Understanding Rand Paul’s Tax Plan


Most of the comments I have read reviewing  Rand Paul’s tax plan are way off base. They show a lack of understanding of basic economics and a misinterpretation of results.

Many assume because the plan involves flat taxes that the rich are being favored and the low income people are getting screwed. This is far from the truth. First of all a large deduction and exemption starts all taxpayers off. Secondly Paul removes the employment tax – you know , Social Security and Medicare Taxes. This is a tax that is paid by all workers no matter how low their income is.

The National Sales Tax or Value Added Tax captures taxes from those who are not employed but are living off capital gains, from foreigners visiting the United States, from illegals, drug dealers, prostitutes, loan sharks, those who live off stocks and bonds only,  those who work under the table, those who receive cash only income, gamblers etc., etc. So everybody pays something but nobody pays an exorbitant amount.

Here to sort out the ins and outs of Rand Paul’s proposal is syndicated financial columnist Scott Burns, who is not a shill for any political party.

Dallas Morning News reports:

sburnsTaxes are wonderful. They give us something to complain about every day. They also aren’t well understood. That’s bad for us and great for politicians, and it also means full employment for accountants.

So let’s take another look at presidential candidate Rand Paul’s “Fair and Flat Tax.” Many, including readers of a recent column, dismissed the plan as regressive. Others think you can’t reduce tax rates without cutting tax revenue and enlarging the federal deficit. Still others think reducing tax rates is a bald give-away to the rich. Let’s take a closer look.

The average tax rate isn’t the marginal tax rate. When politicians talk about taxes, they usually talk about marginal tax rates. That’s the amount of tax you pay on the last dollar of income. Currently, the top rate is 39.6 percent for income over $464,850 on a joint return and $413,201 on a single return. Most people face a top income tax rate of 10 or 15 percent.

A top marginal tax rate of 39.6 percent makes it easy to understand why the people with the highest incomes favor lower tax rates. Would you want to pay any tax at that rate? Getting to a reasonable tax rate explains why the well-off would enjoy the largest reduction in taxes under the Paul plan.

The average tax rate paid by all taxpayers is a lot lower. Taxpayers in the top 50 percent (those with incomes over $36,065) paid at an average rate of 14.33 percent. They also accounted for 97.22 percent of income tax revenue. That’s IRS data for 2012.

So if Rand Paul proposes a flat 14.5 percent income tax rate on taxable income, it’s not a crazy number. The Tax Foundation notes that the effect of the entire plan would be a 10-year net revenue loss just under $1 trillion. That’s an average of $96 billion a year. An increase to a 16 percent flat rate would likely cover that. So would a decrease in deductions and exemptions.

A flat tax can be a fair tax. The most common response to the idea of a single flat tax rate is that it would not be progressive. People with more income wouldn’t pay a greater share because every dollar is taxed at the same rate.

That’s true if every dollar of income is subject to tax. But every dollar of income isn’t subject to tax. Indeed, in the Paul plan, a family of four would have a total of $50,000 in deductions and exemptions. And since every dollar over $50,000 would be taxed at 14.5 percent, the average tax would rise with income.

An income of $50,000 or less would pay 0 percent of income in taxes.

A $60,000 income would pay 2.4 percent in taxes.

A $75,000 income would pay 4.8 percent in taxes.

A $100,000 income would pay 7.25 percent in taxes.

A $500,000 income would pay 13.1 percent in taxes.

These figures cover 99 percent of taxpayers. Note that the average tax rate is lower, but it’s quite progressive. After all, the $75,000 household pays at twice the rate as the $60,000 household. And that 14.5 percent rate isn’t inscribed in stone.

The misdirection problem. Politicians of both parties have studied magicians. They have learned that misdirection is a vital skill. The magician focuses your attention on one thing while doing a sleight of hand with something else. By arguing over the income tax, our politicians direct attention away from the most regressive tax in America, the employment tax. An honest debate would start with the combined tax burden most Americans face. It is high. And it is quite flat. Everyone has reason to complain.

The Rand Paul plan takes a major burden off workers’ shoulders by switching the employment tax to a corporate value-added tax. Most workers pay more in employment taxes than in income taxes, so it would be a major tax cut for most Americans. At the same time, it would increase the progressivity of our tax system.

Remember, the Social Security part of the employment tax stops at $118,500. Converting the employment tax to a value-added tax makes every dime of payroll income taxable, including those big executive salaries. This provides more revenue for Social Security.

Is the Rand Paul plan perfect? No. But it’s good. And it’s far better than the mess we currently have.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s