Arguments For and Aginst The Paul T ax Plan

Rand Paul offers us his take on why we are having such a recoveryless recovery from the 2008 recession. He believes we are being hamstrung by our current levels and methodologies to collect Federal tax revenues. He employed Stephen Moore and numerous other experts to design a tax plan that would replace the current code and basically allow him to gut the IRS. Mr. Moore describes the plan below.

I spent the last several months helping design this plan with Sen. Paul — so I’m biased. But there can be no doubt that a plan that reduces income tax rates from as high as 40 percent and business taxes from 35 percent down to a flat 14.5 percent rate can only be described as explosively pro-growth and pro-jobs. See chart. The 14.5 percent tax would apply to wages, salaries, capital gains, rents, and dividend income. The plan eliminates the estate tax, telephone taxes, Internet taxes, gift taxes and all customs and duties.

This is a positive development along several fronts. It lowers the marginal rate to 14.5%. This takes the gamesmanship out of a lot of financial transactions. The markets are no longer distorted by tax-gaming as they are at present. It takes power away from the abusive and frequently politically vindictive IRS. Lois Lerner will have to find another avenue to inflict herself on those with whom she disagrees once her regulatory basis has been eviscerated.

Moore argues further that this tax simplification would take away a lot of the fat-cat deductions and the legislative carve-outs that make our current tax system just a sop for the top 1%. However, the plan has already attracted a certain amount of fire from various critics. The biggest bone of contention is that the lack of a wages and salaries deduction on the corporate side of the proposal makes it behave like A VAT. Daniel J. Mitchell applauds most of the proposal accept for the part the walks and quacks like a VAT. He explains his reservations below.

So what’s not to like? The answer is that [mc_name name=’Sen. Rand Paul (R-KY)’ chamber=’senate’ mcid=’P000603′ ]’s “business-activity tax” doesn’t allow a deduction for wages and salaries. This means, for all intents and purposes, that he is turning the corporate income tax into a value-added tax (VAT). In theory, this is a good step. After all, the VAT is a consumption-based tax which does far less damage to the economy, on a per-dollar-collected basis, than the corporate income tax. But theoretical appeal isn’t the same as real-world impact. Simply stated, the VAT is a money machine for big government.

I find myself basically liking what [mc_name name=’Sen. Rand Paul (R-KY)’ chamber=’senate’ mcid=’P000603′ ] is proposing. Of course, I don’t like the VAT. I don’t like taxes at all. I’m usually not much of a fan of the entire Leviathan. I’m also not a fan of going to the dentist, but I’ve learned the hard way that I really need to go. There really isn’t a particularly pleasant way for the government to ask me for my money. As Josh Barro points out, the Paul proposal; while it officially taxes businesses and corporations, could financially act like a national sales tax.

It may not be immediately obvious why a VAT is economically equivalent to a sales tax. Think of it this way: While a sales tax is charged at the point of final sale to the consumer, a VAT is charged in pieces all the way along the supply chain. A retailer pays VAT on his sales, minus what he paid to wholesalers; a wholesaler pays on what he collects from retailers, less what he paid to manufacturers; manufacturers pay on what they get from wholesalers, less the cost of parts. When you add it all up, the whole tax bill is the same as if a sales tax had been collected at retail.

I get that. Every time you tax a business one of two things happens. Either the price of what you want to buy goes up or the thing you’re at the store to purchase is no longer available. But this is something that is already happening around us. Texas has no state income tax but collects a lot of its funds at the point of sale. Texas under Governor Perry was one of the most economically successful states in the US for the past decade. Sales taxes are unpleasant and can factor into the calculations of both producers and consumers. They haven’t proven yet to be the economic equivalent of Ebola here in the US.

An overlooked advantage of these sorts of taxes is that I can control to a certain extent how much I get taxed, and how much of a consumptive impact my life makes on people around me. To a certain extent, my effective personal tax rate becomes inversely proportional to my time preference. I can give myself a bit of a tax cut every time I put Mr. Greed back on his leash and choose to defer personal consumption.

Sales taxes ultimately reward those who are willing to live more simply and put a surcharge on people who just have to have it all and wallow in consumptive behavior. I’m enough of an opponent of Keynesian Aggregate Demand Theory so that I fail to see why this is bad exactly. If you, like I thought Cash for Clunkers was Econumix for Maroons then this tax strategy could be seen as the opposite.

We’ll see if this serious or just 9-9-9 Redux. We’ve got a nice, toasty debate and the primary season to sort out just how thoroughly Rand Paul has thought all of this out and is willing to invest in it. I’m at a point where I think it is good, despite not being perfect. I can trade a few a Hershey Bars and Cokes in return for putting the IRS back on a leash. VATs are obnoxious, but I’m willing to give up luxuries if we really have a strategy here to limit the extent to which the USG can use its regulatory codes to inflict tyranny and act out political vendettas.