Also see: How to Judge a Tax Plan
To compile the following grades, we scored each candidate’s plan against the principles laid out in the 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. Foundation Fiscal Fact “How to Judge a Tax Plan.” We gave each of the 10 questions therein equal weight. We relied on candidate statements, websites, and all other available information for the specifics of each plan.
However, the candidates differ in their degree of specificity, and we took this into account in regard to the issue of certainty in the tax code. We also took into account not only the specified ideal of each plan but the practical implementation as we see it. This introduces an unfortunate amount of speculation and subjectivity on our part, particularly for the more radically unprecedented proposals. However, we believe this is the right approach, since the history of taxation tells us that the law and the practice are often two very different things.
1) This “wipe the slate clean” approach, eliminating all tax expenditureTax expenditures are a departure from the “normal” tax code that lower the tax burden of individuals or businesses, through an exemption, deduction, credit, or preferential rate. Expenditures can result in significant revenue losses to the government and include provisions such as the earned income tax credit, child tax credit, deduction for employer health-care contributions, and tax-advantaged savings plans. s, knocks out preferential taxation in one fell swoop.
2) Lowering 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. rate to 25 percent, from the current 35 percent, and switching to a territorial system would make the U.S. more globally competitive and would improve America’s attractiveness to investors.
3) Eliminating capital gains and dividends taxes would spur investment and bolster economic growth.
4) Reducing the number of tax bracketA 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. s from 6 to 3 (8, 14, and 23 percent) and eliminating the AMT will simplify the tax code.
1) The progressive, three-bracket tax system does not treat all taxpayers equally, leaving a degree of special treatment and complexity in the code.
2) It treats different business forms differently. Corporations would pay a 25 percent rate while 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. entities would pay the individual rates of 8, 14, or 23 percent. This could encourage some corporations to reorganize as pass-through entities, thus eroding the corporate 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. and distorting business decision-making.
3) Including state and local corporate income taxes, the combined corporate rate would be about 30 percent, which is still well above the OECD average of 25 percent.
4) It lacks specificity regarding the business provisions, particularly the treatment of 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. versus depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. .
1) It introduces an optional 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 wages, exempts long-term capital gains and dividends, and ends 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. , thus removing nearly all sources of double and triple taxation of saving and investing.
2) By lowering taxes on business income to 20 percent and long-term capital gains and dividends income to zero, it makes the U.S. more competitive globally, more attractive for investment, and more pro-growth.
3) It is self-help tax reform, in that taxpayers would be able to opt out of the complexities of the current code, which would have a limiting effect on special-interest lobbying.
1) It keeps the deductions for mortgage interest, charitable donations, and state/local taxes for those making less than $500,000. This is an arbitrary nod to maintaining progressivity in the tax code while appeasing certain special interests – both of which undermine the simplicity of a “flat tax.”
2) By making the flat tax optional – and parallel to the current code – it does not necessarily create a simpler system overall.
3) The optional nature of the flat tax can potentially introduce some additional instability in revenues.
1) The 9-9-9 plan applies a single-rate tax on a very broad tax base. In its ideal form, this is superior to our current multi-rate, narrow-base tax system.
2) It would significantly reduce the targeted preferences, social engineering, and preferential rates of the current code.
3) It would end the double and triple taxation of saving and investing.
4) By lowering taxes on businesses and investment, it would make the U.S. more competitive, more attractive for investment, and more pro-growth.
5) It could lead to more stable federal tax revenues due to its reduced reliance on volatile high incomes, including investment income and profits
1) In a field of “reform” plans, the 9-9-9 plan is exceptionally radical and would entail a considerable amount of uncertainty as America transitioned to the new system. A further transition to the FairTax would keep the tax code in constant flux and make economic planning nearly impossible, thus hindering economic growth.
2) The plan essentially contains two 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. es: a national sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. and a business activity tax (i.e. a Value Added Tax or VAT). The combination of these taxes has little precedent in the world. Thus it is hard to predict how these two taxes would be implemented together or what their combined economic consequences would be. In practice, both sales taxes and VATs involve numerous exemptions and special-interest lobbying. VATs lack transparency and the rates tend to start low and end much higher than 9 percent, creating a considerable amount of tax evasion. The most likely outcome is a higher overall level of taxation compared to the current code, which at some level cancels any growth benefits of shifting to a consumption tax base.
3) The empowerment zones introduce a degree of preferential treatment, social engineering, and the potential for special interest lobbying.
1) By cutting the corporate rate to 15 percent, moving to a territorial system, and exempting capital gains and dividends, it would make the U.S. more competitive, more attractive for investment, and more pro-growth.
2) By exempting capital gains and dividends and ending the estate tax, it would remove nearly all sources of double and triple taxation of saving and investing.
1) By making permanent the 2001/2003/2010 tax laws, it would not reduce the complexity of the current tax code.
2) Likewise, it fails to significantly reduce the tax preferences in the current code, which distorts economic decision-making in an effort to pick winners and losers.
