Details and Analysis of Senator Rick Santorum’s Tax Plan

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Key Findings:

• Senator Santorum’s 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. plan would enact a 20 percent 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. on individual and corporate income, and repeal a number of complex features in the current tax code.
• Senator Santorum’s plan would cut taxes by $3.2 trillion over the next decade on a static basis. However, the plan would end up reducing tax revenues by $1.1 trillion over the next decade when accounting for economic growth from increases in the supply of labor and capital.
• According to the Tax Foundation’s Taxes and Growth Model, the plan would significantly reduce marginal tax rates and the cost of capital, which would lead to a 10.2 percent higher GDP over the long term, provided that the tax cut could be appropriately financed.
• The plan would also lead to a 29 percent larger capital stock, 7.3 percent higher wages, and 3.1 million more full-time equivalent jobs.
• On a static basis, the plan would cut taxes by 3 percent on average for all taxpayers. The top one percent of taxpayers by income would have the highest increases in after-tax incomeAfter-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize their earnings. , along with the lowest ten percent. However, some upper-middle-income deciles would have decreases in after-tax income.
• Accounting for economic growth, all taxpayers would see an increase in after-tax income of at least 7.5 percent at the end of the decade.

This week, former Senator Rick Santorum released details of a tax reform plan.[1] This plan would institute a flat 20 percent tax rate on all varieties of individual income. It would also consolidate all deductions into a single $2,750 per person credit, which would be refundable up to the amount of an individual’s earned income. The plan would also reduce the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. to that same 20 percent rate. In addition, the plan would eliminate the estate tax and the Alternative Minimum Tax.

Our analysis finds that the plan would reduce federal revenues by $3.2 trillion over the next decade. However, it also would improve incentives to work and invest, which would increase gross domestic product (GDP) by 10.2 percent over the long term. This increase in GDP would translate into 7.3 percent higher wages and 3.1 million new full-time equivalent jobs. After accounting for increased incomes due to these factors, the plan would reduce tax revenues by $1.1 trillion.[2]

Details of the Plan

Individual Income Tax Changes

• Consolidates the current seven tax bracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. into one bracket at 20 percent on all personal income.
• Eliminates the personal exemption and standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. .
• Taxes long-term capital gains and qualified dividends at ordinary income tax rates.
• Eliminates all itemized deductions except for the home mortgage interest deductionThe mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act (TCJA) reduced the amount of principal and limited the types of loans that qualify for the deduction. and the charitable deduction. Places a tighter cap on the home mortgage interest deduction.
• Eliminates the Alternative Minimum Tax.
• Eliminates the Net Investment Income Tax of 3.8 percent and the Medicare surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. of 0.9 percent, which were passed as part of the Affordable Care Act.
• Creates a refundable tax creditA refundable tax credit can be used to generate a federal tax refund larger than the amount of tax paid throughout the year. In other words, a refundable tax credit creates the possibility of a negative federal tax liability. An example of a refundable tax credit is the Earned Income Tax Credit (EITC). , replacing the current earned income 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. , of $2,750 per person, not to exceed the filer’s earned income.
• Preserves the exclusions from income of pension contributions, employer-provided health premiums, and imputed rent, similar to current law.

Business Tax Changes

• Reduces the top corporate income tax rate from 35 percent to 20 percent.
• Allows all capital investments to be fully deductible in the year they are purchased.
• Eliminates the deductibility of interest paid for businesses.
• Most small corporate tax expenditures (those not pertaining to deferral or to asset lives) are eliminated.
• Manufacturing corporations will have a 0 percent rate in the first year, which would phase up to the 20 percent rate over two years.
• Enacts a one-time deemed repatriationTax repatriation is the process by which multinational companies bring overseas earnings back to the home country. Prior to the 2017 Tax Cuts and Jobs Act (TCJA), the U.S. tax code created major disincentives for U.S. companies to repatriate their earnings. Changes from the TCJA eliminate these disincentives. tax of 10 percent on all foreign profits currently deferred.

Other Changes

• Eliminates 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. .

Economic Impact

According to our Taxes and Growth Model, the increased incentives to work and invest from this tax plan would increase the size of the economy by 10.2 percent over the long run. The plan would lead to 7.3 percent higher wages and a 29 percent larger capital stock. The larger economy would mainly result from a significant reduction in the service price of capital, due to the rate reductions for business and the immediate cost recovery. In addition, the reduction of marginal tax rates on individual income would increase incentives to work and result in 3.1 million full-time equivalent jobs.

Table 1. Economic Impact of Senator Santorum’s Tax Reform Plan
GDP	10.2%
Capital Investment	29%
Wage Rate	7.3%
Full-time Equivalent Jobs (in thousands)	3,135
Source: Tax Foundation Taxes and Growth Model, Oct. 2015.

