Marco Rubio

The Good, The Bad and The Ugly of the Rubio-Lee Tax Reform Proposal

It's a hodge-podge of pro-growth and budget-busting populist measures

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Rubio.Lee.Cruz
Goat4421 / Foter / CC BY-SA

Republican Senators Marco Rubio and Mike Lee recently released a tax reform proposal that is a curious mix of principled pro-growth measures and populist middle-class relief. Where it sticks to principle, it is great. But where it veers into populism, the plan collapses into incoherence.

The senators' plan is a first stab at translating the reform conservative vision (which I wrote about here) into a governing agenda for the GOP. Hence, it is hardly surprising that avowed reformocons jumped quickly to praise it. Ramesh Ponnuru declared it the most pro-growth plan since Calvin Coolidge's presidency, and something that Republicans should "learn to love." Yuval Levin seconded that sentiment. Reihan Salam noted that the plan's basic political bargain—coupling pro-growth policies with middle-class tax cuts—offered a sterling example of conservative political entrepreneurship.

It's true: There is much to like in this proposal, at least for anyone who believes that the road to prosperity lies not through Big Government stimulus programs, but a tax code that doesn't treat savings and investments as sins. To that end, the business tax overhaul that Lee and Rubio propose is definitely a step in the right direction.

The plan would trim America's corporate tax rate from 35 percent, the highest among OECD countries, to 25 percent, something that liberals have been loath to do even though the higher rate has been crippling the global competitiveness of American companies. That's not the only item on the liberal no-no list that the conservative duo goes after. President Obama wants to double down on America's worldwide system of taxation, which taxes the overseas income of American companies and citizens. Rubio and Lee would join much of the civilized world by moving America to a territorial system that taxes only domestic income.

Likewise, President Obama has been pushing to raise capital gains and dividend taxes from 23 (ish) to 28 percent. Rubio and Lee would eliminate these taxes altogether, given that they are a form of double taxation, since corporate returns are already taxed before they are handed out to shareholders. The plan would also allow an immediate write-off—not the current slow depreciation—of expenditures on equipment, plants, and other capital expenses. It would also end most business tax credits and special deductions, vastly simplifying the tax code.

The non-partisan Tax Foundation estimates that these changes to individual and corporate taxes would boost investment by nearly 49 percent, wages by 12.5 percent, and employment by 2.7 million jobs.

Sounds great, right? Well, here's where the Rubio-Lee plan goes awry: the individual tax code. It collapses the current seven tax brackets into two, with individuals earning below $75,000 and couples below $150,000 paying 15 percent, and everyone else paying 35 percent. It would eliminate all itemized deductions and personal exemptions, except those for mortgage and charities, and replace the $6,300 standard tax deduction for singles and $12,600 for married joint filers with a tax credit of $2,000 for singles and $4,000 for married joint filers.

The real kicker is the introduction of a new refundable child tax credit of $2,500, in addition to the $1,000 credit that parents already receive. And unlike the current credit, this $2,500 wouldn't phase out with rising income. This is even more generous than the $2,000 additional child care tax credit that President Obama proposed.

But who are the winners and losers here?

Poor families (and for simplicity's sake, let's consider only married joint filers) making under $18,450 wouldn't be harmed. They still wouldn't pay federal income taxes, even though their tax rate would technically go up from 10 percent to 15 percent. But because the new $4,000 tax credit would be worth quite a bit more than the current $12,600 tax deduction, and they would keep their Earned Income Tax Credits too, they'd still come out even.

Those making between $18,450 to $74,900 would come out a little ahead, since their tax rates won't go up but their tax credits will.

The big losers would be many of the families making between $150,000 and $411,500—or the vast middle and upper middle class, the purported beneficiaries of these reforms. Rubio and Lee's proposed 35 percent tax rate would constitute a big tax hike for these families. Some of the increase would be mitigated if they have children and can avail themselves of the child tax credit. But still, it'll be a tax hike.

The biggest winners? Those making above $464,850. They'll get a hefty 4.6 percentage point tax cut, from their current 39.6 percent tax rate to 35 percent—plus the new credits.

But the plan has other problems beyond the uneven middle-class tax relief. It is also a monument to unintended consequences that'll hurt the very people it wants to help.

The advantage of the two-rate tax formula over the current graduated system is its simplicity. But that small advantage is eclipsed by its big down side: the sharp 20-point tax cliff that families on the cusp of $150,000 face. This will create a huge disincentive for them to continue their climb up the income ladder, a point that the Heritage Foundation's otherwise laudatory analysis of the tax plan highlights. One might even call it an anti-mobility tax.

Worse, given that usually women are second earners, it's their income that would likely put families over the $150,000 threshold. This means that it's their work that would face the 20 percent surcharge, making this an anti-working-woman tax.

