Senator Marco Rubio had a tax-reform plan that made him stand out from the Republican pack this primary season. He has apparently concluded that he stood out too far. The revised version he’s now offering would still be a major improvement over current tax law in many respects. Unfortunately, it also makes his original plan’s biggest drawback even worse.
Rubio’s proposal follows a model Republicans have used for decades: combining supply-side tax-rate cuts with tax relief for middle-class families. Just like President George W. Bush, Rubio wants to reduce the top tax rate to 35 percent. But Rubio goes much further than Bush in cutting taxes on investment. He also goes further for middle-class families, expanding the child tax credit by $2,500 and letting parents use it to offset payroll taxes.
Not surprisingly, all this leads to lower revenue for the federal government. The Tax Foundation estimated that over the first 10 years that revenue reduction would amount to $6 trillion, unless the reform boosted economic growth. That’s one of the bigger tax cuts on offer from Republicans in the 2016 campaign.
The other candidates, though, cut taxes in a different way than Rubio: Instead of expanding the child credit, they reduce the top income-tax rate more than he would. Rubio’s choice reflects the notion that there are diminishing returns to cutting the top rate: Lowering it even more than he does wouldn’t do much to increase incentives to work, save and invest, and thus to boost economic growth. It also reflects the view that the burden of government entitlement programs is especially heavy for parents, who should therefore receive tax relief.
The most politically important change in Rubio’s new plan concerns tax brackets. Originally he proposed two of them. Married couples making less than $150,000 would pay 15 percent, and those making more would pay 35 percent. But that would have left some people — say, a couple making $250,000, with no kids and little investment income — with higher tax bills than they have now.
Evidently Rubio has decided that he should avoid raising taxes on so many affluent people. So now he’s adding a middle bracket: Couples making between $150,000 and $300,000 would pay at a 25 percent rate. That adds to the plan’s revenue losses, because everyone above the 15 percent bracket would pay less than under his previous plan. (Even if you’re still in the 35 percent bracket, you benefit from having some of your income taxed at 25 percent.)
Rubio’s second big change concerns the child credit, which would now be phased out for married couples making between $300,000 and $400,000 a year. He also clarifies that he’d eliminate taxes on capital gains and dividends only for new investments. So there’d be no windfall gains for investments made prior to his reform.
The net effect of these changes would be to simplify the tax code a little less, and add to the deficit more.
Rubio is right to favor tax relief for parents. He’s right to move toward a consumption tax base: The current code is biased against savings and investment. He’s right to get rid of tax breaks for business debt, and to lower taxes on business investment. He’s right to place a higher priority on those changes than on cutting the top rate. And he’s right to get rid of the deduction for state and local taxes: Why should low-tax states subsidize high-tax ones?
But the revenue loss Rubio is proposing is huge. American voters are not usually obsessed with balancing the budget: If they were, we wouldn’t have run the deficits we have over the past several decades. Six trillion dollars, though, is the sort of number that could make people notice. It would be irresponsible, given our looming debt problems, to cut taxes by that much and hope that spending cuts and economic growth would save the day. Voters might well think the same thing.
Nobody has proposed a better tax reform than Senator Rubio. He would take the tax structure in the right direction. But it’s possible to go too far in the right direction.
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