Republican tax policy, as least when politically successful, has been a combo of (a) supply-side, top tax rate cuts to spur growth by changing incentives to work, save, and invest and (b) direct tax relief to immediately increase take-home pay.
Ronald Reagan didn’t cut just top marginal tax rates. Nor did George W. Bush.
So it is profoundly odd that Marco Rubio’s tax plan co-authored with Mike Lee is viewed by some as abandoning party orthodoxy or even Democrat-lite because it would expand the child tax credit (also strengthening families and helping parents invest in their kids), a point Ramesh Ponnuru makes in his new National Review piece. Lee-Rubio is, however, not a flat tax. Nor does it prioritize deeply cutting top personal income tax rates. In those two significant ways, what Rubio is offering is different than the plans being offered by some other GOP presidential candidates.
Still, the plan’s proposed top rate of 35% is six percentage points lower than the average top rate of 41% that existed during the 1983-2007 Long Boom. Oh, and it also completely eliminates investments taxes and radically transforms the corporate tax code. So pretty growthy. In the piece, Ponnuru offers a tax-policy reality check and some myth busting to those pushing really deep cuts to top personal rates:
Some supply-siders argue that Lee-Rubio should have proposed bringing the top tax rate still lower, which would do more to improve incentives to work, save, and invest, and thus encourage growth. The Wall Street Journal prefers Christie’s top rate of 28. But this lower rate would not be likely to have a large economic effect. First, we should expect diminishing returns. When Reagan cut the top rate from 70 to 50, the after-tax return on a dollar earned rose 67 percent. Cutting the top rate from 35 to 28 would raise it only 11 percent.Second, Republicans have repeatedly overestimated the growth effects of income-tax rates – predicting a bust when Clinton raised taxes and a boom when George W. Bush lowered them. Neither occurred, and in fact growth rates were better under the higher Clinton income-tax rates than under the lower Bush ones. Any positive effect of lower tax rates on growth are small enough that other factors can overwhelm them.Third, it’s not clear that getting the rate on high earners so far down is politically realistic. A tax package that combined some reduction in the top rate with tax cuts that directly benefited the middle class would almost certainly stand a better chance of enactment. That is, after all, how such tax-rate reductions have been achieved before.
Not that Lee-Rubio is perfect by any means. But it is trying to address the right issues: How to boost growth, and how to make sure the fruits of that growth are broadly experienced in the modern American economy. I would be fine with just dropping the top personal rate a point or two (if only to signal opposition to letting rates drift ever higher), reducing rather than eliminating capital gains taxes, doing deep corporate reform, expansions to the child tax and earned income tax credit to boost working class and lower-income paychecks … and then all the other things — education, regulation, entitlements, public investment, immigration — necessary for a diversified, total-return, economic growth portfolio. I guess I would like more boldness on that other stuff, and a bit less on taxes. And no red ink.
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