OPINION:
Sen. Rand Paul’s flat tax plan is like a decent song in a world full of off-key voices. It hits all the right notes, including greater simplicity, lower rates for everyone, and a more competitive system of corporate taxation. But it has some small details that could use fine tuning.
The plan’s name, “fair and flat,” captures the big selling points of the plan without advancing any rhetoric or agenda. The most significant policy piece of the plan is a broad overhaul of the personal income tax. By collapsing all of the brackets into a single 14.5 percent rate, it is obvious that the plan will make tax filing less complicated. When Americans are spending $400 billion and nearly 6 billion hours on compliance, less complicated means more time and energy spent on more productive activity. All income (wages, capital gains and dividends) is taxed at the same rate, and the wealthy will be less likely to game the system of loopholes to lower their effective burden.
The second significant piece is the complete transition to a 14.5 percent territorial business tax system that uses a value-added-like tax instead of the income approach currently being used. A territorial system will encourage American multinational corporations to bring home their revenue and avoid double taxation. The hidden gem, however, is the transition to up-front expensing of capital. If such a change were made permanent, it would reduce uncertainty and encourage investment in capital, the things that make workers and business productive. Current depreciation schedules do not fully capture the cost of capital purchased today. Basically, the tax code now does not recognize that a dollar today is more valuable than a dollar a year from now.
But there are some items that should be addressed by Mr. Paul if he hopes to take his plan from paper to reality. Capital gains would still be double-taxed, as corporate profits would be taxed both at the corporate level and at the shareholder level. This is concerning, as the tax code should, at the very least, not discourage investment.
He proposes to keep two deductions, most notably the mortgage interest deduction. And while this choice is grounded in political reality, it would make more sense to change the deduction into a tax credit. This would make the government’s support of homeownership more broad-based and not targeted to just high-income earners (more than half of mortgage interest deductions accrue to households earning $75,000 or more), because a credit would allow people to take money directly off their taxes owed. If Mr. Paul added this to his plan he would increase its political appeal, as the credit idea has broad bipartisan support.
Beyond the big tax changes, there is one elephant in the room: revenue neutrality. Although Mr. Rand stipulates that his plan will be revenue neutral, he does not mention specifically what programs he would scale back. And in order to avoid deficits, scale-backs will be necessary. The Tax Foundation has pointed out that even with the massive economic growth unleashed by the plan, there will still be a $1 trillion revenue loss over the course of 10 years. This means there must be an accompanying plan to sensibly reform federal government spending.
At the end of the day, Mr. Paul has composed a solid melody of economic growth that has the conversation on tax reform going in all the right directions. But as with any proposal unveiled in a single newspaper column, the devil will always be in the details. Hopefully. the policy experts will realize that seeing the angels and not just the demons is key in any political proposal.
• Allen B. West, a former member of Congress from Florida, is a retired Army lieutenant colonel and is the president and CEO of the National Center for Policy Analysis, where Jacob Kohlhepp is a research associate.
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