What Marco Rubio's tax policies say about his campaign strategy

Newly declared GOP presidential hopeful Senator Marco Rubio is trying something truly (Bill) Clintonesque—navigating between the demands of his party’s base and a more centrist, forward-looking political agenda. Nowhere is it more obvious than in tax policy. And nowhere is the road ahead more risky for his presidential ambitions.

In March, Rubio and fellow senator Mike Lee (R-UT) proposed a significant, though incomplete, tax reform plan. Their introduction to the plan highlights the need to address income inequality and what Clinton called “the middle-class squeeze” back in 1992. Just listen to the peroration of the Rubio-Lee plan:

“Too many Americans believe the American dream is slipping out of reach for themselves and their children. They see their cost of living rise while their paychecks remain stagnant….Increasingly the deck seems stacked against those who are working hard and playing by the rules, while the system is rigged for the insiders who don’t.”

That’s a message moderate votes might get behind. The problem is, the Lee-Rubio plan does little for those struggling households. Instead its biggest beneficiaries would be the highest income taxpayers. Help for those who “see the American dream slipping away” would be far less certain.

Their tax plan is, at its core, a consumption tax. It would exempt investment income from tax and eliminate most tax preferences. It would allow firms to fully deduct their capital investments in the year they are made, and prohibit them from deducting interest costs on those investments.

Such a plan has real merit but it requires some mechanism, such as a refundable tax credit, to make sure it does not become extremely regressive. It is not clear that Rubio-Lee does that.

While it would cut taxes for most households (Rubio says 90 percent, although that’s little more than a guess), the biggest beneficiaries would be high-income taxpayers. By reducing the top tax rate from 39.6 percent to 35 percent; exempting capital gains, interest, and dividends from tax; maintaining deductions for charitable giving and mortgage interest; repealing the Alternative Minimum Tax; and cutting business taxes, it would aim most tax cuts at the wealthy.

But the tax benefits for the families Rubio speaks so eloquently about are more uncertain. Its new Child Tax Credit would be more generous for middle income families with children but not low-income families. The plan promises to reform the Earned Income Tax Credit, a major form of income support for low-income working families, but does not say how. It proposes a new $2,000 personal credit for individuals ($4,000 for couples) but the details remain ambiguous at best.

While the Tax Policy Center has not modeled the Lee-Rubio plan, we have analyzed a similar idea proposed by Sen. Lee last year. We found that  only about one-quarter of households making $25,000 or less would get a tax cut. On average households in the bottom 20 percent of income would get an extra $79 and see their after-tax incomes rise by just 0.5 percent.

Three-quarters of middle-income households would get a tax cut and overall would pay about $1,100 less than under current law. Their after-tax income would rise by about 2 percent.

By contrast, 80 percent of those making $640,000 or more (the top 1 percent) would get a tax cut, and on average, households in that income group would enjoy an extra $40,000. Those in the top 0.1 percent, who make $3.3 million and up, would be in line for an average tax cut of $240,000—a boost in after-tax income of 3.8 percent.

Then, there is the cost. TPC estimates that Lee’s plan would add $2.4 trillion to the national debt over 10 years. Lee and Rubio’s plan would likely be even more expensive. While they don’t say how they’d pay for it, Rubio supports major changes in Medicare and Social Security.

But, as Clinton found, triangulation brings with it deep skepticism from your base. Yesterday, Rubio and Lee pitched their plan at the Heritage Foundation. And they were pushed hard by those who, when they hear the words “tax reform” reflexively embrace a flat tax.

Rubio knows that while conservative primary voters would love such an idea (just ask Herman Cain who created a stir in 2012 with his 9-9-9 plan—a flat tax in drag), it would never sell in a general election.

So he’s put together a more palatable, and more responsible, consumption tax that will never generate enthusiasm among hard-core conservatives but could win support from moderate and pro-business Republicans. The question for Rubio is whether that’s enough to get him the nomination, and, if it is, whether he can sell the idea to independents in a general election. Maybe he could, but only if he can keep them focused on his rhetoric instead of the details of his tax reform.

The post Rubio Tries to Triangulate Tax Policy appeared first on TaxVox.