UPDATE: Rand Paul has come up with a new Fair and Flat Tax Plan. Read about it here.
It’s the day after Tax Day, so it’s time to do something fun. For me, since I’m attracted to Tax and Economic Analysis like a dog to vomit, I thought I’d start looking at our upcoming presidential candidates’ various tax proposals.
Before I begin, I should add the disclosure that none of these plans are going to be fully fleshed out at this point. This is early in election season, and the best we’re going to get are talking points to motivate the base.
First up to bat: Rand Paul and his EZ Tax, which is a flat tax so simple that he couldn’t be bothered to spell it all out.
The EZ Tax proposed by Rand Paul really is about as simple as you can get. Since I couldn’t find anything more definitive than CNN Money, I’ll go with their breakout:
Individual Income: 17% tax on all wages and salaries. Deductions will be greatly reduced, but Rand Paul hasn’t definitively stated which ones he want to keep.
Investment Income: All tax free , including capital gains, interest, dividends.
Estate and gift tax: Gone with the wind
Judgment-Free Analysis on The Individual Side
Before I get into my personal thoughts, let’s set the stage. Everyone, including Rand Paul himself, acknowledges that this will not be a revenue neutral proposal. We’re lowering taxes overall, which is absolutely going to bring in less revenue. Note that lower taxes do typically lead to a better growing economy, which can bring in more revenue (see the Laffer’s Curve). However, current estimates peg the EZ Tax curve bringing in some $700 billion less revenue every year that the current system, even accounting for economic gains.
Since we currently have a progressive tax, the EZ Tax will, based on simple math, immediately benefit the wealthy more. Before we jump to concluding that the EZ Tax discriminates against the poor, remember that economics is not simple math. Will poorer people pay more of their paychecks to tax than they currently do? Yes. Are they worse off because of that? It depends on a million other factors, including the growing economy I mentioned before.
We have to look at the Cost Benefit Analysis before jumping to conclusions, my friends.
Plus, it depends on how the deductions are structured, which have yet to be announced.
Payroll tax: Everything above is about the income tax. How does it affect the Payroll tax, which is already a 15.3% tax (half paid indirectly)? Rand Paul has announced that his EZ Tax will affect it. Somehow. It’s unclear exactly what that means.
If there’s no change, that would bring our total tax bill up to 32.3% before State and Local Taxes. Ouch.
Business Income: Business income is where the simplification process all falls apart. The EZ Tax proposes a 17% tax rate on business income as well. Great. Except calculating the Business Tax Rate is the most trivial part of corporate income taxes.
There’s so many other things to look at. What is income? What are expenses? Can we use GAAP, IAS, etc.? These end up being extremely complex questions that I doubt will ever be easily answered. Business taxes are a completely different beast than individual income taxes, and combining them together in the same tax reform package does little good.
In theory, a flat tax sounds great, including Rand Paul’s EZ Tax. As a tax preparer, it would suck to lose out on all that sweet individual prep revenue, but as a person who files taxes, it certainly sounds nice to throw tax complexity into an industrial sized shredder.
The thing is, it’ll never happen. Or at least it’ll never stick.
While we could beat around the bush all day about the pros and cons of a simple, flat tax, the fact of the matter is that politicians won’t allow the EZ Tax because they want to meddle. And tax incentives provide a great way to mettle.
It’s not that all meddling is necessarily bad. For example, the charitable deduction signals that the government values the work done by charity. I think most people can get behind that. The Mortgage Interest Deduction says we value home ownership, which is still ingrained as part of the American Dream. I could go on and on: we like x, or dislike x, so we’ll give it a deduction or an additional tax
A good example of this outside the Income Tax realm is the Sin Tax, which I wrote about earlier this week.
If, one day, we get politicians who aren’t self interested, who don’t want to pander to certain industries, who don’t use their political power to garner favor, who don’t believe that the government should incentivze behavior, then we might be able to get–and keep–a flat tax (assuming that it’s actually a good idea). I’d give the chances of that happening about as good as teaching a cockroach not to be gross.
So the EZ Tax might sound nice. It might motivate the conservative base, which is Rand Paul’s real goal. But don’t get your hopes up (or your hackles up if you’re against it) that it’ll pass.