Libertarianish Republican Sen. Rand Paul of Kentucky has announced the outlines of an income tax plan that will, in his words, "blow up the tax code and start over." In the Wall Street Journal, Paul writes:
I am announcing an over $2 trillion tax cut that would repeal the entire IRS tax code—more than 70,000 pages—and replace it with a low, broad-based tax of 14.5% on individuals and businesses. I would eliminate nearly every special-interest loophole. The plan also eliminates the payroll tax on workers and several federal taxes outright, including gift and estate taxes, telephone taxes, and all duties and tariffs. I call this "The Fair and Flat Tax."
To paraphrase Matthew McConnaughey, all right, all right, all right. Then again, the details, which have not yet been released, really matter. Especially when, like all flat taxes, you start out immediately with exemptions, despite the whole idea of a flat tax being equally applied to all people and income, right?
All deductions except for a mortgage and charities would be eliminated. The first $50,000 of income for a family of four would not be taxed. For low-income working families, the plan would retain the earned-income tax credit.
I would also apply this uniform 14.5% business-activity tax on all companies—down from as high as nearly 40% for small businesses and 35% for corporations. This tax would be levied on revenues minus allowable expenses, such as the purchase of parts, computers and office equipment. All capital purchases would be immediately expensed, ending complicated depreciation schedules.
SCTV
The business-activity tax is causing a rumble in the gut of everyone I know who looks at taxes from a free-market perspective. The main fear is that it ends up being even worse than a VAT by dint of being fully hidden from any specific activity or transaction. Taxes that are not visible to the people paying them tend to expand, after all.
Well, we'll see what's in the cake once Paul releases the details later today. Check back for that.
Interestingly, in the very same opinion section that carries Paul's piece is a stinging house editorial by the Journal that critiques the tax reform plan of his fellow presidential candidate Sen. Marco Rubio of Florida. Some wees back, Rubio released with Sen. Mike Lee (R-Utah), a tax plan that promised "family fairness" and economic growth. As Shikha Dalmia and I explained in separate pieces, the plan was the product of "reform conservatives" who seek to use the tax code to engage in both social engineering and vote-buying. Here's Dalmia's piece and here's mine.
Rubio-Lee would raise the credit to $2,500 per head. The left-leaning Tax Policy Center (TPC) estimates this would forgo revenue of $1.576 trillion over a decade. The Tax Foundation estimate is in the same ballpark—notably, on both a static budget basis and using dynamic scoring.
The reason is that unlike the investment portions of Rubio-Lee, the child tax credit does nothing for economic growth. The only growth case for it is the Keynesian claim that it would boost consumer spending and aggregate demand, but by now we've seen how that doesn't work….
there are also big political problems. One is that child subsidies concede the use of the tax code for social policy, and more political mediation over neutrality and individual decisions. By dumping the goal of a cleaner, more neutral code, Republicans will have less credibility to oppose liberal favoritism. Democrats can always outbid Republicans on this kind of policy, starting with the demand that the credit be "refundable," or paid in a check to those who have no tax liability….
Mr. Rubio has let himself be swayed by a coterie of non-economist conservatives who view the tax code as an engine of social policy. This crowd denigrates marginal-rate cuts as politically déclassé, but then the child credit is one of the hoariest forms of tax gimmickry, an echo of Jimmy Carter's New Jobs credit, or Mr. Bush in 2001 and hisPelosi tax rebates in 2008.
Related:"Is 'Reform Conservatism' a Friend or Foe of Limited Government?", a forum moderated by Dalmia and including a debate with Yuval Levin, the leader of the reformocon movement, and responses from The Federalist's Ben Domenech, Cato's Jason Kuznicki, and me.
Matt Welch recently interview Rand Paul about his new book and just about everything else that matters. Take a look:
