No, Senator Paul’s Plan Will Not ‘Blow a $15 Trillion Hole in the Federal Budget’
June 19, 2015
Yesterday, Senator Rand Paul released his tax reform plan (our analysis here). As expected, many news outlets are reporting on it.
In one article that looked at the plan, something jumped out at me. The article cited the Citizens for Tax Justice (CTJ) saying that Senator Paul’s tax plan would reduce federal revenue by $15 trillion over the next decade or about $1.2 trillion in the first year. That is a much larger tax cut than the $3 trillion ($300 billion annually) we estimated that the plan would lose over that period. How are they arriving at such a number while looking at the same exact plan?
After a quick investigation of their blog post on the plan, I found that their estimate of how much revenue Senator Paul’s business transfer tax or VAT would raise was way off: "While it’s uncertain exactly what would be included in the base of Senator Paul’s VAT, a VAT at this rate could plausibly raise about $1.1 trillion a year."
I am not entirely sure how they calculated this number, but it is off by about $900 billion per year.
To calculate the expected revenue from a VAT you can use a simple rule of thumb: you take the sum total of all profits and payroll in the economy and multiply it by the business VAT rate in the Senator’s tax plan. In 2015, profits and payroll were about 76 percent of GDP, or $13.8 trillion. You multiply that number by the tax rate of 14.5 percent, you arrive at $2 trillion in tax revenue, much more than the $1.1 trillion that CTJ claims.
A Tax Policy Center analysis of the VAT base (page 12) concludes the VAT base would be 78.7% of GDP, but lose some of that due to compliance. In other words, they, like us, estimate the VAT base to be somewhere around three quarters of the economy. The implied VAT base in CTJ's analysis is $7.5 trillion, or less than half of the economy. There is absolutely no reason to believe this is the case.
If you were to fix their estimate of the VAT, CTJ’s number would be pretty much the same as ours: $300 billion dollars in lost revenue a year or about $3 trillion over the next decade.
Undoubtedly, Senator Paul’s tax plan will be a large tax cut (about $3 trillion over ten years on a static basis), but it is nowhere near $15 trillion.