But the really pernicious aspect of the Rubio-Lee plan is the child tax credit, which the Tax Foundation points out won't boost economic growth, but will lose the federal Treasury a whopping $173 billion annually—pretty much wiping out the $169 billion revenue gain from the corporate and other tax reform. (See Table 2).

Why are the duo insisting on this massive credit instead of, say, lowering the 35 percent upper tax bracket, upping the income level where it kicks in, or paying down the debt?

Their answer is that this credit is necessary to offset an alleged "parent penalty" that forces parents to pay for the Social Security and Medicare of current retirees while at the same time bearing the cost of raising children who will pay for future retirees. This penalty, the brains behind the Rubio-Lee plan claim, is producing the "suppressed fertility" of American parents, which will make these programs less sustainable.

But as Mercatus Center's Veronique de Rugy notes, references to a "parent penalty" are grossly misleading. "People aren't taxed at a higher rate nor do they pay more taxes the moment they have children," she points out. "In fact, it is the reverse because of personal allowances." Moreover, thanks to public schooling, among other things, parents already receive a huge subsidy from childless Americans.

Using the child tax credit to throw money at parents makes no sense. Instead, why not use the funds to directly shore up old age programs, or, better yet, fundamentally scale them back and make them more sustainable? After all, entitlement programs should serve the population that exists—not create a population to service them.

So what is the real reason that Rubio and Lee are pushing this? Partly, politics—it is a way to steal a liberal issue and create a middle-class conservative constituency. Partly, ideology—it is perhaps a way to advance the social conservative commitment to large, traditional families (with stay-at-home moms).

If that's the case, Rubio, Lee, and their backers should come out and say so and have an open airing of this vision—not inject their agenda into tax reform under the false guise of promoting economic growth and family fairness.

A version of this column appeared in The Week.

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  1. We should get rid of the mortgage deduction. Encouraging home “ownership” through debilitating debt — as the 2008 financial crisis taught us — is not actually a good idea. (Scary quotes used because until you make your last mortgage payment, the bank owns the house though you have title to it.)

    1. Won’t happen. Because politics – and mostly because America needs increasing debt as long as our money is debt-based. Well actually mostly politics

    2. I’m against the mortgage deduction in theory, but as a practical matter I oppose repealing it, because doing so would mean a huge increase in my income taxes.

    3. They supposedly want to encourage home ownership…and then they impose zoning restrictions that drive up the cost of housing. They use zoning restrictions in New England to control school costs…to prevent you from obeying the law by putting your kids in school, they impose zoning restrictions (a nasty way of saying they enact zoning regulations, BTW) to prevent you from obtaining a legal residence within the town limits. This drives up real estate costs and prevents families from affording legitimate school and college.

  2. Paging Socon Tony! Oh, Mrs. Van Halen, can Eddie come out and play? Please please please?

    1. Didn’t everybody duke it out over this same article just a few days ago?

      1. Yes. We did.

      2. Yes, and a couple of weeks before that, as well, but since it was posted again we all know what’s coming anyway. I don’t know what Shikha’s fascination with this subject is, but I guess if it keeps her from posting her usual drivel, than so be it.

  3. An income tax is theft and implied slavery. Of course, you’d have to possess principles/morals to recognize this…..so that leaves 99% of Amerikans out.

    1. You are correct. Whenever I talk about the Fair tax and being able to keep all of your property (earnings) I get blank looks and I’m not shocked or surprised anymore.

    2. We orthodox libertarian extremists are morally and intellectually vastly superior to the ignorant masses: A bunch of fat, stupid, ugly old ladies that watch soap operas, play bingo, read tabloids and don’t know the metric system. It is lonely at the top.

  4. Rubio and Lee would eliminate these taxes altogether, given that they are a form of double taxation,

    Taxing dividends is double taxation. Taxing capital gains is not. There are far better reasons to stop taxing capital gains — most of which are tax-exempt poension funds, yet another middle-class loophole.

    Reason and Cato somehow miss that the rich subsidize 40% of the entire middle-class share or the personal income tax, up from 18% in 1994., but they’re not pandering, right? . And neither of them bothered to look (takes less than a minute) when Obama claimed a $50,000 teacher pays a higher tax rate than millonaotes nd billionaires.

    And there is NO libertarian plan for taxes — except Ron Paul’s crazy notion of repealing the income tax and running the government on FICA taxes.

    1. Taxing dividends is double taxation. Taxing capital gains is not.

      You are forgetting inflation. In fact, with inflation at a (reported) 2%, and an investment that is sold after a year with a “profit” of 2% (so, none at all), you are taxed on that “profit”. So it’s often, perhaps most often, a tax on… nothing whatsoever.

      Then you slip into whining about how it’s all libertarians fault and we have no plan except for the “crazy” guy who is no longer in politics.

      Basically, you started out somewhat wrong and then went immediately off the rails.

      1. Umm, failing to index for inflation is not taxing the same income twice
        It’s taxing false income … once.

      2. Then you slip into whining about how it’s all libertarians fault

        Where?

