WASHINGTON, June 18, 2015 — Sen. Rand Paul, R-Ky., recently introduced what he called the Fair and Flat Federal Income tax plan. This plan is similar to the Busler Single Rate Tax plan that has been out for a number of years. Paul’s plan is good, but it could be better. Here’s how.
Paul wants all income above a certain amount to be taxed at a 14.5 percent rate. In a June 18 op-ed in the Wall Street Journal, he was not specific about what that tax-free income level would be, but he did say that a family of four would not be subject to any income tax until the family income exceeded $50,000. This is similar to the Busler Single Rate tax plan.
Paul said he would eliminate all deductions except for home mortgage interest expense and charitable contributions. Allowing those two deductions is against the theory of the tax plan, but does provide a politically savvy reason for taxpayers to favor his plan. The Busler Single Rate tax plan eliminates all deductions.
Paul’s plan taxes all income at the same rate regardless of how that income is earned. All income from wages, interest, rent, profit, dividends and capital gains is taxed at the same rate. This eliminates the problem of having income earned from labor taxed at a different rate than income earned from capital. The Busler Single Rate Tax plan has been advocating this for a number of years.
If Paul tweaked his plan it could be better.
For instance, change the rate from 14.5 percent to 15 percent. That makes the tax easier to calculate and raises revenue, and the 15 percent rate is what the capital gain rate usually is, so people will be familiar with it. The logic behind this this is simple
The basic premise behind eliminating deductions is to allow the market to be free of distortions. By allowing the two aforementioned deductions, the government is influencing purchasing decisions of consumers, which serves to distort free markets. Eliminating all deductions eliminates all distortions. By allowing home mortgage interest deductions, the government is influencing the purchase-versus-rent decision in the home market.
Paul may argue that the government wants to encourage home ownership, which is commendable. But the purpose of a single rate tax with no deductions is to eliminate the government’s influence in purchasing decisions, treating all Americans the same with regard to taxation. Why then should the government treat renters differently than owners?
The same argument applies to charitable deductions. If Americans want to donate to a charity, they should do so because it is their choice, rather than calibrating donations simply for tax purposes. The idea of this plan is to eliminate all decisions being made for tax purposes. Besides, charitable deductions will likely not be harmed by this action.
A similar argument was made in 1981, when Congress reduced the top individual tax rate from 50 percent to 31 percent. The fear was that the wealthy would not donate to charity if the tax incentive were reduced. Exactly the opposite happened. Charitable deductions actually increased, because Americans had more disposable income and had a strong desire to donate.
While Paul’s op-ed piece does not mention how the calculation determining the amount of income that is free from taxation would be determined, the Busler Single Rate Tax plan has a solution. The amount free of taxation, which Busler refers to as the “livable minimum,” would be set at two times the poverty rate. This would be about $50,000 for a family of four.
The concept is that a taxpayer can earn up to the livable minimum and incur no tax liability. Above that amount, every dollar of income is taxed at a 15 percent rate no matter how that income is earned or how that income is disposed. This applies to every dollar of income above the livable minimum.
It is encouraging to see Paul and his advisors come up with a single rate plan. If he raises the rate in his plan to 15 percent instead of 14.5 percent and eliminates all deductions including home mortgage interest and charitable deductions, he would end up with a plan that is more fair, more free, raises more revenue, significantly adds to growth in the economy, reduces unemployment, tends toward a balanced budget and virtually eliminates the IRS.
It would also encourage U.S. companies to pay U.S. taxes instead of “relocating” to foreign countries, thereby eliminating the serious problem of tax inversion.
Everyone wins, just as Busler has been advocating for a number of years.