We Can Actually Criticize Specifics of Marco Rubio Tax Plan 5

So far, while looking at the various 2016 presidential candidates tax plans, I’ve realized something important: we’re going to have way too many Republicans in the primary. And so far, very few of them have a tax plan.

Rand Paul has a skeletal outline of a tax plan, but the other candidates so far have plans invented by the Underwear Gnomes (Phase One – Convince Everyone That I Know Taxes. Phase Two – … Phase Three – PROFIT!).

This is all just a long way of saying I probably won’t be analyzing any more tax plans until they offer something more substantive than a chest thumping and an amen. I also have Ted Cruz and Hillary Clinton, but after this one I won’t do any more until I find something interesting. Like when Donald Trump suggests all tax revenue is invested in his new hair care product line.

We do have one more real tax plan to look, though, and that’s Marco Rubio’s.

This is Marco Rubio. Not his wife, which, oddly, was the second item in my Google Autocomplete

This is Marco Rubio. Not his wife, which, oddly, was the second item in my Google Autocomplete

Before officially announcing he was running for president, Marco Rubio teamed up with Utah freshman senator Mike Lee to draft up a an actual tax reform plan. It doesn’t go through everything, but it’s enough for the economist-types could run it through their magic computers, waive a wands, and pop out an analysis of what the plan should do.

The reaction to the Rubio-Lee tax plan was bipartisanly mixed, with some surprisingly harsh criticism from even the typically favorable Republican home court reliables like Glenn Beck and the Wall Street Journal.

I’ve read through their plan, through the analysis and commentary. I can see some points on both sides, but honestly, it seems like a pretty decent plan. Something to work with, at least.

It’s broken up into both business and individual changes.

Business Changes

None of the commentary seemed to care much about the business changes proposed in the Rubio-Lee Plan, even though that’s where the good stuff’s happening. But since Joe and Jane Voter don’t typically care about the non-sexy back workings of corporate tax, it’s understandable that neither side is going to waste their valuable political mud slinging at something most people care about less than the lint in their pockets.

Let’s just run though it then. The plan makes the following overall business changes:

  • Replace Depreciation with Full First Year Expensing
  • Make all business entities (C Corps, S Corps, Partnerships, LLC) pay the same maximum tax rate of 25%
  • Get rid of most special business carve out provisions
  • Remove Interest from the equation (i.e. neither taxable nor deductible)
  • No tax on foreign repatriation
  • Some crap about special rules for financial institutions

If you’re not a business person, let’s just say that a couple of these are necessary reforms that both sides of the isle have been fighting for, and the rest make some amount of sense. If the Tax Foundation analysis is right, the depreciation and corporate tax cuts by themselves would increase GDP 14.7%. Not bad at all.

Of course politicians will always find reason to fight about ideas, but I would guess that a President Marco Rubio could get at least some of these suggestions though Congress. Some of those special business carve outs are going to be a drag out, knock down fight, though, no matter which party is in control.

Individual Changes

Here’s where the real debate’s going to focus. I’ll list out the changes, then add my thoughts:

  • Collapse the tax brackets to just 15% and 35%
  • Remove the Standard Deduction and the Personal Exemption
  • Eliminate almost all itemized deductions
  • Add a Personal Credit to a refundable $2,000 per person (looks like just for adults, not children)
  • Increase Child Tax Credit to $2,500, refundable only against taxes paid in (including payroll taxes paid by you and your boss)

This plan would help the economy grow; however, the estimates are much smaller than on the business side. We’re talking a couple of GDP points, tops.

From a simplicity point of view alone, I like it. From a policy point of view, I’m not 100% convinced, but I think it could work.

Criticisms

The first big issue is that this proposal is not revenue neutral in any sort of near term. The government will bring in somewhere between $414 billion and $90 billion less per year for the next decade. Which is a pretty big range. So far, Marco Rubio has not offered how he’d make up the difference, or if it’d all just go to debt. Eventually the increase economic growth should reverse the deficit out, but Tax Foundation doesn’t peg that as happening until at least 2040. And a lot can happen over 25 years. So this is definitely a legitimate concern that hasn’t been address.

