Rick Santorum, who may have won the Iowa caucuses after all, favors a huge broad-based tax cut that would massively increase the budget deficit. According to new estimates by my colleagues at the Tax Policy Center, the former Pennsylvania senator would cut taxes for nearly all households making $40,000 or more. But the impact on the deficit would be enormous: He’d cut taxes by roughly $1 trillion in 2015 alone.
Unlike Mitt Romney, who would slash taxes for those with high-incomes while raising taxes for many low- and moderate-income households, Santorum would boost after-tax incomes for the vast majority of Americans. Only a handful would pay more than they do today.
For individuals, Santorum would start by extending the 2001-2010 tax cuts that are due to expire at the end of this year. But he’d go far beyond that. He’d collapse today’s six tax brackets to just two—10 percent and 28 percent. He’d triple the personal exemption for children, cut taxes on dividends and capital gains from 15 percent to 12 percent, and repeal the Alternative Minimum Tax, the estate tax, and the tax increases in the 2010 health reform law.
For companies, he’s cut the corporate tax rate in half, to 17.5 percent, and allow full first-year expensing of capital equipment. Domestic manufacturing companies would owe no taxes at all. Multinationals could bring profits back to the U.S. at a 5.25 percent tax rate. They’d owe no taxes at all on repatriated earnings they invest in plant and equipment.
As always, measuring the effect of the Santorum tax plan depends on whether or not you assume the 2001-2010 tax cuts are extended. But either way, both the tax cuts for high-income households and the increase in the deficit would be enormous.
Even if you assume the 2011 law is made permanent, the top 0.1 percent (who make more than $2.9 million and average $8.4 million) would get an average tax cut of more than $1.3 million in 2015. By contrast, a typical household making less than $20,000 would get a tax cut of $39. Middle-income households making between about $50,000 and $75,000 would get a tax cut of about $2,000. This largess would add about $900 billion to the deficit in 2015.
If you prefer to compare the Santorum plan to a world where the 2001-2010 tax cuts have expired, they look even more generous. The top 0.1 percent would get an average tax cut of $1.7 million. Those making less than $20,000 would see their taxes cut by $265, and those in the middle would get a tax cut of $3,500. Santorum would increase the deficit by $1.3 trillion in 2015 compared to a budget without the Bush/Obama tax cuts.
The TPC analysis of Santorum’s tax plan comes with the usual caveats. It is static, and thus does not include new revenues generated by economic growth. Much of the benefit to high-income households would come from Santorum’s deep cuts in corporate taxes since TPC assumes those taxes ultimately are paid by owners of capital.
One final caveat: Santorum’s plan includes few details. For instance, while he proposes two individual tax rates, he does not say what the brackets are. Normally, TPC works with the campaigns to clarify these specifics, but the Santorum campaign did not respond to TPC’s requests for information. Thus, the estimates include some heroic assumptions.
Still, like his opponents in the race for the GOP’s presidential nomination, Santorum is proposing extremely generous tax cuts at the price of big increases in the budget deficit.