The Tax Foundation is out with its analysis of Dr. Ben Carson’s tax plan.Tax Foundation scores it with a ten-year $5.6 trillion revenue loss on a static basis and a $2.5 trillion loss on a dynamic basis. (The dynamic scoring takes into account the positive effect that the plan will have on economic grow, based on the Foundation’s econometric model.) That score puts Carson’s in third place when it comes to revenue loss and more or less in a category all his own. Jindal and Trump have static losses over $11 trillion, with Bush, Cruz and Santorum in the $3 trillion neighborhood, Paul and Rubio at less than $2 trillion.
The Plan
Apparently the plan in not original with Dr. Carson and his campaign, which I consider a good thing. Kyle Pomerleau, who wrote TF’s analysis compares it to the Hall-Rabushka flat tax which was developed by Robert E. Hall and Alvin Rabuska in 1981.
The Hall-Rabushka Flat Tax was introduced in 1981 by economists Robert E. Hall and Alvin Rabushka. Their plan was put forth as a complete replacement for the federal income tax. Although the Flat Tax looks like the current U.S. income tax with a few modifications, it is structured to be economically equivalent to a consumption tax or value-added tax (VAT), with a flat, low rate. It does this chiefly by 1) allowing the full expensing of capital investment, 2) eliminating the taxation of interest, dividends, and capital gains at the individual level, and 3) eliminating several exemptions and deductions that are inconsistent with a consumption tax base, such as the exemption for employer-provided health insurance.
The Flat Tax has a much broader base than current law and can raise substantially more revenue for any given tax rate. The Hall-Rabushka Flat Tax also maintains a slight amount of progressivity by exempting some portion of wage income from taxation through a large standard deduction and personal exemption.
The Carson plan deviates slightly from the Hall-Rabushka Flat Tax by also including a $100 per person minimum tax.
The 14.9% rate kicks in at 150% of the federal poverty level. Individuals would not be taxed on interest, dividends and capital gains. ]Dr. Carson, in what I see as an act of political courage, would eliminate all itemized deductions including mortgage interest and charity. All credits except the foreign tax credit would be eliminated.
On the corporate side, there would be a switch to a territorial system that would exempt 100% of foreign earnings. I asked Kyle whether corporations would still be able to game things by parking their intangible assets offshore. He indicated that he had not seen anything specific that would prevent that. The plan would eliminate the deduction for business interest, which I see as a really big deal, even though it is glossed over in the analysis of these plans (Bush does the same) and the deduction for the employer-side payroll tax.
Expensing Of Capital Assets
There would be expensing of capital assets. That provision, which shows up in other plans, has always intrigued me. I asked Kyle about it and he indicated that it would include things that were not depreciable, so I am wondering if we will see a corporate land grab. The other wicked thing that crossed me mind is that rather than working for wages people will start selling their personal goodwill or maybe exchanging it for dividend-paying stock.
The Earned Income Credit
One of the things that makes the plan seem like less of a revenue loser is the elimination of the earned income credit. The earned income credit is, in reality, more of a government expenditure to relieve poverty that happens to be parked in the Internal Revenu Code, because everybody believes the IRS is great at running things. Or maybe there is some other reason. It tends to muck up the analysis a bit.
Favoring Wall Street Over Main Street
The economic models used by he Tax Foundation don’t capture things at the micro level. My big concern about the elimination of the business interest deduction is the effect it would have on small business, which tends, at least according to my own anecdotal observations, to run more on bank debt rather than equity. Having to pay income tax on the money used to pay bank interest could present difficulties for small businesses during a downturn and perhaps have them snapped up by entities that can access equity markets.
More Of A Gig Economy
I’m thinking that the elimination of the deduction for the employer share of payroll taxes would be another nudge towards getting people to be independent contractors rather than employees.
A New Gilded Age
On a static basis the plan takes from the poor and middle class to give to the rich.
On a static basis, Dr. Carson’s tax plan would increase after-tax incomes by 4.5 percent, on average. Due to the elimination of nearly all credits, all itemized deductions, and the exclusion of employer-provided health insurance, taxpayers in the bottom nine deciles would see a decrease in after-tax adjusted gross income (AGI) of between 1 and 14.8 percent. Taxpayers in the top decile would see much lower marginal tax rates, which would offset the much broader tax base. Their after-tax incomes would increase by 16.2 percent. Taxpayers in the top 1 percent would see their after-tax AGI increase by 33.4 percent.
On a dynamic basis, everybody wins, but some win more than others with taxpayers in the bottom three deciles increasing after-tax income by half of a percent to 6.3% with the top 1% increasing by 44.5%.
Who Is The Conservative?
I think it is worth noting that we have had a progressive income tax and an estate tax for a century now. I understand the arguments that the economists make for plans like Carson’s, but there are all sorts of unintended, unforeseen consequences when you make radical changes. From that perspective, the Dwight Eisenhower style socialist from Vermont, Bernie Sanders, is actually looking like the most conservative candidate at the moment , but we’ll see how things develop.