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Rick Perry tax plan means "substantial" revenue loss for U.S. government

Rick Perry
Republican Presidential candidate, Texas Gov. Rick Perry speaks at the ISO Poly Films plant, Tuesday, Oct. 25, 2011, in Gray Court, S.C. AP Photo/ Richard Shiro

The tax plan put forth by Republican presidential candidate Rick Perrywould mean a significant reduction in how much money the government takes in, an independent economic expert said Tuesday.

Perry is offering taxpayers two choices - either stick with the current tax system or opt into a new system in which they pay a 20 percent flat income tax. That incentivizes those who would pay less under the current system to stick with it, and those who would pay less under the flat tax plan - largely Americans on the upper end of the income scale - to opt for the new plan.

That would add up to a "substantial" decrease in revenues, says Ted Gayer, the co-director of the Economic Studies program and a Senior Fellow at the Brookings Institution.

Perry has yet to lay out all the specifics of the plan, which makes it difficult to estimate its full impact. But "it's clearly going to be a reduction in revenues, I think fairly substantial," said Gayer. Many conservative Republicans want to reduce the role of government in society in part by starving it of funds.

(At left, CBS MoneyWatch's Jill Schlesinger and Jack Otter discuss Perry's plan.) 

In addition to allowing Americans to stick with the current tax code, Perry is maintaining a number of deductions under his flat tax plan, including deductions for home mortgage interest and donations to charity. That cuts against one of the key benefits of a flat tax plan. Proponents of a flat tax say it works because it simultaneously makes the pool of taxpayers larger and makes more kinds of income taxable by eliminating deductions, a concept referred to as "broadening the base." The broadening is diminished under Perry's plan because many of the current deductions are kept in place.

By giving taxpayers the right to stick with their old plan, Perry can argue that he is not raising taxes on the poor and middle class. Herman Cain modified his "9-9-9" plan after critics noted that it amounted to a tax increase for as many as 84 percent of Americans; Perry can simply say that if you like your current tax rate, you can keep it.

What Perry's plan boils down to is a tax cut for the highest-income Americans, who currently pay a top marginal income tax rate of 35 percent, and no tax change for those who don't opt for the new system.

Perry argues that his plan simplifies the tax code, saying Tuesday that taxpayers will simply need to fill out a postcard to file their taxes. But since they will need to decide between the old system and the new one, it won't be quite so simple for many Americans.

"It kind of undermines the whole we're making your taxes simpler argument, because you still have to go through both systems to see which one is best for you," said Gayer.

Perry vowed to balance the budget by 2020 and cap on federal spending at no more than 18 percent of Gross Domestic Product. Under current policy forecasts, the United States will be spending 26 percent of GDP in 2020 and 34 percent of GDP by 2035. Perry would need to dramatically slash federal spending to meet his 18 percent goal.

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