The Broader Tax Base Under Ben Carson’s Tax Plan

January 8, 2016

This week Dr. Ben Carson released his tax plan. His plan would replace the current income tax 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 tax 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 Tax.” 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 tax. This includes eliminating many tax credits, such as education credits, the EITC, and the Child Tax Credit. 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.

Revenue Impact of Tax Cuts and Base Broadeners under the Carson Plan

Provision

10-Year Revenue Impact (2015-2024

Eliminate ACA NIIT and Medicare Surtax

-$689

Eliminate Individual AMT

-$322

Flat 14.9 percent Tax Rate on Income

-$5,126

Eliminate Capital Gains and Dividends Taxation

-$1,225

Standard Deduction/Exemption 150% of FPL

-$1,390

Eliminate PEP and Pease

-$160

14.9 Percent Corporate Tax Rate/Repeal Corporate AMT

-$2,452

Full Expensing of Capital Investments

-$708

Eliminate Estate and Gift Tax

-$229

Sum of Tax Cuts

-$12,301

Eliminate the CTC and EITC and other Credits (Including Refundability)

$1,640

Eliminate All Itemized Deductions

$1,916

Eliminate SS Benefit Taxation and Eliminate Employer-Side Payroll Tax Deduction

$536

Eliminate Employer-Provided Healthcare Exclusion

$1,556

$100 Minimum Tax Payment

$69

Eliminate Interest Taxation and Deductability

$739

Eliminate Various Business Tax Expenditures

$228

Sum of Base Broadeners

$6,684

Note: Revenue impact when plan is fully phased in.

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.

Distributional Analysis for Dr. Ben Carson's Tax Reform Plan

Effect of Tax Reform on After-Tax Income Compared to Current Law

All Returns by Decile

Static Distributional Analysis

Dynamic Distributional Analysis

0% to 10%

-13.10%

2.46%

10% to 20%

-14.83%

0.51%

20% to 30%

-9.67%

6.30%

30% to 40%

-5.11%

10.09%

40% to 50%

-3.17%

12.61%

50% to 60%

-2.90%

13.24%

60% to 70%

-2.97%

13.40%

70% to 80%

-2.60%

13.91%

80% to 90%

-0.95%

15.61%

90% to 100%

16.21%

30.30%

99% to 100%

33.44%

44.58%

TOTAL FOR ALL

4.50%

19.86%

Source: Tax Foundation Taxes and Growth Model, Oct. 2015.

Carson’s plan clearly shows some of the tradeoffs you need to make when developing a tax reform plan. You can create a broad-based, flat rate tax plan that will increase the size of the economy. However, it will likely come at the cost of raising taxes on many people.

Read more about presidential tax plans here.


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