Senator Rand Paul’s new tax-reform plan is a considerable improvement over his old one. He’s done what more politicians should: revise their ideas to take account of valid criticisms. But even the new plan doesn’t live up to the senator’s rhetoric. And it isn’t going anywhere.
Paul’s earlier plan was a 17 percent flat tax that would have raised taxes for much of the middle class, especially parents, while reducing them for the rich. The new plan, which Paul is calling a “fair and flat tax,” avoids such big increases.
It has two main parts. First, Paul would replace the income and payroll taxes with a 14.5 percent flat tax with exemptions of $15,000 for filers and $5,000 for dependents. Families of four therefore wouldn’t pay taxes on their first $50,000 of income. Second, Paul would replace the corporate income tax with a new 14.5 percent “business activity tax.”
“This tax,” the senator explains, “would be levied on revenues minus allowable expenses, such as the purchase of parts, computers and office equipment.”
What’s not on that list of allowable expenses is wages. The Tax Foundation’s analysis of the plan confirms that omission wasn’t accidental. What that means is Paul’s business tax is the equivalent of the value-added taxes, or VATs, that many other developed countries have. It’s a consumption tax that people pay in the form of higher prices for consumer goods, or of lower real wages.