Sen. Rand Paul, R-Ky., a GOP presidential candidate, released his tax plan last week. As expected, some commentators piled on criticism. Howard Gleckman of the Urban Institute said Paul was trying to use the tax proposal to “fundamentally restructure the federal government as we know it.” Bob McIntyre, the director of Citizens for Tax Justice, said Paul’s plan would cost $15 trillion over 10 years. Other, less informed folks resorted to calling Paul names.
This criticism from liberals is neither unexpected nor irrational. These are folks who like to see more government spending and revenue raising. Paul is a small government Republican. Of course he wants to see less government and taxes. So it’s not surprising that his tax plan would, in a vacuum, lose the government money. The Tax Foundation says the cost would be $3 trillion over 10 years on a static basis. But that assumes Paul will keep spending at current levels. I suspect that if he became president, he’d support spending cuts equal to or greater than the cost of his tax plan.
Beyond all that, there is a lot to like in Paul’s plan. For individuals, he would impose a flat rate of 14.5 percent and apply it to all income – wages and salaries, capital gains, dividends, interest, and rents. That would likely be a big tax cut for the rich. But he would include a $15,000 standard deduction per filer and a $5,000 per person personal exemption. Basically, a family of four would pay no income tax on the first $50,000 of income. He would retain the home mortgage and charitable deductions, earned income tax credit, and child tax credit, but eliminate all other tax credits and deductions. Keeping the mortgage interest and charitable deductions is not good tax policy, but shedding everything else is.
The Paul plan would also eliminate the payroll tax, the estate tax, and all customs duties and tariffs. Sure, the rich would get a big break on their estates. But that real or perceived unfairness would be overcome by eliminating the regressive payroll taxes. The poor would be far better off under Paul’s plan than under anything offered by anyone else in recent history.
On the business side, Paul would eliminate the corporate tax and create a 14.5 percent business transfer tax. That tax would be levied on a business’s factors of production and all its capital income and labor payments (wages and salaries). All capital expenditures would be fully expensed in the first year. The new transfer tax would work like a European-style VAT. That tax is widely endorsed by economists, who tout its efficiency.
There are many details to work out. And when the numbers are crunched, the Paul plan as proposed may end up being too regressive. He wants to impose his business tax on nonprofits and governments, a dubious proposition. And frankly, many people will be troubled by the end of the payroll tax, since it is dedicated to funding Social Security and Medicare. But Paul is offering a proposal that would change how we pay for government and likely lead to significant economic growth. The Tax Foundation’s initial analysis found that Paul’s plan would grow the economy by 9.4 percent in the long run and create 1.4 million jobs. And even if that analysis is off, not even liberals are denying that there would be some economic growth. More importantly, just about everybody would see a tax cut. The plan is therefore worth serious consideration.