Omar Villafranca, NBCDFW
Gov. Rick Perry details his "flat tax" plan on the campaign trail for the 2012 GOP nomination for President.
Republican presidential candidate Gov. Rick Perry proposed dramatic tax and spending changes Tuesday, saying he would let Americans choose between a 20 percent flat tax and the current system, allow private Social Security accounts and slash government spending and regulation.
Perry, seeking to regain the momentum he enjoyed in late August, said his plan would significantly spur economic growth. But analysts from the left and right said he would need draconian federal budget cuts to avoid massive deficits.
In a pitch to conservatives, the Texas governor said his "Cut, Balance and Grow" plan was bolder than what his Republican rivals or President Barack Obama would do. His proposal calls for gradually increasing eligibility ages for Social Security and Medicare and for amending the Constitution to require balanced budgets.
"America is under a crushing burden of debt, and the president simply offers larger deficits and the politics of class division," Perry said in South Carolina, whose primary will follow early voting in Iowa and New Hampshire. "Others simply offer microwaved plans with warmed-over reforms based on current ingredients."
After weeks of calling Social Security a "Ponzi scheme," Perry proposed major changes to the program's funding and payouts. Benefits would not change for current and soon-to-be retirees. Eventually, however, the eligibility age would rise, and wealthier people would see reduced benefits.
Younger workers could steer some of their Social Security payroll taxes to private investment accounts, an idea President George W. Bush tried and failed to enact in 2005.
The heart of Perry's plan would reduce or eliminate an array of taxes. He would end taxes on Social Security benefits, estates, dividends and capital gains, which would most help upper-income people. He would lower the corporate income tax rate as well as the personal income tax rate for those who choose his 20 percent flat rate.
The top marginal tax rate on individual income is now 35 percent. It was 70 percent in the 1970s.
Perry's plan would let people exempt $12,500 of their income, plus $12,500 for each dependent, from taxation. He would keep popular deductions, such as those for mortgage interest, state taxes and charity gifts, for families making less than $500,000 a year.
Herman Cain was the first presidential candidate to propose a flat tax this year. He called for a 9 percent income tax rate -- and no deductions for most people -- along with a 9 percent sales tax.
By design, Perry's plan "must lose revenue" for the government, said Kevin Hassett, director of economic policy studies at the right-of-center American Enterprise Institute. To avoid higher deficits, Hassett said, the government would have to slash spending in ways not seen since the steep military drawdown after World War II.
Perry said federal spending is out of hand, and suggested such cuts are feasible. In the past, deep cuts have proven easier to pitch than to enact, no matter which party controls Congress and the White House.
Perry said his proposed deep cuts in tax rates and regulation would spur economic growth and thus generate significant new tax revenues. Economists and politicians have long debated the validity of such claims.
If Americans were allowed to choose between the current system and a 20 percent flat tax, several analysts said, the wealthy would get a big tax cut, and lower-income people would hardly be affected.
The Perry plan "hemorrhages revenue" for the government, said Chuck Marr, an economist at the liberal Center on Budget and Policy Priorities. "It's a massive tax cut for the richest people in the country," he said. But it would not demand higher taxes from middle- and low-income people, who would stick with the current tax code because they fare better under its progressive structure.
Those taxpayers would continue to deal with the complex tax code that Perry criticized Tuesday. They would be unable to file their returns on the postcard he waved before cameras to illustrate a flat tax's simplicity.
"Taxes will be cut across all income groups," Perry said in his 24-minute speech. "The net benefit will be more money in Americans' pockets, with greater investment in the private economy instead of the federal government."
Regarding Medicare, Perry would let Americans receive a payment or a credit for the purchase of health insurance instead of the direct benefits provided through the current program. He would gradually raise the eligibility age, and pay benefits based on people's income levels.
Perry acknowledged that many of his proposals, including the private Social Security accounts, are controversial.
"I am not naive. I know this idea will be attacked," he said. "Opposition to this simple measure is based on a simple supposition: that the people are not smart enough to look out for themselves" and invest their retirement savings prudently.
Currently, Social Security payroll taxes paid by workers go directly to today's retirees, with any surplus used for other government programs. Perry said private investment accounts would generate more money for future retirees.
Obama's campaign spokesman Ben LaBolt said Perry's economic plan "would shift a greater share of taxes away from large corporations and the wealthiest onto the backs of the middle class." Some analysts, however, said middle class taxes might be unchanged because the flat tax would be optional.
Perry seemed eager to demonstrate boldness and the ability to present a comprehensive plan on a complex issue. Distracting from his speech, however, were new comments he made questioning whether Obama was born in the United States, a debunked claim kept alive on some conservative Web sites.
In an interview with CNBC, Perry said Monday it was "fun to -- to poke" at the president on the birth certificate issue. "I don't have a clue about where the president -- and what this birth certificate says," Perry said. He was defending an interview he did with Parade magazine, when he said he did not have a "definitive answer" about whether Obama was born in the United States.
Republican strategist Karl Rove, speaking of Perry on Fox News, said, "You associate yourself with a nutty view like that, and you damage yourself."
Perry's policy speech Tuesday sets him to the right of chief rival Mitt Romney, who wants to make less sweeping changes to the tax code. Perry plans to air TV ads in Iowa and has hired a roster of experienced national campaign operatives to help him. Perry's chief adviser on the economic plan is former presidential candidate Steve Forbes, who proposed a 17 percent flat tax when he ran for president in 1996.
Romney released a 59-point jobs plan in early September. Romney would lower rates on corporations and on savings and investment income for middle-class Americans.
In 1996, Romney criticized Forbes' flat tax plan as a "tax cut for fat cats." In the CNBC interview, Perry said if Romney renews that criticism, "he ought to look in the mirror, I guess. I consider him to be a fat cat."
Perry chose South Carolina, where he announced he was running for president, to unveil his economic plan. The first-in-the-South primary is critical to his path to the nomination, though he has fallen in the polls here just as he has dropped nationally.
He also planned a news conference in the state capital, Columbia, and a fundraiser at the home of former South Carolina GOP chairman Katon Dawson, his top South Carolina adviser.
Charles Babington reported from Washington.
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