Analysis of Rick Perry’s Individual Income Tax Plan

Analysis of Rick Perry’s Individual Income Tax Plan

Summary

Rick Perry’s individual income tax plan is a 20 percent optional flat tax with a few deductions. Wealthy taxpayers will see huge tax cuts.  Lower income taxpayers will pay the same.  In between, some will gain depending on family size and current amount of deductions.

• It is an optional 20 percent flat tax.
• There is a $12,500 standard exemption for individuals and their dependents.
• It allows for the deduction of mortgage interest, charitable contributions, and state and local taxes. 
• Wealthy taxpayers receive huge tax cuts under the plan.
• Low income taxpayers receive little or no tax cuts.
• In between, some will gain depending on family size and current amount of deductions. 
  
• Married couples with children, who take all the deductions, may reach $50,000 to $80,000 without paying any tax, depending on family size and deductions. 
• The flat tax is still progressive because of the exemptions and deductions, especially the $12,500 standard exemption.
• Anyone can deduct charitable contributions. This could lead to an increase in deductions for charitable contributions and possibly more people donating to charity.

What is Rick Perry’s Individual Income Tax Plan?

Rick Perry’s tax plan is an optional 20 percent flat tax.  Like most flat taxes, he exempts income near the poverty threshold. 

Lower- and middle-income families will be able to take advantage of an optional 20% flat tax rate that includes generous standard exemptions of $12,500 for individuals and their dependents, as well as deductions for mortgage interest, charitable contributions, and state and local taxes.

http://www.rickperry.org/cut-balance-and-grow-html/  

A single individual gets a $12,500 exemption. It appears that a married couple receives a $25,000 exemption, and families exempt $12,500 for each of their dependent children.  That means a married couple with 2 children and an income at $50,000, or below, is paying $0 tax.

The plan also provides the option to deduct mortgage interest, charitable donations and state and local taxes.

After that, the leftover income is taxed at a flat 20 percent rate.  

How much do people pay under Rick Perry’s Plan?

To calculate the taxes under Rick Perry’s plan, the income was subtracted by the $12,500 standard exemption ($25,000 for married couples and $12,500 per dependent or child.) For those who itemize, the average mortgage interest, state and local taxes and charitable contribution deductions were taken from the IRS statistics for 2009. Those with the standard deduction only deducted state and local taxes.  The remainder is the taxable income, which was multiplied by 20 percent to get the total tax. 

Here is how much people pay under Perry’s income tax plan in 2010 if they only took the standard exemption and the state and local tax deduction:

	Children	$10,000	$20,000	$30,000	$40,000	$50,000	$60,000	$70,000	$80,000	$90,000	$100,000	$200,000	$500,000	$1,000,000
single	0	$0	($858)	($2,796)	($4,685)	($6,531)	($8,340)	($10,340)	($12,057)	($14,057)	($15,279)	($32,774)	($86,706)	($178,313)
	0	$0	$0	($296)	($2,185)	($4,031)	($5,840)	($7,840)	($9,557)	($11,557)	($12,779)	($30,274)	($84,206)	($175,813)
married	1	$0	$0	$0	$0	($1,531)	($3,340)	($5,340)	($7,057)	($9,057)	($10,279)	($27,774)	($81,706)	($173,313)
filing	2	$0	$0	$0	$0	$0	($840)	($2,840)	($4,557)	($6,557)	($7,779)	($25,274)	($79,206)	($170,813)
jointly	3	$0	$0	$0	$0	$0	$0	($340)	($2,057)	($4,057)	($5,279)	($22,774)	($76,706)	($168,313)

Red and in parenthesis means they pay taxes. Otherwise, they receive a refund in the amount shown.

