Paul’s new plan

Sen. Rand Paul’s new tax-reform plan is a considerable improvement over his old one.

Mr. Paul’s earlier plan was a 17 percent flat tax that would have raised taxes for much of the middle class. The new plan avoids such big increases.

First, Mr. 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, Mr. Paul would replace the corporate income tax with a new 14.5 percent “business activity tax.”

“This tax,” the senator explained, “would be levied on revenues minus allowable expenses.”

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What’s not on that list of allowable expenses is wages. What that means is Mr. Paul’s business tax is the equivalent of the “value-added taxes” that many other developed countries have.

The net effect of Mr. Paul’s plan is that the top tax rate on labor income falls from its current 43.4 percent to 26.9 percent. Taxes on capital gains and dividends would fall to 14.5 percent, and taxes on estates to zero.

Mr. Paul has said that the plan “shows that we have something that we can offer to the working class.” The middle class, however, will pay in hidden consumption taxes what it no longer owes in payroll taxes.

The Tax Foundation concludes that the plan would reduce federal tax revenue by $3 trillion over a decade. Mr. Paul says he’d cut spending to prevent the deficit from rising, so this would mean benefit cuts that affect the middle class.

All in all, then, what Mr. Paul is proposing is a big tax cut for high earners and businesses with almost no direct benefits for most Americans. •

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