Now we’re getting somewhere! In a presidential campaign that so far has been mostly characterized by lackluster, status-quo policy proposals—or dodging policy questions, as Hillary Clinton has done—Kentucky Senator Rand Paul, a Republican presidential candidate, has proposed the boldest tax reform plan in decades.
In a nutshell, his plan would “blow up” (his words) the incomprehensible U.S. tax code and start from scratch with a simple, low and fair tax. Then get out of the way and watch the American people’s drive, creativeness and work ethic take off.The key to the plan is a 14.5 percent flat tax on all individuals and businesses. There are currently seven tax rates on individual income, from 10 to 39.6 percent, and the corporate income tax rate is 35 percent.
But wouldn’t a 14.5 percent rate be a tax increase for those paying the current lowest rate of 10 percent? Not really.
Paul provides for a standard deduction—$50,000 for a family of four. Since the median family income is a little more than $50,000, that means that roughly half of the households would pay little or no income tax.
But even those people paying no income tax would get a tax cut because Paul repeals the 15.3 percent Social Security and Medicare payroll (FICA) tax, which is split between employer and employee. In other words, low and lower-middle income families would get a tax cut.
People would still get to take their home mortgage and charitable tax deductions—and the Earned Income Tax Credit would not be affected—but all other deductions would be eliminated. Thus, doing your taxes would take a few minutes, not a few weeks.
The IRS’s National Taxpayer Advocate has estimated that Americans spend 6 billion hours and $168 billion filling out their tax forms. Under Paul’s tax reform you can kiss that time and money HELLO, because you’d be keeping both.
Perhaps more importantly from an economic-growth standpoint, the corporate income tax would decline from 35 percent, the highest in the developed world, to 14.5 percent, one of the lowest.
Companies make business investment decisions based on whether they think they can make a profit. Lower tax rates mean more investments become feasible. And private sector investment, not government spending, is how the economy creates real jobs.
In addition, a 14.5 percent corporate tax rate would resolve a problem the president repeatedly complains about.
In a global economy, it is not unusual for an American company to do more business overseas than it does in the U.S. Companies with foreign operations pay those countries’ corporate income taxes, just as foreign companies operating in the U.S. pay the corporate tax rate on profits earned in the U.S.
But unlike almost every other country, if U.S. companies bring their profits home, they have to pay U.S. corporate taxes, less the amount they paid to foreign countries. As a result, more than $2 trillion in company profits are sitting in other countries. By lowering the U.S. corporate tax rate to 14.5 percent, companies would owe little or nothing by “repatriating” money, and so most of it would flow back into the U.S.
Plus that change would reduce the incentive for U.S. companies to be taken over by foreign companies—as Burger King recently did—in order to get a lower tax rate.
Would such a drastic tax reform reduce federal revenue, and so potentially increase federal deficits—and debt?
Not necessarily. More companies would be investing and more people working—and both would be paying taxes. So it’s possible that such a reform would be deficit neutral or even drive an increase in revenue.
Paul claims he is dedicated to balancing the federal budget regardless of how the cut would affect revenues. But I think the bigger problem will be what to do with all of the extra money flooding government coffers.
The dirty little secret in economic policy is that a rapidly growing economy can cover a multitude of policy failures. If Congress gets nothing else right, getting the tax code flat and fair would fix many of our economic and even political challenges.
President Obama and his policies only made the problems worse. Rand Paul provides a blueprint for a rapidly growing economy, which means more jobs and less debt.