Tax Plan Analysis: Rand Paul versus Donald Trump
October 21, 2015
In one of the biggest overhauls of the U.S. tax code proposed by a current GOP candidate, Rand Paul seeks to implement a “Flat and Fair” plan—a $2 trillion cut that would replace the current seven-bracket structure with a flat rate of 14.5% for businesses and individuals.
In alignment with the GOP’s general mantra of simplicity, Paul proposes to dispose of nearly all special-interest loopholes and deductions. He claims that by getting rid of tax code loopholes designed by the affluent and politically connected, his plan would offset the flat rate’s innate favoring of the rich.
Specific to individuals, Paul’s plan raises after-tax income for all earning brackets. Even on a static basis, post-reform income would increase 4% across all taxpayers. One contributing factor is the outright elimination of the payroll tax—the largest that most Americans pay— along with the termination of gift, estate, and telephone taxes. Lower income households would benefit from the retained earned-income tax credit and generous standard deduction for the first $50,000 of income per family of four.
Paul hopes to stimulate growth by rewarding investment and small business creation. His proposal replaces corporate tax—as high as 40% for small businesses and 35% for larger corporations—with a standard 14.5% business transfer tax. This rate would essentially act as a VAT levied on businesses’ factors of production and would largely be borne by consumers. All capital expenses would be fully expensed in the first year, with Paul’s plan further dictating tax-free capital gains, dividends, and interest. The Tax Foundation estimates that in 10 years the plan would increase gross domestic product by about 10%, and create at least 1.4 million jobs.
(Image: Projected distributional effect of Rand Paul’s tax reform. Source: Tax Foundation Taxes and Growth Model.)
The major drawback to Paul’s “Flat and Fair” is its effect on the budget deficit. On a static analysis, his plan would increase the deficit by $3 trillion over 10 years. Though Paul’s proposed drastic spending cuts and the projected boosts in gross domestic product would cover much of the gap, revenue loss would still stand at about $1 trillion after accounting for growth – which is itself a controversial and unreliable practice.
Donald J. Trump
Donald J. Trump, in his book Time to Get Tough: Make America Great Again, asks Americans to “imagine [their] paycheck was 40 percent higher than it currently is. What could [one] do with 40 percent more wealth? How many jobs and opportunities for others could [be] created?” Trump has edited his Tax Plan since his book from 2011, but the central principles remain the same. He wants to simplify the tax code and cut taxes to, in effect, boost consumer spending, encourage savings and investment, and maximize economic growth.
(Image: Breakdown of the Trump Tax Plan brackets. Source: Trump: Make America Great Again)
As the above chart indicates, the Trump Tax Plan is split into four tax brackets - 0%, 10%, 20%, and 25%. It eliminates income tax for over 73 million households—nearly 50% of Americans—because those who earn less than $25,000 as single filers or less than $50,000 married and jointly will owe 0% in income tax. The other brackets are also outlined in the above chart.
Trump has many concerns about the American workforce and believes that his Tax Plan will meet his goals and will attack these challenges head-on. He wants to decrease the tax burden on the middle class, simplify the tax code, promote economic growth, and avoid adding to our national debt and annual deficits.
The Trump Tax Plan also caps corporate income tax at 15% instead of the current 35%. Trump believes that too many American companies are leaving the U.S. through either direct means or through corporate inversions. This is the “symptom of a larger disease”: America has lost its position of having the best corporate tax rate in the developed world. This will help multinational companies, but more importantly small business owners, and self-employed workers because there will be a business income tax rate within the personal income tax that matches the 15% and helps these struggling entrepreneurs to thrive.
Comparable to Rand Paul, Trump would like to end the death tax, estate tax, Alternate Minimum Tax and several other small taxes that can “punish” or “burden” households. Trump proposes that corporate income tax be around 15% in order to compete with the world market for corporate “citizenship”. In this, Trump agrees with Paul’s stance on business-oriented growth. He disagrees with Paul because he does not believe in a fair tax. He says that it benefits the wealthy too much. He has also suggested that a flat tax would not be able to support government spending.
The Tax Foundation estimates that Trump’s plan would cut taxes by $11.98 trillion over the next 10 years on a static basis or by $10.14 taking economic growth into account. The plan may also result in increased outlays due to higher interest on the debt (continuing to increase deficits unless revenue neutral policies are enacted early). The Tax Plan would reduce marginal tax rates and cost of capital, which would result in 11 percent GDP growth over the long term. It would also lead to 5.3 million full-time equivalent jobs, a 6.5 percent increase in wages, and a 29 percent larger capital stock.
The Tax Plan is revenue neutral because it (1) reduces or eliminates loopholes and most deductions for the rich; (2) puts forth a one-time deemed “repatriation of corporate cash held overseas held overseas at a discounted 10% tax rate; (3) ends the deferral of taxes on corporate income earned outside U.S. borders; (4) and it reduces or eliminates the loopholes of corporations along with deductions that will become redundant.
Some critics claim that many of the principles defending Trump’s plan are myths such as the argument that lower tax rates will lead to stronger growth because reductions in income tax have statistically shown an insignificant amount of behavioral response and therefore economic growth and that this myth is hyperbolized by supply-side advocates.
Donald J. Trump continues to stand by Presidents such as John F. Kennedy and Ronald Reagan who firmly believe that cutting taxes incentivizes a strong national work ethic.
Sources and Further Reading
“Blow Up the Tax Code and Start Over.” WSJ. N.p., 17 June 2015. Web. 15 Oct. 2015.
“The Economic Effects of Rand Paul’s Tax Reform Plan.” Tax Foundation. N.p., n.d. Web. 15 Oct. 2015.
“Rand Paul’s Flat Tax Proposal: What It Means for You.” CNNMoney. Cable News Network, n.d. Web. 15 Oct. 2015.
“Rand Paul’s Implausible Flat Tax.” BloombergView.com. N.p., n.d. Web. 15 Oct. 2015.
“Donald Trump Unveils His BOLD Income Tax Proposal - This Is a BIG DEAL! - The Political Insider.” The Political Insider Donald Trump Unveils His BOLD Income Tax Proposal This Is a BIG DEAL Comments. N.p., 06 Aug. 2015. Web. 13 Oct. 2015.
“Donald Trump on Tax Reform.” Donald Trump on Tax Reform. N.p., n.d. Web. 13 Oct. 2015.
“Tax Reform.” Trump: Make America Great Again! N.p., n.d. Web. 13 Oct. 2015. .
“Details and Analysis of Donald Trump’s Tax Plan.” Tax Foundation. N.p., n.d. Web. 13 Oct. 2015. .
Fieldhouse, Andrew. “3 Dangerous Myths About ‘Revenue-Neutral’ Tax Reform.” The Fiscal Times. N.p., n.d. Web. 13 Oct. 2015.
Additional Blog Posts
Student Blog Disclaimer
The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.