trickle-down economics.”

Most of the top GOP con­tenders — Mitt Romney’s an excep­tion — offer a vari­a­tion of the tax plan in which every­one pays the same rate. Busi­ness­man Her­man Cain has his 9–9-9 pro­posal, and Texas Gov. Rick Perry unveiled a 20 per­cent flat tax on income this week. Even Rom­ney fore­sees a flat­ter tax sys­tem in the future, though he favors some­thing closer to the cur­rent setup in the short term.

The idea of a flat tax has long been cham­pi­oned by con­ser­v­a­tive politi­cians as being sim­ple and fair. Pub­lisher Steve Forbes made it a cen­ter­piece of his Repub­li­can pres­i­den­tial cam­paigns in 1996 and 2000. Forbes has endorsed Perry, call­ing his eco­nomic plan “the most excit­ing plan since (Ronald) Reagan’s.”

“Amer­i­can fam­i­lies deserve a sys­tem that is low, flat and fair,” Perry wrote in his tax plan. “They should be able to file their taxes on a post­card instead of a mas­sive novel-length document.”

Con­ser­v­a­tive econ­o­mists argue a flat tax would pro­mote long-term eco­nomic growth by low­er­ing taxes on the peo­ple who save and invest the great­est share of their income: the wealthy.

Low­er­ing taxes on the wealthy, how­ever, could prove polit­i­cally dif­fi­cult, espe­cially now, with pro­test­ers around the coun­try occu­py­ing pub­lic spaces and call­ing for the rich to pay more. Pres­i­dent Barack Obama and many Democ­rats in Con­gress also want higher taxes for the highest-income Americans.

“It’s all about polit­i­cal rhetoric,” said William McBride, an econ­o­mist the Tax Foun­da­tion, a con­ser­v­a­tive think tank. “The inevitable result of shift­ing the tax bur­den away from sav­ing and invest­ment is that you reduce the tax bur­den on the rich.”

Lib­er­als and many mod­er­ates com­plain that a flat tax is a give­away to the rich, renew­ing an old debate over whether the ben­e­fits of tax cuts for those at the top trickle down to the rest of the population.

“This idea of low­er­ing taxes on high-income peo­ple and some­how mid­dle class peo­ple will ben­e­fit has been there for a long time,” said Chuck Marr, direc­tor of fed­eral tax pol­icy at the left-leaning Cen­ter on Bud­get and Pol­icy Pri­or­i­ties. “Obvi­ously it hasn’t worked very well.”

Flat tax plans by both Cain and Perry have pro­vi­sions to pro­tect low-income fam­i­lies from tax increases. But that raises ques­tions about who will be left to pay the tab, said Rober­ton Williams, a senior fel­low at the Tax Pol­icy Cen­ter, a Wash­ing­ton think tank.

“If you exempt the low-income peo­ple from higher taxes, if you cut the taxes for the wealthy, get­ting the same amount of rev­enue means the mid­dle class are going to pay more, a lot more,” Williams said.

The fed­eral income tax cur­rently has six mar­ginal tax rates, also known as tax brack­ets. The low­est rate is 10 per­cent, and it applies to tax­able income up to $17,000, for a mar­ried cou­ple fil­ing jointly. The top tax rate is 35 per­cent, on tax­able income above $379,150.

“Tax­able income” is income after deduc­tions and exemp­tions, which can greatly reduce the amount that is taxed. There are also many tax cred­its that can fur­ther reduce tax bills.

In all, nearly half of U.S. house­holds pay no fed­eral income tax because their incomes are so low or because they qual­ify for so many tax breaks, accord­ing to the Tax Pol­icy Cen­ter. House­holds mak­ing between $50,000 and $75,000 pay, on aver­age, 7.2 per­cent of their income in fed­eral income taxes.

By con­trast, the top 10 per­cent of house­holds, in terms of income, pay more than half of all fed­eral taxes and more than 70 per­cent of fed­eral income taxes, accord­ing to the non­par­ti­san Con­gres­sional Bud­get Office.

Cain’s plan would scrap most of the cur­rent tax sys­tem. He would elim­i­nate the pay­roll taxes that fund Social Secu­rity and Medicare, and replace the pro­gres­sive fed­eral income tax with a flat 9 per­cent tax on income. He would lower the cor­po­rate income tax from 35 per­cent to 9 per­cent, and impose a new 9 per­cent national sales tax. The tax on cap­i­tal gains would be eliminated.

The only income tax deduc­tions allowed under Cain’s orig­i­nal plan were for char­i­ta­ble con­tri­bu­tions. He has since said peo­ple liv­ing below the poverty line — $22,314 for a fam­ily of four — would also be exempt from income tax.

Perry’s plan would impose an optional 20 per­cent flat tax. Fam­i­lies could choose between the cur­rent tax struc­ture and a new 20 per­cent tax on income, pre­sum­ably pick­ing the one that taxes them the least.

Perry’s flat tax would pre­serve deduc­tions for mort­gage inter­est, char­i­ta­ble dona­tions and state and local taxes. It also includes a $12,500 exemp­tion for indi­vid­u­als and their depen­dents, mean­ing a fam­ily of four could make $50,000 and pay no fed­eral income tax.

Perry’s plan would reduce the cor­po­rate income tax from 35 per­cent to 20 per­cent and would elim­i­nate the tax on div­i­dends and long-term cap­i­tal gains.

Romney’s tax plan would ini­tially main­tain the cur­rent tax rates, extend­ing sweep­ing tax cuts that were enacted under for­mer Pres­i­dent George W. Bush and extended through 2012 by Obama. Rom­ney would elim­i­nate taxes on cap­i­tal gains, div­i­dends and inter­est for tax­pay­ers with adjusted gross income below $200,000. He would push to lower the cor­po­rate income tax from 35 per­cent to 25 percent.

In the long term, Rom­ney would “pur­sue a con­ser­v­a­tive over­haul of the tax sys­tem that includes lower and flat­ter rates on a broader tax base.”

Posted by AP News on Oct 26 2011. You can follow any responses to this entry through the RSS Feed. Comments can be made below.