Details and Analysis of Dr. Ben Carson’s Tax Plan

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Key Findings:

• Dr. Ben Carson’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 replace the federal income tax code with a modified Hall-Rabushka-style 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. of 14.9 percent.
• Dr. Carson’s plan would cut taxes by $5.6 trillion over the next decade on a static basis. However, the plan would end up reducing revenues by $2.5 trillion over the next decade when accounting for economic growth, due to increases in the supply of labor and capital.
• The plan would also result in increased outlays, due to higher interest on the debt, creating a 10-year deficit somewhat larger than the estimates above.
• The plan would move to a consumption base, which would significantly reduce the cost of capital. According to the Tax Foundation’s Taxes and Growth Model, the plan would lead to a 16 percent higher GDP over the long term, provided that the tax cut could be appropriately financed.
• The plan would also lead to a 46.6 percent larger capital stock, 10.9 percent higher wages, and 5.2 million more full-time equivalent jobs.
• On a static basis, the plan would increase taxes on all income groups except the top 10 percent of taxpayers. The plan reduces the 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. of the bottom three income deciles by as much as 14.8 percent. The top decile would see an increase in after-tax income of 16 percent and the top 1 percent would see an increase of 33 percent.
• Accounting for economic growth, all taxpayers would see an increase in after-tax income of at least 0.5 percent in the long term.

This week, Dr. Ben Carson released details of a tax reform plan.[1] This plan would replace the current federal income tax (both individual and corporate) with a 14.9 percent Hall-Rabushka-style flat tax. The plan would tax all wage income and business income at 14.9 percent. Capital gains, dividends, and interest income would be tax-exempt at the individual level. Businesses would be allowed to fully expense capital investment, but would no longer be able to deduct interest expenses. The plan would also eliminate all itemized deductions and all tax credits except for the foreign 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. . The plan would further expand the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. by including fringe benefits, such as employer-provided health insurance, in the tax base.

Our analysis finds that the plan would reduce federal revenues by $5.6 trillion over the next decade. However, it also would improve incentives to work and invest, which would increase gross domestic product (GDP) by 16 percent over the long term if the tax cuts were appropriately financed. This increase in GDP would translate into 10.9 percent higher wages and 5.2 million new full-time equivalent jobs. After accounting for increased incomes due to these factors, the plan would reduce tax revenues by $2.5 trillion.[2]

Details of the Plan

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. Although the Flat Tax looks like the current U.S. income tax with a few modifications, it is structured to be economically equivalent to 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. or value-added tax (VAT), with a flat, low rate. It does this chiefly by 1) allowing the full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. of capital investment, 2) eliminating the taxation of interest, dividends, and capital gains at the individual level, and 3) eliminating several exemptions and deductions that are inconsistent with a consumption tax base, such as the exemption for employer-provided health insurance.[3]

The Flat Tax has a much broader base than current law and can raise substantially more revenue for any given tax rate. The Hall-Rabushka Flat Tax also maintains a slight amount of progressivity by exempting some portion of wage income from taxation through a large 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. and personal exemption.

The Carson plan deviates slightly from the Hall-Rabushka Flat Tax by also including a $100 per person minimum tax.

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. Changes

• Eliminates the current progressive income tax brackets and replaces them with a 14.9 percent flat tax rate.
• Alters the standard deduction and personal exemption to exempt wage income of a filer under 150% of the federal poverty level.
• Eliminates the taxation of dividends, capital gains, and interest income.
• Eliminates all itemized deductions.
• Eliminates the income exclusion for employer-provided health insurance and other fringe benefits.[4]
• Eliminates all tax credits, such as the Child Tax Credit and the Earned Income Tax Credit. The foreign tax credit would remain.
• Eliminates the Alternative Minimum Tax.
• Eliminates the Net Investment Income Tax of 3.8 percent and the 0.9 percent 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. , which were both passed as part of the Affordable Care Act.
• Eliminates the taxation of Social Security benefits.
• Enacts a $100 per citizen minimum tax.

Business Tax Changes

• Replaces the current graduated 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. with a flat 14.9 percent tax on corporate income.
• Enacts a territorial tax systemA territorial tax system for corporations, as opposed to a worldwide tax system, excludes profits multinational companies earn in foreign countries from their domestic tax base. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation. that exempts 100 percent of foreign earnings of U.S. corporations from domestic taxation.
• Allows full expensing for all capital investment.
• Eliminates all other credits and deductions not pertaining to 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. . The foreign tax credit would remain.
• Eliminates the deductibility of interest expenses, but exempts interest income from taxation for non-financial institutions.
• Eliminates the deduction for the employer-side payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. .
• Eliminates the corporate Alternative Minimum Tax.

Other Changes

• Does not alter payroll taxes.
• Eliminates the estate and gift taxes.

Economic Impact

Overall, Dr. Carson’s plan would nearly eliminate the taxation of investment, which would greatly increase incentives to save and invest. In addition, the much lower marginal rates on wage income would greatly increase the incentive to work, leading to higher workforce participation and more hours worked.

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 16 percent over the long run. The plan would lead to 10.9 percent higher wages and a 46.6 percent larger capital stock. The larger economy would mainly result from a significant reduction in the service price of capital, due to the full expensing of capital equipment and the reduction in tax rates for corporate and pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. es. In addition, the reduction of marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. s on individual income would increase incentives to work and result in 5.2 million full-time equivalent jobs.

Table 1. Economic Impact of Dr. Ben Carson’s Tax Reform Plan

Source: Tax Foundation Taxes and Growth Model, Oct. 2015.
GDP	16%
Capital Investment	46.6%
Wage Rate	10.9%
Full-time Equivalent Jobs (in Thousands)	5,213

Revenue Impact

Overall, the plan would reduce federal revenue on a static basis by $5.6 trillion over the next 10 years. Most of the revenue loss is due to the reduction in the individual income tax, which we project to reduce revenues by $3.2 trillion over the next decade. The reduction in the corporate income tax would reduce revenues by approximately $2.2 trillion over the next decade. The elimination of the estate and gift taxA gift tax is a tax on the transfer of property by a living individual, without payment or a valuable exchange in return. The donor, not the recipient of the gift, is typically liable for the tax. es would reduce revenue by another $229 billion.

If we account for the economic growth that the plan would produce, the plan would end up reducing federal revenue by $2.5 trillion over the next decade. The larger economy would increase wages, which would decrease the amount of revenue lost through the individual income tax to $1.3 trillion. Payroll tax revenue would increase by about $1.2 trillion. The corporate income tax would lose slightly more on a dynamic basis ($2.4 trillion) than on a static basis, as businesses invest more and take more deductions for capital investments.

Table 2. Ten-Year Revenue Impact of Dr. Ben Carson’s Tax Reform Plan (Billions of Dollars)

Tax	Static Revenue Impact (2015–2024)	Dynamic Revenue Impact (2015–2024)
Note: Individual items may not sum to the total due to rounding. Source: Tax Foundation Taxes and Growth Model, Oct. 2015.
Individual Income Taxes	-$3,205	-$1,251
Payroll Taxes	$0	$1,157
Corporate Income Taxes	-$2,183	-$2,368
Excise Taxes	$0	$101
Estate and Gift Taxes	-$229	-$229
Other Revenue Sources	$0	$118
Total	-$5,617	-$2,472

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