Rand Paul is trying something new. His EZ Tax Plan, which was short on specifics and always doomed to fail, has now morphed into something much more unique: The Fair and Flat Tax.
I have to give Rand Paul credit here. Whether or not you like the plan he offers, he at least offers specifics, unlike any other current presidential candidate other than Marco Rubio. Doing so is an unnecessary political risk even bigger than messing with Donald Trump’s hair.
This new Rand Paul Tax Plan has some crazy suggestions. Crazy enough that it just might work? I’m not so sure about that. But people are still seeing Transformers movies, and they’re even making Shenmue III, so crazier things have happened.
Crazy Idea #1: Remove the Payroll Tax
15.3% of your wages go to the government before you even see them. The programs they support are on the path to fiscal destruction, so let’s just throw away the related taxes, right?
It’s actually a huge thought shift. No longer would Medicare and Social Security be separated off in their own tax farm, but part of the general budget. Even if Rand Paul’s tax plan doesn’t go through, we might have to make that shift anyway.
Crazy Idea #2: Flat Tax For All
The EZ Tax Rand Paul originally suggested included a low tax rate of 17% for everyone. But Crazy Randy knows you’re the discriminating kind (in the good sense, not the racist type) and only the best rates will get you in the door. So that hypothetical flat tax has been slashed to an insane 14.5% for both individuals and businesses.
And if you want your deductions, Crazy Randy Pauly’s got them for you. This new Rand Paul Tax Plan has a $15,000 standard deduction per filer and a $5,000 per person personal exemption. That means a family of four won’t pay any taxes at all until they make over $50,000. Since even payroll taxes are out, that’s a hefty tax cut for low wage families.
Oddly, the plan still includes deductions for charitable giving and mortgage interest. Fortunately, only one of those two deductions is condemned by The Economist.
It also still includes the Earned Income Tax Credit, which gives even more support for low income families.
Crazy Idea #3: Introduction of the Value Added Tax
Rand Paul is too savvy to call anything in his tax plan a VAT, since a VAT would be unAmerican (is that really how it’s spelled?). Instead, his plan includes a business-activity tax at that same flat rate of 14.5%. Which, if you look into it, is essentially a Value Added Tax.
Democrats have been clamoring for a VAT for years, so to see it pop up in one of the million Republican candidates’ tax plan, rather than a Hillary’s or Bernie’s, is crazy in and of itself.
Economic Results of the Fair and Flat Tax
In terms of economic growth, this Rand Paul Tax Plan 2.0 isn’t looking too bad. The early analysis out of the Tax Foundation is that it’ll grow the economy an additional 9.4% and create 1.4 million jobs over ten years.That additional 1% to GDP certainly helps, though it’s not earth shattering.
The cost of the plan is about $300 billion in lost revenue every year if you believe the conservative leaning Tax Foundation, or an insane $1.2 trillion a year if you believe the left wing Citizens for Tax Justice. Considering how much the VAT has been shown to bring in, I’m guessing the Tax Foundation’s estimate is better than CTJ’s.
Whatever the actual cost is, we know it will be something in terms of tax revenue. No one, not even Rand Paul, is claiming this will be revenue neutral. The aim here is cuts, and he states to have budget cuts in mind to offset the tax revenue (though he hasn’t shared those budget cuts yet).
As a side note, the disagreement over revenue has led to a pretty entertaining Twitter debate between the Tax Foundation and CTJ, leading to this fun conclusion:
— Kyle Pomerleau (@kpomerleau) June 19, 2015
And I bet you though economists couldn’t get feisty?
Apart from the tax revenue cuts mentioned above, I’ve seen a few more gut reactions to his plan. Many of them are minor issues that can be fought over later, but here are a key few that stuck out:
Value Added Tax: most economists agree that taxing consumption is less damaging to the economy than taxing income. Because of that, VATs are often seen as economically preferential to income taxes. They are also big revenue raisers for the government, and often done in ways that people don’t notice. This makes the big government crowd happy, and the small government crowd less so.
VATs are also typically regressive taxes, since low income households will end up spending a bigger percentage on their income on the tax than a progressive (or even flat) income tax.
Unfair: Despite the fact that Rand Paul’s Tax Plan has “fair” right in it’s name, many are arguing that it is unfair.
Yes, the plan will absolutely lead to tax cuts for the wealthy, which automatically invalidates the plan in some people’s eyes. I really don’t give much credit to that argument if it’s made in isolation (i.e. doesn’t look at what else the plan is doing). The question is if it’s a situation where, as JFK put it, a rising tides lifts all boats? If it is, we’d be shooting ourselves in the foot just to nick the toe of The Rich. If that’s our goal, it’s probably time to realign our values.
Now, whether all those boats are lifted or not is still up for debate. And it’s not just Democrats who aren’t convinced.
Also remember that these kinds of plans are just starting points. If it’s just The Rich not having some arbitrarily high rate that’s a concern, debates could lead to adding a second tier for people making over a certain amount. Though Rand Paul would have to remove “flat” from its name.
My point being that the tax plan shouldn’t be thrown out solely based on this unfairness argument. It’s just a start. The question should be whether it is a good start.
Double Tax: Right now, our system tries to avoid double taxation. It fails on several points, but generally does a good job. This new Rand Paul Tax Plan doesn’t even try. The VAT taxes corporate revenue without deducting payroll. That payroll is then taxed again as income. Investment is still double taxed, something Rand Paul removed in his EZ Tax, but has added back this time around.
Is It A Good Idea?
Honestly, I have no idea. There are certainly good, unique concepts here. Using the VAT to replace business income tax may end up being a brilliant move. Getting rid of all those random deductions is probably the right track (though I’d cut out mortgage interest as well). Remove ALL tax from low income families is something that should resound with many.
My gut reaction to the plan was to shake my head, denounce it as terrible, but that’s because I think flat taxes are just never going to work. The more I’ve looked through it, though, the more I’m thinking that it has some merit. It’s still not my favorite plan, but it’s definitely unique, and it has some good things going for it.