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Santorum's Tax Plan: Good for South Carolina, Bad for America

Stocks in this article: UDN UUP

NEW YORK ( TheStreet ) -- Senator Rick Santorum's tax plan falls short of real success, but it might be the right card to play headed into South Carolina.

Much of Santorum's plan looks like his opponents'. He favors simplifying the tax code into two brackets: 28% for top earners and 10% for lower income workers. The latter would pay 60% less in tax and could save $7,500 a year. Those making $10 million, for example, would see their taxes fall 20% and pay about $700,000 less.

Rick Santorum

Unlike his opponents, Santorum also favors tripling the deductions for children. According to Joe Rosenberg, research associate at Urban Brookings Tax Policy Center, this could take lower income household's tax rate to zero but offer them no rebate. The less money they make the less profitable this deduction will be.

"For more low and middle income households ... their benefits may be limited," says Rosenberg, "certainly for more middle and higher income people with kids it would be a potentially substantial reduction in their taxes."

Santorum treads the line on other Republican favorites like lowering the capital gains tax to 12%, eliminating the estate and marriage tax and reducing the corporate tax rate to 17.5% from 35%. The area where Santorum really stands out in is in manufacturing.

Santorum would lower the corporate tax rate for the sector to 0% and also give a 0% tax rate for companies repatriating their money, as long as they sink their cash into manufacturing equipment.

His bias for manufacturing might play well in South Carolina, a state with nearly 10% unemployment. Manufacturing is the fastest hiring sector in the state. It currently employs 11 million people up 5.2% in the past 12 months, but for the rest of the country manufacturing is not where the growth is.

Manufacturing represented just 12% of U.S. Gross Domestic Product or GDP in 2010, less than half that of the financial sector at almost 21%. Even government represented a bigger slice of the growth pie at almost 14%

Manufacturing also only employs 12 million people, which is only the eighth biggest employment sector of the economy - falling well short of education and healthcare, which employs 20 million people, and private services at 92 million. The biggest growth in jobs nationwide actually comes from the mining and logging sector. Hiring was up more than 12% in December.

Manufacturing pays on average $23.93 an hour, up 2% versus a year ago but still falls short of other more profitable sectors. Mining and logging pays $28.62 an hour and has ramped up its pay 3.7% in the last year. Financial services anything from banking to insurance can pay $28.16 while professional and business services pays $28.02 an hour.

Rosenberg wonders if Santorum's bias towards the manufacturing sector is more pomp than policy. "When it's coming from a presidential candidate you sort of wonder if it is something that sounds good on the stump and that maybe hasn't really been thought through in terms of policy."

Rosenberg doesn't see a very good economic reason for favoring the manufacturing sector and is worried it will cloud the tax system even further. "As you expand the definition of manufacturing presumably companies will try to exploit that as much as they could," he says. "They are just eroding the corporate tax further, giving away more money, raising less revenue and further exacerbating these differentials."

The Tax Policy Center is still working on their formal analysis of Santorum's tax plan, but Rosenberg estimates it would be in line with his opponents and shave $1 trillion off of Federal revenues. "My guess is he'd shake out somewhere in that ballpark or even more depending on how he's actually proposing to do these things."

Santorum hopes to also cut $5 trillion from spending over 5 years. Assuming $1 trillion in cuts a year and using 2011's spending and revenue figures, Santorum's economic plan would bring in $1.3 trillion a year and he would spend $2.6 trillion, still creating a budget deficit of $1.3 trillion.

-- Written by Alix Steel in New York.

>To contact the writer of this article, click here: Alix Steel.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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