The Lee-Rubio Tax Proposal

by Yuval Levin

Senators Mike Lee and Marco Rubio have today released a more detailed version of the tax proposal they outlined together last year. It combines a very aggressive pro-growth reform of the business side of the code with significant and broad-based tax relief on the individual side. 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,” precisely because it is directed to the most serious obstacles the tax code poses to growth in our 21st century economy while also addressing the most serious federal tax burdens confronting most Americans now. 

The proposal would cut the business tax rate to 25 percent (including for all pass-through business income, so that large and small businesses pay the same rate); end the taxation of capital gains, dividends, and interest; allow businesses to deduct capital investments from their taxable income immediately rather than over time; and move to a territorial tax system. The combination of these reforms would bring us closer to a consumption tax base on the business side, and would make for a dramatically more growth-oriented tax system precisely where today’s tax system most obstructs the economy’s performance. 

On the individual side, Lee and Rubio would bring the top rate back to Bush tax cut levels and consolidate today’s tax brackets into two (at 15 percent and that top 35 percent rate), but business income would be taxed at 25 percent and income from savings would not be taxed. They would also repeal the Alternative Minimum Tax and most of the deductions in the code (leaving only the charitable deduction and a capped mortgage interest deduction that would both be available to all taxpayers, not just those who itemize). They would then replace today’s standard deduction with a $2,000 individual ($4,000 per married couple) credit, end the marriage penalty in the tax code, and provide a new $2,500 per child credit (alongside the existing $1,000 credit, which phases out with income) to offset some of the over-taxation of parents in our system—providing very broad-based tax relief, including for families mostly burdened by the payroll tax rather than the income tax since the credit applies against both.  

One key remaining question about this proposal has to do with its effects on the deficit and debt. We will no doubt see it scored by various modelers in the coming months, presumably in both static and dynamic ways, and will get some sense of that. But one detail that isn’t yet in the proposal—the particular design and level of the cap on the mortgage-interest deduction—will be very important to answering the fiscal question, and its absence means that it won’t actually be possible to score the plan’s net effects at this point. How the rest of the proposal scores will presumably shape how that cap is designed, and determine what other measures are included in further versions of this proposal (as Lee and Rubio note, this is still a proposal in progress, and it’s also intended to be advanced in conjunction with other policy reforms that would dramatically reduce future deficits). 

But the details that are provided in the paper released today do speak to the friendly debate among supply-siders that has taken shape in recent months, and suggest that the differences on the right aren’t as big as some might have thought. The tax conversation that has taken shape since Lee and Rubio first proposed the general outline of this idea last year has at times been a little abstract, ignoring how aggressively pro-growth this proposal is and suggesting that the question is whether broad-based tax relief should be a goal in itself or whether tax reform should only focus on the tax code’s direct effects on overall growth. These have been important arguments about particulars among very like-minded conservatives, but what Lee and Rubio’s proposal suggests is that this isn’t really the choice we face. Successful conservative tax reforms have always provided both broad-based relief and better incentives at the margins—not one or the other. The Reagan reforms could have avoided addressing bracket creep or cutting rates below the top rate and just focused on top marginal rate effects, but they would have been less helpful and less popular if they had. The Bush reforms, too, provided broad-based cuts (including through the child credit).  These were both substantively important and politically crucial. 
 
Republicans don’t face a choice between lessening the tax burden on working families and lessening the tax burden on the economy—they face the challenge of doing both. Lee and Rubio have laid out an appealing and aggressive path for doing that. 

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