3) Likewise, it would ensure that corporations and pass-through business entities would pay vastly different rates. Pass-through entities would pay as much as 35 percent, the top individual rate, while corporations would pay only 15. This would cause a huge number of pass-through businesses to reorganize as C-corporations, incurring great costs for the businesses but also taxpayers, because of the instability of tax revenues.
1) By moving to a 15 percent flat tax on wages only (not investment income), and ending the estate tax, it would remove the double and triple taxation of saving and investing.
2) By lowering taxes on business and investment, it would make the U.S. more competitive, more attractive for investment, and more pro-growth.
1) It would keep far too many tax expenditures (deductions for mortgage interest and charitable donations, the child and 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. s, and most business tax expenditures), thus maintaining much of the current tax code’s social engineering, preferential treatment, and special interest provisions.
2) There are a number of moving parts or unspecified portions, which adds to uncertainty, makes the tax code more complex and less understandable, and introduces potential instability in revenues. In particular: a) the optional flat tax means the current tax code will continue in parallel; b) the flat tax option will not go into effect immediately but will transition in some unspecified way; and c) the 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. will eventually be replaced with private accounts.
3) Unlike many of the other candidates’ plans, it continues the current system of worldwide taxation of U.S. corporate income, which is costly to comply with, raises little revenue, and is out-of-step internationally.
1) Reducing the corporate income tax rate to 9 percent and moving to a territorial system of taxation of foreign earnings would immediately make America more globally competitive and attractive for foreign investment.
2) Reducing the number of 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. brackets would make the tax code marginally simpler to understand (to what extent is difficult to say, however, because of the lack of specifics in the proposal).
3) By ending the estate tax and capital gains taxes, it eliminates two sources of double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. of saving and investing.
1) The lack of specificity in this plan is a major drawback. The proposal seeks to reduce the number of tax brackets but gives no specifics regarding the cut-off floors or the rates of these brackets.
2) Targeted, biased tax expenditures are not dealt with, leaving special interest provisions and a tremendous amount of social engineering intact.
3) By maintaining multiple tax brackets in the individual code, it ensures individuals will pay different rates (as mentioned, the rates themselves have not been proposed).
4) Business income will be taxed at different rates since the corporate rate would go down to 9 percent, while the individual rate paid by pass-through entities would be as high as 20 percent.
1) By making permanent the 2001/2003/2010 tax laws, it would remove some of the uncertainty in the tax code.
2) Lowering the corporate rate to 25 percent, making permanent 100 percent expensing, and moving to 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. would make the U.S. more competitive globally and improve our attractiveness for investment.
3) By ending the estate tax, it would eliminate one layer of double taxation of saving and investing.
1) On the individual side of the code, it really takes no step toward fundamental reform.
2) By making permanent the 2001/2003/2010 tax laws, it fails to reduce significantly the complexity of the current tax code.
3) The exemption of capital gains and dividends for those making $200,000 and below is an arbitrary nod to progressivity. It would do practically nothing to incent investment, since the vast majority of individuals who pay capital gains and dividends taxes make more than $200,000. Instead, it further complicates the code.
4) It fails to reduce significantly the special-interest provisions of the current code.
5) By maintaining multiple tax brackets in the individual code, it ensures individuals will pay different rates.
6) By taxing C-corporations at 25 percent and pass-through business entities at a top rate of 35 percent, the plan would distort business decision-making and could cause some private businesses to flip to C-corporations.
1) Cutting the corporate rate by half would make American corporations much more globally competitive.
2) Eliminating the estate tax removes one source of double taxation of saving and investing, and marginally improves certainty in the tax code.
1) By making permanent the 2001/2003/2010 tax laws, it fails to reduce significantly the complexity of the current tax code.
2) Likewise, it fails to address the special-interest provisions and the preferential rates of the current code.
3) Santorum has talked about taxing manufacturers at a zero percent rate, blatantly adding a targeted tax preference to the code.
4) It also maintains much of the current code’s double and triple taxation of saving and investing, since there is no mention of the tax treatment of capital gains and dividends.
5) Though it drastically reduces the corporate income tax rate, the plan would still tax different forms of business income unequally.
6) Unlike many of the other candidates’ plans, it continues the current system of worldwide taxation of U.S. corporate income, which is costly to comply with, raises little revenue, and is out-of-step internationally.
7) It lacks specificity, particularly regarding the corporate rate structure.
1) Assuming this is a Hall-Rabushka type flat tax, it would tax all personal income at one rate.
2) Eliminating taxation on saving and investment would grow the American economy by making capital more accessible and mobile.
3) Eliminating the corporate income tax, and perhaps replacing it with a business VAT, would potentially drastically lower the tax burden on business and investment. However, it remains unspecified.
1) It has the potential for a high grade, assuming the basic idea is a Hall-Rabushka type flat tax, but it remains unspecified.
1) Like Gary Johnson, Roemer invokes a flat tax, specifying a rate of 17 percent. Presumably this means all personal income would be taxed at one rate.
2) If it is a Hall-Rabushka type flat tax it would exempt all investment income, and this would incent a tremendous amount of saving and investing.
1) Like Gary Johnson’s plan, this remains insufficiently specified.Share