Senator Rand Paul’s campaign did two things yesterday in a desperate attempt to revitalize his shrinking campaign. The first thing Senator Paul did was print out the federal tax code and mutilate it with a chainsaw (hey, Senator Paul? The environment would like a word with you). The second thing Paul’s campaign did was release a laughably bad plan to reform the tax code. Because I’m in a bipartisan mood today, I would like go over the response to Paul’s delusional flat-tax plan from a conservative economist as well as a liberal one. Let’s start off with the conservative response.
Writing at Bloomberg View, here is Ramesh Ponnuru’s take on Paul’s flat-tax plan. Ponnuru is one of those interesting “reform conservatives” who believes that the federal government should do more to improve people’s lives other than simply “get out of the way”. To be fair, Ponnuru is undoubtedly a very conservative guy. Ponnuru wrote a book in 2006 called The Party of Death, which vehemently criticizes abortion supporters (mostly Democrats, surprise, surprise). But even for someone as conservative as Ponnuru, he isn’t buying Paul’s flat-tax plan. Ponnuru starts off with the basic details:
“[Senator Paul’s plan] has two main parts. First, Paul would replace the income and payroll taxes with a 14.5 percent flat tax with exemptions of $15,000 for filers and $5,000 for dependents. Families of four therefore wouldn’t pay taxes on their first $50,000 of income. Second, Paul would replace the corporate income tax with a new 14.5 percent ‘business activity tax.'”
Ponnuru liken the “business activity tax” to a Value Added Tax (VAT), which is used in many European countries as a type of national sales tax. VAT’s are one reason (among others) that a variety of goods tend to be more expensive in places like Canada, the U.K. and Germany than they are here in the U.S. Ponnuru concludes his views about the plan thusly:
“All in all, then, what Paul is proposing is a big tax cut for high earners and businesses with almost no direct benefits for most Americans. It’s the latest evidence that a flat tax that cuts most people’s taxes while keeping revenue at a plausible level is just not possible.”
This could not be more correct. For instance, what value does lowering the capital gains tax to 14.5% have on ordinary Americans? According to Wikipedia, the current capital gains tax rate is 0% for the 10%–15% brackets; 15% for the 25%–35% brackets; and 20% for the 39.6% bracket.). Capital gains rates were much higher during the Clinton years, and we had a booming economy then that benefited all Americans in all income brackets. Furthermore, lowering the top labor income tax rate to 27% does not mean this will lead to increased purchasing of consumer goods. It does not mean wages will grow for anyone, except those (roughly) 10% of Americans who fall in that top income bracket. Most importantly of all, it does not address how economic growth at the top will trickle-down to those at the bottom. If you’re going to state that economic growth is the only thing keeping poor Americans from joining the middle-class, you need to explain how a cashier at Wal-Mart is going to get a raise if the economy grows at 4% annually (he/she won’t). Senator Paul needs to explain why his constant fear of inflation continues to exist, despite that inflation is currently hovering around 2% (the Federal Reserve’s exact target). Senator Paul constantly loves to attack the Federal Reserve, but has little to no explanation of how auditing the Fed or getting rid of it will benefit the overwhelming majority of Americans who need jobs and increased wages.
Let’s now take a look at what the liberal economist has to say about Senator Paul’s plan.
Kevin Drum of Mother Jones starts off his review of the plan the way any review should start: “[i]f Stephen Moore is one of the brains behind this, we can be pretty sure it’s the usual hodgepodge of innumerate nonsense he’s famous for.” This could not be more correct. Stephen Moore, famous conservative economist who writes for the Wall Street Journal, has an incredibly poor track record predicting that tax cuts will generate economic growth. Basically, Stephen Moore’s economic predictions are the equivalent of Bill Kristol’s foreign policy predictions in that 97% of the time, they turn out to be flat out wrong. But let’s save Moore (and Kristol) for another day.
“It’s the usual flat-tax utopia: One rate for everyone, no deductions, end of story. No discussion of how to define “income,” of course, which is what makes the tax code complicated in the first place. But no matter. According to Paul, the rich will end up paying 14.5 percent in taxes, with no loopholes to pay less. Given that the rich currently pay about 22 percent of their income in federal taxes, they should be pretty happy about that. They should also be pretty happy that he’s getting rid of the estate tax entirely.
And the middle class? Well, they no longer have to pay payroll taxes. Just 14.5 percent of their income.
Happy days! And how will this add up? The usual way: it will supercharge the economy blah blah blah, and we’ll all be making such huge buckets of cash that tax revenues will go up. Easy peasy.”
Easy peasy, indeed. Can anyone explain to me why exactly simplifying the tax code is the key to economic growth? I mean, if this is the case, why have a tax code at all? Seriously, let’s just have a tax code where a few lines are scribbled onto a piece of paper, and then bada-bing, bada-boom! Economic growth of 4 percent arrives at our doorstep. Hell, forget 4 percent. Why not make it 10 percent?
The overall point I’m trying to make here is the guys like Stephen Moore have had several years now to convince us that wealthy people paying very little taxes and deregulating all industries will lead to a better life for everyone. Except that wages have been stagnant for decades, and the only time we’ve have 4 percent economic growth was during Clinton. And guess what? Clinton raised taxes. Hell, even Reagan raised taxes. It really is a shame that conservatives don’t listen more to Ponnuru, James Pethokoukis, Ross Douthat, Josh Barro and Reihan Salam. I don’t even agree with these gentlemen the majority of the time, but at least they have some new ideas.