Battle4Liberty

Senator and presidential candidate Rand Paul launched a flat tax proposal last month. It’s received a lot of criticism from all sides. Some has been warranted, but much of it is really designed to mask a deeper problem.

Paul proposed a single 14.5% income tax rate with no tax on the first $50,000 of income for a family of four, and deductions for mortgage interest and charitable contributions. The plan also eliminates the worker share of payroll taxes, gift and estate taxes, and all tariffs and duties. Capital gains would also be taxed at the 14.5% rate.

The left doesn’t like Paul because he has a way of encroaching on some of their constituencies. A July 10 op ed piece in the New York Times exemplifies the liberal opposition to the plan. It’s flawed because (1) it retains two popular deductions, (2) it would reduce government revenue, and (3) it helps the rich at the expense of everyone else. If these are really legitimate problems, then the NYT could address these concerns by countering with a proposal that (1) eliminates all deductions, (2) contains a higher rate that increases revenues, and (3) excludes more income. They didn’t because they don’t like the idea of a flat tax anyway. The arguments they made are but a smokescreen.

The NYT piece makes an interesting claim:“ Arguments about the proper role of government aside, a population and an economy that are growing in size and complexity cannot thrive with a shrinking government.” In other words, an economy can only grow when government grows. This statement is patently false and exposes their bias.

In fairness, a critical analysis of Rand’s proposal is in order. The $50,000 exemption and the 14.5% rate are arbitrary. Arguing to raise or lower them requires in-depth analysis of economic data, so I’ll set this issue aside. Suffice to say that government revenues would likely decline as a result, but Paul’s answer would simply be to spend less anyway.

An ideal tax system would contain no deductions, but the two retained in the proposal are logical. The mortgage tax deduction should be eliminated over time because it requires a higher tax rate to finance, and it distorts the housing market. Abolishing it (all at once) could have negative repercussions because individuals have become accustomed to the current system. I would prefer phasing it out over 4-6 years, adjusting tax rates down with each cut in the deductible amount. Nonetheless, one could argue that keeping it retains stability in the housing market. It’s also a political decision.

The charitable deduction is entirely logical. If charities don’t have to pay income taxes, then individuals should be able to assign a portion of their income to charities and avoid the taxes as well. I prefer a fair tax (i.e., sales tax) to a flat tax in part because it eliminates the entire question of charitable deductions. However, retaining this deduction makes perfect sense if you’re going to have an income tax.

Does Paul’s proposal “hurt” the poor? This is really a complex question. Eliminating the worker portion of social security would help low wage earners because this tax is paid on the first dollar of income. Not taxing the first $50,000 of income should be fair enough, but there are so many giveaways embedded in the tax code that this might actually hurt some low-income filers. If so, it only tells us how far we drifted into a tax code that’s entirely a game of redistribution and social engineering.

In the end, I’d propose a fair tax, or a slightly different flat tax. That having been said, no proposal like this has any chance of getting through Congress without changes anyway, so knit picking the details at this point is an exercise in futility. Consider the big picture. Paul’s plan would be a substantial improvement over the status quo. It would cut the influence of special interests, and save billions in compliance costs. Anyone who opposes it should provide an alternative.