Senator Rand Paul (R-KY), a candidate for president, recently announced his plan to reform the U.S. tax code. His proposal, the “Flat and Fair Tax,” would move to a 14.5 percent tax rate on all types of income with a sizable deduction and exemption, eliminate the corporate tax to create a 14.5 percent business transfer tax paid by businesses on profits and wages, introduce full expensing for investments in capital, and eliminate the payroll tax on both the employer and employee.
Our analysis finds that Senator Paul’s plan would grow the economy by 9.4 percent in the long run, create 1.4 million jobs, and cost … $960 billion when accounting for economic growth.
Structure of the Tax Reform Plan
Sen. Paul would make a number of changes to the tax code for individuals. He would replace the current seven tax bracket structure with a flat rate of 14.5 percent and apply that tax rate to all income – wages and salaries, capital gains, dividends, interest, and rents.
The plan would include a $15,000 standard deduction (per filer) and a $5,000 per person personal exemption. This means that a family of four would pay no income tax on their first $50,000 of income ($55,000 for a family of five, etc.).
Retirement accounts remain as they currently are and in our modeling we assumed that the exclusion for employer-provided health care remains.
The plan retains home mortgage and charitable deductions, the earned income tax credits, and the child tax credit and eliminates all other tax credits and deductions.
The plan would eliminate the payroll tax, the estate tax, and all customs duties and tariffs.
On the business side, the plan would eliminate the corporate tax, create a territorial type system, and introduce a 14.5 percent business transfer tax. This tax would be levied on a business’s factors of production and tax all capital income (profits, rents, royalties) and all labor payments (wages and salaries). All capital expenses (machines, equipment, buildings, etc.) are fully expensed in the first year, which would do away with current depreciation schedules. This tax would also apply to wages paid by governments and nonprofits.
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