Saturday, July 25, 2015

Rand Paul's Tax Dodge

Ever wonder why most politicians are often vague about specifics when it comes to policy? Just ask Rand Paul. The Kentucky senator recently unveiled his tax plan and I'll give him this much. He's brave. He's also completely wrong, not just about what it would mean to economic growth, but also his understanding of both the personal and corporate tax rate, as well as the payroll tax.

Paul's tax plan calls for the following:

  • Reducing both the personal and corporate tax rates to 14.5 percent.
  • Eliminating the payroll tax for all employees, but keeping it for employers.
  • Pulling the employers' share of the payroll tax out of the 14.5 percent corporate tax rate.
  • Eliminating the estate tax

While Paul gets an E for effort, he gets an F for delivery. In a nutshell, if a President Rand Paul ever enacted this cockamamie tax plan, it would be nothing short of disastrous for the country. Let's take it from the top.

For starters, a flat tax is not a new concept. It's been floated several times before. [Remember Herman Cain's 9-9-9 plan in 2012?] Some economists laud it because of its simplicity; others hate it because of its impracticability. The stumbling block has always been where to set the rate. Too high and you ostensibly foist a gigantic tax hike on the bulk of the population; too low and you rob the treasury of the funds needed to run the government, thus leading to massive deficits.

So Paul decided on 14.5 percent for both the personal and corporate rates. There are problems with both of these rates. First is that for many middle class tax payers, Paul's plan would mean a tax increase. That's because by definition a flat tax would remove all deductions such as mortgage interest, property taxes and charitable contributions from their tax returns. Middle class homeowners who donate to their churches or synagogues would be penalized under a Rand Paul administration, while the very wealthy would see their taxes go down.

Secondly, Paul doesn't seem to understand the difference between the official corporate tax rate (what American companies are supposed to pay) and the effective corporate tax rate (what they actually pay). The official rate is 35 percent, which admittedly is the highest among developed nations. However, the effective rate is less than half that. It stands somewhere between 16 and 17 percent. And some corporations - G.E. for example - don't pay any corporate taxes at all. Indeed, according to a recent study, corporate taxes amounted to 2.6 percent of U.S. GDP, eleventh lowest among the 27 wealthiest nations.

Paul brags about the need to get rid of the so-called seventy thousand pages of tax code and replace them with one simple page. Unfortunately for him, most of those seventy thousand pages of code were written by corporate tax lawyers on behalf of their clients - corporate America. The last thing either they or their clients would want is for anyone to come along and upset the apple cart.

Moving on, Paul's next step is eliminating the "burden" of the payroll tax. That comes out to 6.2 percent of an employee's wage. Not exactly chump change. Of course, here Paul has another problem; one even bigger than his flat tax proposal. The payroll tax is the sole source of funding for Social Security. The trust fund that provides the principle means of income for millions of retirees does not rely on the general fund for its financing. In other words, it is self sustaining. In fact, the only exception to this was during the payroll tax holiday period when $4.9 billion was diverted to the fund from the treasury to offset the 2 percent break taxpayers received. If it were eliminated, the fund would quickly dry up.

Contrary to what some believe, Social Security is NOT a retirement account. The money that recipients receive comes from current payroll tax deductions that go directly to the fund. If those deductions cease for any reason, bye bye checks. I'd like to see Paul address a group of senior citizens and explain to them how he proposes to protect their checks while at the same time eliminating their funding source.

Of course, Paul has an answer for that. He proposes to come up with the funds needed by deducting them from the corporate taxes that are collected. In other words, the first 6.2 percent of the 14.5 percent corporate tax would go directly to the Social Security trust fund. That would ostensibly reduce America's corporate tax rate to 8.3 percent. While Paul's plan has not been scored by the CBO, it is hard to imagine how the deficit wouldn't explode if it were implemented. And this assumes, by the way, that ALL of the 6.2 percent goes to the trust fund. Remember Republicans have this affinity for block grants and history has shown that when you lump everything into one bucket, you invariably run into unintended commingling consequences.

To make his budget balance, Paul proposes reducing government spending to unprecedented levels and that presents yet another huge problem. There is no way that Paul can balance the federal budget with so little income coming into the treasury. For one thing, a careful look at the budget will tell you that of the $1.16 trillion in discretionary spending, almost 70 percent of that goes to defense, which neocons in his party will never allow him to slash. Indeed, it's entirely possible that Paul will be forced to increase spending here. The much maligned Department of Education that Paul wants to eliminate altogether, amounts to a paltry $70 billion. That doesn't get Paul to first base with respect to balancing the budget. Hell, I doubt it even gets him in the dugout.

And lastly, Paul wants to eliminate the estate tax, or, as it is known among conservatives, the death tax. Republicans have had a hard on for this tax for years and while its repeal wouldn't be a substantial blow to the budget, it does underscore the lengths this party will go to advance ideology over practical policy.

To sum up, Rand Paul's very articulate, but ultimately unworkable, tax plan is yet another example of the GOP's refusal to admit what George H. W. Bush had the courage to admit back in 1980: that supply-side economics is voodoo economics. If you'd like a bird's eye view of what America would look like if Rand Paul's tax plan ever saw the light of day, just take a trip to Kansas. Governor Sam Brownback has so badly damaged that state's economy it could well take years for it to fully recover. Even now, faced with mounting deficits, he has refused to relent; instead he's doubling down.

As strange as it may seem, I like Rand Paul. Unlike so many of his fellow Republican candidates, he seems willing to buck his party when he feels it's wrong. And I still think if he manages to win the nomination, he will give Hillary Clinton the run of her life. But his tax plan is a major bust. The best you can say about it is that it faces some very stiff challenges, ironically from some of the GOP's staunchest allies; the worst you can say is that it would be an unmitigated nightmare for the country.

It's fair to say our tax code needs to be revamped. There are way too many loopholes that permit corporations to avoid paying taxes and the argument can certainly be made that the country needs a more incentive-based tax system. But simply employing a flat tax as a cure-all is not the answer. It further squeezes the middle class and widens the gap between the haves and the have-nots without addressing the core problems that legitimately plague the tax system.

If Republicans are serious about this issue, they should look to New York, where, ironically, a Democratic governor has come up with some rather novel solutions that are working. Andrew Cuomo's Enterprise-Free Tax Zones have encouraged businesses to relocate to the Empire State without putting undo pressure on the state's budget.

It's not perfect, but it's a helluva lot better than this constant, incessant fawning over a badly flawed economic policy that was long ago discredited by virtually every reputable economist.

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