Rubio-Lee tax plan means more debt and greater income inequality

For Republicans, there are only two certainties in life: debt and tax cuts. During his eight-year tenure, President Ronald Reagan tripled the national debt accumulated over the first two centuries of the republic. (The hemorrhaging from his 1981 tax cut would have been worse, but for 11 subsequent tax hikes the Gipper signed to help cauterize the revenue drain.) His supply-side tax-cutting successor, George W. Bush, nearly doubled the red ink. And with their massive tax-cut windfalls for the wealthy and cowardly silence about which tax breaks they'd end, Mitt Romney (20 percent across the board rate decrease) and Paul Ryan (two brackets, lower corporate tax rates) each would have left Uncle Sam at least $5 trillion poorer within 10 years.

Now, Republican Sens. Mike Lee (R-UT) and Marco Rubio (R-FL) have unveiled a new version of what they call the "Economic Growth and Family Fairness Tax Reform Plan."  Unfortunately, this blueprint supposedly designed to provide help to the middle class is fairer to some families than others. And with its golden showers for the richest Americans, the Rubio-Lee proposal can only mean more debt and greater income inequality for everyone else.

Of course, you’d never know that judging by the reactions from the best and brightest among the Young Guns of the conservative movement. Ramesh Ponnuru called it "a tax plan Republicans should learn to love." Yuval Levin agreed, gushing in the National Review, "I think Ramesh is right to describe the result as 'the most pro-growth tax reform since Calvin Coolidge’s presidency,' and Ryan Ellis of Grover Norquist’s Americans for Tax Reform is right to say that this is 'what pro-growth looks like in the 21st century.'" Meanwhile, James Pethokoukis proclaimed, "Marco Rubio and Mike Lee have cooked up the first great tax cut plan of the 21st century."

The near-orgasmic response of the Reformicons should come as no surprise. After all, many of the ideas in the Rubio-Lee framework had their genesis in their 2014 manual, Room to Grow: Conservative Reforms for Limited Government and a Thriving Middle Class. But as Howard Gleckman of the Tax Policy Center lamented, there’s not a whole lot for the middle class in it:

[W]hile it is not accompanied by a budget score, the elements that it specifies would add trillions of dollars to the nation’s debt over the next decade. It would also likely target the bulk of these new tax cuts to high-income households.

A glance at the dramatic changes to both business and individual taxes, below, shows why.

Lee and Rubio begin by slashing the corporate tax rate for businesses and "pass-through" entities topping $150,000 a year in revenue (entities like $40-billion Bechtel) from 35 to 25 percent. But as Gleckman explains, that’s not all:

Businesses could fully deduct the cost of all investment (including inventories and real estate) in the year it is made. U.S.-based multinationals would be taxed through a dividend exemption system. The roughly $2 trillion in existing unrepatriated foreign income would be taxed at 6 percent, payable over 10 years.

At the same time, new business debt would no longer be tax deductible while most interest income would be exempt from tax. Financial firms would operate under their own set of tax rules, though Rubio and Lee don’t specify what they’d be.

What some businesses might lose in deductions that Rubio and Lee would eliminate, most would more than make up from lower rates and the policy that taxes will be levied "only in the country where income is actually earned."  But the loss of the deduction for debt interest isn't just a problem for a "large coalition of real estate, technology and retail companies"—it could put a serious debt in the private equity business model pioneered by one Willard Mitt Romney.

But what pitch man Mike Lee and presidential candidate Marco Rubio might taketh from some companies, they more than giveth to the richest Americans. For starters, the Republican duo would end the estate tax altogether, cutting off a federal revenue source projected to bring in $260 billion between 2015 and 2024. The current tax of 40 percent for individual fortunes above $5.43 million for an individual and $10.86 million per married couple impacts less than 0.15 percent of all estates. (In 2013, only 20 family farms or small businesses paid any federal estate tax at all.) Despite decades of Republican myth-making about the so-called "death tax," 99.85 percent of estates don’t pay it.

As Chuck Marr of the Center on Budget and Policy Priorities (CBPP) explained, by eliminating taxes on capital gains and dividends, the payday for plutocrats hardly ends there:

The plan would do away with taxes on capital gains and dividends, even though they are already taxed at lower rates than wages and salaries. And the benefit would flow overwhelmingly to those with the highest incomes. In 2012, more than 10 percent of capital gains went to the top 400 filers, who collected an average of $230 million apiece (or $92 billion total). This tax cut would also encourage wealthy people to use tax schemes to convert ordinary income into this newly tax-free income.

