The truth about Santorum’s tax plan

Ryan Ellis President, Center for a Free Economy
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Read any account of the various GOP presidential tax plans, and it won’t be long before you run into one describing the Santorum tax plan as the “pro-family” or “child tax preference” option. It might surprise you, however, that at least two other plans are arguably more pro-family, and that the Santorum plan has more supply-side elements than other plans do — not that a GOP president has to do anything other than sign the Paul Ryan tax reform plan that a GOP Congress will send him.

There are two reasons Santorum’s plan is called “pro-family.” The first is that it eliminates the “marriage penalty” in the tax brackets. All this means is that the tax brackets for married couples are twice the size of those for single people. But this isn’t a huge departure from 2012 law. Under the current tax system, there is no marriage penalty in the first two (10 and 15 percent) brackets. Since Santorum has a two-rate plan (10 and 28 percent), all he is doing is making sure the second bracket starts at twice the level of income for married couples as it does for single people.

Furthermore, two other tax plans not commonly described as “pro-family” — Governor Rick Perry’s and Speaker Newt Gingrich’s — also eliminate the marriage penalty, as would Congressman Paul Ryan’s plan.

The other reason Santorum’s tax plan is called “pro-family” is that it triples the dependent exemption. This would increase the deduction for a child to approximately $11,000. That sounds like a lot except when compared to the Perry and Gingrich plans, which have per-child deductions of $12,500 and $12,000, respectively.

Some would say that Santorum’s retention of the child tax credit skews the analysis back in his favor, but IRS data suggests that a shrinking minority of tax filers with children are able to claim this credit, thanks to frozen income eligibility. Even within that minority of families with dependents which can claim the child tax credit, many have a zero or lower income tax liability — making a larger child deduction irrelevant for them.

So the media should be describing Perry and Gingrich as the pro-family tax cutters, not Santorum.

Some media organizations have even gotten some basic facts wrong here. National Journal, for instance, suggested that Santorum’s plan to triple the dependent exemption would result in more non-income taxpayers receiving refundable spending checks from the IRS. That’s impossible, since Santorum is not talking about a tax credit, but a tax deduction.

What’s going on here? Perhaps people are reading Santorum’s non-economic policy positions (especially his position on same-sex unions) into his tax plan. Because Santorum is the most socially conservative candidate in the race, the logic goes, his tax plan must be the most socially conservative tax plan.

Though Santorum’s tax plan may not be the most socially conservative tax plan put forward by a GOP candidate this cycle, it’s among the most pro-growth. It cuts the top individual rate (at which the majority of small business profits face taxation) by one-fifth, from 35% to 28%. It cuts the corporate income tax in half, from 35% to 17.5%. It cuts the capital gains and dividends tax rate from 15% to 12.5%. It moves from complex depreciation schedules to full business expensing. It creates a permanent repatriation system for profits earned overseas. By any metric, that is a robust series of pro-growth reforms to our tax code.

Santorum’s plan would result in a lower top marginal tax rate than either Mitt Romney’s plan (35%) or Ron Paul’s (which can reasonably be called 35%). It would result in a lower corporate income tax rate than Romney’s plan, Perry’s plan or Huntsman’s plan. It features a lower capital gains and dividends rate than Romney’s plan. Neither Romney nor Huntsman would move from depreciation to expensing.

Many on the right have complained about Santorum’s unworkable and wrong-headed proposal to exempt manufacturers from income taxation. This is bad tax policy, and probably could not be implemented even in the unlikely event that it became law. Because of this, some (including the Tax Foundation) have given the Santorum plan low marks. This is a mistake. No tax bill is perfect. The question for pro-growth, supply-side conservatives is whether we’re moving the ball forward on lower rates and a consumption base, not whether a proposed tax outline contains gimmicks we disagree with. The growth elements within the Santorum plan are the same elements which make the Paul Ryan plan or a flat tax so attractive. To deny that — ostensibly over a manufacturing provision — is shortsighted, and brings into question whether Santorum’s social conservatism is coloring some libertarian tax analysis of his plan.

The next GOP president merely has to be able to sign his own name. We don’t need to worry about a bad idea like a manufacturing tax exclusion, because the GOP Congress is going to be sending him Paul Ryan’s tax plan from his “American Roadmap,” along with every other good idea contained in the House GOP budget.

Ryan Ellis is tax policy director at Americans for Tax Reform.