Before the Iowa results rolled in, you could probably have counted on one hand the number of people who knew any of the details of Rick Santorum’s economic plan. But if the former senator is to repeat his success in Iowa elsewhere, he will have to convince voters that his economic policies are serious, could plausibly become law, and will revive our flagging economy. So far, each of the “non-Romneys” has failed miserably at that task, unless, of course, you are someone who is comforted by the fantasy that tax reform will produce 5 percent growth for a decade, so the numbers will add up.
Can Santorum pull it off?
The good news is that much of Santorum’s plan is centered on lowering taxes. The bad news is that much of his tax relief is either welfare in disguise or social engineering. After weighing the plusses and minuses, the conservative Tax Foundation gave his plan a D+. That score might be generous.
Advertisement
His individual income-tax plan has just two rates — 10 and 28 percent. He does not specify at what point those rates begin, but it is safe to assume that no one will experience a tax increase. His plan calls for the elimination of the alternative minimum tax and the estate tax.
All that has much to recommend it, but Santorum would also triple the personal exemption for dependent children while maintaining the earned-income tax credit and the child tax credit. This move would radically reduce the percentage of taxpayers paying any federal income tax whatsoever. Since he would retain most of the other major individual tax deductions, complexity would not be reduced, but revenue would be radically lower. I will return to this in a moment.
His corporate plan would lower the top corporate tax rate from 35 to 17.5 percent while eliminating the corporate income tax altogether for manufacturers; it would increase the research-and-development tax credit from 14 to 20 percent, allow expensing of capital investment, and permit repatriation of foreign income at a 5.25 percent tax rate (while repatriated income is entirely exempt from taxation if it is invested in “manufacturers’ equipment”).
This plan caters to the fetishistic political focus on giveaways to manufacturing. An optimal code would reward job-creating businesses regardless of their industry. The radical differences between taxes for manufacturing and other activities would introduce perhaps the biggest and most damaging tax distortion in American history. It would also invite endless fraud. As I type this piece, I am manufacturing sentences, am I not? Shouldn’t my income be taxed as manufacturing?
What would be the deficit effect of this reform? In 2008, the estate tax netted $25 billion in revenue, while corporate income taxes on the manufacturing sector gathered $74 billion. Eliminating these taxes outright would cost the government $100 billion per year. By a conservative estimate of the personal-income-tax rate reduction (assuming the 28 percent rate applies to all income that was previously taxed at rates at or above 28 percent, and that the 10 percent rate applies to income previously taxed between 10 and 25 percent), the Santorum reform would have cost the government $285 billion in 2008. The tax-exemption increase for dependent children would decrease revenue still further — assuming a 15 percent average tax rate for exempt individuals, this policy would cost more than $60 billion. Eliminating the AMT would have cost $76.4 billion in 2008 (and much more in future years), according to the Tax Policy Center. And lowering the estate tax to 12 percent would shave another $15 billion in revenue.
On the back of the envelope, these provisions alone would reduce revenue by $550 billion per year. There are several policies not estimated here, some of which would be significant. The shift in resources toward manufacturing and away from other sectors with higher taxes would lower growth, decrease employment, and cause a massive reduction in tax revenue. The dramatic difference in marginal tax rates between corporations and pass-through entities would cause many pass-throughs to incorporate, especially in the manufacturing sector, further increasing the revenue loss. And allowing 100 percent expensing by corporations would also dramatically reduce revenues. All told, the total revenue loss would be at least $700 billion a year, and perhaps as much as $10 trillion over a ten-year budget window. While all the Republican tax plans lose some revenue, presuming to make up for it in spending cuts and growth effects, this staggering sum certainly rises to the level of implausible.
I am a growth optimist, and am sure that the true cost of his plan would be far less than my back-of-the-envelope calculations suggest because a surging economy would lead to increased revenues. But this static-scoring exercise just sketched is a taste of things to come for Santorum. The sad fact is that no serious individual would ever expend any effort trying to get such a thing through Congress. It is just not a defensible plan.
Santorum has some good ideas — lowering the corporate tax rate, reducing the number of income-tax brackets, and expensing capital investment, to name a few. But the massive distortions introduced to favor manufacturing and the social engineering from radically higher exemptions are horrible tax policy.
— Kevin A. Hassett is director of economic-policy studies at the American Enterprise Institute.
