The Fair & Flat Tax Revisited

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The Tax Foundation, which has been looking at the tax plans of the Republican candidates, has revised some of it’s stats on Rand Paul’s plan after receiving new data and models to use. They no longer have the old data up, as they revised their article, so here are the new numbers.

Overview:

The Tax Foundations found:

Senator Paul’s plan would grow the economy by 12.9 percent in the long run, create 4.3 million jobs, and cost $1.8 trillion over ten years on a static basis and raise $737 billion when accounting for economic growth.

Structure:

Eliminates the current 7-bracket confusing, too big system

Tax Rate: 14.5% (Flat)

What that rate applies to:

  • Wages/Salaries
  • Capital Gains
  • Dividends
  • Interests
  • Rents

Standard Deduction: $15,000 (per filer)

Personal Exemption: $5,000

For a family of 4:

A family of four would pay nothing on the first $50,000 of income. This is due to the standard deduction on both parents ($15,000 each, $30,000 over the 2), and then each family member having the personal exemption ($5,000 each, $20,000 over all 4).

For a family of 5:

A family of five would pay nothing on the first $55,000 of income. This is due to the standard deduction on both parents ($15,000 each, $30,000 over the two), and then each family memeber gaining the personal exemption ($5,000 each, $25,000 over all 5).

Deductions:

  • Home Mortgage Deduction
  • Charitable Deduction
  • All others are eliminated completely

Credits:

  • Earned Income Tax Credits
  • Child Tax Credits
  • All others are eliminated completely

Taxes Eliminated:

  • Payroll Tax
  • Estate Tax
  • All Customs Duties and Import Tariffs

Business Rate: 14.5% (Business Transfer Tax)

How:

This tax would be levied on a business’s factors of production and tax all capital income (profits, rents, royalties) and all labor payments (wages and salaries).

Business Expensing: All capital expenses (machines, buildings, equiptments, etc…) are fully expensed in first year. Does away with depreciation scales.

Others This Applies To: Governments entities and Nonprofits

Economic & Revenue Estimates

Increase/Decrease in GDP: +12.9% (over 10 years)

Increase/Decrease in GDP: +1.2% (per year additional)

Due to:

This growth is largely due to a cut in the service price of capital, which is a result of lower taxes on businesses and investment, specifically the tax cut to 14.5 percent on business profits, the 14.5 percent rate on capital gains and dividends, and the shift to full expensing. These tax changes result in an increase of the capital stock of 40.5 percent by the end of the adjustment period and results in higher after tax wages of 5.5 percent.

Capital Stock: 40.5% increase

After-Tax Wages: 5.5% increase (to 11.4%)

Effects:

Additionally, the tax cut on wage income to 14.5 percent also increases the incentive to work and results in 3.5 percent additional private business hours of work. This is equivalent to 4.3 million full-time jobs.

New Jobs Created: 4.3 Million (full-time)

Federal Revenues

On a STATIC Basis: (meaning no growth)

Losses: $2 Trillion (over 10 years)

Losses per year: $200 Billion

On a DYNAMIC Basis: (meaning growth)

Gains: $737 Billion (over 10 years)

Gains per year: $73.7 Billion

Distributional Analysis

On a STATIC Basis: (not considering growth)

Across the board: 4% Increase in After-Tax-Income across all taxpayers

0% change for those making $10,000, and varying degree’s for above

On a DYNAMIC Basis: (considering growth)

Across the board: 16% Increase in After-Tax-Income across all taxpayers

Taxpayers making <$10,000: Increase in Income by 11%

Taxpayers making $20,000-$150,000: Increase in Income by 14%

Taxpayers making $150,000-$250,000: Increase in Income by 15%

Details on Update:

We had previously estimated that Senator Paul’s tax proposal would be strongly pro-growth, highly beneficial for American workers, but expensive for the federal government in terms of tax revenue. The updated numbers suggest that Senator Paul’s plan would generate a larger growth dividend than we had estimated earlier this year and be less costly for the U.S. Treasury.

One reason for the difference in the growth and revenue estimates is that the October TAG Model employs a more detailed Individual Income Tax calculator than in the old model. The primary explanation for the higher growth estimate is that the new version of the TAG Model does a better job evaluating the effects of a value added tax. Senator Paul would replace the Payroll Tax and the Corporate Income Tax with what he calls a Business Transfer Tax (BTT). To a tax analyst, a BTT is a type of value added tax, although it looks nothing like a European-style VAT because it employs a much simpler and more straightforward collection method.

Two other factors also affected the revenue estimates. In June, we used the personal exemption and standard deduction amounts stated in Senator Paul’s plan. Because the TAG model’s Individual Income Tax calculator uses microdata from the IRS’s 2008 Public Use File (an anonymized sample of approximately 140,000 tax records), we should have converted the amounts into 2008 dollars for consistency, and have now done so. Further, the model’s 10-year revenue estimates are calibrated to the Congressional Budget Office (CBO) baseline. CBO released a midyear update in August, and we have calibrated the 10-year revenue estimates in the October version of the TAG model to CBO’s newest baseline.

TL;DR:

So yeah, this still applies, but the rates fo growth have been made a lot better.

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