You’ll have to forgive me for writing about the Lee-Rubio tax reform proposal yet again. I can’t help myself. Over the past few days, I’ve had a number of conversations about Lee-Rubio, and I think I’ve been too glib about some of its flaws. There are a few quick points I’d like to make for now, but I can’t promise that I won’t write more about the proposal in the future.
First, as Howard Gleckman of the Tax Policy Center observes, a static analysis of an earlier version of Lee-Rubio estimated that it would add $2.4 trillion to the federal debt over the next decade, and the new version would mean even lower revenues (again, on a static basis). I don’t doubt that Lee-Rubio’s favorable treatment of savings and investment would yield somewhat higher economic growth, but it’s irresponsible to assume that it would dramatically increase economic growth.
Keep in mind that Greg Mankiw, a Harvard economist who served as chairman of President George W. Bush’s Council of Economic Advisors, estimates that in the long run, 17 percent of a cut in taxes on labor income and 50 percent of a cut in taxes on capital income will be recouped through economic growth. And that’s over the long run. Given that Republican lawmakers have spent much of the Obama era fighting against rising deficits, you can rest assured that the threat of yawning deficits will be used against Lee-Rubio if it ever becomes the basis of an honest-to-goodness bill.
Say we accept a drastic decrease in revenues on the grounds that it’s better for taxpayers to retain their earnings than for the federal government to do so. If you’re going to lower revenues by well over $3 trillion over the next decade, why choose this particular approach? Why not drastically reduce payroll taxes? In 2011, payroll taxes raised $819 billion. Cutting them by $3 trillion over a decade would make a big dent in the tax bills of American families. There are good reasons not to cut payroll taxes so drastically in a vacuum, among them that the “bang for the buck” from a growth perspective wouldn’t be as great as some other (less popular) tax cuts. But by contemplating such an enormous tax cut, we are in effect saying that we’re not terribly concerned about the trade-offs between one tax cut and another. In that case, why not offer an even bigger child credit or even lower rates? Is there a principled difference between increasing the debt by $3 trillion or $5 trillion?
In an earlier post, I compared Lee-Rubio to the flat tax, the FairTax, and 9-9-9. I did this for a reason. Though Lee-Rubio represents an improvement over these proposals, it has a long way to go before it can serve as the basis for a realistic tax reform effort. I want to emphasize that I like the basic structure of Lee-Rubio. More than that, I believe that Lee-Rubio’s structure is a genuinely important innovation in conservative policy thinking. What I don’t like is that in its current form, it is trying to promise everything to everyone. If Lee-Rubio ever gets to the point where it’s being debated in Congress, it will simply have to raise more revenue. It won’t necessarily have to raise as much as the current tax code, or even as much as the Bush-era tax code would have raised had it remained in place. But it will have to be in that ballpark. And once we get to that point, we’re going to actually have debate these trade-offs: do we go with the cuts in capital taxation or do we shrink the child credit? Should we balance out cuts in capital taxation with higher rates? Try as we might, we can’t dodge these issues. I understand that the debates we have in party primaries are different from the debates we have in general elections, or in Congress. That’s fair enough. But one of the reasons conservatives have grown cynical is that candidates will run on one set of ideas and then abandon them once in office. That is why it’s important that Lee and Rubio address serious concerns about their proposal sooner rather than later.
[I've updated this post to reflect the fact that one of my concerns, that the gap in the tax rate for corporations and pass-through entities might lead individuals to reclassify salary income as business income, has been addressed in the proposal. I regret the error.]