Rubio-Lee tax reform plan would add trillions to the debt

The tax reform plan from Marco Rubio and Mike Lee is filled with a lot of interesting and credible ideas, but the specifics would add trillions to the nation's debt over the next decade. 

The newest entrants in the tax reform sweepstakes are senators Marco Rubio (R-FL) and Mike Lee (R-UT).  Their plan is filled with a number of interesting and credible ideas but ducks many important questions. And, while 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.

Unlike former House Ways & Means Committee chair Dave Camp, Rubio and Lee did not write a tax bill. Rather, they’ve presented a framework for reform. As such, it is filled with many holes, some acknowledged and others not. Thus, it is incomplete. But it is nonetheless interesting. In many ways, it would shift the revenue code in the direction of a consumption tax.

On the business side, they’d create a top rate of 25 percent that would apply to all corporations and those pass-through firms with income in excess of $150,000.

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.

Finally, the two lawmakers say they’d eliminate what they call “extraneous” business tax provisions but never describe what they are. They do say they would not renew any of the 50+ tax breaks known as the tax extenders.

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.

Investment income from capital gains and dividends would be tax free.

Rubio and Lee dodge two big individual tax issues: They say tax treatment of health insurance should be addressed as part of broader health reform. Thus, they’d retain the exclusion for employer paid health insurance, a $2.6 trillion tax subsidy over 10 years. They also say the fate of the Earned Income Tax Credit should be tied to future welfare reform and thus propose no EITC changes.

Add up their tax treatment of business investment, interests costs (except for mortgages), and capital gains and dividends and Rubio and Lee move quite a way down the road to a consumption tax. That alone makes their plan worthy of further discussion.

But in the end, they fail to propose a fully-formed plan that confronts the need to eliminate many specific tax preferences. Indeed, unlike Camp, they didn’t even try to design a plan that raised roughly the same amount of money as the current tax code.

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.

Such a huge tax cut may be red meat to part of the GOP base—remember that Rubio is mulling a run for president—but it also makes the plan a political non-starter. Too bad, because it includes some really interesting ideas.

The post The Rubio-Lee Tax Reform Plan Raises Important Issues But Would Add Trillions to the Debt appeared first on TaxVox.