Detractor Dangles Shiny Objects to Obscure Facts about Rand Paul's Deficit-Inflating Flat Tax Proposal


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Since Sen. Rand Paul (R-KY) announced the broad outlines of his plan for restructuring the federal tax system yesterday, a number of research groups have weighed in on the question of how Paul’s proposed Value Added Tax (VAT) would work—and, critically, how much revenue such a tax could raise. This question is of vital importance in evaluating Paul’s plan because if his tax cuts add huge amounts to the budget deficit, there’s no way he will be able to keep his campaign promise to balance the federal budget.

Yesterday, a CTJ blog post estimated that Paul’s VAT would likely raise about $1.1 trillion a year if fully implemented in 2016—far below the $2.3 trillion in annual tax cuts that would result from other components of Paul’s plan. We estimated that this would translate into a $1.2 trillion revenue loss in the first year—and a $15 trillion budgetary hole over the next decade. 

The rightwing Tax Foundation has since claimed that CTJ understated the revenues that Rand Paul's VAT would raise by a huge amount, citing a 2012 analysis from the Tax Policy Center (TPC) for support. The Tax Foundation specifically claims that a VAT could actually raise about $2 trillion a year, far above our $1.1 trillion estimate. But a closer examination of the Tax Policy Center's VAT analysis proves just the opposite.

According to the Tax Foundation, Senator Paul’s VAT would include government spending in the VAT base. But the TPC analysis points out the obvious absurdity of this: "inclusion of government in the tax base has no effect on real federal spending or deficits. At the federal level, the government is simply paying tax to itself." The TPC goes on to add that taxing state and local governments under a VAT would also have to be offset by federal rebates so that those taxes can’t plausibly be counted as new revenue either.

TPC estimates that sensibly removing these phantom taxes reduces the VAT base by almost a quarter. Put another way, ending this shell game reduces the annual yield of Sen. Paul’s VAT from the Tax Foundation’s $2 trillion estimate to about $1.5 trillion.

Moving beyond the cheap parlor trick of government paying taxes to itself, the next question is whether it is politically feasible to tax every element of personal consumption. An analysis from the Congressional Budget Office (CBO) weighs in on this question. CBO’s analysis showed what a VAT might raise if private spending on health care, education, and religion  were excluded from the VAT base, as is commonly the case with existing European VATs and sales taxes in the United States. That, plus some other differences between CBO's analysis and TPC's, meant that the CBO's plausible VAT base clocked in at just 61 percent of total NIPA personal consumption.

We used CBO's 61 percent figure in calculating the tax base and potential revenue from a plausible VAT. Had we used an implausible 75 percent figure, our results would not have changed much—the Paul plan would still cost about $1 trillion per year or $12 trillion over a decade.

The main difference between our analysis and the Tax Foundation's is that the Tax Foundation is prepared to pretend that the government paying taxes to itself would be a huge revenue raiser. Alas, that's simply not true.

For more on this odd idea, see: http://ctj.org/pdf/fairtax1998.pdf

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