And the data show, historically low capital gains tax rates have been fueling America’s increasing income inequality for decades.

In September 2011, the Washington Post illustrated how plummeting capital gains and dividend tax rates helped bring that about. As part of the Post's series on the widening chasm between the super-rich and everyone else, titled "Breaking Away," the Post concluded that "capital gains tax rates benefiting wealthy feed [the] growing gap between rich and poor." As the Post explained, for the very richest Americans, the successive capital gains tax cuts from Presidents Clinton (from 28 to 20 percent in 1998) and Bush (from 20 to 15 percent in 2003) have been "better than any Christmas gift":

While it's true that many middle-class Americans own stocks or bonds, they tend to stash them in tax-sheltered retirement accounts, where the capital gains rate does not apply. By contrast, the richest Americans reap huge benefits. Over the past 20 years, more than 80 percent of the capital gains income realized in the United States has gone to 5 percent of the people; about half of all the capital gains have gone to the wealthiest 0.1 percent.

While the "fiscal cliff" tax deal boosted the top capitals gains tax rate back to 23.8 percent (the Affordable Care Act added a 3.8 percent surtax for upper-income earners on top of the new 20-percent top rate), the dynamic remains essentially unchanged. Not only are America's wealthy rapidly pulling away from the rest of their fellow citizens, the stratospherically rich are leaving the merely rich in the dust, too.

In his 2011 and 2013 analyses, Thomas Hungerford of the Congressional Research Service found the income-gap widening effects of lowering capital gains tax rates. "Capital gains and dividends were a larger share of total income in 2006 than in 1996 (especially for high-income taxpayers) and were more unequally distributed in 2006 than in 1996," Hungerford revealed, concluding, "Changes in capital gains and dividends were the largest contributor to the increase in the overall income inequality."  In his later study, Hungerford provided an update:

By far, the largest contributor to this increase was changes in income from capital gains and dividends.

(If lower capital gains and dividend tax rates clearly fueled increased investment in the economy, the growing chasm between the rich and everyone else might be acceptable. But as Jared Bernstein and Brad Plumer, among others, documented, the historical data don’t support that conclusion.)

Where in the tax code, then, do the Reformicon favorite Lee and the GOP White House wannabe Rubio actually bring help to middle class?

In a nutshell, their "pro-family" policy consists of lowering marginal rates for most Americans, ending the "marriage penalty," and doing away with most deductions in exchange for two new benefits. As Gleckman summed it up:

For individuals, they’d collapse the current seven rates to two—15 percent and 35 percent. They’d eliminate head of household filing status, replace the standard deduction and personal exemption with a personal credit of $2,000 ($4,000 for joint filers), expand the child credit to up to $2,500 for some families, and repeal the Alternative Minimum Tax. They’d eliminate most itemized deductions but keep them for mortgage interest and charitable giving.

But the advantages this simplified system offers some American families are offset both by what Lee and Rubio leave out of their plan and by what they leave in. The Earned Income Tax Credit, a measure President Ronald Reagan once touted as "the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress," is left unchanged, deferred to an unspecified future reform of welfare. They preserve the employer deduction for providing health insurance, keeping in place the current system that will cost Uncle Sam $2.6 trillion over the next decade. With the loss of the deduction for state and local taxes, many families in high-tax blue states would likely end up owing Uncle Sam more. According to the TPC analysis of the previous version of the Lee proposal, the same is true for single-parent families: Due to the elimination of the head of household status, a quarter of them would pay higher taxes.

But a less visible problem with their plan to counter the so-called "Parent Tax Penalty," as Elizabeth Stoker Bruenig details in The New Republic, is that "Marco Rubio and Mike Lee want you to have kids—unless you're poor."

According to this Parent Tax Penalty theory, parents effectively pay payroll taxes twice: once themselves, and once via the payroll taxes their children pay when they grow up and enter the labor force. To remedy this unfairness, the Reformocons claim we need to compensate parents for the future payroll taxes of their children. Yet the $2,500 Child Tax Credit proposed by Lee and Rubio does not actually do this. At least not for parents who need the most help.

That’s right. The reasons have to do with expiring tax provisions and the American working life cycle itself. As CBPP's Marr explained, the new $2,500 Rubio-Lee annual baby bonus "not only excludes most working-poor families from its new child tax credit but allows much of their existing child credit to disappear after 2017." The result?

