On November 2, 2015 Josh Barro wrote a column in the New York times presenting details from some Republican candidates’ tax proposals. (See “Republicans’ Talk of Taxes Leaves Much Unsaid,” New York Times, November 2, 2015, P. A 3) Instead of being satisfied with sound bites, Barro does readers a service by going into some of the details. The tax plans I want to highlight are those of Dr. Ben Carson and Senator Ted Cruz. (He also discusses the plans of Senators Marco Rubio and Rand Paul and Governor John Kasich.)
At the recent Republican debate, Dr. Carson was challenged on how he could justify a tax rate of 10% when the Tax Foundation had stated this would create a massive increase in the federal budget deficit. (For the moment, I am going to ignore the unspoken assumption that raising the deficit would be a bad thing for the economy --- a “fact” that is not at all certain, especially with the employment to population ratio still at ….. ). Dr. Carson denied he was promising a ten percent tax rate to replace the income tax we have now, ---- that he was merely illustrating the tithing principle from the Bible. He said his rate would be closer to 15%. He then made the startling comment that if you were to tax Gross Domestic Product at 15% you would raise a great deal of revenue.
That is true. The Gross Domestic Product is over $18 trillion and 15% of that is 2.7 trillion. This year, the federal government is projected to take in over $3 trillion from the individual income tax which means that Dr. Carson’s plan would only be a about 10% short of the goal of being “revenue neutral.” (In fact, many of the Republican candidates claim that whatever their tax cuts, the result will be such a dramatic increase in economic growth that revenues will grow as a result of the tax cut. These were the arguments made in favor of the Reagan era supply side tax cuts, but in fact Reagan himself signed a number of tax increases to partially offset the tax cuts he persuaded Congress to pass in 1981. For details see my book SURRENDER, HOW THE CLINTON ADMINISTRATION COMPLETED THE REAGAN REVOLUTION, particularly chapters 3-6.) So Dr. Carson has hit on a magic bullet, right? All we have to do is tax the entire GDP and we can lower rates dramatically.
But of course we cannot tax the entire GDP. If we are talking about an income tax, you have to measure income not GDP. GDP includes everything produced – even those products that do not generate business income, such as the non-profit and government sectors. Individuals owning businesses pay income tax on their net income if the business is not incorporated. Corporations pay taxes on corporate profits and individual share-holders pay taxes on their dividends and on their capital gains when they sell their stock. All revenue for the non-profit sector (even revenue that colleges and universities salt away in their endowments) as well as revenues received by government entities are not subject to income taxation. The appropriate number to look at if we are looking to see how much we can raise with a different individual income tax is Personal Income. This is close to $15 trillion – significantly less than GDP. If all of Personal Income were subject to Dr. Carson’s tax, it would raise only 2.25 trillion – a shortfall of 350 billion. However, and this is the real problem with Dr. Carson’s analysis, to collect all of that, many low income taxpayers would see themselves paying much more in taxes, even as taxpayers currently taxed at 28, 33, 35 and 39.6% would see dramatic tax cuts. (Someone in the 25% bracket making a taxable income of $150,000 would have their taxes cut from approximately $29,000 to $22,500. People in the higher brackets would save much more money of course.)
For an example of how lower income taxpayers would pay a lot more, married couples filing jointly do not pay taxes on social security benefits unless their income exceeds $32,000. If Dr. Carson’s proposal were to eliminate this tax free aspect of social security, that would amount to a 15% cut in social security benefits for the lowest income recipients. Similarly, right now married taxpayers pay no income tax on their first $16,000 a year. If Dr. Carson’s plan were to eliminate that deduction, all low income taxpayers currently paying 10% to the IRS will experience a dramatic increase in their taxes – a minimum of $4200 a year on the previously untaxed income PLUS, all of their income now subject to the 10% rate would be taxed at the higher, 15% rate. (So for example, a married couple making $20,000 currently pays 10% on the $4000 over the $16,000 zero bracket – a tax burden of $400. Under Dr. Carson’s plan with no exemption and a new 15% rate, this same couple would pay $3000 – a massive tax increase for people barely making ends meet.)
Let’s turn to Senator Ted Cruz. He actually has a 10% income tax plan and he plans to fill the revenue gap with what he calls a “business flat tax” of 16 percent. Most people hearing that term would think this is a tax on business income – a replacement for the corporation income tax. Actually this is a tax on business revenue, where the only deduction is on the cost of actual physical inputs. In Europe this tax is known as a value added tax or VAT. A business could be making a loss and still owe VAT so long as the cost of the raw materials used in production is lower than revenue. As with every other kind of tax on output (sales taxes for example) businesses pass the cost of this tax to their customers. If anyone has ever traveled to Europe, they would note that the price is always quoted as “price plus VAT.” Foreign tourists are able to get rebates on the VAT as they leave the country if they remember to save their sales slips. Thus, under a President Cruz, one’s individual income tax payments would go down (except for those who already pay no income tax) but the price of everything one buys will go up – perhaps as much as 16%. According to Barro’s article, Cruz’s VAT would apply to lots of purchases currently not subject to sales taxes, like payments for health care.
Beware tax plans until you read the fine print. They are very generous to high income people but serious punishment for the rest of us.
Michael Meeropol is professor emeritus of Economics at Western New England University. He is the author (with Howard Sherman) of Principles of Macroeconomics: Activist vs. Austerity Policies.
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