Rubio-Lee hints at tax reform's troubling direction

Republican Senators Marco Rubio and Mike Lee have introduced what should probably be thought of as the first major set of tax proposals in the 2016 Presidential election season. While their proposals are unlikely to be enacted, they hint at the troubling direction that tax reform debates seem to be headed.

|
J. Scott Applewhite/AP/File
Sen. Marco Rubio, R-Fla., right, accompanied by Sen. Mike Lee, R-Utah, outline their ideas for a new tax plan during a news conference on Capitol Hill in Washington

Republican Senators Marco Rubio and Mike Lee have introduced what should probably be thought of as the first major set of tax proposals in the 2016 Presidential election.  While their proposals are unlikely to be enacted, they hint at the troubling direction that tax reform debates seem to be headed.

The Senators would reduce the top income tax rate to 25 percent for corporations and pass-through entities like partnerships.  They would eliminate the taxation of interest, dividends, and capital gain income at the personal level.  They would allow full deductions of capital investments in the first year and disallow companies’ interest deductions.  They would increase the child credit for middle- income families, but not for poor families.

While many proposals in the 2012 election – including Mitt Romney’s – aimed for revenue neutrality when estimated on a conventional (sometimes called a static) basis, the Rubio and Lee proposal would lose trillions of dollars in revenues over the next decade when estimated using the conventional approach.

Instead, Rubio and Lee aim to make up the lost revenue through economic growth.  The dynamic scoring analysis by the Tax Foundation estimates that the plan would raise GDP by 15 percent and would raise revenue in the long term once those growth effects are taken into account.

The Tax Foundation’s growth estimate is, to put it mildly, inconsistent with standard economic analysis.  State-of-the-art analysis of a transition to a consumption tax is found in a 2001 American Economic Review paper co-authored by Alan Auerbach, Larry Kotlikoff and several other economists.  Their paper estimates that conversion of the then-current system to a pure “flat tax” proposal would raise GDP by 4 percent over a decade.

The “flat tax” proposal they analyze is more pro-growth than Rubio-Lee is.  It is a consumption tax.  Like Rubio-Lee, it eliminates taxation of interest, dividends, and capital gains, introduces expensing, and eliminates corporate interest deduction.  It goes further, though.  Unlike Rubio-Lee it also eliminates the entire corporate income tax (whereas Rubio-Lee leave in place a 25 percent corporate tax).  It also eliminates all itemized deductions, which allows a top rate of 21-22 percent, compared to 35 percent under Rubio-Lee.  All of those differences should make the flat tax have bigger effects than Rubio-Lee, not smaller.  This suggests that the claim that Rubio-Lee would boost GDP by 15 percent over a decade is way too high and that the notion that the tax cut will pay for itself is well beyond unrealistic.

Tax rate cuts in the past have not spurred much if any growth. Harvard’s Martin Feldstein, a leading conservative economist who headed Ronald Reagan’s Council of Economic Advisers, shows this in two papers regarding the 1981 tax cuts.  Moreover, there is simply no credible evidence that the 2001 tax cuts generated any growth.  Indeed, growth after 2001 was sub-normal and was concentrated in housing and finance, sectors that were not boosted by the 2001 tax cuts and were more likely helped by loose monetary policy.  The literature on debt-financed tax cuts shows little if any growth effect from most such changes.  Moreover, cross-country evidence shows great variation in top tax rates over time but no correlation between those rates and subsequent rates of economic growth.

In any case, if the proposal were to go forward legislatively, the Joint Tax Committee would have to score it and my guess it that their growth and revenue estimates would be quite different than the Tax Foundation’s.

In the meantime, discussion of tax reform is a good idea.  But it’d be even nicer to discuss serious ways to pay for reform as well.

The post Rubio-Lee Hints at Tax Reform's Troubling Direction appeared first on TaxVox.

You've read  of  free articles. Subscribe to continue.
Real news can be honest, hopeful, credible, constructive.
What is the Monitor difference? Tackling the tough headlines – with humanity. Listening to sources – with respect. Seeing the story that others are missing by reporting what so often gets overlooked: the values that connect us. That’s Monitor reporting – news that changes how you see the world.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

QR Code to Rubio-Lee hints at tax reform's troubling direction
Read this article in
https://www.csmonitor.com/Business/Tax-VOX/2015/0312/Rubio-Lee-hints-at-tax-reform-s-troubling-direction
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe