Understanding Rick Perry's Cut, Balance and Grow Plan

Earlier this week, Texas Governor Rick Perry released his Cut, Balance and Grow Plan.  It includes two major conservative dreams:  a Flat Tax and a Balanced Budget Amendment. 

I'm sure many of you are unsure specifically what the 20% flat tax would mean to you as an individual, especially if you're one of the people who are currently in a tax bracket below 20%, like I am. Yet this plan claims it would actually cut your tax burden...how can this be?

For starters, it increases the personal standard deduction. As of 2010, the standard deduction for a single adult was $5700, $11,700 for a married couple filing jointly, and $11,400 for a Head of Household. (1)  Under the Perry plan, you would receive a tax exemption of $12,500 per person in your household.  $12,500 for you, for you spouse, for each of your children (up to 4 children).

So let's compare the current tax system for the Median Income family to Rick Perry's Flat Tax Plan.  Earlier this week we actually broke down the Flat Tax, basing it on Perry advisor Steve Forbes plan from 1996 and 2000. (2)  Now that we know the specifics of Perry's plan, lets examine what an American family making the median income of about $44,389 per year (2), lets examine what that family consisting of two parents and two children would be paying in taxes:

Under Perry's system, there would be only five types of exemptions and deductions: A $12,500 exemption per person in the family up to two parents and four children; mortgage interest deduction, charitable giving deduction, state and local tax deduction, and capital gains deduction (this is part of eliminating all Capital Gains taxes).  So that means that family can deduct $50,000 in exemptions ($12,500 x 4).  So before we even deduct anything else, that family is down to 0% taxes.  But let's continue:  Let's again say that the same American family can deduct an average of $1,227 per year in mortage interest (3) and say another 5% of their income in other, assorted deductions (charitable donations, etc) which would equal $3466.45 in additional deductions for a total of in total deductions.  So now this family has $53,466.45 in total deductions against it's taxable income of $44,389.  Translation: Zero taxes actually paid.  As a matter of fact, a family of four that owns it's own home would have to have a household income of AT LEAST $53,466.65 to pay ONE PENNY in taxes (actually, with that income, they'd pay PRECISELY one penny in taxes).  Their effective rate is 0% in taxes. 

Now under the current system, that same American family would be in the 15% tax bracket. They would receive a total of $2000 tax credit because of the two children in that family. Let's again say that the same American family can deduct an average of $1,227 per year in mortage interest (3) and say another 5% of their income in other, assorted deductions (charitable donations, etc) which would equal $2219.45 in additional deductions for a total of $5446.45 in total deductions. So that means their taxable income on that income is $38,942.55 in taxable income That means that family would pay $5841.39 in taxes. That's an effective tax rate of 13.16% for an American family making the median income. 

So that median income family with two parents and two children would have $5841.39 each year MORE in taxes.  That is absolutely HUGE. That's $486 each month more money.  That's two car payments for two good quality used cars with less than 50,000 miles.

What about a single adult who doesn't own his own home and makes a recent college graduate's salary of $30,000 per year?  How about that person?  Well, under the current system that individual wouldn't have enough deductions to itemize his taxes, so he'll take the Standard Deduction of $5700 on his taxes.  That same person is in the 15% tax bracket, just like the above family, and lets say that person lives in New York state like I do, in the 7.85% tax bracket.  So he takes a standard deduction of $5700 and also deduct another $500 in student loan interest giving him a taxable income of $23,800.  At the 15% rate, he's paying $3570 in taxes each year. That's an effective tax rate of 11.9%.

But under Perry's plan, this same young adult is going to receive a $12,500 exemption, plus he can deduct any charitable donations.  So let's figure that same man gives 5% of his annual income to charity.  So now he's up to $13,900 in exemptions and deductions.  Now let's also subtract his New York state taxes of $2198.  Now he has $16,098 in total deductions. So his taxable income is $13,902.  That means that single adult is paying $2780 in taxes.  That's an effective tax rate of 9.27% in taxes.

That single adult is paying $790 less each year in taxes under the Rick Perry Flat Tax than he would be under the current system.  It's not a ton of money, but it is a tax cut, both in dollars and effective tax rate.

Perhaps more importantly, the Perry Flat Tax is OPTIONAL.  An individual can keep his current tax rate if he so chooses! It's kind of an alternative maximum tax option. Based on the huge increases in exemptions from the current deductions, it's ultimately going to be a choice most people make who take the time to do the math.

Of course, there are some people who are asking the question: How are you going to pay for this?  It's a good question.  There will be some increased revenue based on the new money in the economy being spent on new products and services which means more employees which means more taxpayers.  However, the other cornerstone of the plan will take care of the rest:  A Balanced Budget Amendment and a cap on spending of 18% of GDP.  Our current spending is at 24% of GDP, so cutting spending back to 18% of GDP would cut $875 billion from last year (4) en route to a Balanced Budget by 2020.  Don't believe it can work?  It worked in Texas!

Rick Perry has my attention.  As a conservative seeing a candidate who is presenting a Balanced Budget Amendment and a Flat Tax is exciting. He's got a few more things to do before I can really decide that he's "my candidate."  I'll be honest...I really want to get on board with Perry. There's still a few things missing. 

#1 - He has to explain where he's cutting government spending.  That's HUGE.  I for one believe $875 Billion in cuts is not only possible but reasonable.  It's going to take a lot though.  It's going to have to start with major reforms to Medicare, Medicaid, and Social Security.  It's going to require dealing with ad homonym attacks from liberals. 

#2 - He needs to prove he can effectively communicate conservatism to a national audience.  Once again, this is HUGE.  Real conservatism wins whenever it is effectively communicated.  We need someone who will effectively communicate it...and right now I'm just not sure if Perry can do that.  Time will tell, and he's got plenty of chances to do it...now let's see if he does.

Perry's got a shot to make a comeback.  He has my attention...what he doesn't have yet is my support.  Yet being the operative word.

* Overall Source: Cut-Balance-Grow Plan from RickPerry.org

(1) Standard tax deduction amounts

(2) Rick Perry Set to Propose Flat Tax

(3) Scrap the mortgage deduction? Americans weigh in

(4) Perry Joins Flat-Tax Camp