A Rand Paul fan writes in to take issue with my description of his plan (I have added some links):
I think you’ve got faulty information. You write that “Paul abolishes the payroll tax, flattens the income tax and imposes a new value-added tax in a way that leaves the middle class a bit ahead.” Problem #1: I don’t see any record of Senator Paul supporting a VAT. He has gone through his plan in the Wall Street Journal and on NRO (!) and he does not say anything about a VAT. Stephen Moore says he worked with Senator Paul on the plan and says it’s not a VAT. Problem #2: You say that Senator Paul would “lower the top income-tax rate from 43.4 percent to 26.9 percent.” I don’t see that anywhere in his plan. I looked at his website and it says he wants a 14.5 percent flat tax. Senator Paul is trying to put some exciting new ideas [on] the table and they shouldn’t be distorted.
I can see how you think I got it wrong in those passages, but I didn’t. One of the smartest tax experts I know, someone who knows way more about the details of this stuff than I do, missed this when he read Paul’s WSJ op-ed, until I pointed out these
two three sentences to him: “I would also apply this uniform 14.5% business-activity tax on all companies—down from as high as nearly 40% for small businesses and 35% for corporations. This tax would be levied on revenues minus allowable expenses, such as the purchase of parts, computers and office equipment. All capital purchases would be immediately expensed, ending complicated depreciation schedules.” A tax on business revenues without a deduction for the wages those businesses pay is a tax on consumption. The Tax Foundation looked at the plan Sen. Paul submitted to it and reached the same conclusion: “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).”
Assume the Fed accommodates the new wage tax by making prices rise instead of wages fall. When a high earner (or a low earner, for that matter) wants to consume a dollar he has made, his marginal rate will be Paul’s 14.5 percent flat tax plus a 14.5 percent consumption tax on anything he buys. That second tax will take 14.5 percent of the remaining 85.5 percent of his income, and 14.5 + (14.5 percent of 85.5) = 26.8975. I rounded to 26.9. Moore’s point in that op-ed is that Paul’s VAT is not a “European-style” VAT because it replaces other taxes rather than being piled on existing taxes. Whether or not he’s right–I don’t know the history of European VATs–he’s not denying it’s a Paul-style VAT.
In his recent NRO article, Paul writes, “I’d set a single rate of 14.5 percent for businesses and individuals. I’d also eliminate the payroll tax, a move that would raise after-tax income by at least 15 percent over ten years.” He does not mention, but also does not deny, that his tax on businesses would also hit wages and that this would eliminate much of that increase in after-tax income. The Tax Foundation estimates that people making an adjusted gross income between $40,000 and $200,000 would see their incomes rise 3 percent as a result of the plan, leaving aside its effects on economic growth. So the middle class would indeed come out a little bit ahead as a result of this tax swap.