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Analysis: Santorum tax plan cuts rates, keeps goodies

Republican presidential candidate Santorum speaks during a Republican presidential candidates debate in Concord
Republican presidential candidate Santorum speaks during a Republican presidential candidates debate in Concord

By Kim Dixon

WASHINGTON (Reuters) - Republican presidential hopeful Rick Santorum appeals to the party's hunger for low taxes, but earns poor grades from economists across the U.S. political spectrum who say the plan will bloat the already intractable U.S. deficit.

Santorum has garnered new attention after coming from behind to virtually tie Mitt Romney in last week's Iowa caucuses, the first nominating contest for 2012 in the race to take on President Barack Obama on election day in November.

Riding his Iowa momentum, Santorum is rising in some opinion polls in New Hampshire, which has its primary on Tuesday.

The former Pennsylvania senator's low-tax ideas mesh with the party's conservative mantra, but he offers no way to recoup the revenue losses, and the plan will surely deepen the deficit,

the analysts said. His proposals to keep cherished individual tax breaks that reformers want to slash also mar his plan, they said.

"The Santorum tax plan would, by any metric, lead to a massive increase in the deficit and would take tax receipts well below its average post-war level," said Alex Brill, an economist at the conservative American Enterprise Institute.

"By keeping all the biggest tax expenditures while increasing other deductions and credits, the plan simply doesn't add up. Where will the revenue come from?"

A spokesman for Santorum did not respond to a request for comment on the criticism.

The former Pennsylvania senator proposes cutting top marginal corporate tax rates to 17.5 percent from 35 percent - with a special zero rate for manufacturers to boost jobs in this sector. He would cut rates for the richest individuals to 28 percent, from 35 percent, but keeps breaks that economists say distort the market, including the mortgage and healthcare deductions.

Many economists across the political spectrum say the current U.S. corporate rate is too steep compared with global rivals, but most propose cutting the rate with other changes so as not to bloat the deficit.

Santorum's website says its zero tax rate for manufacturers will "spur middle income job creation in the United States and benefit from the job multiplier effect in manufacturing."

The conservative Tax Foundation criticized the plan, in particular its manufacturing special carve-out.

"It gets a D plus, which is the lowest grade we gave," said William McBride, an economist with the think tank.

McBride said Santorum's new tax break for manufacturers would likely lead all sorts of companies to claim to be eligible, similar to a manufacturing deduction grabbed by nearly every company a few years back.

"It would create very unstable revenue," he said.

Another conservative economist, who asked not to be identified due to the political sensitivity of the race, called it "industrial planning," a term associated with government control of business - anathema to Republicans.

In the aftermath of the financial crisis, government spending shot up and revenue dwindled to 15 percent of gross domestic product, the lowest level since 1950.

FAMILY VALUES?

Santorum says he will cut spending by $5 trillion over five years, and boost the tax deduction for families with children.

More than any of his rivals, Santorum is playing up social issues in his campaign, especially the importance of "family values." The church-going Catholic is also fervently anti-abortion and opposes gay marriage.

His bigger deduction for families with children will, ironically, add more taxpayers to the rolls of those who pay no federal income taxes, said Howard Gleckman, a tax expert at the liberal-leaning Tax Policy Center.

Just under half of Americans do not pay federal income tax, according to the Tax Policy Center, a statistic that has become a conservative criticism of the current system. A large number of these individuals are retired and pay payroll, sales and other taxes.

Overall, Gleckman blasted the plan for benefiting corporations and the wealthy at the expense of working and middle class.

"This should play well in future (Republican) primaries," Gleckman said. "If he somehow gets the nomination, he'll still have to explain the huge hole he'd blow in the budget."

SANTA CLAUS LISTS

There is no official cost estimate for the impact of Santorum's plan on the deficit, but the Tax Policy Center is seeking details from the campaign to size it up. The group recently forecast that Mitt Romney's tax proposal would slash federal tax revenue by $180 billion to $600 billion in 2015.

Last month, the TPC estimated that Newt Gingrich's plan would cut government revenues by at least $850 billion in one year, nearly a third of the government's $2.3 trillion revenue take in 2011.

Most of the Republican hopefuls have touted new tax schemes, with the most radical approach taken from Herman Cain, who dropped out of the race amid several sexual harassment accusations. Cain's 9-9-9 plan pitched a consumption tax, an idea that economists back but is unlikely to gain traction in the United States.

Most Republicans and corporations are pushing the United States to move to a "territorial" tax system, whereby multinational firms are not taxed on foreign profits. Critics say this will add further incentive for U.S.-based firms to outsource operations and jobs abroad.

By contrast to most of his Republican peers, Santorum sidesteps this issue, calling for a low tax rate on foreign income -- but only for manufacturers.

The conservative economist said candidates inevitably give pie-in-the-sky tax proposals in the heat of campaigns, and Santorum's is no different.

"The tendency of politicians is to compile tax reform plans the way kids compile their Christmas lists for Santa Claus," this person said. "If Santorum intends a huge tax cut, he should say so and then explain its size and why that's appropriate. If he doesn't intend a huge tax cut, then all he's done is tell half the story. The other half is how to offset the cuts."

(Editing by Philip Barbara)

(Reporting By Kim Dixon)

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