Flat tax renews fight on 'trickle-down economics'

October 26, 2011 - 5:15 PM
2012 GOP Flat Tax

FILE - In this Oct. 13, 2011 file photo, Republican presidential candidate former Massachusetts Gov. Mitt Romney speaks in Redmond, Wash. 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/Elaine Thompson, File)

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."