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Brick City Blog The impact of Newt Gingrich’s Flat Tax Option Plan, in graphs

In October, we looked at the impact of Herman Cain’s 9-9-9 tax plan.

In October, we looked at the impact of Herman Cain’s 9-9-9 tax plan.  With former Speaker of the House Newt Gingrich currently topping the polls, this would be a good time to look at his tax plan.

The Gingrich plan would give taxpayers the option to keep the current tax code or move to a flat tax of 15%.  Gingrich’s flat tax would retain current home mortgage interest and charitable donation deductions, as well as exempting all capital gains and dividend income from taxation.

The Tax Policy Center has released an analysis of the Gingrich plan.  Let’s have a look at some of the effects such a plan would have.

Because all citizens would have the right to either keep the current tax code or switch to the Gingrich plan, no one would see their taxes increase.  82% of taxpayers would see a reduction in their taxes.

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Next, let’s look at the effects on distribution.

As the plan is designed, the effective tax rate for all income levels is lower than current law.  Taxpayers with incomes between $100,000 and $500,000 pay the highest rate under the Gingrich plan (nearly 18 percent), while the millionaires would pay just under 12% of their income.  The middle 20% of income earners would pay 13.7% under the Gingrich plan.

Let’s look at the impact the rate changes would have on after-tax income.

The above graph looks at the percent change in after-tax income.  The Gingrich plan would provide more after-tax income to the wealthiest Americans.  The average millionaire would see an increase in their after-tax income of 37.8%, while the middle quintile of taxpayers would see an increase of 5.4%.

So far, the Gingrich plan sounds pretty good to most people.  82% get a tax cut, everyone (on average) gets at least 2.6% in after-tax income in their pocket.  What’s not to like?

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The Gingrich plan would explode the national deficit.  Revenues would decrease by $1.28 trillion in 2015 using a static economic model — that’s a 35% reduction in federal revenue.  Unless substantial spending cuts are made, that would roughly double the annual national deficit.  This looks like a tax plan we can’t afford right now.

(To be fair, the Gingrich campaign disagrees with the notion of a static economic model and claims that the economic impact of such a substantial tax cut would create an economic boom and tax revenues would increase.  The campaign has offered no estimate of what the dynamic impact of their tax plan would be.  Moody’s economist and former John McCain adviser Mark Zandi scores most income tax cuts as recouping about one-third of their cost.  Using that model, the Gingrich Plan would only blow about a $850 billion hole in the deficit annually.)

This post was originally published on Brick City Blog and written by Sean Olsen. Find Sean on Twitter: @sean_olsen