Here is how much people pay under Perry’s income tax plan in 2010 if they deduct mortgage interest, charitable contributions and state and local taxes (at the average rate):

	Children	$10,000	$20,000	$30,000	$40,000	$50,000	$60,000	$70,000	$80,000	$90,000	$100,000	$200,000	$500,000	$1,000,000
single	0	$0	$0	($726)	($2,432)	($4,207)	($5,812)	($7,812)	($9,287)	($11,287)	($11,830)	($27,145)	($76,887)	($163,185)
	0	$0	$0	$0	$0	($1,707)	($3,312)	($5,312)	($6,787)	($8,787)	($9,330)	($24,645)	($74,387)	($160,685)
married	1	$0	$0	$0	$0	$0	($812)	($2,812)	($4,287)	($6,287)	($6,830)	($22,145)	($71,887)	($158,185)
filing	2	$0	$0	$0	$0	$0	$0	($312)	($1,787)	($3,787)	($4,330)	($19,645)	($69,387)	($155,685)
jointly	3	$0	$0	$0	$0	$0	$0	$0	$0	($1,287)	($1,830)	($17,145)	($66,887)	($153,185)

In the first table, it shows how the standard exemption allows some taxpayers to avoid paying income tax.  In the second table, it shows how the mortgage interest and charitable contribution deductions allow even more taxpayers to avoid paying taxes.

How Does Rick Perry’s Plan Compare to the Current Tax Code?

The 2010 taxes under the current tax code are calculated using only the standard deduction and personal exemptions.  The Child Tax Credit and Earned Income Tax Credit were taken where possible. For those who itemize deductions, the average total itemized deductions from the IRS statistics for 2009 (which is the latest version) were used instead of the standard deduction.

Here is how much people would have gained under Perry’s income tax in 2010 if they only took the standard deduction:

	Children	$10,000	$20,000	$30,000	$40,000	$50,000	$60,000	$70,000	$80,000	$90,000	$100,000	$200,000	$500,000	$1,000,000
single	0	($197)	$325	($113)	($502)	($181)	$510	$1,010	$1,793	$2,293	$3,819	$15,257	$62,665	$146,058
	0	($457)	$131	$837	$176	($170)	($479)	($979)	($1,296)	($1,663)	($585)	$8,734	$54,557	$137,950
married	1	($4,050)	($4,050)	($1,913)	$731	$783	$474	($26)	($343)	($1,043)	$2	$10,212	$55,780	$139,173
filing	2	($5,060)	($7,036)	($4,829)	($1,723)	$766	$1,426	$926	$609	($91)	$590	$11,690	$57,294	$140,395
jointly	3	($5,561)	($8,216)	($6,826)	($3,718)	($781)	$719	$1,879	$1,562	$862	$1,177	$13,639	$59,794	$141,618

Red numbers in parenthesis means they lose money.

Here are the gains for those who also itemize their deductions at the average rate:

	Children	$10,000	$20,000	$30,000	$40,000	$50,000	$60,000	$70,000	$80,000	$90,000	$100,000	$200,000	$500,000	$1,000,000
single	0	($263)	$34	$404	$71	($204)	($449)	$51	$438	$938	$1,195	$7,228	$38,950	$102,590
	0	($457)	$0	$738	$1,583	$1,119	$812	$312	($146)	($846)	($1,109)	$3,240	$32,836	$96,476
married	1	($4,050)	($4,050)	($2,308)	$135	$1,279	$1,764	$1,264	$807	$107	($156)	$4,718	$34,059	$97,699
filing	2	($5,060)	($7,036)	($5,226)	($2,273)	($269)	$1,029	$2,217	$1,759	$1,059	$796	$6,287	$35,798	$98,921
jointly	3	($5,561)	($8,216)	($6,862)	($4,268)	($1,652)	($519)	$981	$1,999	$2,012	$1,749	$7,874	$38,298	$100,144

Let’s look at the numbers in a chart:

This is why the chart doesn't include $200,000 and above:

The most important thing to note is that this tax is optional, so nobody has to lose any money. As with most flat taxes, the wealthy get huge tax cuts, and the lower income taxpayers lose money. The numbers are all over the place, so it’s hard to see the pattern.  The pattern is this: There are 3 major reasons that cause people to lose money (or not gain because it’s optional) under this plan.