So it comes to this that NR now argues against tax cuts as a way to stimulate the economy.
Yes I know that arguments is that these are the "wrong" kind of tax cuts, not an argument against Santorum that I believe would endear agreement from Bill Buckley or Ronald Reagan.
I could easily spend the same time pointed out the frailties of Romney's plan, but of course I would be poo pooed for my reasoning.
The larger is issue that is in the end supporting Santorum's view is that it is one that will resonate with a middle class that is squeezed into unemployment by the Democrats and forgotten economically by the Republican elites.
These middle class voters are the ones who will decide this election; not the environmentalists, nor the Wall Street brokers, nor the occupy Wall streeters, nor the bankers, nor the columnists; it is the middle class, and they are POd that no one wants to listen.
Note - the huge difference between him and Michele Bachmann: the former wants to use the power of the federal government to subsidize those who live the way he does (quel surpris), while the latter said that EVERYONE should pay SOMETHING.
His dual rate on corporate income taxes is just him privileging his home-state / Rust belt interests over the general welfare of the macroeconomy. As long as he gets plaudits we will be unable to say that we're all Austrians now!!!
It is not wrong to look not just at how much the economy grows but also in what ways. A manufacturing job allows a man to support his family, perhaps allowing the mother of the family to stay home and raise their children. With the bullk of manufacturing moved to China, that guy in America who lost his manufacturing job can buy a real cheap DVD player -- and it is true that the savings for consumers brings about an overall economic growth from increased sales -- but that guy likely can no longer support his family with whatever non-manufacturing work he was lucky enough to find. This kind of thing has effects on the culture. Santorum sees that.
Among the candidates, whose fiscal plan makes perfect sense. You are requiring something from Santorum that no candidate (including, most irritatingly Obama) has or can produce.
Looking at the list of article in the on-line NR, one quickly sees that they are on task to swat down any non-Mitt.
Although I like the general direction of Santorum's tax plan, Hassett is right that it doesn't all add up. While that's unfortunate in that a strong candidate should have a more rock solid position, it doesn't bother me that much. If Santorum is president, guys like Paul Ryan are going to be in charge of a lot of the details. And besides, Romney hasn't articulated a plan on taxes at all.
Why is Rick running for President?! I would think that the Corporate World of "Mad Men" would welcome him with open arms? He is their kind of guy. Isn't he?
Santorum's plan is no more irresponsible than Romney's:
"Mitt Romney’s proposed tax plan would slash federal revenue and deliver a substantial tax cut to the wealthiest Americans, according to a new analysis by the nonpartisan Tax Policy Center.
Romney, the former Massachusetts governor and leading contender for the GOP presidential nomination, proposes to make permanent the George W. Bush-era tax cuts; slice the corporate income tax rate from 35% to 25%; repeal the federal estate tax and do away with taxes on long-term capital gains, dividends and interest income for households making less than $200,000; among other things."
Does anyone have any doubt that if it were not for the abortion and gay marriage issues that "compassionate with other people's money" Santorum would in fact be a Democrat?
I thought the Tea Party was about fighting government debt? So, you latch onto Santorum of all people, who never met an Earmark he didn't love and voted for all big spending programs that Bush proposed?
I think the Tea Party is losing all of its credibility.
Agreed. I'm certain, however, that the tea party will come around once Rick's record is exposed. The last thing this country needs right now is right-wing social engineering.
Rick Santorum in 2005:
"They have this idea that people should be left alone, be able to do whatever they want to do. Government should keep our taxes down and keep our regulation low and that we shouldn't get involved in the bedroom, we shouldn't get involved in cultural issues, you know, people should do whatever they want. Well, that is not how traditional conservatives view the world, and I think most conservatives understand that individuals can't go it alone, that there is no such society that I'm aware of where we've had radical individualism and that it succeeds as a culture."
This is all assuming that Santorum does nor radically reduce the size of government. If he shrinks the size and scope of government, then less revenue isn't an issue.
Now the question really should be what departments and agencies is Santorum going to get rid of.
Some of us here are turning into liberals ourselves. Since when are tax cuts and lower overall taxes bad? So Santorum's plan decreases yearly revenue by $550 billion. Is there a problem with that? Not if we decrease spending by a greater amount. Which, of course, is Santorum's plan. He wants small government, like any good conservative should.
