Rand Paul's tax plan not quite what it seems
Rand Paul's tax plan not quite what it seems
BY JOSEPH LAWLER |
JUNE 20, 2015 | 5:00 AM http://cdn.washingtonexaminer.biz/ca...ce0ebb2eef.jpg
The plan would be a massive reduction from todays 39.6 percent top rate for individuals and 35 percent rate for corporations. (AP)
Republican presidential candidate Sen. Rand Paul promised to propose the largest tax cut in U.S. history, and he delivered with a plan that includes surprises for adherents to GOP orthodoxy, even as it has supply-siders ecstatic.
The Kentucky Republican's "Fair and Flat Tax," announced this week as a major plank in his presidential platform, would drastically cut taxes, implementing a single tax rate of 14.5 percent on individuals and businesses. It would eliminate all breaks except for deductions for mortgage interest payments and charitable giving and pro-work tax credits for poor families.
The plan would be a massive reduction from today's 39.6 percent top rate for individuals and 35 percent rate for corporations.
Additionally, Paul would eliminate the payroll tax collected for Social Security and Medicare, which he calls the "workers' tax" in a video announcing his plan. "That's right, it's gone, zero, nothing," Paul says of the tax plan.
It is an "astoundingly good plan," said Arthur Laffer, "and it will put the rest of the candidates on their toes." Laffer, a former Reagan administration economist who is regarded as the father of supply-side economics, was credited by Paul with helping to develop the plan.
There's no doubt that Paul's plan would be a massive tax cut, one that analysts say would dramatically simplify the tax system and shrink federal government revenue by trillions. And it would represent a major step toward the long-sought GOP goal of a flat tax. But initial analysis of the plan suggests that it is not quite what it seems in at least two ways:
First, Paul's proposal for business taxation would effectively amount to a value-added tax, of the kind collected in many European countries alongside individual and corporate taxes.
"His plan makes him the most recent public figure to propose a value-added tax," American Enterprise Institute tax expert Alan Viard wrote in a blog post on Paul's proposal.
Paul doesn't label it a value-added tax, but experts acknowledged it would have the same effect.
"I'm not into the linguistics. They're all about the same size and have the same effect," Laffer said.
Here's how the value-added tax works: It's like a sales tax, but where the sales tax applies to final sales to consumers, a value-added tax is collected on sales by businesses at each stage of production, with credits for taxes paid on purchases from other businesses.
Paul's business transfer tax would work similarly: The tax would apply to total business receipts, minus input purchases from other businesses. Spending on investments such as machines or property, however, would be immediately subtracted from the taxable receipts.
"It's basically value-added by the business," said Michael Schuyler, a tax economist at the nonprofit Tax Foundation who analyzed Paul's plan for the campaign.
Second, the way Paul's business transfer tax is collected means that there is a 14.5 percent employment tax that may even be bigger than the current payroll tax that Paul would repeal.
Because wages and salaries are paid out of the business receipts that make up the tax base for the business transfer tax, they would be taxed at 14.5 percent, a feature first noted by Bloomberg.
Economists assume that workers bear the brunt of employment taxes, whether they're levied on workers or businesses. That's the case with the 15.3 percent payroll tax in effect today, of which only half is technically taken from workers' paychecks.
It would be the same for the taxation of wages in Paul's plan, said Schuyler. The tax "is going to be passed back to the factors of production: labor and capital," he said.
So Paul's plan includes a wage tax, one slightly lower than the current 15.3 percent payroll tax that is tied to Social Security and Medicare funding (a new Obamacare tax also raises Medicare taxes for some high earners). Paul's plans for funding Social Security and Medicare have yet to be spelled out.
The current payroll tax, however, applies only to the first $118,500 of income. All wages and salaries would be taxed in Paul's plan.
As a result, it's not clear whether total employment taxes would rise or fall in the plan. A spokesman for the campaign responded that it is "a business transfer tax, not a payroll tax, so it would be decreased."
"I haven't done the scoring to the penny, but it should come out damn close to a break, and it will be enormously pro-growth," Laffer said.
Schuyler said that in the model used by the Tax Foundation, workers' after-tax income would rise for all income earners in Paul's plan.
That's because on the individual side, the flat tax doesn't kick in until a certain level of income, $50,000 for a family of four.
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