Lots of liberals are also upset that’ll help the rich. And it will. But if you’re willing to shoot yourself in the foot just so you can kick the rich kid in the shins, pretty much no serious talk of tax reform is ever going to sound good. I think it’s more important to focus on the good it does to everyone else than on how much it hobbles those who have done well for themselves, but that’s a debate that moves out of data and into emotion.

The big conservative freak out is over the tax rates. The 35% rate is just too high, many argue. I can see why, the since the income level where we hit them is a bit intimidating:

Chart from Marco Rubio's official proposal

Chart from Marco Rubio’s official proposal

Right now, you’re not paying 35% until you make over $400k, so dropping it down to $150,000 is a huge tax increase, right?

Well, no, not necessarily. You can’t just take straight income and compare the two. It depends on a whole ton of complex factors, which is part of the reason Macro Rubio is trying to simply the tax code. Marco Rubio claims it’ll reduce taxes for 90% of Americans, a claim the Washington Post still has as “pending” in their analysis. We’ll see as more details come to light. A lot of it depends on that Refundable Personal Credit and which individual deductions stay on board.

Finally, the last big criticism is the expanding Child Tax Credit. The debate here is over the cost ($170 billion over 10 years) without any measurable economic advantages. Plus, some think it’s an attempt at social engineering. I like the idea, since the vast majority of our economic growth hinges on people having kids, but, again, this is moving out of the debate I want to have on this page.

I’m definitely intrigued by this plan. If Marco Rubio makes a significant run to the top office, I might have to dig a little deeper, figuring out what kind of tax decrease it would offer in various scenarios.

 

  • Jason Hirst

    I’m just going off your numbers here… but does this mean that a family of four (two adults, two kids) will pay $0 income tax unless they make over $60k? ($4k credit for adults, $5k for kids, 15% tax rate with no deductions).

    • Sounds right to me.

      I wanted to run though some examples while I was writing the post, but it was already getting too long. I still plan on doing some comparisons between our tax plan an this proposal at some point in time.

      • Jason Hirst

        I can see why a lot of people hate the expanded child tax credit, but it seems like you could easily just make it a flat $2,000 credit per dependent. The rationale would be easy that the income is being shared among each person, and it wouldn’t be as obvious that the credit is designed to help larger families, and it would only be slightly less helpful.

        Kids cost way more than $2,500 a year, so I don’t think this would really cause people to suddenly start having children, and the revisions to the EITC could make this change a wash anyway – but I can understand those that oppose it.

        • That’s one way to do it, though I wonder if it’d be more “expensive” in terms of government revenue. Right now, Marco Rubio has been saying that the $2k credit is refundable. The $2,500 child credit is non-refundable, but you can use it to offset payroll tax, including the amount the employer paid in. Not sure how that all plays out in terms of total revenue, but I would guess that a $2k refundable credit might end up being slightly more “expensive” than a $2,500 non-refundable credit.

          (For anyone not Jason reading this, “expensive” is in quotes because the government not getting revenue that it used to get in the past isn’t really an expense, even though the political types like to call it that)

          I also read this thought piece a while ago saying that it’d take a $5k child tax credit (at least in the current tax system) to make taxes not factor in to having children. If that’s true, then $2,500 seems reasonable, or maybe even low, especially considering that having more children is the only way to continue to have the big welfare programs like Social Security not go bankrupt for our generation.

          • Jason Hirst

            Interesting numbers, and I don’t have a problem with a higher child tax credit or even think this part of Rubio’s tax plan is bad… but I can understand how politically it is going to take some criticism, even if that criticism isn’t really valid. It’s more about how it looks than how it actually is, as far as politics are concerned.

            I’m still not sure why any of the tax has to be refundable… since he wants to align the tax credits with other welfare programs, and a refundable credit isn’t a “tax” but is welfare administered through the IRS, just clean it up and make someone go through another program if they are going to have the government pay them.