The first major reason is that the plan does not include the Earned Income Tax Credit and the Child Tax Credit.  These credits are refundable, which means the taxpayer gets more back than they paid.  That is why most of the lower income taxpayers lose money under the plan, despite not owing any tax.  They can’t take those tax credits anymore.

The next major reason is the exemptions and deductions.  Under the plan, the first $12,500 is exempt from taxes. This exemption applies to the spouse and children, so a family of 5 doesn’t pay tax on their first $62,500.  On top of that they can deduct mortgage interest, taxes and charitable contributions, so that family of 5 won’t start paying taxes until they make over $80,000.  Once their income is high enough to pay taxes on it, they slowly lose the benefits because of the third major reason.
The third major reason is the 20 percent tax rate.  For most taxpayers, a 20 percent flat tax is a tax increase.  However, as described above, the plan allows them to exempt and deduct enough that the tax increase becomes a tax cut.  As the income increases the tax increases overcome the deductions and the taxpayer loses money.  This happens sooner for those who only take the standard deduction. Eventually, as the income increases, the 20 percent flat tax becomes a tax cut, and it continues to be a tax cut.

The 20 Percent Flat Tax is Still Progressive

Here are the effective 2010 tax rates for those who only take the standard exemption and deduct the average state and local taxes:

	Children	$10,000	$20,000	$30,000	$40,000	$50,000	$60,000	$70,000	$80,000	$90,000	$100,000	$200,000	$500,000	$1,000,000
single	0	0.00%	4.29%	9.32%	11.71%	13.06%	13.90%	14.77%	15.07%	15.62%	15.28%	16.39%	17.34%	17.83%
	0	0.00%	0.00%	0.99%	5.46%	8.06%	9.73%	11.20%	11.95%	12.84%	12.78%	15.14%	16.84%	17.58%
married	1	0.00%	0.00%	0.00%	0.00%	3.06%	5.57%	7.63%	8.82%	10.06%	10.28%	13.89%	16.34%	17.33%
filing	2	0.00%	0.00%	0.00%	0.00%	0.00%	1.40%	4.06%	5.70%	7.29%	7.78%	12.64%	15.84%	17.08%
jointly	3	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%	0.49%	2.57%	4.51%	5.28%	11.39%	15.34%	16.83%

Here are the effective 2010 tax rates for those who also deduct the average mortgage interest and charitable contributions:

	Children	$10,000	$20,000	$30,000	$40,000	$50,000	$60,000	$70,000	$80,000	$90,000	$100,000	$200,000	$500,000	$1,000,000
single	0	0.00%	0.00%	2.42%	6.08%	8.41%	9.69%	11.16%	11.61%	12.54%	11.83%	13.57%	15.38%	16.32%
	0	0.00%	0.00%	0.00%	0.00%	3.41%	5.52%	7.59%	8.48%	9.76%	9.33%	12.32%	14.88%	16.07%
married	1	0.00%	0.00%	0.00%	0.00%	0.00%	1.35%	4.02%	5.36%	6.99%	6.83%	11.07%	14.38%	15.82%
filing	2	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%	0.45%	2.23%	4.21%	4.33%	9.82%	13.88%	15.57%
jointly	3	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%	1.43%	1.83%	8.57%	13.38%	15.32%

As with most of the flat taxes, this tax is not actually flat.  It is progressive mostly because of the $12,500 standard exemption.

More Deductions of Charitable Contributions (and Possibly More Charitable Contributions)

There is an interesting difference here between this and the current tax code. Under the current tax code, the choice is between the standard deduction and itemized deductions, so a taxpayer can only deduct something if their itemized deductions are more than the standard deduction (typically that means they have a mortgage or large medical bills.)  Under this plan, anyone can deduct charitable contributions.

This could lead to more people deducting their charitable contributions, and it may lead to more people giving to charity.


Link to this article:

http://articlesonpolitics.blogspot.com/2011/12/analysis-of-rick-perrys-individual.html