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.  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.

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?

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.)


8 Responses to “The impact of Newt Gingrich’s Flat Tax Option Plan, in graphs”

  1. Can you do me a favor and send the graph with the blue line to Mark Dayton and President Obama? It seems to me that the rich are paying more than their fair share after all.

    • Certainly, it’s true at the federal level that wealthy folks pay a higher rate. At the state and local level, not so much.

      If you look at the trend table in the above post, you see the point Jim Weygand was making in his piece from a couple of weeks ago. Prior to the Ventura tax cuts (the 1990 column), the distribution of state and local taxes was pretty equitable across all income levels. Since then, the rate has increased in the middle income levels and declined at the top of the distribution.

      • So, like Weygand, are you an advocate of the flat tax? It would seem that your “effective” tax rate lends it self to removing all taxes, and only using flat rate based upon income. What is a “fair” rate for everyont to pay? The graph showing the lowset 1% paying the greatest amoount of their income makes me laugh. these people pay zero income tax, but your graph shows a tax rate based upon income. If sales tax is so determiental to the poor, then get rid of it, along with cigarette and gasoline taxes. Chuck all of the so-called “regressive” taxes, and create a flat tax. It seems that’s what you liberals are advocating with this silly “effective” tax anyway.

        • When you look at the bottom 10% on the state and local taxes graph, there’s clearly some mitigating factors there (as are noted in the original post). I would favor moving us back to a flatter distribution, more like the 1990 column. Political reality probably dictates that a true flat tax (no exceptions or deductions with one rate for everyone) isn’t feasible because each side has their own sacred cows that they would want protected.

          On the national level, I favor going back to the principles of the 1986 tax reform, which taxed all forms of income at the same rate and simplified the tax code considerably.

  2. Oops. Part 5 of Gingrich’s plan is to balance the federal budget. Part 2 is the tax plan. I don’t think he’s proposing one without the other.

    • Gingrich has not detailed spending cuts of sufficient quantity to close the existing $1 trillion-plus budget gap, much less adding on the at least $850 billion hole that his tax plan would add.

      The Part 5 you cite on his website details a best-case scenario of $620 billion a year in cuts, and even Gingrich notes that independent consultants find one of his savings projections to be high by $400 billion a year. So, he’s got a long, long ways to go yet.

      • There’s also part 1 of his plan. repeal Obamacare. that will save 700 billion easily. Not to mention the boost to the economy that ridding us of this expensive nonsense will do for businesses, large and small. Well, except for the Democrat’s favorites, who have been granted a pass from this unconstitutional disaster.

        • Obamacare reduces the deficit by $143 billion over the first decade (and increasingly more over time) and reduces the number of uninsured by 32 million over that time. Republican counter-proposals saved less money and insured fewer people. So, no, repealing Obamacare would not have the budget impact you suggest.

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