Analysis of Ron Paul’s Individual Income Tax Plan

Analysis of Ron Paul’s Individual Income Tax Plan

Summary

Ron Paul proposes eliminating the individual income tax.  This will give huge tax breaks to the wealthy and middle income taxpayers.  However, this could end up costing lower income households thousands of dollars. 

• Nobody pays any income tax.
• Ron Paul’s plan is actually similar to the other flat tax proposals.
• It gives huge tax breaks to the wealthy.
• It takes thousands of dollars away from lower income households because they lose refundable tax credits, like the Earned Income Tax Credit and the Child Tax Credit, which give refunds to those who pay no tax.
• A family of 5 with an income of $20,000 would lose over $8,000 in refundable tax credits.
• Besides that, everyone else receives large tax breaks.  They get larger as income increases and family size decreases.

What is Ron Paul’s Individual Income Tax Plan?

Ron Paul's tax plan is to eliminate the income tax:

As President, Ron Paul will support a Liberty Amendment to the Constitution to abolish the income and death taxes.  And he will be proud to be the one who finally turns off the lights at the IRS for good.

http://www.ronpaul2012.com/the-issues/taxes/

On the surface, it seems simple.  However there are a few issues worth mentioning.
 
How much do people pay under Ron Paul’s Plan?

The income tax is eliminated, so everybody pays $0.
 
How Does Ron Paul’s Plan Compare to the Current Tax Code?

The 2010 taxes under the current tax code are calculated using only the standard deduction and personal exemptions.  The Child Tax Credit and Earned Income Tax Credit were taken where possible. For those who itemize deductions, the average total itemized deductions from the IRS statistics for 2009 (which is the latest version) were used instead of the standard deduction.
 
Here is how much people would have gained under Ron Paul’s income tax plan in 2010 if they only took the standard deduction:
 

	Children	$10,000	$20,000	$30,000	$40,000	$50,000	$60,000	$70,000	$80,000	$90,000	$100,000	$200,000	$500,000	$1,000,000
single	0	($197)	$1,183	$2,683	$4,183	$6,350	$8,850	$11,350	$13,850	$16,350	$19,098	$48,031	$149,371	$324,371
	0	($457)	$131	$1,133	$2,361	$3,861	$5,361	$6,861	$8,261	$9,894	$12,194	$39,008	$138,763	$313,763
married	1	($4,050)	($4,050)	($1,913)	$731	$2,314	$3,814	$5,314	$6,714	$8,014	$10,281	$37,986	$137,486	$312,486
filing	2	($5,060)	($7,036)	($4,829)	($1,723)	$766	$2,266	$3,766	$5,166	$6,466	$8,369	$36,964	$136,500	$311,208
jointly	3	($5,561)	($8,216)	($6,826)	($3,718)	($781)	$719	$2,219	$3,619	$4,919	$6,456	$36,413	$136,500	$309,931

Red numbers in parenthesis means they lose money under Ron Paul’s plan.
 
Here are the gains for those who also itemize their deductions at the average rate:
 

	Children	$10,000	$20,000	$30,000	$40,000	$50,000	$60,000	$70,000	$80,000	$90,000	$100,000	$200,000	$500,000	$1,000,000
single	0	($263)	$34	$1,130	$2,503	$4,003	$5,363	$7,863	$9,725	$12,225	$13,025	$34,373	$115,837	$265,775
	0	($457)	$0	$738	$1,583	$2,826	$4,124	$5,624	$6,641	$7,941	$8,221	$27,885	$107,223	$257,161
married	1	($4,050)	($4,050)	($2,308)	$135	$1,279	$2,576	$4,076	$5,094	$6,394	$6,674	$26,863	$105,946	$255,884
filing	2	($5,060)	($7,036)	($5,226)	($2,273)	($269)	$1,029	$2,529	$3,546	$4,846	$5,126	$25,932	$105,185	$254,606
jointly	3	($5,561)	($8,216)	($6,862)	($4,268)	($1,652)	($519)	$981	$1,999	$3,299	$3,579	$25,019	$105,185	$253,329

Let’s look at the numbers in a chart:

This is why the chart doesn't include $200,000 and above:

Looking at both ends it seems very similar to the other plans.  It gives huge tax cuts to the rich, and ends up costing the poor more money.  The reason the poor lose so much money under Ron Paul’s plan is they currently receive refundable tax credits.  In other words, they get money back even when they don’t pay taxes.  The Earned Income Tax Credit and the Child Tax Credit give these households as refund check worth thousands of dollars.
 
Unique Features of the Plan

As previously mentioned, no income tax means eliminating taxes for a lot of people, but it also eliminates the refundable tax credits, such as the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC.)  These credits provide refunds to those who already don't pay any income tax, especially lower income families.  Low income families can usually eliminate their taxable income through exemption, deductions and credits.  

After that, they rely on the EITC and the CTC to give them a refund.  A large family can receive thousands of dollars in refunds.  As shown in the tables, a family of 5 with a $20,000 income receives over $8,000 in refundable tax credits.  They lose that money under Ron Paul's plan.


It's not just low income families.  The EITC is typically for those near the poverty threshold, but the Child Tax Credit is available to middle income families.  A family gets $1,000 per child in tax credits.  If that family is able to reduce their tax to below $0 through that credit and other deductions, credits, exemptions, etc., they can get a refund for that amount.  That is why a family with 3 children and an income of $60,000, who itemizes their deductions at the average rate for 2009, still loses over $500 under Ron Paul's plan.

It's not unusual.  Most flat tax plans tend to ignore the EITC and the CTC.





Link to this article:

http://articlesonpolitics.blogspot.com/2011/12/analysis-of-ron-pauls-individual-income.html