Last month Senator Rand Paul of Kentucky proposed blowing up the tax code and replacing our convoluted income tax system with a14.5 percent flat tax. This may be the most ambitious and pro-growth reform plan ever introduced since the income tax was introduced 100 years ago.
The Rand Paul flat tax would eliminate corporate income tax, the payroll tax, all excise taxes and tariffs. All 70,000 pages of tax code would be shrunk by 90 percent because almost all deductions would be eliminated. No one knows for sure how many more jobs this would create and how much faster our economy would grow, but the experts at the Tax Foundation estimate 2 million more jobs and 10 percent more growth over a decade. That’s $2 trillion more output every year – which is like adding another California to the economy.
But critics on the right are complaining about the plan and so it is worth taking on and taking out these arguments against the flat tax.
Complaint number 1. The Flat tax is a Value Added Tax that will make America look like Europe.
No, the business tax is not a European style VAT. It is more like a tax on the net receipts of every business and the tax would be clearly posted on the final price tag of goods and services so consumers would see how much tax was collected. This is not a hidden tax. Also, when Europe introduced its VAT taxes, it did so on top of the income tax. Rand Paul’s business tax entirely replaces payroll and corporate income taxes.
Complaint number 2. The Rand Paul plan will hurt Social Security by eliminating the payroll tax.
No, Rand Paul’s plan guarantees full funding of Medicare and Social Security. Under the plan the first claim on the flat business tax is to each year fully fund Social Security and Medicare. This is a greater protection than the current system because the payroll tax is not collecting enough each year to cover benefits, so the system is going bankrupt.
Complaint number 3. Rand Paul’s flat tax is a big tax cut for the rich.
Wrong. Because the flat tax eliminates almost all deductions and loopholes (except for the mortgage and charitable deductions) the rich no longer have a way to shelter their income. Everyone will pay 15 percent on their income. The Rand Paul plan would tax wage and salary income at the same rate as capital gains and dividend income. So Warren Buffett will pay the same tax rate as his secretary, more, actually, because the Rand Paul plan exempts the first $40,000 of income for a family of four from tax. So low income families will pay zero income or payroll tax.
Complaint number 4. The flat tax blows a hole in the budget deficit.
No, the best way to balance the budget is to grow the economy and put Americans back to work. The Tax Foundation says that the Flat Tax is such an injection of steroids into the economy that the Treasury would raise enough money to pay the nation’s bills – when including some common sense budget cuts.
Complaint number 5. The Flat Tax will never happen because of special interest opposition.
Well, it is true the lobbyists hate the flat tax and they played a big part in defeating the flat tax when Steve Forbes ran on it 20 years ago. What’s different now is the public is fed up with a tax code that is, by and for the special interest lobbyists. A Rand Paul presidency – or any Republican committed to tax reform – could get this done in 2017. Tax reform worked under Ronald Reagan in 1986 with a vote of approval in the Senate of 97-3 with hundreds of deductions and credits cleaned out.
The flat tax has to be sold as a way to overcome the corruption and cronyism in Washington and return power to Main Street. This is the ultimate America versus Washington issue and a way to put K Street out of business. That’s good politics and good policy.
