The problem with Perry's optional tax

One of the biggest problems with Texas Governor Rick Perry’s optional flat tax may be the choice it gives taxpayers. Perry says you can either pay his new tax or pay under today’s system, whichever results in a lower bill. That sounds great, but it is a policy disaster. This is the tax code we’re talking about, not some TV game show.

Perry says he wants a system that is simple. But his option could well make tax filing far more complicated, especially for middle-income households. He says he wants certainty. But the optional tax will create more confusion. He says he wants people to be able to file on a postcard. But his option may require taxpayers to prepare their returns three times.

The option does solve one problem—the regressive nature of any consumption tax. Herman Cain has learned this the hard way as he’s struggled with his 9-9-9 tax. Perry’s semi-consumption tax has a similar problem. And he’s chosen to cure it by telling lower income people that if his plan doesn’t work for them–which it won’t–they can continue to pay under the current system.

This will help blow an even bigger hole in the budget. For Perry, a small government guy, that may be a good thing since it would drive even deeper spending cuts. And, if he can avoid describing what cuts he’d make, it might even be good politics—at least through the primaries.

The trouble is that Perry’s choice creates a tax compliance mess. How much of one depends on a detail he has yet to share: How often will we get to choose which tax to pay? If we can pick each April, filing will be an even bigger headache for most Americans than it is today, although the ability to switch yearly would also make it possible for people to maximize their tax savings. On the other hand, Perry could require you to make the choice only once in your life. That would make filing relatively simple. There’s just one minor downside: The wrong choice could cost you hundreds of thousands of dollars over your lifetime. A third option could allow you to switch every, say, 10 years, or if you have an important lifecycle event.

The choice between the current tax system and the Perry plan will be a no-brainer for the very rich, who would do much better under his system. And it will lbe easy for most low-income working-class families, especially if they have kids. They’d be far happier under a system that preserves refundable credits such as the earned income and child credits than under Perry’s plan.

But for everyone else, picking between the two tax laws will a huge pain in the butt. The only way to get the right answer will be to do your taxes twice. And if you happen to be among the millions at risk for paying the dreaded Alternative Minimum Tax, you’ll have the pleasure of doing your returns three times each year. As my former Tax Policy Center colleague Len Burman says, the Perry choice is something like an Alternative Maximum Tax. At least with Perry’s AMT you get to pay the lowest possible tax instead of the highest.

Making a one-time election would avoid this annual headache, of course. But what a choice. When you first start paying taxes on your own, you’d have to anticipate how many kids you’re going to have, how much money you’re going to make, and whether you’re going to itemize decades in the future (and unless Perry exempts dependent filers from the election, some 3-year-olds would be forced to choose). Guess right, and you can maximize your lifetime tax savings. Guess wrong, and you’ll be an unhappy camper for a lot of years.

Oh, and there is one other question: Which current system do you get to choose from? Does Perry assume the Bush tax cuts are extended indefinitely or do they expire? If the former, the pre-Perry tax code would itself be quite generous. So far, he has not said.

Whatever you think of the rest of Perry’s plan, giving taxpayers a choice about how much tax to pay is just plain dumb. If Perry really wants to make his tax plan progressive, there are far better ways to do it.