Don't dismiss Rand Paul's tax plan

Most news media dismissed Rand Paul's tax plan, like his candidacy for president, as a non-starter. Reports failed to grasp a gigantic part of the plan. They also wrongly concluded that the flat tax was a big break for high-income people, but not so good for middle-income people.

Let's take a closer look at what the plan offers.

Abolish the employment tax

The plan would end the most regressive tax in the lifetime of every living American. This is a big, big deal. All workers pay this tax on the first dollar of wages. But the tax stops at $118,500. Wages over that amount pay taxes for Medicare but not for Social Security. This tax has been rising since 1937.

In 1937, the tax was 2 percent of the first $2,000. Today, including the Medicare tax, the rate is 15.3 percent on the first $118,500 in earnings. It's a big tax.

How big? Most Americans pay more employment taxes than income taxes. A recent report shows that the income tax burden was lower than the employment tax for most households with incomes under $200,000. Internal Revenue Service data tell us that 96 percent of all households have incomes under that amount.

So take a look at your next pay stub. Think about what you could do with the largest "raise" most people have received in years. Then think about the trivial tinkering that most of the other candidates are offering.

The money to support Social Security and Medicare would come from a new tax on corporate payrolls in the amount of 14.5 percent. Note that the tax is on the entire payroll, not just wages up to $118,500. So the tax could sustain our nation's most important social programs. And it wouldn't be regressive. The other benefit is that a later increase in the tax could bolster Social Security. The next generation wouldn't be shortchanged on benefits.

Most proposals to improve Social Security focus on shrinking the benefits of future retirees while collecting the same regressive taxes. Young workers would be most affected.

Replacing the income tax with the "fair and flat tax"

For years, public and media reaction to the idea of a flat tax has been that it would be tough on poor people, but great for rich people. The reality is different.

The Rand Paul proposal calls for a flat tax rate of 14.5 percent on all taxable income. But first, some hefty deductions and exemptions come off the top.

How hefty? Under current tax law, a family of four that didn't itemize would have deductions of $28,600. That's four personal exemptions of $4,000 and a standard deduction of $12,600. Under Paul's tax plan, the same family would have $50,000 in exemptions and deductions. That means no taxes on an extra $21,400.

A family with $50,000 in income would pay no income taxes under Paul's plan. The same family would pay $2,287.50 under current law. That's a 100 percent tax cut.

Double income to $100,000, and the family would pay $7,250 under the Paul plan and $9,787.50 under current law. That's a 26 percent tax cut.

Double income again to $200,000, and the family would pay $21,750 under the Paul plan and $35,043.50 under current law. That's a 38 percent tax cut.

What about the big dogs? Yes, they'd get a big tax cut, too. The top 1 percent pays income taxes at an average tax rate of 22.8 percent. That's according to IRS figures. So the drop to 14.5 percent would be about a 36 percent cut.

The Paul plan cuts the corporate tax rate to 14.5 percent. Right now the top rate is 35 percent. Armies of corporate finaglers, lobbyists and tax code whisperers work to avoid that rate. They do their best to cut the burden.

So reduce the rate. Then watch Apple and dozens of other companies repatriate billions in overseas earnings. Watch companies that have become corporate expatriates renew their love for Delaware. Watch companies decide to build new factories and hire new workers in America, not Asia or Mexico.

This is a new deal for America. If Republicans can't find the nerve to back it, pray that a smart Democrat does.

On the Web:

Historical Social Security Tax Rates: taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=45

IRS tax share data (see Number of Returns, Shares of AGI and Total Income Tax Rate, AGI Floor on Percentiles in Current and Constant Dollars, and Average Tax Rates): irs.gov/uac/SOI-Tax-Stats-Individual-Statistical-Tables-by-Tax-Rate-and-Income-Percentile

• Questions about personal finance and investments may be sent by email to scott@scottburns.com. Please visit www.assetbuilder.com to comment on any of his articles, find referenced Web links or to discuss personal finance topics on his forums. Questions of general interest will be answered in future columns and on the website.

(Scott Burns is a principal of the Plano, Texas-based investment firm AssetBuilder Inc., a registered investment adviser. The opinions of this article do not necessarily reflect the views of AssetBuilder Inc. This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, product or service.)