The Broader Tax Base Under Ben Carson’s Tax Plan

This week Dr. Ben Carson released his tax plan. His plan would replace the current income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code with a 14.9 percent flat tax on wage income and 14.9 percent tax on corporate income with the first 150% of the federal poverty level of wages exempt from taxation. It would eliminate taxation on capital gains, dividends, and interest income. All businesses would be able to fully expense capital investments and the estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. would be eliminated. It would also eliminate a number of other taxes such as the AMT, the Net Investment Income Tax, and the Medicare Surtax.

His plan aims to cut the overall level of federal revenues. The proposals outlined above would certainly do that. I estimate that the cuts contained in his plan reduce revenues by $12.3 trillion over the next decade. However, our overall analysis found that the plan would reduce tax revenue by $5.6 trillion over a decade without accounting for any economic benefits of the plan.

This is because his plan pairs the large tax cuts with significant base broadeners. The Carson plan is based on what is called the “Hall-Rabushka Flat TaxAn income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets. .” The Hall-Rabushka Flat Tax was introduced in 1981 by economists Robert E. Hall and Alvin Rabushka. Their plan was put forth as a complete replacement for the federal income tax that would tax all income once, at a low, flat rate. While this plan looks like a simpler version of our current income tax system, it is actually a consumption tax in disguise.

As such, it eliminates many deductions and exemptions that are not consistent with a consumption taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible. . This includes eliminating many tax credits, such as education credits, the EITC, and the Child Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. . It also would eliminate some very large exemptions such as the income exemption for employer-provided health insurance.

The elimination of these proposals brings in a lot of revenue under the Carson plan. For example, the elimination of all itemized deductions would bring in $1.9 trillion over a decade. The elimination of the employer-provided healthcare and other fringe benefit income exclusion would bring in $1.5 trillion. The elimination of all credits, except for the foreign tax credit, would bring in another $1.6 trillion.

Altogether, the base broadeners would reduce the cost of the Carson plan by half.

The advantage of having a significantly broader tax base is that it allows a tax system to raise much more revenue at a much lower marginal tax rate. This minimizes economic distortions and makes a tax code much more pro-growth. This is the main reason why we find that the Carson tax plan would increase the size of the economy over the long run.

The trade-off is that many of these base-broadeners hit low- and middle-income taxpayers hard. The elimination of the employer-provided healthcare exclusion would mean that many families would see their taxable income increase significantly. Even with the lower marginal tax rates, their tax bill would likely go up. We find that the much broader base results in a static tax increase on every income group, except for the top.

Read more about presidential tax plans here.