        We have no plan except for the “crazy” guy who is no longer in politics.

        We don’t. This is the political opportunity of a lifetieme, but we have ZERO solutions, nothing at all for taxes, healthcare, jobs or governance. Somehow, I can’t see how spouting memorized slogans can create a free society.

        Forty years and the libertarian brand is accepted by fewer than less than 6% of the voters .. and rejected by 91% of libertarians (2006 Cato survey) But that’s just “whining.” Fuck liberty; who needs it?

  5. Nice of Mike to point out that taxing capital gains is not double taxation. Also, the Tax Foundation is not “nonpartisan”. It’s board consists of Republicans and corporate big shots, including, until 2008, Wayne Gabel, director of Federal Affairs for–wait for it–Koch Industries. Ever heard of them, Shikha?

    1. Big surprise seeing that after reading the article. Let’s just make it even easier for the rich to keep widening that gap- especially under the guise of “tax cuts for the middle class.” It’s the next biggest lie to the “jobs jobs jobs!” chant that somehow justifies doing all manner of terrible things just to get some jobs.

      1. I’m not a fan of this tax nonsense as income taxes are immoral of themselves. That being said, allowing some people to actually keep more of their money is not bad, it’s that some others have to pay any more that’s bad.

      2. Big surprise seeing that after reading the article.

        Many are surprised that the libertarian establishment is rather useless.
        Well, a few loyal Tribesmen.

      3. Let’s just make it even easier for the rich to keep widening that gap- especially under the guise of “tax cuts for the middle class.”

        The same rich who subsiodize 40% of the entire middle-class share of the personal income tax? THAT rich?

    2. Nice of Mike to point out that taxing capital gains is not double taxation.

      That makes sense.

      Also, the Tax Foundation is not “nonpartisan”.

      You seem to assume I don’t know that, or that I saids anything at all about the Tax Foundation.

      Koch Industries. Ever heard of them, Shikha?

      Ever stay on topic?

  6. my neighbor’s mother makes $86 /hour on the internet . She has been fired from work for 8 months but last month her check was $12427 just working on the internet for a few hours. see it here…………..

    ????? http://www.netjob70.com

  7. So what about singles who are making around $75k who may see their taxes go up? They don’t matter eh? And is $150K really the lower threshold for middle class these days? If it is then this country really is bad shape.

  8. Shikha Dalmia thinks that having two tax brackets instead of seven will simplify the tax code? Has anyone ever thought that it’s the number of brackets that makes the code complex? Come on, it’s simple math to compute your taxes once you have your income. The complexity is entirely around computing your income.

  9. Reducing the number of deductions and credits will most definitely simplify the tax code. So will reducing the number of tax brackets. I think the two-bracket solution has benefit because it will 1) dispel the notion that “tax the rich” is where the budget comes from, and 2) make it screamingly evident that with today’s Federal budget, this amount is what it takes to make ends meet. The more voters realize the reality of this, the more pressure not to ask ever more of Uncle Sugar.

    The fact that 35% rate is a benefit for people earning half a million yearly? Well think about this social question: do we really want to discourage people from working hard enough to earn stratospheric income? Do we want them to feel like the Atlas of some book? Do truly high income people not produce benefits in excess of what they cost the government?

    1. Reducing the number of deductions and credits will most definitely simplify the tax code.

      You most definitely have never done your own taxes.

      So will reducing the number of tax brackets.

      Not in the slightest. Regardless of how many brackets, working the tax tables is identical.
      1) See the tax at a specific level. with a percentage above that.
      2) Subtract that level from your taxable income.
      3) Multiply the difference times the percentage.

      dispel the notion that “tax the rich” is where the budget comes from,

      It can’t be the poor. It sure as hell ain’t the middle class, who would need a 55% tax increase, just to pay its own share. That leaves only the rich and double-taxed large corporations (small-medium corps are tax exempt).

      I think the two-bracket solution has benefit because it will 1) dispel the notion that “tax the rich” is where the budget comes from,

  10. Consider Johnny and Jimmy. Johnny lives and works in Calais, Maine. Jimmy lives in Calais but works in St. Stephen, New Brunswick.

    Johnny invests in U.S. stocks and earns wages. If the factory is unsafe, he can call OSHA. If the employer does not pay him, he can call the state bureaucrats. If he gets defrauded on an investment, he can call S.E.C.

    Jimmy cannot call OSHA because the factory is in Canada. If the employer does not pay him, he’d call the Canadian bureaucrats. If he gets ripped off on an investment, he’d call the Canadian authorities. So why should U.S.A. taxes apply on his income?

    Wouldn’t it make more sense to tax what passes through ports of entry and cash registers in the U.S.A.? Even wages involve government protection. Jimmy would spend lots of his earnings in Maine, and the State would collect tax on that.

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