Republican Presidential hopeful Rick Perry introduced his tax plan Tuesday in the Wall Street Journal, and it raises more questions and concerns than it answers. Specifically, Perry promises to “scrap the current tax code” with a “flat tax” that is not flat and will not scrap the current tax code.

The highlights of his plan include:

  • Individuals will be given a choice of paying a 20 percent tax rate or their current income tax rate. Families earning less than $500,000 per year will still be able to claim deductions for mortgage interest, charitable contributions and state and local taxes. The personal and dependency exemption will increase to $12,500.
  • Individuals will be exempt from paying tax on dividends, capital gains and Social Security benefits.
  • The corporate tax rate will be lowered to 20 percent – and temporarily lowered to 5.25 percent on foreign earnings.
  • Multi-nationals would be subject to a “territorial” tax system rather than the current “global” tax system, meaning they would only be taxed on in-country income.

Perry’s plan does not address the many tax credits that U.S. corporations currently claim, nor does it explain how to calculate income for “flow thru” entities (sole proprietor, partnership, S Corp, LLC) that have business-related expenses in order to generate revenue. If Perry intends to eliminate the credits and deductions, then tax liabilities will skyrocket. If he intends to keep the credits and deductions, then he is not scrapping the current tax code.

And when he refers to a “flat tax,” he is actually describing a single tax rate. Most of us would consider a “flat tax” to be a tax on gross receipts with no deductions and no credits. Perry’s plan allows some deductions and does not address credits. It seems he is more interested in using the buzzword than truly creating a flat tax.

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