Consider a mother with two children who works in a nursing home full-time, year-round, at the minimum wage, and receives a child tax credit of $1,750. The Lee-Rubio plan would let her credit disappear in 2018. It also would exclude her -- and millions of other working-poor people -- from its new child credit, which wouldn't be fully refundable.

As Bruenig pointed out, for the conservatives supporting the Rubio-Lee plan, this perverse result is a feature, not a bug:

The Reformocon tax proposal is intentionally designed to exclude the poorest 20 percent of families from these new child benefits, as plan architect Robert Stein previously explained. According to Stein, the plan is intentionally "not designed to encourage fertility in the poor over and above what we already do," meaning that its disproportionate boost to the wealthy is a piece of social engineering, not an unintended facet of the policy.

And to be sure, the new $2,500 child tax credit will disproportionately help wealthier, older, and smaller families. Low-income working parents with kids get hit with the supposed payroll "Parent Tax Penalty," too. They just won't get relief from Rubio-Lee:

Traditional families are deprived because they are much more likely to be low-income, on account of having a single household earner. In fact, figures produced by W. Bradford Wilcox of the National Marriage Project show that a whopping 54% of married families in the bottom quintile of income are traditional families. Young families suffer similarly on account of being at the very beginning of their careers, and are much more likely to find themselves in and around the bottom of their respective pay scales. This lifecycle pattern of income is why 25-year-olds are 94 percent more likely to be impoverished than 64-year-olds, and why 1-year-olds are 40 percent more likely to live in poverty than 15-year-olds. Large families are penalized because they tend to run out of child tax credits to claim, due to their size.

Now, the obvious—and not so obvious—drawbacks of the Rubio-Lee plan would be easier to swallow if this new Republican elixir magically produced new tax revenue to offset its toxic effects or, like the aborted reform bill offered last year by Rep. Dave Camp, at least approached paying for itself. But for a Republican Party now as ever claiming it wants a balanced budget, the Rubio-Lee scheme doesn't even come close. Gleckman captured the essence of this deficit-producing, income inequality-generating machine:

As a result, they’ve proposed a tax reform that would add many trillions to the national debt over the next decade (a problem dynamic scoring is not likely to paper over). The Tax Policy Center estimated that an earlier, less ambitious version of the plan’s individual provisions would add $2.4 trillion to the debt. This plan would surely be even more expensive. TPC also found that the households in the top 1 percent of incomes would get almost one-third of the tax benefits of that earlier plan.

For his part, Rubio didn’t deny that his tax platform would add to the national debt. Echoing the standard GOP line that "You should never have to offset cost of a deliberate decision to reduce tax rates on Americans," Rubio declared:

I’ve never believed that tax reform by itself should pay for itself. That basically argues that the money belongs to the government.

Still, Rubio’s red ink, he protested, shouldn't be held against him. "I think it's unfair," he said, "to score a pro-growth tax plan without taking into account growth." And for Republicans in Congress, that means turning to dynamic scoring in order to make big deficits smaller and convert small deficits into surpluses. So that’s exactly what William McBride of the right-wing Tax Foundation did to make the ugly picture much prettier. According to his model, over its first decade the Rubio-Lee plan would boost GDP by 15 percent more than the nonpartisan Congressional Budget Office (CBO) projects. And with his forecast of capital stock increasing by 50 percent, wages by 13 percent, work hours by 3 percent and jobs by 2.7 million, McBride magically turned red ink black:

[T]he growth in the economy would eventually boost tax revenue, relative to current law. We find after all adjustments (again, about 10 years) that federal tax revenue would be about $94 billion higher on an annual basis. This is our dynamic estimate. Our static estimate, i.e. assuming the economy does not change at all, shows a tax cut of $414 billion per year. We believe the dynamic estimate is much closer to reality.

Five hundred billion dollars a year is a big swing. That's why, as The Hill reported, "Rubio said that the tax reform plan would be part of a broader fiscal approach that included revamping entitlement programs like Medicare and Social Security to help get long-term deficits under control." As Rubio, a supporter of Paul Ryan’s plans to privatize those programs for future seniors, revealed in a moment of candor:

Our generation is going to have to accept that our Medicare and our Social Security is going to be different than our parents'.

That you can count on from President Rubio. After all, for Republicans like him, Mike Lee and their Reformicon cheerleaders, the only certainties in life are death and tax cuts.