Revenue Impact

Overall, the plan would reduce federal revenue on a static basis by $3.2 trillion over the next ten years. Most of the revenue loss is due to the reduction in individual and corporate income taxes, which we project to reduce revenues by approximately $1.7 trillion and $1.3 trillion, respectively, over the next decade. The remaining static cost ($238 billion) comes from the elimination of the estate tax.

If we account for the economic growth that the plan would produce, the plan would end up lowering revenue by $1.1 trillion over the next decade. The larger economy would increase wages, which would narrow the revenue lost through the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. by about $1.1 trillion and increase payroll tax revenues by $743 billion, with the remainder of the recouped revenue coming from other taxes.

Table 2. Ten-Year Revenue Impact of Senator Santorum’s Tax Reform Plan (Billions of Dollars)
Tax	Static Revenue Impact (2015-2024)	Dynamic Revenue Impact (2015-2024)
Individual Income Taxes	-$1,724	-$645
Payroll Taxes	$0	$743
Corporate Income Taxes	-$1,260	-$1,105
Excise Taxes	$0	$61
Estate and Gift Taxes	-$238	-$238
Other Revenue Sources	$0	$90
Total	-$3,223	-$1,093
Source: Tax Foundation Taxes and Growth Model, Oct. 2015. Note: Individual items may not sum to the total due to rounding.

Distributional Impact

On a static basis, Senator Santorum’s tax plan would increase after-tax incomes by 3 percent, on average. Taxpayers in most income groups would see higher after-tax incomes, while taxpayers in the upper-middle income bracket would see lower after-tax incomes.

Taxpayers in the bottom decile would see a 13.9 percent increase in after-tax income due to the refundable per person credit. The next five deciles (the 10^th through 60^th percentiles) would see increases in after-tax adjusted gross income (AGI) of between 0.4 and 2.1 percent. Upper-middle-income taxpayers with incomes that fall within the 60^th to 90^th percentiles would see decreases in their after-tax AGI of between 0.3 and 1.3 percent. Finally, taxpayers with incomes that fall in the highest income class (the 90-100 percent decile) would see an increase in after-tax income of 6.7 percent. The top 1 percent of all taxpayers would see a 15.4 percent increase in after-tax income.

On a dynamic basis, the plan would increase after-tax incomes by 11.2 percent on average. All deciles would see an increase in after-tax AGI of at least 7.5 percent over the long term. Taxpayers that fall in the bottom decile would see their after-tax AGIs increase by 22.5 percent. The middle eight deciles would see increases in their after-tax AGI between 7.5 and 11.5 percent. The top decile would see an increase in after-tax AGI of 14.3 percent, and the top 1 percent of all taxpayers would see an increase in after-tax AGI of 21.0 percent.

Table 3. Distributional Analysis for Senator Santorum’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%	13.9%	22.5%
10% to 20%	0.4%	7.5%
20% to 30%	1.2%	8.7%
30% to 40%	1.8%	10.2%
40% to 50%	2.1%	11.5%
50% to 60%	1.1%	10.3%
60% to 70%	-0.3%	8.7%
70% to 80%	-1.2%	7.7%
80% to 90%	-1.3%	7.6%
90% to 100%	6.7%	14.3%
99% to 100%	15.4%	21.0%
TOTAL FOR ALL	3.0%	11.2%
Source: Tax Foundation Taxes and Growth Model, Oct. 2015.

Conclusion

Senator Santorum’s tax plan would enact a number of tax reforms that would lower marginal tax rates on labor. In addition, the reduced corporate income tax with immediate cost recoveryCost recovery is the ability of businesses to recover (deduct) the costs of their investments. It plays an important role in defining a business’ tax base and can impact investment decisions. When businesses cannot fully deduct capital expenditures, they spend less on capital, which reduces worker’s productivity and wages. would significantly reduce the cost of capital. These changes in the incentives to work and invest would greatly increase the U.S. economy’s size in the long run, leading to higher incomes for taxpayers at all income levels. The plan would also be a large tax cut, which would increase the federal government’s deficit by over $3.2 trillion on a static basis and $1.1 trillion on a dynamic basis.

Modeling Notes

The Taxes and Growth Model does not take into account the fiscal or economic effects of interest on debt. It also does not require budgets to balance over the long term, nor does it account for the potential macroeconomic effects of any spending cuts that may be required to finance the plan.

Senator Santorum has proposed a repeal of the Patient Protection and Affordable Care Act, colloquially known as Obamacare. Included in these modeling provisions are the 3.8 percent surtax on investment income, and the 0.9 percent Medicare surtax. However, not included are the provisions more specifically applicable to the health care law, such as its excise taxes, its mandate penalties, and its premium tax credits for plans purchased over the exchanges.

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