WASHINGTON, Jan. 8, 2016 — Republican presidential candidate Ben Carson recently announced his plan to change the federal income tax system. He wants a 14.9 percent tax on all income above one-and-a-half times the poverty rate, with no deductions. The corporate tax rate would be 15 percent, while dividends and capital gains would not be subject to any tax.
The primary goal of a tax plan should be to equitably raise sufficient revenue while encouraging growth in the economy. The plan should also be easy to administer, cause no market distortions and recognize social responsibility.
Carson’s tax plan is similar to the Busler Single Rate tax plan, which has been discussed in this column numerous times over the past two years. The Busler plan taxes all income above a livable minimum (twice the poverty rate) at 15 percent with no deductions for anything. All income is taxed at the same rate whether from wages, rent, interest, profit, dividends or capital gains. Corporations pay the same 15 percent, but they pay the entire 12.4 percent social security tax for all employees. Currently the employee pays half and the employer pays half.
Carson selected a rate of 14.9 percent, but 15 percent is simply a much easier number to work with. Carson sets the livable minimum at 1.5 times the poverty rate instead of Busler’s two times. Carson eliminates the tax on dividends and capital gains. Busler counts them as ordinary income and taxes them.
The problem with setting the livable minimum where Carson sets his number is that more than 90 percent of families that currently earn between $36,000 and $50,000 pay no income tax at all. Under Carson’s plan those families would pay up to $2,100 per year. That results in a politically impossible situation where taxes are raised on the lower end of the middle class — workers who are “those rising from poverty.”
Keeping the tax on dividends and capital gains, as the Busler Plan would, makes sense. Dividend income is paid from one legal entity, the corporation, to another legal entity, the stockholder. As such, the stockholder receives new income and the income should be subject to tax. Similarly, capital gains creates new income and should be taxed.
The Busler plan gives a tax cut to all wage earners since the employer will now pay the employee’s share of the Social Security tax, which will average more than $3,000 per worker. Additionally, labor and capital would be taxed at the same rate, and all Americans would be treated exactly the same with no special treatment for anyone, including those who choose to buy a home rather than rent. There are no market distortions created by the tax code and every single loophole is eliminated.
The plan is very easy to administer. The tax form is very simple. A taxpayer simply adds up all income from all sources, subtracts the livable minimum, then multiplies the balance by 0.15. That’s the amount of taxes owed. No need for tax accountants, tax attorneys, expensive tax preparation services or expensive software. And virtually no IRS.
The plan also solves the tax inversion problem, where American companies have relocated their corporate headquarters to a country with a lower corporate tax rate to avoid paying income tax to the U.S. government. Since a 15 percent corporate tax rate would be lower than that of any other country, American companies would relocate their headquarters back to the U.S. and once again become U.S. tax-paying companies.
But is this plan fair? Wouldn’t this just be a tax cut for the rich?
The plan is fair and the wealthy will end up paying more tax dollars. It is fair because we almost all agree that taxes should be levied based at least somewhat on a person’s ability to pay. As income increases, people should pay more taxes. Under the Busler plan, tax liability increases proportionately as income rises; under a progressive system, tax liability increases disproportionately as income rises. Clearly, this can be viewed as unfair.
By taking advantage of existing loopholes, most of the wealthy end up paying a tax rate of less than 15 percent. Recall that during the 2012 election, Warren Buffett complained because he paid a 13 percent tax rate while his secretary paid almost 20 percent. His tax lawyers and tax accountants had found all of the loopholes.
Most importantly, the Busler plan would double economic growth from the just over 2 percent rate we have experienced for the past seven years to more than 4 percent. This is the most important impact of the new tax plan.
It is the lack of economic growth, due in part to a counter-productive tax policy, that has caused most of the economic problems and some of the social problems that we continue to confront today. The Busler Single Rate Tax plan, which is nearly identical to Ben Carson’s plan, would fairly and easily solve most of the economic problems.
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