The only issue I take with his plan is his singling out of the manufacturing sector (we ought to let the market decide what America's best industries are), but it's not terrible. Eventually all corporations (and all natural persons too) should have taxes close to zero; if this is the first step in that direction (and by slashing all corporate taxes in half, Santorum signals that it is), then it's where we want to be going. If manufacturing can grow by slashing taxes, it will show our liberal friends that taxes hurt jobs and hurt growth - at the very least that will convert the economically uncertain independents to a more fiscally conservative position.
We have here a fiscal conservative who wants to radically decrease taxes, a social conservative who wants to end abortion and gay marriage, and an all-around good, honest, family man.
According to the Buckley Rule, we ought to nominate the most conservative electable candidate. Considering he practically tied for first place in Iowa by spending < $618,000 (vs. Romney's $4,600,000+ ), let's give him a shot and see how he does these next few weeks. He's earned it.
I definitely share Mr. Hassett's concerns about the huge dangers of a tax code like Santorum that picks favorites: the "manufacturing" thing quickly gets a life of its own.
That said, this column doesn't add up, for two reasons.
First, he cites early, as a major authority, the Tax Foundation's D+ grade. But the plan they grade is not the one on Santorum's web page. The negatives they cite are (1) that he keeps in place the old code, though his page calls for a radical revamping; (2) that it fails to address special-interests, and though this is very true of his manufacturing stuff, otherwise he eliminates almost all loopholes, with little difference from Mr. Huntsman's plan, which is their favorite; (3) they say he has "talked about" manufacturing perks: this is a big problem, but it shows that they're not at all up to date: he hasn't just "talked about," it's the center of his plan; (4) it says there is "no mention" of capital gains, though his web site says he'll cut them to 12%. They simply haven't graded the plan he has in place: effectively, they give him a D+ because at the time of their research, he didn't yet have a plan. Now he does It is intellectually dishonest for Hassett to cite this grade.
Second, Hassett adds up the costs, without any reference to the costs of other plans. It is, frankly, bizarre for a conservative tax analyst to pillory a tax plan primarily because it cuts taxes. Santorum's plan may be unrealistic, I don't know. But Hassett casts no light on that when he fails to compare it to the cost of other plans. I suspect Perry's plan -- which is great -- would cost a lot more, and Gingrich's more still. Romney's plan might cost less, but that's because he doesn't want to lower taxes.
This is a bizarrely poor piece from an otherwise thoughtful analyst.
Check the author's affiliation. The American Enterprise Institute is not a consistently conservative organization. Like the Chamber of Commerce, it is not particularly averse to big government when that serves the perceived interests of the business establishment.
The real positive in this plan which you posit as a negative is actually it's strongest point for future economic growth potential for the U.S.
You wrote: "Santorum would also triple the personal exemption for dependent children while maintaining the earned-income tax credit and the child tax credit. This move would radically reduce the percentage of taxpayers paying any federal income tax whatsoever." Yes, this so-called social experiment is actually a boost for those who are willing to have large families so that we don't actually become the demographic wasteland that is Europe. Our greatest economic asset is people and we need to do 2 simple things to reverse this economic disaster already 35+ years in the making. Overturn Roe V. Wade and stop taxing to death single income families who are trying to raise more than 1.2 children. Santorum is the only politician running who sees this AND has made it clear that he is determined to make it happen.
You are assuming most of the children born in this country are likely to become productive and self-sufficient citizens. Given that 50% of the people currently pay no taxes (useless) and 40% are liberal (brain-damaged), I am not so sure this is a good idea.
Yes, ideological purity would argue against any special treatment of any industry over any other. That is great if the entire world is a free market, but it isn't. Santorum is absolutely correct though that manufacturing in this country is under a unique, anti-competitive assault from China et al. He is also absolutely correct that we cannot simply be only a "knowledge economy". We simply have too many people, as every country does, that are not and lack the capacity to be knowledgeable. Not everyone can be a doctor or a nuclear engineer. And if it's taken as a priori that nothing is actually made here, then a whole lot of people are left with the choice of working at Walmart or taking 99+ weeks of unemployment. So Reagan Democrats now become Obama Democrats, because they literally can't afford to take the chance of losing their benefits, since no sustainable work is available to them. A strong economy needs jobs for all levels of intelligence, and the manufacturing sector is an enormous source of mid-level intellect jobs, which is where most people fall on the bell-curve, and why the loss of manufacturing has hurt the middle-class most.
