Tag: Tax Reform

Ben Carson’s Tax Plan

Presidential candidate Ben Carson released a three-page tax plan yesterday. Based on the limited information the plan includes, it looks like the best GOP plan so far.

Individuals and businesses would be subject to a simple 14.9 percent flat tax. The tax base appears to be of the Hall-Rabushka (HR) design, which is the gold standard of simple and pro-growth tax structures. I say “appears to be” because the Carson three-pager gives some hints, but not full details.

The defining feature of HR is that income is taxed once and only once. The current double taxation of savings and investment would be ended. Capital income would be taxed at the business level under HR, while labor income would be taxed at the individual level. Robert Hall and Alvin Rabushka proposed the HR tax structure back in 1981, as I discuss here. Rabushka, by the way, is a Cato adjunct scholar.

Ben Carson seems to have avoided the dangerous business VAT structure of the Ted Cruz and Rand Paul tax plans. He appears to be critiquing Cruz and Paul in this passage:

Unlike proposals advanced by other candidates, my tax plan does not compromise with special interests on deductions or waffle on tax shelters and loopholes.

Nor does it falsely claim to be a flat tax while still deriving the bulk of its revenues through higher business flat taxes that amount to a European-style value-added tax (VAT).

Adding a VAT on top of the income tax would not only impose an immense tax increase on the American people, but also become a burdensome drag on the U.S. economy.

Everything You Need to Know about Deductions, Loopholes, and Special-Interest Tax Provisions

Why does the tax code require more than 10,000,000 words and more than 75,000 pages?

There are several reasons and none of them are good. But if you had to pick one cause for all the mess, it would be the fact that politicians have worked with interest groups and lobbyists to create myriad deductions, credits, exclusions, preferences, exemptions, and other loopholes.

This is a great deal for the lobbyists, who get big fees. It’s a great scam for politicians, who get lots of contributions. And it’s a great outcome for interest groups, who benefit from back-door industrial policy that distorts the economy.

But it’s not great for the American people or the American economy.

Debunking Fiscal Myths: There Is No Loophole for “Carried Interest”

I’m a big fan of the flat tax because a low tax rate and no double taxation will result in faster growth and more upward mobility.

I also like the flat tax because it gets rid of all deductions, credits, exemptions, preferences, exclusions, and other distortions. And a loophole-free tax code would be a great way of reducing Washington corruption and promoting simplicity.

Moreover, keep in mind that eliminating all favors from the internal revenue code also would be good for growth because people then will make decisions on the basis of what makes economic sense rather than because of peculiar quirks of the tax system.

Sounds great, right?

Well, it’s not quite as simple as it sounds because there’s a debate about how to measure loopholes. Sensible people want a tax code that’s neutral, which means the government doesn’t tilt the playing field. And one of the main implications of this benchmark is that the tax code shouldn’t create a bias against income that is saved and invested. In the world of public finance, this means they favor a neutral “consumption-base” tax system, but that’s simply another way of saying they want income taxed only one time.

Folks on the left, however, are advocates of a “Haig-Simons” tax system, which means they believe that there should be double taxation of all income that is saved and invested. You see this approach from the Joint Committee on Taxation. You see it from the Government Accountability Office. You see it from the Congressional Budget Office. Heck, you even sometimes see Republicans mistakenly use this benchmark.

The Ted Cruz Tax Plan: A Pro-Growth Restructuring of the Internal Revenue Code, but with One Worrisome Feature

The tax-reform landscape is getting crowded.

Adding to the proposals put forth by other candidates (I’ve previously reviewed the plans offered by Rand Paul, Marco RubioJeb Bush, Bobby Jindal, and Donald Trump), we now have a reform blueprint from Ted Cruz.

Writing for the Wall Street Journal, the Texas Senator unveiled his rewrite of the tax code.

…tax reform is a powerful lever for spurring economic expansion. Along with reducing red tape on business and restoring sound money, it can make the U.S. economy boom again. That’s why I’m proposing the Simple Flat Tax as the cornerstone of my economic agenda.

Here are the core features of his proposal.

…my Simple Flat Tax plan features the following: • For a family of four, no taxes whatsoever (income or payroll) on the first $36,000 of income. • Above that level, a 10% flat tax on all individual income from wages and investment. • No death tax, alternative minimum tax or ObamaCare taxes. • Elimination of the payroll tax and the corporate income tax… • A Universal Savings Account, which would allow every American to save up to $25,000 annually on a tax-deferred basis for any purpose.

From an economic perspective, there’s a lot to like. Thanks to the low tax rate, the government no longer would be imposing harsh penalties on productive behavior. Major forms of double taxation such as the death tax would be abolished, creating a much better environment for wage-boosting capital formation.

Trump and Taxes: A Bush-Like Plan from “The Donald”

It’s been a challenge to assess Donald Trump’s fiscal policies since they’ve been an eclectic and evolving mix of good and bad soundbites.

Though I did like what he said about wanting to pay as little tax as possible because the government wastes so much of our money.

On the other hand, some of his comments about raising tax burdens on investors obviously rubbed me the wrong way.

