Rick Perry Tax Plan: What Do Economists Think of His Optional Flat Tax?

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Perry does not fall into that trap, Zerbe said, so the tax cuts he proposes for big businesses would not come at the expense of small and medium businesses -- and preserving the R&D credit would also encourage manufacturing, which is "vital for economic growth and for good jobs and just a host of reasons," he said.

Perry's Plan More-Fair Than Cain's, But Not Simple

In terms of fairness -- that is, the burden it places on different income groups -- the consensus is that Perry's plan is significantly better than Cain's. That's because the 20 percent flat tax Perry proposes is optional, meaning that low- and middle-income taxpayers whose current tax rates are less than 20 percent can remain in their current brackets. Only wealthier Americans would see tax cuts, but nobody's taxes would increase.

The problem with that model is that it could create confusion as taxpayers tried to calculate which plan would be better for them -- and once they switched over to the 20 percent flat tax, they would not be able to return to their previous tax rate, even if their financial situation changed so that the previous rate became more advantageous.

"If we have a complex tax system, people don't understand how it works, and they distrust the system," Roberton Williams, a senior fellow at the nonpartisan Urban Institute's Tax Policy Center, told IBTimes. "They worry, maybe I'm not getting the kind of breaks other people are getting. As soon as you say, 'Here's a second way of doing it,' this makes people worry more about, 'Am I doing it the right way?'"

These questions undermine one of the Perry plan's main selling points: its simplicity.

"By giving taxpayers an option of whether to pay under the current or flat-tax systems, he would maintain the complexities of the current tax system and layer an entire new tax system on top of it," Karen Hube, a columnist for The Fiscal Times, wrote recently. "That would hardly be an improvement."

Either-Or Option Would Protect the Poor

Perry counters, and some experts agree, that giving taxpayers two options is the only way to get the economic benefits of a flat tax without overburdening the poor, thus avoiding the accusations of unfairness that have dogged Cain's "9-9-9" plan.

"Progressivity doesn't require progressive rates. Perry accomplishes it by letting people choose," Zerbe said.

Critics have pointed out that, while Perry's plan does not hurt the poor, it does disproportionately help the wealthy, whose current tax rates are above 20 percent and who earn much of their income from capital gains and dividends, which Perry would not tax.

But Perry has argued that as long as nobody's taxes increased, the benefits of the flat tax for the economy as a whole would outweigh that inequity.

"That's where the Perry folks are going to have to make their strong claim, and that's going to be a challenge, because people wake up tossing and turning about certain wealthier individuals appearing to be in a better position," Zerbe said. "But I do think if you made a compelling case, people would say, 'I get it, and I'd rather see more jobs out there than feeling better that these folks are going to be in a higher bracket.'"

Perry Plan: Would Lead to Lower Federal Revenue

But the seemingly win-win framework of Perry's optional flat tax creates an inherent revenue problem: if you guarantee taxpayers that everybody's rates will either decrease or stay the same, how can the government maintain its current revenue levels?

That is one positive of Cain's "9-9-9" plan. The tax burden would fall disproportionately on the poorest taxpayers, but it would keep revenue steady, according to an analysis by Fiscal Associates -- and revenue neutrality is key in a political climate that emphasizes deficit reduction above most else.

Perry does not deny that the government would take in less money under his plan. In fact, according to a John Dunham and Associates study that his campaign commissioned, the government would collect between $1.7 trillion and $4.7 trillion less under his plan than the Congressional Budget Office baseline from 2014-2020, depending on how much the plan spurred the economy.

This means that, between 2014 and 2010, government spending would have to be cut by anywhere from $1.7 trillion to $4.7 trillion just to avoid adding to the current $14.9 trillion deficit, much less reduce it. Spending totaled $3.82 trillion in Fiscal Year 2011, which ended September 30, 2011.

Can Perry's Tax Plan Lead to a Balanced Budget?

That task becomes even more daunting with Perry's promises to balance the budget and cut spending to 18 percent of GDP by 2020, but Perry insists it is possible.

"It will be an extremely difficult task exacerbated by the current economic crisis and our need for significant tax cuts to spur growth," he wrote in a Wall Street Journal op-ed on Tuesday. "But that growth is what will get us to balance, if we are willing to make the hard decisions of cutting."

Those hard decisions could include slashing anything from education spending to military spending to popular entitlement programs like Social Security, Medicare and Medicaid.

Perry argues that after a few years, the economic growth resulting from his plan would more than make up for the lost revenue.

"Lower, flatter taxes could generate both more revenue than the current tax code and significantly more economic growth over time," the John Dunham and Associates analysis concluded. "With increasing demands on the federal government from growing entitlements, higher pension expenses and interest on the debt, it will be necessary to increase the size of the economy -- and the tax base -- in order to generate significantly higher revenues."

Reuters columnist James Pethokoukis made the same argument in a blog post for the American Enterprise Institute, a conservative think tank. "The numbers look better the further out you go as the Perry economy far outpaces the CBO economy long term," Pethokoukis wrote. "And even under the static score [not accounting for economic growth], revenues return to their long-term average."

But many tax experts -- even some who supported Perry's proposals overall -- said revenue neutrality was an important component of a sustainable tax plan.

"The argument is, well, this is going to grow the economy and create jobs, and that's fine. I think it will help business to have a simpler world and have a simpler understanding of the tax code and what's expected of them," Zerbe said. "But we all recognize we have to pay for things."

Questions Whether Taxes Cuts Will Pay for Themselves

Williams, from the Urban Institute, called Perry's estimates of economic growth unrealistically high. Tax cuts will lead to growth, he said, but not enough to make up for the lost revenue.

"They say the economy's going to grow so fast we'll have money coming out of our ears -- but I think economists generally agree that tax cuts will not pay for themselves," Williams said. "We do believe that simpler taxes and flatter taxes will cause the economy to grow faster, but not so much faster as to recoup all the tax losses. The estimates by the Perry campaign just aren't consistent with mainstream economics."