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The tax plans cometh: Romney vs. Santorum

Raymond Keating

Taxes always rank as major costs and big concerns for entrepreneurs, businesses and investors. But that’s even more so the case now given imposed, scheduled and proposed tax increases under President Barack Obama. There’s the possibility of even more tax hikes not too far down the road given the four-plus-year unprecedented explosion in federal spending and debt.

All of this is having a real negative impact on the economy, as risk taking is discouraged.

Given the party’s general history of being friendly to tax relief, it would seem that in this election year, Republican candidates for president have a significant opportunity on the tax issue.

Let’s take a look at the major proposals by the current leaders — Mitt Romney, former Massachusetts governor, and Rick Santorum, former senator from Pennsylvania.

Romney’s tax plan could be classified as mixed to solid, but less than inspiring. His main proposals include:

Eliminating scheduled tax increases in personal income, capital gains and dividend taxes.

For those earning less than $200,000 annually, taxes on capital gains, dividends and interest earnings would be eliminated.

Eliminating the death tax.

Reducing the top corporate income tax rate from 35 percent to 25 percent.

This program obviously would be a significant improvement over the Obama tax agenda. In particular, killing off the death tax would be a dramatic positive for family businesses, investment and jobs. Resources would be reallocated from wasteful tax-avoidance measures to productive endeavors.

The U.S. imposes one of the highest corporate income tax rates among developed nations, so cutting that tax rate would improve U.S. competitiveness, while in general enhancing the returns on running and building a company.

Of course, eliminating scheduled tax increases would be a big plus for business and investment in terms of reducing uncertainty and removing the negatives of higher taxes. However, it’s clear given the deep recession and poor recovery our economy has suffered through in recent years that more is needed to spur entrepreneurship, investment, economic growth and job creation.

The idea of eliminating taxes on capital gains, dividends and interest — which simply amount to multiple layers of taxation on saving and investment — makes tremendous sense. Unfortunately, capping this to those earning less than $200,000 not only falls prey to the class warfare games played on taxes, but misses the fact it is upper income earners that possess the resources to invest in new and expanding businesses.

Rick Santorum’s tax proposals are far bolder, although they stray into political preferences overruling sound tax policy when it comes to manufacturing. His plan includes:

Eliminating various tax deductions and reducing the personal income tax rate system to two rates of 10 percent and

28 percent.

Reducing capital gains and dividend tax rates to 12 percent.

Eliminating the death tax and alternative minimum tax.

Cutting the corporate income tax rate from 35 percent to 17.5 percent.

Providing for 100 percent expensing for capital spending on business equipment.

Eliminating the corporate income tax on manufacturing activity.

Santorum takes the necessary step of not merely stopping Obama tax increases, but also providing substantial, additional tax relief. All of these measures would boost incentives for risk taking — both entrepreneurship and investment — and driving growth and job creation forward.

By proposing the elimination of income taxes on manufacturing, it’s hard to blame Santorum’s instincts. After all, aspects of our tax system that make businesses noncompetitive need to be eliminated. But manufacturing should not get additional, special treatment over any other kind of business activity, as it would merely artificially distort resource allocation, with efficiency and growth suffering accordingly. The key to tax policy when it comes to investment and business is to provide a system that imposes the lowest burdens possible on all industries and businesses. Eliminating income taxes for certain businesses and not others is a case of substituting political preferences (no matter how well intentioned) for sound economics and tax policy.

Both Romney and Santorum propose tax policies that offer vast improvements over what President Obama has put forth. In general, they would have positive effects on entrepreneurship, investment and the economy. Still, both also have shortcomings due to the interference of politics over economics.

As for which candidate’s plan would be most beneficial for the U.S. economy, Santorum’s plan clearly is more pro-growth than the Romney agenda. But both are far better than President Obama’s plans for raising taxes and doing nothing to simplify and stabilize the system.  

Website:
Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. Reach him through the Web site at www.sbecouncil.org.
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Posted by on Mar 6 2012. Filed under Contributors, Opinion. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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