Rick Perry's 'Cut, Balance and Grow' Flat Tax Plan: Big Savings, Bigger Costs

Over the past few months, Republican presidential hopefuls have unveiled one new tax plan after another. Meanwhile, Texas Governor Rick Perry has largely remained on the sidelines, focusing less on taxes than on easing environmental restrictions on oil exploration. On Tuesday, however, he entered the flat tax fray with "Cut, Balance and Grow," a startling new plan that seems destined to capture the interest of many voters. Borrowing freely from Herman Cain's 9-9-9 tax plan, the Perry proposal is designed to be more palatable to the middle class. The question is: Would "Cut, Balance and Grow" help American workers, or would it slash, topple and shrink the U.S. economy?

Cheaper by the Dozen

One selling point for Perry's plan is its incredible simplicity: It levies a 20% tax on all earners, retains deductions for mortgage interest and charitable contributions, and expands deductions for capital gains, dividends, and state and local taxes. As for dependent deductions, Perry proposes increasing them from $3,700 to $12,500. Eventually, Perry claims, his plan would phase out many of these deductions for taxpayers who make more than $500,000 per year.

Joe Rosenberg, a research associate at the Urban-Brookings Tax Policy Center, notes that the deduction changes would be especially significant: "The standard right now is an $11,600 deduction for a married couple, combined with personal exemptions of $3,100 apiece, which totals $19,000." Under the Perry plan, a married couple could get a combined exemption of $25,000. If they have children, the benefits get even better: Current tax law provides a $3,700 deduction per child, but Perry would increase that to a $12,500 deduction. In other words, a married couple with one child deducts $22,700 under the current tax schedule, but could deduct $37,500 under Perry's plan. The gains increase with each additional child.

Pick Your Plan

Some taxpayers -- notably those who rent, don't have many kids, and don't make much money -- would owe more under Perry's flat tax. His solution: He would allow taxpayers to choose to use either the old system or his new one.

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"You can continue to pay taxes, as well as accountants and lawyers under the current system, or, you can file your taxes on a postcard, with deductions only for interest on a mortgage, charitable giving, and state and local tax payments," says Perry. In other words, all taxpayers would either owe the same amount of money as they do now, or less under Perry's plan.

Rosenberg points out, however, that the real benefits of Perry's plan kick in for those in higher income brackets: "The income level at which you are indifferent between the two systems is relatively high, somewhere around $75,000 for a single taxpayer and $150,000 for a couple." For the average taxpayer at the top end, however, the proposal really pays off: The highest tax bracket, 35%, works out to 14.4% after all deductions are worked in. Perry's plan reduces the tax rate for the top income bracket to 20%, while expanding many deductions, offering an added bonus to top earners. Additionally, by cutting the 15% capital gains and dividend taxes, he would slash taxes at the upper levels. In other words, under Perry's plan, Warren Buffett would owe even less.

So What's the Catch?

On the surface, Perry's plan seems to have something for everybody: Middle class taxpayers would see their tax burdens remain the same or drop, while wealthier taxpayers would get a major discount. Paired with a proposed corporate tax rate reduction to 20%, "Cut, Balance and Grow" would put a lot more money in corporate coffers.

The trouble is, Rosenberg notes, that Perry's plan is "almost certain to be a fairly large revenue reducer." The governor has accounted for this by announcing his plan to cut the federal budget to 18% of GDP, the lowest level since 1966. Given that he has pledged to retain Social Security and Medicare benefits at current levels, it seems likely that, under Perry, nearly every other part of the federal government would take a big hit. For those who rely on federally-supported programs -- like public schools, the FDA, interstate highways, and the Centers for Disease Control -- the sugary front end of Perry's plan may mask a bitter pill.

Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at @bruce1971.