Senator Mike Lee and Senator Marco Rubio’s forthcoming tax-reform plan — which would reduce marginal tax rates, eliminate special-interest giveaways, and remove unfair tax burdens on small businesses and working families — has sparked a heated debate among economic conservatives. This is odd, considering that the plan is very likely the most pro-growth tax-reform blueprint developed in recent memory.
Traditional supply-side conservatives argue for reducing the top tax rate. So-called “reform conservatives” do too, but believe that today the tax code includes other, more pressing anti-growth dysfunctions than the top marginal rate.
As a disciple of the late Jack Kemp, I’ve spent my entire career — as a congressional staffer in the 1980s–’90s and a Bush-Cheney White House policy staffer — fighting for pro-growth ideas, especially for across-the-board tax cuts. And conservatives were enormously successful in those battles. When Ronald Reagan took office in 1981, the top tax rate was 70 percent, and middle-income taxpayers were pushed into higher tax brackets by inflation. Reagan’s emphasis on rate reduction solved the economic challenges of his time and ushered in an era of unprecedented economic growth, job creation, and rising living standards.
Lowering rates remains enormously important, but today working Americans of and aspiring to the middle class also face new challenges — such as an economy transformed by automation, buffeted by global competition, and burdened by sclerotic 20th-century government institutions — that are restricting economic opportunity. The question at the heart of this debate is whether the solutions of 1981 will meet the problems of 2015.
As it was in 1981, the tax code is one of those problems, a leading impediment to freedom, upward mobility, and growth. But the top individual marginal income-tax rate on labor income is no longer the most toxic, opportunity-strangling provision in the code. That distinction goes to our 35 percent corporate tax rate (highest in the developed world, and even higher for “flow through” firms such as S-corporations and partnerships), our double taxation of capital gains and dividends, or perhaps our absurd system of “depreciation” under which businesses must slowly deduct capital expenses rather than fully expense them in the year of purchase.
Furthermore, for millions of individuals (“47 percent” as you may have heard), the tax system’s heaviest burden is no longer the income tax at all, but the payroll tax. This is especially so for parents, who are effectively double-taxed within the senior entitlement systems, responsible for both payroll taxes and the costs of raising children, who of course grow up to become the next generation of taxpayers. The tax code must do a better job of recognizing this.
The expansion of the child credit in the Lee-Rubio proposal has been the source of the most of the internal conservative debate about its merits. The plan lowers marginal tax rates on labor income (returning to the pre-Obama top tax rate of 35 percent) and creates a new $2,500 per-child credit to offset the parent penalty. The deductions for mortgage interest and charitable contributions are retained.
All conservatives believe tax reform should improve economic growth. But growth is a function of freedom and opportunity, and cannot be pursued at their expense. Our tax code is a barrier to more than simply Gross Domestic Product growth.
If the elimination of a discriminatory tax burden — like the marriage penalty or the parent penalty — suddenly allowed a working mom (or dad!) to downshift for a few years from full-time to part-time work, or from part-time to staying at home, that decision might not boost short-term GDP, but it would still be rightly viewed as a success for that family and for that reform.
The Lee-Rubio child credit does not single out parents for a special benefit — it’s only applicable to actual tax liability; it’s not refundable — but ends the current code’s singling out of parents for a special burden.
And most important, none of this should give short shrift to the explosive pro-growth elements of this plan. The Lee-Rubio plan is the most pro-growth tax plan proposed in recent memory: full business expensing, ending the double taxation of capital gains and dividends, and integrating and lowering business tax rates to the developed-nation average of 25 percent — all those things will level the playing field for small and new businesses up against the corporate incumbents. It would also level the playing field for low-tax jurisdictions by ending the state-and-local tax deduction, which forces them to subsidize their big-government neighbors.
A level playing field for small entrepreneurs will intensify competition at the top of our economy, spurring investment, innovation, jobs and growth. A level playing field for low-tax states will force high-tax states to reform, or fall further behind. A level playing field for working parents will allow more families to make their own choices according to their values, not those of politicians in Washington.
Pro-family and pro-growth tax reforms are not mutually exclusive. The Lee-Rubio plan achieves both goals by reducing and consolidating tax rates, closing special-interest loopholes, and ending the tax bias against saving and investment, while at the same time providing tax fairness and relief to middle-class families.
— Cesar Conda was chief of staff to Senator Marco Rubio (R., Fla.) from 2011 to 2014 and is a former assistant for domestic policy to Vice President Dick Cheney