Santorum More Specific, Still Gets a D+

January 05, 2012

The good news is Santorum has gotten more specific about his tax plan since last month when we gave him a D+.  The bad news is... he's gotten more specific. 

Particularly, he now confirms that he supports a hugely differential corporate tax rate of 17.5 percent for all but manufacturers, who would pay zero.  This may be the worst idea of any of the Republican candidates, for the following reasons: 

1)      It is grossly unfair, and I fail to see how this is even politically feasible, since the non-manufacturers would not go along with it (except very cynically, which I'll come to). 

2)      Santorum tries to justify this by claiming a "job multiplier effect" of manufacturing.  I know of no such multiplier, and see no reason to think manufacturing generates more jobs than other industries.  All I can tell is that it might be politically appealing because manufacturing is tangible, and can be seen, as opposed to services, for example.

3)      There would be a tremendous incentive to suddenly claim to be a manufacturer.  This is where support from non-manufacturers might come from.   We have some experience with this, through the manufacturing deduction that went into effect in 2004, which engendered a national conversation on the subtle distinctions between burger flipping and manufacturing.  Ultimately, nearly every industry took and continues to take the manufacturing deduction, based on IRS data.  The biggest beneficiaries aren't even manufacturers, as designated by the IRS, but rather in mining, agricultural production, publishing, motion picture and sound recording, and broadcasting.  For no industry does the manufacturing deduction amount to even 1 percent of all deductions, so we could expect a much bigger effect of such a grossly differential corporate rate.  It would likely result in everyone claiming to be a manufacturer.

To his credit, Santorum is now planning, as are the other candidates, to move to a system of territorial taxation, meaning exemption of the foreign profits of U.S. corporations.  However, Santorum here also favors manufacturers, exempting only those repatriated profits that are "invested for manufacturers equipment investment", while other profits would be subject to a rate of 5.25 percent. 

On the individual side, Santorum has gotten more specific, calling for a two rate system of 10 percent and 28 percent.  We still don't know how the brackets are defined, i.e. who pays these rates.  That's kind of important.  It does mean necessarily the top rate would be reduced from 35 percent, so that would increase long-term economic growth, but the degree to which we can't say without more specifics.

He's also calling for a tripling of the personal deduction for each child.  This is obviously a big tax cut, and might spur growth, or it might just spur child making.  It certainly would complicate the code further, make it less fair and neutral across taxpayers, and push more taxpayers off the tax rolls such that likely a majority of tax filers would pay no tax.  That last one's a serious concern in a democracy controlled by majority rule.

He also plans to reduce taxes on capital gains and dividends from the current 15 percent to 12 percent.  That seems almost inconsequential and certainly timid compared to most of the other candidates who are proposing to eliminate these taxes all together.

Overall, Santorum has improved his grade not at all.  Still a D+.

Follow William McBride on Twitter @EconoWill

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