But now “The Donald” has unveiled a real plan and we have plenty of details to assess. Here are some of the key provisions, as reported by the Wall Street Journal. We’ll start with the features that represent better tax policy and/or lead to lower tax burdens, such as somewhat lower statutory tax rates on households and a big reduction in the very high tax rate imposed on companies, as well as a slight reduction in the double tax on capital gains.

…no federal income tax would be levied against individuals earning less than $25,000 and married couples earning less than $50,000. The Trump campaign estimates that would reduce taxes to zero for 31 million households that currently pay at least some income tax. The highest individual income-tax rate would be 25%, compared with the current 39.6% rate. …Mr. Trump also would cut the top capital gains rate to 20%, from the current 23.8%. And he would eliminate the alternative minimum tax. …For businesses, Mr. Trump’s 15% rate is among the lowest that have been proposed so far.

But there are also features that would move tax policy in the wrong direction and/or raise revenue.

Most notably, Trump would scale back certain deductions as taxpayers earn more money. He also would increase the capital gains tax burden for partnerships that receive “carried interest.” And he would impose worldwide taxation on businesses.

To pay for the proposed tax benefits, the Trump plan would eliminate or reduce deductions and loopholes to high-income taxpayers, and would curb some deductions and other breaks for middle-class taxpayers by capping the level of individual deductions, a politically dicey proposition. Mr. Trump also would end the “carried interest” tax break, which allows many investment-fund managers to pay lower taxes on much of their compensation. …The Trump plan would raise revenues in at least a couple of significant ways. It would limit the value of individual deductions, with middle-class households keeping all or most of their deductions, higher-income taxpayers keeping around half of theirs, and the very wealthy losing a significant chunk of theirs. It also would wipe out many corporate deductions. …The plan also proposes capping the amount of interest payments that businesses can deduct now, a change phased in over a long period, and would impose a corporate tax on future foreign earnings of American multinationals.

Last but not least, there are parts of Trump’s plan that leave current policy unchanged.

Which could be characterized as “sins of omission” since many of these provisions in the tax code - such as double taxation, the tax bias against business investment, and tax preferences - should be altered.

…the candidate doesn’t propose to end taxation of individuals’ investment income… Mr. Trump would not…allow businesses to expense all their new equipment purchases, as some other Republicans do. …All taxpayers would keep their current deductions for mortgage-interest on their homes and charitable giving.

So what’s the net effect?

The answer depends on whether one hopes for perfect policy. The flat tax is the gold standard for genuine tax reform and Mr. Trump’s plan obviously falls short by that test.

But the perfect isn’t the enemy of the good. If we compare what he’s proposing to what we have now, the answer is easy. Trump’s plan is far better than the status quo.

Now that I’ve looked at the good and bad policies in Trump’s plan, I can’t resist closing with a political observation.  Notwithstanding his rivalry with Jeb Bush, it’s remarkable that Trump’s proposal is very similar to the plan already put forth by the former Florida Governor.

I’m not sure either candidate will like my interpretation, but I think it’s flattery. Both deserve plaudits for proposing to make the internal revenue code less onerous for the American economy.

P.S. Here’s what I wrote about the plans put forth by Marco Rubio and Rand Paul.

Assessing Jeb Bush’s Pro-Growth Tax Plan

In my 2012 primer on fundamental tax reform, I highlighted the three biggest warts in the current system.

1. High tax rates that penalize productive behavior such as work and entrepreneurship.

2. Pervasive double taxation that undermines saving and investment.

3. Corrupt loopholes and cronyism that lure people into using resources inefficiently.

These problems all need to be addressed, along with additional problems with the internal revenue code, such as worldwide taxation and erosion of constitutional freedoms and civil liberties.

Based on these criteria, I’ve already reviewed the tax reform plan put forth by Marco Rubio. And I’ve analyzed the proposal introduced by Rand Paul.

Now let’s apply the same treatment to the “Reform and Growth Act of 2017” that former Florida Governor Jeb Bush has unveiled in today’s Wall Street Journal.

Senator Rand Paul’s Very Good Tax Plan Needs One Important Tweak

Our nation very much needs fundamental tax reform, so it’s welcome news that major public figures - including presidential candidates - are proposing to gut the internal revenue code and replace it with plans that collect revenue in less-destructive ways.

A few months ago, I wrote about a sweeping proposal by Senator Marco Rubio of Florida.

Today, let’s look at the plan that Senator Rand Paul has put forward in a Wall Street Journal column.

He has some great info on why the current tax system is a corrupt mess.

From 2001 until 2010, there were at least 4,430 changes to tax laws—an average of one “fix” a day—always promising more fairness, more simplicity or more growth stimulants. And every year the Internal Revenue Code grows absurdly more incomprehensible, as if it were designed as a jobs program for accountants, IRS agents and tax attorneys.

And he explains that punitive tax policy helps explain why our economy has been under-performing.

…redistribution policies have led to rising income inequality and negative income gains for families. …We are already at least $2 trillion behind where we should be with a normal recovery; the growth gap widens every month.

So what’s his proposal?

…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.” …establish a 14.5% flat-rate tax applied equally to all personal income, including wages, salaries, dividends, capital gains, rents and interest. 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.

Kudos to Senator Paul. This type of tax system would be far less destructive than the current system.

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